Chemed Corp. 10-Q Summary: Period Ended September 30, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Chemed Corporation, a Delaware corporation operating through two primary segments: VITAS Healthcare (hospice care) and Roto-Rooter (plumbing and drain cleaning). The report covers the three and nine-month periods ended September 30, 2009. The company is a large accelerated filer with 22,557,524 shares of common stock outstanding as of the period end.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2009 | 9 Months Ended Sep 30, 2008 | 3 Months Ended Sep 30, 2009 | 3 Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Service Revenues & Sales | $886,987 | $856,736 | $296,794 | $288,312 |
| Net Income | $55,799 | $49,082 | $19,210 | $16,951 |
| Diluted EPS | $2.46 | $2.08 | $0.84 | $0.74 |
| Operating Cash Flow | $80,547 | $89,530 | N/A | N/A |
| Cash & Equivalents (End of Period) | $42,047 | $6,804 | $42,047 | $6,804 |
| Long-Term Debt (Carrying Value) | $150,431 | $158,210 | $150,431 | $158,210 |
| Consolidated Gross Margin | 29.7% | 28.9% | 29.6% | 29.8% |
Note: All dollar amounts in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 3.5% for the nine months and 2.9% for the quarter. VITAS revenue grew 6% (driven by a 3.5% Medicare rate increase, higher acuity mix, and a $1.95M retroactive BNAF adjustment), while Roto-Rooter revenue declined 2% (driven by an 8% drop in job count offset by price increases).
- Profitability: Net income increased 13.7% for the nine months and 13.3% for the quarter. Diluted EPS improved due to higher earnings and a reduction in average shares outstanding from stock repurchases.
- Liquidity: Cash and cash equivalents surged from $3.6 million to $42.0 million, primarily due to strong operating cash flows and a significant reduction in debt ($17.9 million decrease in long-term debt).
- Accounts Receivable: Increased by $8.6 million, largely due to $10.3 million in Medicare-related administrative delays at VITAS.
- Unusual Items: The nine-month period included $4.0 million in "Other operating expenses" related to a contested proxy solicitation. Additionally, $1.95 million in revenue was recognized related to a retroactive price increase for VITAS services provided in Q4 2008.
Guidance, Outlook, and Risks
- Full-Year 2009 Guidance:
- VITAS: Expects full-year revenue growth of 5.7% to 6.2% (pre-Medicare cap). Admissions estimated at 98% to 100% of 2008 levels. Medicare contractual billing limitations estimated at $1.25 million for Q4.
- Roto-Rooter: Expects full-year revenue to range from 98% to 101% of 2008 levels, driven by 5.0% pricing increases and favorable mix, offset by a 7.0% to 8.0% decline in job count.
- Management Commentary: Management anticipates operating income and cash flows will be sufficient to meet commitments. The company is in compliance with all debt covenants.
- Risks and Contingencies:
- Regulatory Investigations: VITAS is subject to ongoing investigations by the Office of Inspector General (OIG) regarding Medicare/Medicaid billing practices. The company cannot predict the outcome or financial impact.
- Litigation: A class-action lawsuit in California alleges failure to pay overtime and provide meal/rest periods to employees. Liability is currently unestimable.
- Convertible Notes: The company has $187 million in 1.875% Senior Convertible Notes. Diluted EPS calculations will be impacted if the stock price exceeds the conversion price of $80.73.
Investor Verification Checklist
- Medicare Reimbursement Risks: Verify the status of the OIG investigations and the potential impact of the $1.25 million estimated Q4 Medicare cap limitation on VITAS revenue.
- Accounts Receivable Quality: Investigate the $10.3 million increase in VITAS receivables attributed to administrative delays and the adequacy of the allowance for doubtful accounts ($12.4 million).
- Job Count Trends: Monitor Roto-Rooter's job count decline (estimated 7-8% for the full year) to ensure pricing power can continue to offset volume losses.
- Convertible Note Conversion: Track the company's stock price relative to the $80.73 conversion threshold to assess potential future dilution.
- Proxy Solicitation Costs: Confirm that the $4.0 million expense related to the contested proxy solicitation is a one-time item and does not signal ongoing governance issues.