For the Six Months Ended June 30, | | Net Income | | | Shares | | | Earnings per Share | |
| 2010 | | | | | | | | | |
| Earnings | | $ | 38,213 | | | | 22,608 | | | $ | 1.69 | |
| Dilutive stock options | | | - | | | | 319 | | | | | |
| Nonvested stock awards | | | - | | | | 85 | | | | | |
| Diluted earnings | | $ | 38,213 | | | | 23,012 | | | $ | 1.66 | |
| | | | | | | | | | | | | |
| 2009 | | | | | | | | | | | | |
| Earnings | | $ | 36,589 | | | | 22,406 | | | $ | 1.63 | |
| Dilutive stock options | | | - | | | | 216 | | | | | |
| Nonvested stock awards | | | - | | | | 38 | | | | | |
| Diluted earnings | | $ | 36,589 | | | | 22,660 | | | $ | 1.61 | |
For the three and six-month periods ended June 30, 2010, 976,000 and 991,000 stock options, respectively were excluded from the computation of diluted earnings per share as their exercise prices were greater than the average market price for most of the period. For the three and six-month periods ended June 30, 2009, 1.8 million stock options were excluded from the computation of diluted earnings per share.
Diluted earnings per share may be impacted in future periods as the result of the issuance of our 1.875% Senior Convertible Notes (the “Notes”) and related purchased call options and sold warrants. Per FASB’s authoritative guidance on the effect of contingently convertible instruments on diluted earnings per share and convertible bonds with an issuer option to settle for cash upon conversion, we will not include any shares related to the Notes in our calculation of diluted earnings per share until our average stock price for a quarter exceeds the current conversion price. We would then include in our diluted earnings per share calculation those shares issuable using the treasury stock method. The amount of shares issuable is based upon the amount by which the average stock price for the quarter exceeds the conversion price. The purchased call option does not impact the calculation of diluted earnings per share as it is always anti-dilutive. The sold warrants become dilutive when our average stock price for a quarter exceeds the strike price of the warrant.
The following table provides examples of how changes in our stock price impact the number of shares that would be included in our diluted earnings per share calculation. It also shows the impact on the number of shares issuable upon conversion of the Notes and settlement of the purchased call options and sold warrants:
| | | | Shares | | | | | | | | | | | | Incremental | |
| | | | Underlying | | | | | | Total Treasury | | | Shares Due | | | | |
| | | | 1.875% | | | | | | Method | | | to the Company | | | Received by the | |
| Share | | | Convertible | | | Warrant | | | Incremental | | | under Notes | | | Company upon | |
| Price | | | Notes | | | Shares | | | Shares (a) | | | Hedges | | | Conversion (b) | |
| $ | 80.73 | | | | 11,398 | | | | - | | | | 11,398 | | | | (12,194 | ) | | | (796 | ) |
| $ | 90.73 | | | | 266,091 | | | | - | | | | 266,091 | | | | (284,657 | ) | | | (18,566 | ) |
| $ | 100.73 | | | | 470,215 | | | | - | | | | 470,215 | | | | (503,022 | ) | | | (32,807 | ) |
| $ | 110.73 | | | | 637,470 | | | | 118,682 | | | | 756,152 | | | | (681,947 | ) | | | 74,205 | |
| $ | 120.73 | | | | 777,018 | | | | 314,621 | | | | 1,091,639 | | | | (831,231 | ) | | | 260,408 | |
| $ | 130.73 | | | | 895,216 | | | | 480,584 | | | | 1,375,800 | | | | (957,676 | ) | | | 418,124 | |
| a) | Represents the number of incremental shares that must be included in the calculation of fully diluted shares under U.S. GAAP. |
| b) | Represents the number of incremental shares to be issued by the Company upon conversion of the 1.875% Convertible Notes, assuming concurrent settlement of the note hedges and warrants. |
5. Long-Term Debt
We are in compliance with all debt covenants as of June 30, 2010. We have issued $28.3 million in standby letters of credit as of June 30, 2010 for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of June 30, 2010, we have approximately $146.7 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the expansion feature.
