Chemed Corp. 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, and the six months ended June 30, 2008. Chemed Corporation operates through two primary segments: VITAS Healthcare, providing hospice care services, and Roto-Rooter, providing plumbing and drain cleaning services. The company is a large accelerated filer with 22,906,177 shares of common stock outstanding as of June 30, 2008.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Service Revenues and Sales | $283.2 million | $568.4 million |
| Net Income | $17.3 million | $34.1 million |
| Diluted Earnings Per Share | $0.73 | $1.42 |
| Operating Cash Flow | N/A (Quarterly not provided) | $41.8 million |
| Cash and Cash Equivalents | $1.5 million | $1.5 million |
| Total Debt (Current + Long-term) | $228.0 million | $228.0 million |
| Unused Revolving Credit | $139.2 million | $139.2 million |
| Consolidated Gross Margin | 29.0% | 28.4% |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 4.3% in Q2 and 4.9% for the six-month period compared to 2007. This was driven by an 8% revenue increase at VITAS (due to a 4% increase in Average Daily Census and Medicare rate hikes) which offset a 1-2% decline at Roto-Rooter (due to a 9-10% drop in job count, partially mitigated by price/mix increases).
- Profitability: Net income increased significantly year-over-year ($17.3M vs. $9.4M for Q2; $34.1M vs. $25.7M for six months). A primary driver was the absence of a $13.7 million pre-tax loss on extinguishment of debt recorded in the prior year's comparable periods.
- Interest Expense: Interest expense declined substantially (from $3.4M to $1.4M in Q2) due to refinancing transactions completed in May 2007.
- Share Count: Diluted shares outstanding decreased due to an active stock repurchase program, where approximately 1.1 million shares were repurchased in the first six months of 2008.
Outlook, Risks, and Contingencies
- Accounting Changes: The company anticipates adopting FASB Staff Position No. APB 14-1 on January 1, 2009. This will require separate accounting for debt and equity components of its $200 million Convertible Debentures, potentially creating a discount of $50-$60 million and increasing future interest expense.
- Legal and Regulatory Risks:
- OIG Investigation: The Office of Inspector General continues to investigate VITAS regarding alleged billing irregularities. The company cannot predict the outcome or financial impact.
- Litigation: VITAS faces a class action lawsuit in California regarding overtime and meal/rest periods (liability unestimable). Roto-Rooter reached a tentative settlement of approximately $1.8 million for a wage and hour class action, expected to be paid in Q3 2008.
- Medicare Caps: VITAS monitors programs for potential Medicare per-beneficiary caps. As of June 30, 2008, no revenue reductions were recorded for the 2007 or 2008 measurement periods, though two programs had a cap cushion of less than 10%.
- Liquidity: Management believes liquidity is satisfactory, with $139.2 million available under the revolving credit facility and compliance with all debt covenants.
Investor Verification Checklist
- Verify the impact of the upcoming adoption of FASB Staff Position No. APB 14-1 on future interest expense and equity balances.
- Monitor the status of the OIG investigation and the final approval of the $1.8 million Roto-Rooter litigation settlement.
- Assess the sustainability of VITAS's Average Daily Census (ADC) growth given the industry-wide increase in Focused Medical Reviews (FMR) and unbilled revenue balances ($12.2 million).
- Review Roto-Rooter's ability to offset declining job counts with price increases without further eroding market share.
- Confirm the company's ability to maintain debt covenant compliance as interest rates on variable debt fluctuate.