Business Context and Reporting Period
Company: Chemed Corporation (CHEMED)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Chemed operates through two primary segments: VITAS Healthcare (hospice care services) and Roto-Rooter Group (plumbing and drain cleaning services). The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
Revenue and Profit (Six Months Ended June 30, 2009):
- Service Revenues and Sales: $590.2 million (up 3.8% from $568.4 million in 2008).
- Net Income: $36.6 million (up 13.9% from $32.1 million in 2008).
- Diluted Earnings Per Share (EPS): $1.61 (up from $1.34 in 2008).
- Operating Income: $62.7 million.
Cash Flow and Liquidity:
- Cash and Cash Equivalents: $16.6 million (up from $3.6 million at year-end 2008).
- Net Cash Provided by Operating Activities: $43.1 million.
- Net Cash Used in Investing Activities: $9.0 million (primarily capital expenditures of $8.1 million).
- Net Cash Used in Financing Activities: $21.1 million (driven by debt repayments and revolver reduction).
- Available Credit: Approximately $147.2 million unused under the revolving credit facility.
Debt and Margins:
- Long-Term Debt: $148.8 million (carrying value), down from $158.2 million at year-end 2008.
- Consolidated Gross Margin: 29.8% (up from 28.4% in the prior year period).
- Effective Tax Rate: 38.8%.
Material Changes vs. Prior Period
Revenue Drivers:
- VITAS Segment: Revenue increased 6% to $419.7 million. Growth was driven by a 3.5% Medicare reimbursement rate increase, a $1.95 million retroactive price increase (BNAF adjustment) for Q4 2008 services, and a reversal of Medicare cap billing limitations. Average Daily Census (ADC) was flat year-over-year.
- Roto-Rooter Segment: Revenue was essentially flat at $170.5 million. A 7% decline in job count was offset by a 9% increase in price and mix shift.
Expense and Income Changes:
- SG&A Expenses: Increased 7% to $95.4 million, primarily due to stock market gains increasing deferred compensation plan liabilities and higher stock-based compensation.
- Other Operating Expenses: $4.0 million recorded related to a contested proxy solicitation (not present in 2008).
- Other Income: Increased significantly to $3.1 million (from a $0.3 million expense in 2008) due to gains on investments held in deferred compensation trusts.
Guidance, Outlook, and Risks
Management Guidance (Full Year 2009):
- VITAS: Expects revenue growth of 5.0% to 6.0% (prior to Medicare cap). Admissions estimated at 98% to 102% of 2008 levels. Estimated Medicare contractual billing limitations of $2.3 million.
- Roto-Rooter: Expects revenue to range from flat to a 1% increase. Anticipates a 7.0% to 9.0% decline in job count offset by 5.0% pricing increases.
Risks and Contingencies:
- Regulatory Investigations: VITAS is subject to ongoing investigations by the Office of Inspector General (OIG) and the Department of Justice 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.
- Proxy Solicitation: The company incurred significant costs ($4.0 million YTD) related to a contested proxy solicitation.
Investor Verification Checklist
- Medicare Cap Exposure: Verify the impact of the estimated $2.3 million Medicare cap limitation on full-year VITAS revenue.
- Regulatory Outcomes: Monitor the status of the OIG and DOJ investigations into VITAS billing practices for potential future liabilities.
- Job Count Trends: Track Roto-Rooter's job count decline (estimated 7-9%) to ensure pricing increases continue to offset volume loss.
- Debt Covenants: Confirm continued compliance with financial covenants, particularly given the reduction in revolver usage and term loan repayments.
- Deferred Compensation Volatility: Assess the impact of stock market fluctuations on SG&A expenses and other income related to deferred compensation trust investments.