In May 2008, the FASB issued authoritative guidance for accounting for convertible debt instruments that may be settled in cash upon conversion including partial cash settlement. This guidance requires all convertible debentures classified as Instruments B or C to separately account for the debt and equity pieces of the instrument. Convertible debentures classified as Instruments B may be settled in either stock or cash equivalent to the conversion value and convertible debentures classified as Instruments C must settle the accreted value of the obligation in cash and may satisfy the excess conversion value in either cash or stock. At inception of the convertible instrument, cash flows related to the convertible instrument are to be discounted using a market rate of interest. We adopt ed the provisions of the guidance on January 1, 2009 and applied the guidance retrospectively. Upon adoption, the Notes had a discount of approximately $55.1 million.
The following amounts are included in our consolidated balance sheet related to the Notes:
| | | June 30, 2010 | | | December 31, 2009 | |
| Principal amount of convertible debentures | | $ | 186,956 | | | $ | 186,956 | |
| Unamortized debt discount | | | (31,348 | ) | | | (34,829 | ) |
| Carrying amount of convertible debentures | | $ | 155,608 | | | $ | 152,127 | |
| Additional paid in capital (net of tax) | | $ | 31,310 | | | $ | 31,310 | |
The following amounts comprise interest expense included in our consolidated income statement (in thousands):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Cash interest expense | | $ | 1,083 | | | $ | 1,346 | | | $ | 2,153 | | | $ | 2,424 | |
| Non-cash amortization of debt discount | | | 1,755 | | | | 1,640 | | | | 3,480 | | | | 3,253 | |
| Amortization of debt costs | | | 161 | | | | 156 | | | | 318 | | | | 309 | |
| Total interest expense | | $ | 2,999 | | | $ | 3,142 | | | $ | 5,951 | | | $ | 5,986 | |
The unamortized debt discount will be amortized using the effective interest method over the remaining life of the Notes. The effective rate on the Notes after adoption of the standard is approximately 6.875%.
6. Other Operating Expenses
For the three and six-month periods ended June 30, 2010, there were no other operating expenses recorded. For the three and six-month periods ended June 30, 2009, we recorded pretax expenses of $3.4 million and $4.0 million, respectively, related to the costs of a contested proxy solicitation.
7. Other Income -- Net
Other income -- net comprises the following (in thousands):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Market value gains/(losses) on assets held in | | | | | | | | | | | | |
| deferred compensation trust | | $ | (83 | ) | | $ | 3,199 | | | $ | 105 | | | $ | 1,585 | |
| Gain on settlement of company-owned life insurance | | | - | | | | - | | | | - | | | | 1,211 | |
| Loss on disposal of property and equipment | | | (58 | ) | | | (78 | ) | | | (152 | ) | | | (54 | ) |
| Interest income | | | 150 | | | | 207 | | | | 225 | | | | 289 | |
| Other - net | | | 1 | | | | 30 | | | | 18 | | | | 51 | |
| Total other income | | $ | 10 | | | $ | 3,358 | | | $ | 196 | | | $ | 3,082 | |
8. Stock-Based Compensation Plans
On May 17, 2010 the stockholders approved the adoption of the Company’s 2010 Stock Incentive Plan. The Stock Incentive Plan authorizes the issuance or transfer of a maximum of 1,750,000 shares of capital stock pursuant to stock incentives granted to key employees of the Company. Stock incentives granted under the Stock Plan may be in the form of options to purchase capital stock or in the form of capital stock awards.
In April 2010, we met the stock price target of our Long-Term Incentive Plan. The stock price hurdle of $54.00 was achieved during 30 trading days out of a 60 day trading day period. On April 16, 2010, the Compensation/Incentive Committee of the Board of Directors (“CIC”) approved a stock grant of 27,900 shares and the related allocation to participants. The pretax cost of the stock grant was $1.8 million.
On February 18, 2010, the CIC approved a grant of 47,896 shares of restricted stock to certain key employees. The restricted shares cliff vest four years from the date of issuance. The cumulative compensation expense related to the restricted stock award is $2.5 million and will be recognized ratably over the four-year vesting period. We assumed no forfeitures in determining the cumulative compensation expense of the grant.
On February 18, 2010, the CIC approved a grant of 515,100 stock options to certain employees. The stock options vest ratably over three years from the date of issuance. The cumulative compensation expense related to the stock option grant is $7.8 million and will be recognized over the three-year vesting period. We used the Black-Scholes option valuation method to determine the cumulative compensation expense of the grant.
