Chemed Corp. 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008. Chemed Corporation operates through two primary segments: VITAS Healthcare (hospice care) and Roto-Rooter (plumbing and drain cleaning services). The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Service Revenues and Sales | $288.3 million | $856.7 million |
| Net Income | $17.9 million | $52.0 million |
| Diluted EPS | $0.79 | $2.20 |
| Operating Cash Flow | N/A (Quarterly not provided) | $89.5 million |
| Consolidated Gross Margin | 29.8% | 28.9% |
| Total Debt (Current + Long-term) | $217.2 million | $217.2 million |
| Cash and Equivalents | $6.8 million | $6.8 million |
| Unused Credit Facility | $147.7 million | $147.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 5.8% in Q3 and 5.2% for the nine-month period compared to 2007. This was driven by an 8-9% increase in VITAS revenues (due to a 4% increase in Average Daily Census and Medicare rate hikes) offset by a 1% decline in Roto-Rooter revenues (due to a 9-12% drop in job count, partially offset by price/mix increases).
- Profitability: Net income increased 18.8% for the nine months ended September 30, 2008, compared to the same period in 2007. This improvement is largely attributable to the absence of a $13.8 million pre-tax loss on debt extinguishment recorded in the prior year.
- Segment Performance: VITAS after-tax earnings increased 26.1% in Q3 and 4.9% for the nine months. Roto-Rooter earnings declined 13.8% in Q3 and 13.0% for the nine months, primarily due to increased health insurance costs from large medical claims.
- Capital Structure: The company repurchased approximately 1.7 million shares of treasury stock for $69.1 million during the nine-month period. Interest expense decreased significantly due to debt repayments and lower floating rates.
Outlook, Risks, and Contingencies
- Accounting Changes: The company will adopt FASB Staff Position No. APB 14-1 on January 1, 2009. This will require separating debt and equity components of its $200 million Convertible Debentures, resulting in an estimated discount of $50-$60 million and higher interest expense going forward.
- Legal and Regulatory Risks:
- OIG Investigation: The Office of Inspector General continues to investigate VITAS regarding alleged Medicare/Medicaid billing issues. The company cannot predict the outcome or financial impact.
- Class Action Lawsuits: VITAS faces a wage and hour lawsuit in California (Santos) with unestimable liability. Roto-Rooter settled a similar wage and hour lawsuit (Ita) for approximately $1.8 million in August 2008.
- Medicare Cap: VITAS monitors programs for potential Medicare billing caps. As of the filing date, no revenue reductions were recorded for the 2007 or 2008 measurement periods, though three programs had less than a 10% cushion.
- Market Risk: The company has $17.0 million in variable rate debt. A 1% change in interest rates would impact annual interest expense by approximately $170,000.
Investor Verification Checklist
- Verify the impact of the upcoming adoption of FASB APB 14-1 on future interest expense and equity balances.
- Monitor the status of the OIG investigation and potential financial exposure from the Santos class action lawsuit.
- Assess the sustainability of VITAS's Average Daily Census (ADC) growth given the competitive hospice landscape.
- Review Roto-Rooter's ability to offset declining job counts with price increases and mix shifts in a potentially slowing economy.
- Confirm the company's compliance with debt covenants, particularly given the $147.7 million in available credit and $217.2 million in total debt.