Chemed announces financial results for fourth-quarter ended December 31, 2009

Chemed Corporation (Chemed) (NYSE:CHE), which operates VITAS Healthcare Corporation (VITAS), the nation’s largest provider of end-of-life care, and Roto-Rooter, the nation’s largest commercial and residential plumbing and drain cleaning services provider, reported financial results for its fourth quarter ended December 31, 2009, versus the comparable prior-year period, as follows:

Consolidated operating results:

• Revenue increased 3.8% to $303.2 million
• Diluted EPS of $0.78
• Adjusted Diluted EPS increased 7.1% to $1.06

VITAS segment operating results:

• Net Patient Revenue of $217.6 million, an increase of 5.7%
• Average Daily Census (ADC) of 12,149, an increase of 2.7%
• Admissions of 13,677, an increase of 2.7%
• Net Income of $19.4 million, a decrease of 0.9%
• Adjusted EBITDA of $34.3 million, essentially equal to the prior year
• Adjusted EBITDA margin of 15.8%, a decrease of 91 basis points

Roto-Rooter segment operating results:

• Revenue of $85.7 million, a decline of 0.8%
• Job count of 167,877, a decline of 6.3%
• Net Income of $8.1 million, a decrease of 0.2%
• Adjusted EBITDA of $16.0 million, an increase of 3.4%
• Adjusted EBITDA margin of 18.7%, an increase of 76 basis points

VITAS

Net revenue for VITAS was $217.6 million in the fourth quarter of 2009, which is an increase of 5.7% over the prior-year period. This revenue growth was the result of increased ADC and admissions of 2.7% and Medicare price increases of approximately 3.5%. The Medicare price increase of 3.5% is a combination of adjustments to the BNAF phase-out in February and August of 2009 and a 1.3% market basket update effective October 1, 2009. The remaining difference is attributed to patient geographic mix.

Average revenue per patient per day in the quarter, before the effect of the Medicare Cap, was $196.28, which is 3.6% above the prior-year period. Routine home care reimbursement and high acuity care averaged $154.74 and $678.94, respectively, per patient per day in the fourth quarter of 2009. During the quarter, high acuity days-of-care were 7.9% of total days-of-care. This compares to high acuity days of care of 7.8% in the prior-year quarter.

In the fourth quarter of 2009, VITAS recorded a reduction in revenue due to estimated Medicare Cap limitations of $1.8 million. The amount recorded relates predominantly to one program which is our largest provider number. Admissions for this provider were strong during the quarter. However, revenue increased at a more rapid pace during the quarter due to a decrease in overall discharges and a mix shift to higher acuity days of care. The full-year gross margin for this program, including the Medicare Cap, is approximately 28%.

The government’s Medicare Cap fiscal year begins on September 29. The first quarter of a Medicare Cap year has the potential to be volatile if a program experiences unusual admission or discharge patterns. As the year progresses, the Medicare Cap estimate tends to become more predictable on a quarterly and year-to-date basis. Actual January 2010 admissions in this one program were more than adequate to eliminate all billing limitations for this program for the four-month period. Consequently, VITAS anticipates reversing a significant portion of the Medicare Cap liability related to this program during the first quarter of 2010.

Of VITAS’ 34 unique Medicare provider numbers, 32 provider numbers, or 94%, have a Medicare Cap cushion greater than 10% for the trailing twelve-month period with two provider numbers having cushion of less than 5%. VITAS generated an aggregate cap cushion of $189 million or 24%, during the trailing twelve-month period.

The fourth quarter of 2009 gross margin was 24.1%, which is 106 basis points lower than the fourth quarter of 2008. The revenue reduction for Medicare Cap limitations reduced 2009 gross margin by 64 basis points. The remaining decline is caused by slightly higher labor costs and a mix shift towards higher acuity care which carries a lower gross margin than routine homecare.

Selling, general and administrative expense was $18.0 million in the fourth quarter of 2009, which is an increase of 4.4% when compared to the prior year. Adjusted EBITDA totaled $34.3 million in the quarter. Adjusted EBITDA margin, excluding the impact from Medicare Cap, was 16.5% in the quarter. This compares to an Adjusted EBITDA margin of 16.8% in the prior-year quarter.

Roto-Rooter

Roto-Rooter’s plumbing and drain cleaning business generated sales of $85.7 million for the fourth quarter of 2009, a decline of 0.8%. Despite the decline in revenues, Roto-Rooter’s gross margin expanded 61 basis points to 46.2%, as compared to the fourth quarter of 2008. This is attributable primarily to favorable technician turnover rate and lower health insurance expense. Favorable technician turnover rates improve margins by reducing hiring expenses and training costs. Adjusted EBITDA in the fourth quarter of 2009 totaled $16.0 million and the Adjusted EBITDA margin was 18.7% in the quarter, an increase of 76 basis points when compared to the prior-year quarter.