9. Independent Contractor Operations
The Roto-Rooter segment sublicenses with sixty-one independent contractors to operate certain plumbing repair and drain cleaning businesses in lesser-populated areas of the United States and Canada. We had notes receivable from our independent contractors as of June 30, 2010 totaling $1.2 million (December 31, 2009 -$1.3 million). In most cases these loans are fully or partially secured by equipment owned by the contractor. The interest rates on the loans range from zero to 8% per annum and the remaining terms of the loans range from two months to 5 years at June 30, 2010. During the three months ended June 30, 2010, we recorded revenues of $5.6 million (2009 - $5.4 million) and pretax profits of $2.7 million (2009 - $2.4 million) from our independent contractors. During the six months ended June 30, 2010, we recorded revenues of $11.2 million (2009 - $10.7 million) and pretax profits of $5.1 million (2009 - $4.7 million) from our independent contractors.
10. Pension and Retirement Plans
All of the Company’s plans that provide retirement and similar benefits are defined contribution plans. Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans were $2.2 million and $5.6 million for the three months ended June 30, 2010 and 2009, respectively. Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans were $4.7 million and $7.0 million for the six months ended June 30, 2010 and 2009, respectively.
11. Legal and Regulatory Matters
Litigation
On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from Roto-Rooter and Chemed. They also seek payment of penalties, interest and plaintiffs’ attorney fees. We contest these allegations. In June 2010, the Court conditionally certified a nationwide class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment. There has been no final determination of the merits of collective treatment of the case. The lawsuit is in its early stage and we are unable to estimate o ur potential liability, if any, with respect to these allegations.
VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White. This case alleges failure to pay overtime and failure to provide meal and rest periods to a purported class of California admissions nurses, chaplains and sales representatives. The case seeks payment of penalties, interest and Plaintiffs’ attorney fees. VITAS contests these allegations. In December 2009, the trial court denied Plaintiffs’ motion for class certification. The lawsuit is in its early stages and we are unable to estimate our potential liability, if any, with respect to these allegations.
Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity. In the normal course of business, we are a party to various claims and legal proceedings. We record a reserve for these matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable.
Regulatory Matters
In April 2005, the Office of Inspector General (“OIG”) for the Department of Health and Human Services served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services. As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review. It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges. During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us. The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Flori da with prejudice in July 2007. The plaintiffs appealed this dismissal, which the Court of Appeals affirmed. The government continues to investigate the complaint’s allegations. In March 2009, we received a letter from the government reiterating the basis of their investigation.
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the OIG documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter. In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review. In February 2010, VITAS received a companion civil investigative demand from the state of Texas Attorney General’s Office, seeking related documents. Based on the early stage of the investigation and the limited information we have at this time, we cannot predict the outcome of this investigation. We believe that we are in material compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
The costs to comply with either of these investigations were not material for any period presented. We are unable to predict the outcome of these matters or the impact, if any, that the investigation may have on our business, results of operations, liquidity or capital resources. Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.
12. Related Party Agreement
VITAS has pharmacy services agreements ("Agreements") with Omnicare, Inc. and its subsidiaries (“OCR”) whereby OCR provides specified pharmacy services for VITAS and its hospice patients in geographical areas served by both VITAS and OCR. The Agreements renew automatically for one-year terms. Either party may cancel the Agreements at the end of any term by giving 90 days prior written notice. VITAS made purchases from OCR of $8.9 million and $8.2 million for the three months ended June 30, 2010 and 2009, respectively. VITAS made purchases from OCR of $17.5 million and $16.1 million for the six months ended June 30, 2010 and 2009, respectively.
Mr. Joel F. Gemunder, President and Chief Executive Officer of OCR and Ms. Andrea Lindell are directors of both OCR and the Company. Mr. Kevin J. McNamara, President, Chief Executive Officer and a director of the Company, is a director emeritus of OCR. We believe that the terms of the Agreements are no less favorable to VITAS than we could negotiate with an unrelated party.
13. Cash Overdrafts Payable
Included in accounts payable at June 30, 2010 is cash overdrafts payable of $10.4 million (December 31, 2009 - $11.7 million).
14. Financial Instruments
We adopted the provisions of the FASB’s authoritative guidance on fair value measurements. This statement defines a hierarchy which prioritizes the inputs in fair value measurements. Level 1 measurements are measurements using quoted prices in active markets for identical assets or liabilities. Level 2 measurements use significant other observable inputs. Level 3 measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions. In recording the fair value of assets and liabilities, companies must use the most reliable measurement available.
