CHE

Business Context and Reporting Period

Company: Chemed Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2005
Business Overview: Chemed operates through two primary segments: VITAS (hospice services) and Roto-Rooter (plumbing and drain cleaning). The company also reported discontinued operations related to the sale of Service America.

Key Financial Metrics

Margins (Six Months 2005 vs 2004):
- Consolidated Gross Margin: 29.4% (2005) vs 31.5% (2004).
- VITAS Gross Margin: 21.2% (2005) vs 21.6% (2004).
- Roto-Rooter Gross Margin: 46.3% (2005) vs 44.5% (2004).

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 13.6% in Q2 2005 and 39.3% in the first six months of 2005 compared to the prior year. The six-month increase is largely driven by the full-year inclusion of VITAS operations (acquired Feb 2004) and increased patient census.
• Profitability: Net income for the six months ended June 30, 2005, was $17.0 million, a significant increase from $1.2 million in the prior year period. This improvement is attributed to higher operating income from VITAS and Roto-Rooter, offset by a loss on discontinued operations.
• Debt Reduction: Total long-term debt decreased by approximately $56 million from year-end 2004 to June 30, 2005, following a refinancing in February 2005. This included prepaying $110 million of Floating Rate Notes.
• Cash Position: Cash and cash equivalents declined from $71.4 million at Dec 31, 2004, to $17.9 million at June 30, 2005, primarily due to debt repayment and capital expenditures.
• Discontinued Operations: The company recorded a loss of $2.0 million for the six months ended June 30, 2005, related to the disposal of Service America, compared to income of $0.1 million in the prior year.

Guidance, Outlook, Risks, and Unusual Items

• OIG Investigation: The Office of Inspector General (OIG) served VITAS with civil subpoenas regarding alleged billing failures for Medicare/Medicaid. The company cannot predict the outcome or financial impact but has accrued $160,000 in legal expenses for the quarter.
• Medicare Cap Liability: VITAS recorded a $1.0 million liability for its Phoenix program regarding the Medicare Cap, considered a pre-acquisition contingency.
• Stock Split: A 2-for-1 stock split was effected in May 2005. Historical per-share data has been restated.
• Accounting Changes: The company accelerated the vesting of stock options in Q1 2005 to mitigate the impact of the upcoming SFAS No. 123R implementation in 2006, incurring a $215,000 pretax charge.
• Litigation: A tentative resolution was reached regarding a class-action lawsuit against Roto-Rooter concerning unlicensed employees; a $3.1 million settlement was accrued in Q4 2004. A separate California wage-and-hour lawsuit against VITAS remains pending with no estimated liability.
• Liquidity: Management believes liquidity is satisfactory, with approximately $147.3 million in unused lines of credit available under the revolving credit facility.

Investor Verification Checklist

• Medicare Payment Timing: Verify the impact of delayed Medicare payments on recent acquisitions and new starts on future cash flows.
• OIG Investigation Outcome: Monitor the status of the OIG investigation into VITAS billing practices for potential future liabilities or reputational damage.
• Discontinued Operations Finalization: Confirm the final settlement of the Service America disposal and any remaining receivables from the buyer.
• Debt Covenants: Ensure continued compliance with financial covenants under the amended credit facility with JPMorgan Chase.
• Stock-Based Compensation: Review the impact of SFAS No. 123R implementation on future earnings starting January 1, 2006.