Business Context and Reporting Period
Company: Chemed Corporation
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2005
Business Overview: Chemed operates through two primary segments: VITAS Healthcare (hospice care) and Roto-Rooter (plumbing and drain cleaning). The company completed a 2-for-1 stock split in May 2005. As of September 30, 2005, there were 25,752,440 shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2005 |
|---|---|---|
| Service Revenues and Sales | $233,328 | $678,274 |
| Income from Continuing Operations | $14,632 | $33,648 |
| Net Income | $14,632 | $31,633 |
| Diluted EPS (Continuing Ops) | $0.55 | $1.28 |
| Diluted EPS (Net Income) | $0.55 | $1.21 |
| Cash and Cash Equivalents | $37,575 | $37,575 |
| Net Cash Provided by Operating Activities | N/A | $44,037 |
| Total Long-Term Debt | $235,450 | $235,450 |
| Available Credit Facilities | $147,100 | $147,100 |
Note: Total Long-Term Debt includes current portion ($1,123) and long-term portion ($234,327).
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 15.6% in Q3 2005 and 30.1% for the nine-month period compared to 2004. VITAS revenues grew 19% in Q3 and 45% year-to-date, driven by a 15% increase in Average Daily Census (ADC) and full-year consolidation of VITAS in 2005 versus partial year in 2004. Roto-Rooter revenues grew 9% in Q3 and 6% year-to-date, driven by a shift toward higher-margin commercial jobs.
- Profitability: Net income increased 38% in Q3 and 168% year-to-date. Income from continuing operations as a percent of revenue improved to 6.3% in Q3 2005 from 5.3% in Q3 2004.
- Debt Reduction: Total long-term debt decreased by $56.3 million from December 31, 2004, to September 30, 2005, following a refinancing in February 2005 that included prepaying $110 million of Floating Rate Notes.
- Cash Position: Cash and cash equivalents declined $33.9 million to $37.6 million, primarily due to debt repayment and capital expenditures, partially offset by operating cash flows.
- Discontinued Operations: The company recorded a $2.0 million after-tax loss from discontinued operations in the first nine months of 2005 related to the final disposal of Service America in May 2005.
Guidance, Outlook, Risks, and Unusual Items
- OIG Investigation: The Office of Inspector General (OIG) is investigating VITAS regarding alleged billing irregularities for Medicare/Medicaid. The company has incurred $564,000 in pretax expenses for the nine months ended September 30, 2005, related to this investigation. The outcome and potential financial impact remain uncertain.
- Medicare Cap Liability: VITAS recorded a preliminary liability of $1.0 million to $1.5 million related to the Medicare Cap for its Phoenix program (acquired in late 2004). The final liability will be determined in Q4 2005.
- Legal Contingencies:
- Roto-Rooter Litigation: A tentative settlement of $3.1 million was accrued in Q4 2004 regarding a class action lawsuit alleging unlicensed plumbing work in Illinois. Court approval is pending.
- VITAS Wage Litigation: A class action lawsuit in California alleges failure to pay overtime and provide meal breaks. Liability is currently indeterminable.
- Accounting Changes: The company accelerated the vesting of stock options in Q1 2005 to mitigate the impact of the upcoming SFAS No. 123R implementation (effective Jan 1, 2006), incurring a $215,000 pretax charge.
- Outlook: Management believes liquidity is satisfactory, with $147.1 million in available credit lines. The company expects to remain in compliance with all debt covenants through 2005.
Investor Verification Checklist
- OIG Investigation Status: Monitor for updates on the Department of Health and Human Services investigation into VITAS billing practices and potential fines or repayments.
- Medicare Cap Finalization: Verify the final liability amount for the Phoenix program Medicare Cap in the Q4 2005 filing.
- Debt Covenants: Confirm continued compliance with financial covenants under the amended credit facility with JPMorgan Chase.
- Discontinued Operations: Review the final settlement of the Service America disposal and any remaining receivables from the buyer.
- Stock-Based Compensation: Assess the impact of SFAS No. 123R implementation in 2006 on future earnings, given the company's plan to reduce stock option grants.