The following shows the carrying value, fair value and the hierarchy for our financial instruments as of June 30, 2010 (in thousands):
| | | | | | Fair Value Measure | |
| | | Carrying Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Mutual fund investments of deferred compensation plans held in trust | | $ | 26,282 | | | $ | 26,282 | | | $ | - | | | $ | - | |
| Long-term debt | | | 155,608 | | | | 172,701 | | | | - | | | | - | |
For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount is a reasonable estimate of fair value because of the liquidity and short-term nature of these instruments.
15. Capital Stock Transactions
On April 26, 2007, our Board of Directors authorized a $150 million stock repurchase program. On May 19, 2008, our Board of Directors authorized an additional $56 million to the April 2007 stock repurchase program. For the quarter ended June 30, 2010, we repurchased 114,900 shares at a weighted average cost per share of $54.99 under the April 2007 program. For the six months ended June 30, 2010, we repurchased 146,275 shares at a weighted average cost per share of $53.32. For the quarter and six months ended June 30, 2009 there was no stock repurchased.
| 16. Guarantor Subsidiaries | | | | | | | | | | | | | | | |
| Our 1.875% Notes are fully and unconditionally guaranteed on an unsecured, jointly and severally liable basis by certain of our 100% owned subsidiaries. The following unaudited, condensed, consolidating financial data presents the composition of the parent company (Chemed), the guarantor subsidiaries and the non-guarantor subsidiaries as of June 30, 2010 and December 31, 2009 for the balance sheet, the three and six months ended June 30, 2010 and June 30, 2009 for the income statement and the six months ended June 30, 2010 and June 30, 2009 for the statement of cash flows (dollars in thousands): | |
| | | | | | | | | | | | | | | | |
June 30, 2010 | | | | | Guarantor | | | Non-Guarantor | | Consolidating | | | |
| | | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| ASSETS | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 105,276 | | | $ | (1,238 | ) | | $ | 5,042 | | | $ | - | | | $ | 109,080 | |
| Accounts receivable, less allowances | | | 560 | | | | 100,754 | | | | 422 | | | | - | | | | 101,736 | |
| Intercompany receivables | | | - | | | | 149,823 | | | | - | | | | (149,823 | ) | | | - | |
| Inventories | | | - | | | | 7,272 | | | | 706 | | | | - | | | | 7,978 | |
| Current deferred income taxes | | | (962 | ) | | | 15,312 | | | | 103 | | | | - | | | | 14,453 | |
| Prepaid income taxes | | | 3,424 | | | | (2,939 | ) | | | (134 | ) | | | - | | | | 351 | |
| Prepaid expenses | | | 1,047 | | | | 9,326 | | | | 50 | | | | - | | | | 10,423 | |
| Total current assets | | | 109,345 | | | | 278,310 | | | | 6,189 | | | | (149,823 | ) | | | 244,021 | |
| Investments of deferred compensation plans | | | - | | | | - | | | | 26,282 | | | | - | | | | 26,282 | |
| Properties and equipment, at cost, less accumulated depreciation | | | 12,987 | | | | 63,209 | | | | 2,241 | | | | - | | | | 78,437 | |
| Identifiable intangible assets less accumulated amortization | | | - | | | | 56,620 | | | | - | | | | - | | | | 56,620 | |
| Goodwill | | | - | | | | 445,644 | | | | 4,461 | | | | - | | | | 450,105 | |
| Other assets | | | 6,373 | | | | 2,384 | | | | 1,741 | | | | - | | | | 10,498 | |
| Investments in subsidiaries | | | 677,384 | | | | 17,356 | | | | - | | | | (694,740 | ) | | | - | |
