Chemed Corporation — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2020, compared with the same periods in 2019. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration services business. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $528.3 | $480.6 | $1,546.3 | $1,416.2 |
| Operating income | $74.3 | $64.9 | $246.4 | $179.9 |
| Net income | $67.7 | $58.9 | $205.7 | $154.3 |
| Diluted EPS | $4.14 | $3.56 | $12.53 | $9.35 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $402.4 | $237.6 |
- Revenue rose 9.9% in Q3 and 9.2% year to date. Reported gross margin increased to 35.8% from 31.7% in Q3 and to 32.5% from 31.2% year to date.
- Management-reported non-GAAP adjusted diluted EPS was $4.86 for Q3 and $12.94 year to date, versus $3.46 and $9.73, respectively. Adjusted EBITDA was $117.8 million for Q3 and $319.6 million year to date. These are non-GAAP measures; the filing provides reconciliations.
- Year-to-date investing cash outflow was $45.6 million, including $42.7 million of capital expenditures; financing cash outflow was $250.2 million. Cash increased to $112.8 million from $6.2 million at December 31, 2019.
- There was no debt outstanding at September 30, versus $90.0 million at year-end 2019. Chemed reported $412.1 million of available revolving-credit capacity after letters of credit and compliance with its debt covenants. Current liabilities were $329.2 million and current assets were $270.6 million.
- Dividends were $0.34 per share in Q3 and $0.98 year to date. The company repurchased 325,000 shares for $147.1 million during the first nine months.
Material changes and operating drivers
- Roto-Rooter revenue increased 20.4% in Q3 and 14.5% year to date, reflecting growth across major service lines, higher residential job counts and contributions from 2019 acquisitions. Segment gross margin was 51.6% in Q3 and 50.3% year to date, compared with 49.2% and 48.3%.
- VITAS revenue increased 4.8% in Q3 and 6.5% year to date. Year-to-date days of care rose 2.8%; Q3 days of care were essentially flat, down 0.2%. VITAS Q3 gross margin improved to 26.8% from 23.1%, principally from lower labor costs and a Medicare Cap liability reversal.
- Year-to-date operating cash flow increased $164.8 million. The filing attributes much of the increase to the $80.2 million CARES Act provider-relief payment and deferred payroll taxes, as well as working-capital timing.
- Amortization increased substantially year over year because of reacquired franchise rights from 2019 acquisitions. The company completed a $2.2 million Roto-Rooter franchise acquisition in Bloomington, Indiana, in June 2020.
Outlook, commentary and risks
- Management provided 2020 guidance but cautioned that the pandemic makes forecasting unusually challenging and that government actions or economic conditions could materially affect results. Forecasts: VITAS revenue growth of 4% before Medicare Cap, average daily census growth of approximately 1.3%, and adjusted EBITDA margin of 21% before Medicare Cap; Roto-Rooter revenue growth of 12.5%–13.0% and adjusted EBITDA margin of 26.1%.
- Chemed estimated $8.7 million of Medicare Cap billing limitations for calendar 2020. Management expected VITAS’s $80.2 million in CARES Act funds to cover eligible pandemic-related costs and potential incremental Medicare Cap limits; guidance excludes any earnings benefit from relief funds tied to lost revenue. Unused funds must be returned after the applicable period, currently June 30, 2021.
- The company deferred $22.9 million of employer payroll taxes under the CARES Act. The suspension of Medicare sequestration was recognized as approximately $6.3 million of revenue in Q3 and $10.5 million year to date.
- COVID-19 materially affected operations, results, cash flow and financial position. Risks cited include workforce illness or shortages, access to protective equipment, reduced hospice referrals, economic weakness affecting Roto-Rooter, supply-chain disruption and increased cybersecurity exposure from remote work.
- VITAS received a DOJ Civil Investigative Demand on October 16, 2020, seeking information on 32 Florida patients in a False Claims Act investigation. The company is cooperating; timing and outcome are uncertain. Chemed also recorded a $3.1 million accrual for a Roto-Rooter wage-and-hour settlement, subject to court approval. VITAS remains subject to a five-year corporate integrity agreement, with potential penalties or exclusion from federal healthcare programs for breach.
- CARES Act accounting and grant eligibility remain important uncertainties. HHS revised its definition of lost revenue, prompting reversal of a previously recognized $13.5 million amount in Q3. The filing says management will continue monitoring guidance and cannot predict the pandemic’s full effects.
Most important facts for investors to verify
- Whether reported growth and margins persist after considering Medicare Cap adjustments, CARES Act support, sequestration relief, pandemic-related costs and other items excluded from adjusted measures.
- VITAS’s Medicare Cap exposure, including the 2020 estimate and the disputed $8.7 million in historical Medicare Cap deductions under CMS’s “as if” sequestration methodology.
- Use and compliance status of the $80.2 million provider-relief award, the amount still unutilized, and any future repayment obligation.
- Progress and potential financial or operational consequences of the DOJ investigation, wage-and-hour matters and VITAS corporate integrity agreement.
- Whether cash generation remains strong after accounting for temporary relief-related cash flows, deferred payroll taxes, share repurchases and capital spending.