Job count in the fourth quarter of 2009 declined 6.3% when compared to the prior-year period. Total residential jobs declined 4.9%, as residential plumbing jobs decreased 3.5% and residential drain cleaning jobs declined 5.6%, when compared to the fourth quarter of 2008. Residential jobs represented 72% of total job count in the quarter. Total commercial jobs declined 9.8% with commercial plumbing job count declining 13.7% and commercial drain cleaning decreasing 9.7%, when compared to the prior-year quarter. These declines were partially offset by a 21.5% increase in jobs in the “Other” category.

This job count decline was significantly mitigated relative to total revenue through a combination of increased pricing and favorable job mix shift to more expensive jobs such as excavation.

Management continues to have discussions with existing franchisees to acquire Roto-Rooter franchise territories. This activity is attributed to the current state of the capital markets, the potential increase in tax rates and the recessionary difficulties our franchisees are experiencing. Management will continue to be highly disciplined in terms of valuation, risk assessment and overall return on investment of any potential acquisition. However, the timing or actual completion of any acquisition cannot be predicted.

Chemed Consolidated Debt and Cash Flows

Effective January 1, 2009, the Company retrospectively adopted a new accounting standard to account for its convertible debt instrument. This accounting standard required the Company to separately account for the debt and equity portions of its 1.875% Senior Convertible Notes (Notes). This accounting method assumed the Company could have borrowed under a conventional seven-year fixed rate interest-only note at 6.875%. The difference between the actual 1.875% coupon rate of the Notes and this estimated borrowing rate created a discount on the Notes that is recorded in equity at the inception of the debt. The Notes, net of this discount, will be accreted to their face value over the life of the Notes using the effective interest method. The impact of this accounting change for the year ended December 31, 2009, was a non-cash increase in pretax interest expense of approximately $6.3 million ($4.0 million after-tax).

Chemed had total debt of $152.1 million at December 31, 2009. This debt is net of the discount taken as a result of the new accounting standard. Excluding this discount, aggregate debt is $187.0 million and is due in May 2014. Chemed’s total debt equates to less than one times trailing twelve-month adjusted EBITDA.

Chemed’s $175.0 million revolving credit facility expires in May 2012. At December 31, 2009, this credit facility had approximately $146.2 million of undrawn borrowing capacity after deducting $28.8 million for letters of credit issued under this facility to secure the Company’s workers’ compensation insurance.

Capital expenditures for 2009 aggregated $21.5 million and compares favorably to depreciation and amortization in 2009 of $27.9 million.

Total cash and cash equivalents as of December 31, 2009, was $112.4 million, which represents 56.7% of total current assets. Net cash provided from operations in the fourth quarter of 2009 aggregated $80.3 million. The fourth quarter cash flow was unusually high due primarily to the liquidation of $50.7 million in accounts receivable primarily at VITAS. During the fourth quarter of 2009, VITAS cleared certain regulatory hurdles allowing for collection of accounts receivable which had been delayed, mainly by Medicare, due to administrative or compliance audit delays. Additionally, VITAS received its final periodic payment from Medicare for the year of $30.4 million on December 31, 2009, which enhanced total cash collections during the quarter.

The Company increased its quarterly dividend per share in the third quarter of 2009, from $0.06 per share to $0.12 per share. During the fourth quarter, the company purchased $742,000 of treasury stock and has approximately $53 million of remaining authorization under its previously announced share repurchase program. Management continually evaluates cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of available capital resources.

Guidance for 2010

VITAS expects to achieve full-year 2010 revenue growth, prior to Medicare Cap, of 5.0% to 6.0%. Admissions in 2010 are estimated to increase 2.0% to 4.0% and full-year Adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 15.0% to 15.5%. Effective October 1, 2009, Medicare increased average hospice reimbursement rates by approximately 1.3%. Our full-year guidance includes $5.0 million of estimated Medicare contractual billing limitations during 2010.

Roto-Rooter expects to achieve full-year 2010 revenue growth of 1.0% to 3.0%. The revenue estimate is a result of increased pricing of 3.0%, a favorable mix shift to higher revenue jobs, offset by a job count decline estimated at 2.0% to 4.0%. Adjusted EBITDA margin for 2010 is estimated in the range of 17.5% to 18.0%.

Based upon these factors, an effective tax rate of 39.0% and a full-year average diluted share count of 22.8 million shares, management estimates 2010 earnings per diluted share from continuing operations, excluding non-cash expenses for stock options, the non-cash increase in interest expense related to the accounting change for convertible debt interest expense and other items not indicative of ongoing operations will be in the range of $4.05 to $4.20.