| Total assets | | $ | 806,089 | | | $ | 863,523 | | | $ | 40,914 | | | $ | (844,563 | ) | | $ | 865,963 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | (970 | ) | | $ | 49,646 | | | $ | 455 | | | $ | - | | | $ | 49,131 | |
| Intercompany payables | | | 143,947 | | | | - | | | | 5,876 | | | | (149,823 | ) | | | - | |
| Income taxes | | | (969 | ) | | | 6,199 | | | | (447 | ) | | | - | | | | 4,783 | |
| Accrued insurance | | | 677 | | | | 34,052 | | | | - | | | | - | | | | 34,729 | |
| Accrued compensation | | | 2,063 | | | | 39,026 | | | | 524 | | | | - | | | | 41,613 | |
| Other current liabilities | | | 1,215 | | | | 10,346 | | | | 108 | | | | - | | | | 11,669 | |
| Total current liabilities | | | 145,963 | | | | 139,269 | | | | 6,516 | | | | (149,823 | ) | | | 141,925 | |
| Deferred income taxes | | | (11,417 | ) | | | 43,452 | | | | (7,682 | ) | | | - | | | | 24,353 | |
| Long-term debt | | | 155,608 | | | | - | | | | - | | | | - | | | | 155,608 | |
| Deferred compensation liabilities | | | - | | | | - | | | | 25,374 | | | | - | | | | 25,374 | |
| Other liabilities | | | 2,968 | | | | 2,327 | | | | 441 | | | | - | | | | 5,736 | |
| Stockholders' equity | | | 512,967 | | | | 678,475 | | | | 16,265 | | | | (694,740 | ) | | | 512,967 | |
| Total liabilities and stockholders' equity | | $ | 806,089 | | | $ | 863,523 | | | $ | 40,914 | | | $ | (844,563 | ) | | $ | 865,963 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2009 | | | | | | Guarantor | | | Non-Guarantor | | Consolidating | | | | |
| | | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| ASSETS | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 109,331 | | | $ | (1,221 | ) | | $ | 4,306 | | | $ | - | | | $ | 112,416 | |
| Accounts receivable, less allowances | | | 618 | | | | 52,303 | | | | 540 | | | | - | | | | 53,461 | |
| Intercompany receivables | | | - | | | | 149,888 | | | | - | | | | (149,888 | ) | | | - | |
| Inventories | | | - | | | | 7,009 | | | | 534 | | | | - | | | | 7,543 | |
| Current deferred income taxes | | | (378 | ) | | | 14,048 | | | | 31 | | | | - | | | | 13,701 | |
| Prepaid expenses | | | (2,457 | ) | | | 13,706 | | | | (112 | ) | | | - | | | | 11,137 | |
| Total current assets | | | 107,114 | | | | 235,733 | | | | 5,299 | | | | (149,888 | ) | | | 198,258 | |
| Investments of deferred compensation plans | | | - | | | | - | | | | 24,158 | | | | - | | | | 24,158 | |
| Properties and equipment, at cost, less accumulated depreciation | | | 10,309 | | | | 62,912 | | | | 2,137 | | | | - | | | | 75,358 | |
| Identifiable intangible assets less accumulated amortization | | | - | | | | 57,920 | | | | - | | | | - | | | | 57,920 | |
| Goodwill | | | - | | | | 445,662 | | | | 4,380 | | | | - | | | | 450,042 | |
| Other assets | | | 11,190 | | | | 2,232 | | | | 312 | | | | - | | | | 13,734 | |
| Investments in subsidiaries | | | 643,572 | | | | 15,523 | | | | - | | | | (659,095 | ) | | | - | |
| Total assets | | $ | 772,185 | | | $ | 819,982 | | | $ | 36,286 | | | $ | (808,983 | ) | | $ | 819,470 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | (2,411 | ) | | $ | 54,084 | | | $ | 398 | | | $ | - | | | $ | 52,071 | |
| Intercompany payables | | | 147,744 | | | | - | | | | 2,144 | | | | (149,888 | ) | | | - | |
| Income taxes | | | (2,145 | ) | | | 2,159 | | | | 49 | | | | - | | | | 63 | |
| Accrued insurance | | | 1,231 | | | | 33,930 | | | | - | | | | - | | | | 35,161 | |
| Accrued compensation | | | 4,235 | | | | 30,020 | | | | 407 | | | | - | | | | 34,662 | |
| Other current liabilities | | | 1,643 | | | | 11,367 | | | | 1,117 | | | | - | | | | 14,127 | |
| Total current liabilities | | | 150,297 | | | | 131,560 | | | | 4,115 | | | | (149,888 | ) | | | 136,084 | |
