Business Context and Reporting Period
Company: Chemed Corporation (CHEMED)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Business Overview: Chemed operates through two primary segments: VITAS Healthcare (hospice care) and Roto-Rooter Group (plumbing and drain cleaning services). The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Service Revenues and Sales | $308.8 million | $294.9 million |
| Net Income | $19.4 million | $19.3 million |
| Diluted Earnings Per Share | $0.84 | $0.85 |
| Adjusted EBITDA | $43.1 million | $42.2 million |
| Operating Cash Flow | $7.7 million | $25.1 million |
| Cash and Equivalents | $112.1 million | $11.9 million |
| Long-Term Debt (Carrying Value) | $153.9 million | $152.1 million |
| Unused Credit Facility | $147.0 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 4.7% year-over-year. This was driven by a 7.0% increase in VITAS revenues (due to a 5.1% rise in average daily census and 1.3% Medicare price increases) offset by a 0.7% decline in Roto-Rooter revenues (due to a 7.0% drop in job count despite a 6.3% price/mix increase).
- Profitability: Net income remained essentially flat ($19.4M vs $19.3M). Diluted EPS decreased slightly due to an increase in the average number of shares outstanding.
- Cash Flow: Net cash provided by operating activities decreased significantly by $17.5 million to $7.7 million. This decline was primarily attributed to a $34.0 million increase in accounts receivable at VITAS, related to the timing of Medicare payments and refunds of prior year overpayments.
- Balance Sheet: Accounts receivable increased from $53.5 million to $87.4 million. Cash and cash equivalents increased substantially from $11.9 million to $112.1 million, largely due to the timing of cash collections and a significant cash balance carried over from the prior year-end.
Guidance, Outlook, and Risks
Management Guidance (Full Year 2010)
- VITAS: Expects revenue growth of 5.0% to 6.0% (prior to Medicare cap) and admissions growth of 2.0% to 4.0%. Adjusted EBITDA margin is estimated at 15.0% to 15.5%.
- Roto-Rooter: Expects revenue growth of 1.0% to 3.0%, driven by 3.0% pricing increases and favorable mix, offset by a 2.0% to 4.0% decline in job count. Adjusted EBITDA margin is estimated at 17.5% to 18.0%.
Risks and Contingencies
- Regulatory Investigations: VITAS is subject to ongoing investigations by the Office of Inspector General (OIG) and the Department of Justice regarding alleged billing irregularities for Medicare and Medicaid services. The company believes it is in material compliance but cannot predict the outcome or financial impact.
- Legal Proceedings: A class-action lawsuit filed in California alleges failure to pay overtime and provide meal/rest periods to certain employees. The trial court denied class certification in December 2009, but the case remains in early stages.
- Medicare Cap: VITAS monitors programs for potential exceedance of the annual per-beneficiary Medicare cap, which could result in revenue reductions. The company reversed $1.8 million of previously recorded Medicare cap liability in Q1 2010.
Investor Verification Checklist
- Accounts Receivable Quality: Verify the collectability of the $34 million increase in receivables, specifically regarding the timing of Medicare payments and potential denials from Focused Medical Reviews (FMR).
- Regulatory Exposure: Monitor the status of the OIG and DOJ investigations into VITAS billing practices for potential future liabilities or revenue adjustments.
- Convertible Notes: Review the impact of the 1.875% Senior Convertible Notes on future diluted EPS, noting that shares are excluded from the calculation until the stock price exceeds the conversion price.
- Segment Mix: Assess the sustainability of Roto-Rooter's pricing power given the continued decline in job counts.