Business Context and Reporting Period
Company: Chemed Corporation (CHEMED)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2007
Business Overview: Chemed operates through two primary segments: VITAS Healthcare (hospice care services) and Roto-Rooter Group (plumbing and drain cleaning services). The company serves over 90% of the U.S. population through its network of company-owned branches, independent contractors, and franchisees.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2007 | Q1 2006 |
|---|---|---|
| Service Revenues and Sales | $270,439 | $243,921 |
| Income from Continuing Operations | $16,221 | $12,038 |
| Net Income | $16,221 | $12,215 |
| Diluted EPS (Continuing Ops) | $0.62 | $0.45 |
| Net Cash Provided by Operating Activities | $34,700 | $32,740 |
| Cash and Cash Equivalents (End of Period) | $30,137 | $45,668 |
| Long-Term Debt | $150,235 | $150,331 |
| Available Credit (Revolving Line) | $141.7 million | N/A |
Margins: Consolidated gross margin improved to 30.4% in Q1 2007 from 27.8% in Q1 2006. VITAS gross margin was 22.8% (up from 19.5%), and Roto-Rooter gross margin was 46.6% (up from 45.5%).
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 10.9% year-over-year. VITAS revenue grew 10.8% driven by a 10% increase in Average Daily Census (ADC) and Medicare rate increases. Roto-Rooter revenue grew 11.0% driven by a 2% increase in job count and a 9% price increase.
- Profitability: Net income increased 32.8% to $16.2 million. Income from operations rose $5.2 million to $29.2 million, primarily due to improved gross margins and lower interest expense.
- Interest Expense: Declined from $5.3 million to $3.7 million due to the repayment of a $84.4 million term loan in early 2006.
- Stock Repurchases: The company repurchased 626,079 shares at a weighted average cost of $46.76 per share in Q1 2007, compared to no repurchases in Q1 2006.
- One-Time Items: Q1 2007 included a $1.1 million pretax gain from the sale of Roto-Rooter's Florida call center and a $5.4 million stock-based compensation charge related to the Long-Term Incentive Plan (LTIP). Q1 2006 included a $430,000 loss on debt extinguishment.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management attributes the revenue increase to volume growth and pricing power. The company successfully managed Medicare cap liabilities, recording no revenue reduction for the 2007 measurement period, reversing a $472,000 provision from late 2006. Liquidity is considered satisfactory with $141.7 million in available credit.
Subsequent Events (Post-March 31, 2007)
- Debt Refinancing: On May 2, 2007, Chemed entered a new $375 million credit facility ($100M term loan, $175M revolver, $100M expansion) to replace the existing facility. Interest rate is LIBOR + 0.875%.
- Bond Redemption: Issued a notice to redeem $150 million of 8.75% senior notes due in 2011. This will incur a $6.5 million premium charge and a $4.8 million write-off of deferred debt costs in Q2 2007.
- Share Repurchase: On April 26, 2007, the Board authorized a new $150 million stock repurchase program.
Risks and Contingencies
- Legal Litigation: VITAS faces class-action lawsuits in California regarding wage and hour violations (Costa and Santos cases). A $19.9 million settlement was approved in the Costa case; the Santos case is in early stages with unestimable liability.
- Government Investigation: The Office of Inspector General (OIG) is investigating VITAS regarding Medicare/Medicaid billing practices. A qui tam complaint has been filed. The company cannot predict the outcome or financial impact.
- Medicare Caps: While no cap liability was recorded for Q1 2007, the company monitors programs closely to prevent exceeding per-beneficiary caps.
Investor Verification Checklist
- Debt Restructuring Costs: Verify the impact of the $11.3 million total charge ($6.5M premium + $4.8M write-off) expected in Q2 2007 related to the senior note redemption.
- Legal Exposure: Monitor the status of the Santos class-action lawsuit and the OIG investigation for potential future reserves or penalties.
- Medicare Cap Liability: Confirm that the reversal of the $472,000 provision holds as the year progresses and no new programs exceed caps.
- Stock Repurchase Execution: Track the utilization of the new $150 million repurchase authorization and its impact on share count and EPS.
- Interest Rate Sensitivity: Assess the impact of the new floating-rate credit facility (LIBOR + 0.875%) on future interest expense compared to the fixed-rate notes being redeemed.