| Deferred income taxes | | | (10,549 | ) | | | 43,183 | | | | (6,710 | ) | | | - | | | | 25,924 | |
| Long-term debt | | | 152,127 | | | | - | | | | - | | | | - | | | | 152,127 | |
| Deferred compensation liabilities | | | - | | | | - | | | | 23,637 | | | | - | | | | 23,637 | |
| Other liabilities | | | 3,148 | | | | 1,388 | | | | - | | | | - | | | | 4,536 | |
| Stockholders' equity | | | 477,162 | | | | 643,851 | | | | 15,244 | | | | (659,095 | ) | | | 477,162 | |
| Total liabilities and stockholders' equity | | $ | 772,185 | | | $ | 819,982 | | | $ | 36,286 | | | $ | (808,983 | ) | | $ | 819,470 | |
| For the three months ended June 30, 2010 | | | | | Guarantor | | | Non-Guarantor | | | Consolidating | | | | |
| | | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| Continuing Operations | | | | | | | | | | | | | | | |
| Service revenues and sales | | $ | - | | | $ | 308,825 | | | $ | 6,170 | | | $ | - | | | $ | 314,995 | |
| Cost of services provided and goods sold | | | - | | | | 220,455 | | | | 3,247 | | | | - | | | | 223,702 | |
| Selling, general and administrative expenses | | | 6,508 | | | | 42,302 | | | | 1,146 | | | | - | | | | 49,956 | |
| Depreciation | | | 244 | | | | 5,749 | | | | 201 | | | | - | | | | 6,194 | |
| Amortization | | | 366 | | | | 921 | | | | - | | | | - | | | | 1,287 | |
| Total costs and expenses | | | 7,118 | | | | 269,427 | | | | 4,594 | | | | - | | | | 281,139 | |
| Income/ (loss) from operations | | | (7,118 | ) | | | 39,398 | | | | 1,576 | | | | - | | | | 33,856 | |
| Interest expense | | | (2,888 | ) | | | (111 | ) | | | - | | | | - | | | | (2,999 | ) |
| Other (expense)/income - net | | | 3,670 | | | | (3,562 | ) | | | (98 | ) | | | - | | | | 10 | |
| Income/ (loss) before income taxes | | | (6,336 | ) | | | 35,725 | | | | 1,478 | | | | - | | | | 30,867 | |
| Income tax (provision)/ benefit | | | 2,150 | | | | (13,567 | ) | | | (595 | ) | | | - | | | | (12,012 | ) |
| Equity in net income of subsidiaries | | | 23,041 | | | | 994 | | | | - | | | | (24,035 | ) | | | - | |
| Net income | | $ | 18,855 | | | $ | 23,152 | | | $ | 883 | | | $ | (24,035 | ) | | $ | 18,855 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the three months ended June 30, 2009 | | | | | | Guarantor | | | Non-Guarantor | | | Consolidating | | | | | |
| | | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| Continuing Operations | | | | | | | | | | | | | | | | | | | | |
| Service revenues and sales | | $ | - | | | $ | 289,382 | | | $ | 5,873 | | | $ | - | | | $ | 295,255 | |
| Cost of services provided and goods sold | | | - | | | | 204,416 | | | | 2,921 | | | | - | | | | 207,337 | |
| Selling, general and administrative expenses | | | 5,783 | | | | 39,586 | | | | 4,211 | | | | - | | | | 49,580 | |
| Depreciation | | | 148 | | | | 5,016 | | | | 174 | | | | - | | | | 5,338 | |
| Amortization | | | 315 | | | | 1,303 | | | | - | | | | - | | | | 1,618 | |
| Other operating expenses | | | 3,444 | | | | - | | | | - | | | | - | | | | 3,444 | |
| Total costs and expenses | | | 9,690 | | | | 250,321 | | | | 7,306 | | | | - | | | | 267,317 | |
| Income/ (loss) from operations | | | (9,690 | ) | | | 39,061 | | | | (1,433 | ) | | | - | | | | 27,938 | |
| Interest expense | | | (2,757 | ) | | | (385 | ) | | | - | | | | - | | | | (3,142 | ) |
| Other income - net | | | 106 | | | | 38 | | | | 3,214 | | | | - | | | | 3,358 | |
| Income/ (loss) before income taxes | | | (12,341 | ) | | | 38,714 | | | | 1,781 | | | | - | | | | 28,154 | |
| Income tax (provision)/ benefit | | | 4,148 | | | | (14,766 | ) | | | (286 | ) | | | - | | | | (10,904 | ) |
