Business Context and Reporting Period
Company: Chemed Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 1999
Business Overview: Chemed operates through three primary segments: Roto-Rooter (plumbing and drain cleaning), Patient Care (hospice services), and Service America (home services and retail). The company is actively managing Year 2000 (Y2K) compliance and liquidity for its investment in Vitas Healthcare Corporation.
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 1999 | 9 Months Ended Sep 30, 1998 | 3 Months Ended Sep 30, 1999 | 3 Months Ended Sep 30, 1998 |
|---|---|---|---|---|
| Service Revenues & Sales | $326,313 | $279,872 | $112,824 | $96,517 |
| Net Income | $14,881 | $16,509 | $4,412 | $4,692 |
| Diluted EPS | $1.41 | $1.64 | $0.42 | $0.47 |
| Operating Cash Flow | $18,709 | $14,125 | N/A | N/A |
| Cash & Equivalents (End of Period) | $20,197 | $50,074 | $20,197 | $50,074 |
| Total Debt (Current + Long-term) | $86,799 | $84,800 | $86,799 | $84,800 |
| Unused Credit Lines | $101,200 | N/A | $101,200 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 17% for the nine months ended September 30, 1999, compared to the prior year. The Roto-Rooter segment drove this growth with a 28% increase, while Patient Care and Service America grew 6% and 4%, respectively.
- Net Income Decline: Reported net income decreased 10% year-over-year for the nine-month period ($14.9M vs. $16.5M). This decline is primarily attributed to a significant reduction in "Other income, net" due to lower gains on the sale of investments in 1999 compared to 1998.
- Adjusted Performance: Excluding investment gains, diluted earnings per share actually increased 30% to $1.14 for the nine-month period, indicating strong core operational performance.
- Liquidity Position: Cash and cash equivalents decreased by $21.2 million to $20.2 million. This reduction was driven by $15.8 million in business combinations and $18.0 million in capital expenditures, largely within the Roto-Rooter segment.
- Segment Margins: Roto-Rooter's after-tax margin improved to 5.9% (from 5.5%) due to operating leverage. Patient Care margins slightly declined to 2.7% (from 2.8%) due to expected Medicare revenue reductions from the Balanced Budget Act of 1997.
Guidance, Outlook, and Risks
- Dividend Policy Change: The Board declared a quarterly dividend of $0.53 per share for Q4 1999. However, a new policy for 2000 and beyond anticipates quarterly dividends in the range of $0.10 per share, a significant reduction from the current rate.
- Capital Structure: The Board adopted a plan for an exchange offer allowing shareholders to exchange up to 2 million common shares for a new class of high-yielding convertible trust preferred stock with an annual cash payout of approximately $2.00 per share.
- Year 2000 (Y2K) Risk: While mission-critical systems are believed to be Y2K-ready, the Patient Care segment relies heavily on electronic processing of Medicare/Medicaid claims. Failure of external intermediaries to be Y2K-ready could significantly slow revenue processing. Contingency plans include manual processing.
- Investment Contingency: A $27 million investment in Vitas Healthcare Corporation (redeemable preferred stock) has a deferred dividend payment. Management believes the investment is fully recoverable with no impairment, but liquidity issues at Vitas remain a monitoring point.
Investor Verification Checklist
- Dividend Sustainability: Verify the rationale and long-term impact of the proposed dividend reduction from $0.53 to ~$0.10 per share starting in 2000.
- Y2K Execution: Confirm the status of Medicaid fiscal intermediaries' Y2K readiness, as this directly impacts the collection of 33% of Patient Care's revenues.
- Vitas Investment Health: Monitor the status of Vitas Healthcare's financing negotiations and the potential for further dividend deferrals or impairment.
- Core Earnings Quality: Validate the "adjusted" earnings growth (excluding investment gains) to ensure the 30% increase in core profitability is sustainable without one-time asset sales.
- Liquidity Management: Assess the company's ability to fund future acquisitions and capital expenditures given the $21 million cash burn in the first nine months, despite having $101 million in unused credit lines.