Chemed Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business. Management said COVID-19 materially affected operations, results, cash flow and financial position.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $502.2 million | $473.6 million | $1,018.0 million | $935.6 million |
| Operating income | $92.8 million | $65.5 million | $172.1 million | $115.0 million |
| Net income | $82.1 million | $50.7 million | $138.0 million | $95.4 million |
| Diluted EPS | $5.01 | $3.08 | $8.39 | $5.79 |
| Adjusted diluted EPS (non-GAAP) | $4.41 | $3.36 | $8.08 | $6.27 |
| Adjusted EBITDA (non-GAAP) | $108.7 million | $85.1 million | $201.8 million | $159.9 million |
Adjusted EBITDA margin was 21.7% in Q2 versus 18.0% a year earlier, and 19.8% for the first half versus 17.1%. Consolidated gross margin was 29.9% in Q2 versus 31.7%; for the first half it was 30.9% versus 31.0%. VITAS gross margin declined, primarily due to COVID-19 costs; Roto-Rooter gross margin improved with higher revenue and expense management. The reported earnings comparison was significantly affected by CARES Act grant recognition and other adjustments; adjusted figures are non-GAAP and exclude specified items.
Q2 revenue increased 6.0%: VITAS revenue rose 4.7% and Roto-Rooter 8.6%. First-half revenue increased 8.8%: VITAS rose 7.4% and Roto-Rooter 11.6%. VITAS growth reflected increased days of care and Medicare reimbursement rates, partly offset by acuity mix and Medicare cap reductions. Roto-Rooter growth included acquisitions completed in 2019.
Cash flow and liquidity: First-half operating cash flow was $277.8 million, compared with $108.9 million in 2019. Management attributed much of the increase to receipt of $80.2 million in CARES Act funds and deferred income and payroll tax payments. Capital expenditures were $32.3 million. Cash at June 30 was $20.4 million. Chemed had no debt outstanding, down from $90.0 million at December 31, 2019, and reported $412.1 million of available revolver capacity after $37.9 million of standby letters of credit. It was in compliance with debt covenants. First-half share repurchases totaled $122.1 million; dividends paid were $10.2 million.
Material changes and unusual items
- VITAS received $80.2 million in federal CARES Act provider-relief funds. Chemed recognized $41.0 million as other operating income in Q2 and the first half; $39.2 million remained recorded as an unutilized grant liability at June 30. The recognized amount included eligible costs, additional paid time off, Medicare-cap-related amounts and estimated lost revenue. VITAS reported $30.5 million of after-tax grant benefit, partly offset by COVID-19 costs.
- The filing says approximately $4.2 million of revenue was recognized from the temporary suspension of the 2% Medicare sequestration cut. Chemed also deferred $19.0 million in federal income taxes, $10.7 million in employer payroll taxes and $2.9 million in state taxes.
- VITAS recorded $8.3 million of Medicare cap revenue reductions in the first half. It reported $9.1 million in disputed Medicare-cap withholdings across several programs and said it had appealed CMS’s methodology.
- Roto-Rooter acquired a Bloomington, Indiana franchise for $2.2 million in June. Higher amortization primarily reflected reacquired franchise rights from 2019 acquisitions.
- Chemed repurchased 275,000 shares in the first half at a weighted average price of $444.18 per share. The Board authorized an additional $250 million of repurchase capacity in March; $231.9 million remained at June 30.
Outlook, risks and contingencies
Management provided 2020 guidance but cautioned that the continuing pandemic could materially disrupt healthcare and the broader economy, making results difficult to forecast. Guidance was VITAS revenue growth of 5%–7% before Medicare cap, average daily census growth of approximately 2%–4%, and adjusted EBITDA margin of 19%–20% before Medicare cap. Management estimated $17 million of Medicare cap billing limitations for 2020. Roto-Rooter guidance was revenue growth of 9%–10% and adjusted EBITDA margin of 23%–25%. Full-year adjusted EPS guidance excludes any financial benefit from CARES Act funds related to lost revenue. Management expected operating income and cash flow to meet foreseeable needs, while anticipating return of unused CARES Act funds after the measurement period.
Risks cited include workforce illness or labor shortages, difficulty obtaining protective equipment or other supplies, reduced VITAS referrals, a prolonged downturn affecting Roto-Rooter demand, and operational and cybersecurity risks from remote work. VITAS is subject to Medicare and Medicaid oversight, audits and payment limits. It remains subject to a five-year corporate integrity agreement connected to a 2017 False Claims Act settlement. A California VITAS wage-and-hour settlement remained subject to final court approval, then scheduled for December 8, 2020; Roto-Rooter was defending a California employee class action. The filing says outcomes and potential losses for certain proceedings could not be estimated clearly.
Important facts for investors to verify
- Whether VITAS satisfies CARES Act grant conditions, how much of the $80.2 million is ultimately eligible for recognition, and whether unused funds must be repaid.
- Actual Medicare cap exposure versus management’s $17 million full-year estimate, including the disputed $9.1 million CMS withholdings and the appeal’s status.
- Whether VITAS census, referrals and COVID-related costs—and Roto-Rooter demand—support the 2020 guidance as pandemic effects evolve.
- How much reported earnings and cash flow depend on grant recognition, deferred taxes and other temporary or adjusted items; compare GAAP results with the company’s non-GAAP measures.
- Developments in the VITAS corporate integrity agreement, wage-and-hour matters and Roto-Rooter litigation, as well as capital allocation and share repurchases.