Business Context and Reporting Period
Company: Chemed Corporation (CHEMED)
Filing Type: Form 10-Q (Unaudited Quarterly Report)
Reporting Period: Three months ended March 31, 2006
Business Overview: Chemed operates through two primary subsidiaries: VITAS Healthcare Corporation, providing hospice care, and Roto-Rooter Group, Inc., providing plumbing and drain cleaning services. The company is a large accelerated filer with 26,159,533 shares of common stock outstanding as of March 31, 2006.
Key Financial Metrics
| Metric | Q1 2006 | Q1 2005 |
|---|---|---|
| Service Revenues and Sales | $246,238,000 | $218,637,000 |
| Income from Continuing Operations | $12,215,000 | $7,905,000 |
| Net Income | $12,215,000 | $8,116,000 |
| Diluted EPS (Continuing Ops) | $0.46 | $0.31 |
| Operating Cash Flow | $32,740,000 | ($4,148,000) |
| Cash and Cash Equivalents (End of Period) | $45,668,000 | $8,557,000 |
| Long-Term Debt | $194,399,000 | $234,058,000 |
| Consolidated Gross Margin | 27.8% | 30.0% |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 12.6% year-over-year. VITAS revenue grew 15.3% driven by a 10% increase in Average Daily Census (ADC) and a 3% Medicare reimbursement rate increase. Roto-Rooter revenue grew 7.2% due to higher job counts and price increases.
- Profitability: Net income increased 50.5% to $12.2 million. Income from continuing operations rose 54.5% to $12.2 million, aided by revenue growth outpacing expense growth and a reduction in debt extinguishment losses.
- Cash Flow: Operating cash flow swung from a $4.1 million use of cash in Q1 2005 to a $32.7 million source in Q1 2006. This improvement was primarily due to a $21.1 million decrease in accounts receivable and higher net income.
- Debt Reduction: Long-term debt decreased by approximately $40 million. The company repaid an $84.4 million term loan in full using cash on hand and a draw on its revolving credit facility.
- Margin Compression: Consolidated gross margin declined to 27.8% from 30.0%. VITAS margins dropped due to unusually high seasonal discharge rates in January and February 2006, while Roto-Rooter margins were lower due to the absence of a $1.6 million prior-period insurance benefit recorded in 2005.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management believes liquidity is satisfactory for foreseeable needs, with approximately $103 million in unused credit available under the revolving facility. The company expects to remain in compliance with all debt covenants throughout 2006. VITAS discharge rates and gross margins returned to historic levels in March 2006.
Accounting Changes
Effective January 1, 2006, the company adopted SFAS 123(R) for stock-based compensation using the modified prospective transition method. Management determined there was no material impact on financial position or results of operations from this adoption.
Risks and Contingencies
- OIG Investigation: The Office of Inspector General (OIG) is investigating VITAS regarding alleged improper Medicare/Medicaid billing. A qui tam complaint remains under seal. The company incurred $132,000 in compliance costs for the quarter and cannot predict the outcome or financial impact.
- California Wage and Hour Litigation: A tentative settlement was reached regarding a class action lawsuit alleging wage and hour violations. A preliminary approval was granted in April 2006, pending final court approval. A $17.4 million pretax charge was recorded in Q4 2005 for this matter.
- Illinois Plumbing Litigation: A class action lawsuit regarding unlicensed plumbers was preliminarily approved for settlement in December 2004. Final approval is expected in 2006. A $3.1 million reserve was accrued in 2004.
- Medicare Cap: As of March 31, 2006, no VITAS programs are projected to exceed the Medicare Cap for the 2006 measurement period, though a $2.4 million accrual remains for the 2005 Phoenix facility.
Investor Verification Checklist
- Debt Structure: Verify the terms of the amended $175 million revolving credit facility and the status of the $50 million "accordion" feature.
- Regulatory Outcomes: Monitor the final court approval of the California wage and hour settlement and the resolution of the OIG investigation regarding Medicare billing.
- Operational Metrics: Track VITAS Average Daily Census (ADC) and discharge rates to ensure the Q1 2006 margin compression was indeed temporary.
- Receivables Quality: Review the aging of accounts receivable, particularly the $12.5 million long-term receivable from Patient Care and the $4.0 million in current receivables subject to litigation.
- Stock-Based Compensation: Assess the impact of future stock option grants and vesting under the new SFAS 123(R) framework on future earnings.