| Equity in net income of subsidiaries | | | 25,443 | | | | 1,295 | | | | - | | | | (26,738 | ) | | | - | |
| Net income | | $ | 17,250 | | | $ | 25,243 | | | $ | 1,495 | | | $ | (26,738 | ) | | $ | 17,250 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the six months ended June 30, 2010 | | | | | | Guarantor | | | Non-Guarantor | | Consolidating | | | | | |
| | | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| Continuing Operations | | | | | | | | | | | | | | | | | | | | |
| Service revenues and sales | | $ | - | | | $ | 611,827 | | | $ | 11,981 | | | $ | - | | | $ | 623,808 | |
| Cost of services provided and goods sold | | | - | | | | 436,655 | | | | 6,184 | | | | - | | | | 442,839 | |
| Selling, general and administrative expenses | | | 12,206 | | | | 83,619 | | | | 2,669 | | | | - | | | | 98,494 | |
| Depreciation | | | 380 | | | | 10,882 | | | | 401 | | | | - | | | | 11,663 | |
| Amortization | | | 696 | | | | 1,815 | | | | - | | | | - | | | | 2,511 | |
| Total costs and expenses | | | 13,282 | | | | 532,971 | | | | 9,254 | | | | - | | | | 555,507 | |
| Income/ (loss) from operations | | | (13,282 | ) | | | 78,856 | | | | 2,727 | | | | - | | | | 68,301 | |
| Interest expense | | | (5,739 | ) | | | (212 | ) | | | - | | | | - | | | | (5,951 | ) |
| Other (expense)/income - net | | | 7,291 | | | | (7,199 | ) | | | 104 | | | | - | | | | 196 | |
| Income/ (loss) before income taxes | | | (11,730 | ) | | | 71,445 | | | | 2,831 | | | | - | | | | 62,546 | |
| Income tax (provision)/ benefit | | | 3,894 | | | | (27,106 | ) | | | (1,121 | ) | | | - | | | | (24,333 | ) |
| Equity in net income of subsidiaries | | | 46,049 | | | | 1,820 | | | | - | | | | (47,869 | ) | | | - | |
| Net income | | $ | 38,213 | | | $ | 46,159 | | | $ | 1,710 | | | $ | (47,869 | ) | | $ | 38,213 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the six months ended June 30, 2009 | | | | | | Guarantor | | | Non-Guarantor | | | Consolidating | | | | | |
| | | Parent | | | Subsidiaries | | | Subsidiaries | | | Adjustments | | | Consolidated | |
| Continuing Operations | | | | | | | | | | | | | | | | | | | | |
| Service revenues and sales | | $ | - | | | $ | 578,521 | | | $ | 11,672 | | | $ | - | | | $ | 590,193 | |
| Cost of services provided and goods sold | | | - | | | | 408,445 | | | | 5,905 | | | | - | | | | 414,350 | |
| Selling, general and administrative expenses | | | 11,268 | | | | 79,978 | | | | 4,127 | | | | - | | | | 95,373 | |
| Depreciation | | | 299 | | | | 10,023 | | | | 341 | | | | - | | | | 10,663 | |
| Amortization | | | 590 | | | | 2,564 | | | | - | | | | - | | | | 3,154 | |
| Other operating expenses | | | 3,989 | | | | - | | | | - | | | | - | | | | 3,989 | |
| Total costs and expenses | | | 16,146 | | | | 501,010 | | | | 10,373 | | | | - | | | | 527,529 | |
| Income/ (loss) from operations | | | (16,146 | ) | | | 77,511 | | | | 1,299 | | | | - | | | | 62,664 | |
| Interest (expense)/income | | | (5,527 | ) | | | (465 | ) | | | 6 | | | | - | | | | (5,986 | ) |
| Other (expense)/income - net | | | 490 | | | | (239 | ) | | | 2,831 | | | | - | | | | 3,082 | |
| Income/ (loss) before income taxes | | | (21,183 | ) | | | 76,807 | | | | 4,136 | | | | - | | | | 59,760 | |
| Income tax (provision)/ benefit | | | 7,418 | | | | (29,216 | ) | | | (1,373 | ) | | | - | | | | (23,171 | ) |
| Equity in net income of subsidiaries | | | 50,354 | | | | 2,900 | | | | - | | | | (53,254 | ) | | | - | |
| Net income | | $ | 36,589 | | | $ | 50,491 | | | $ | 2,763 | | | $ | (53,254 | ) | | $ | 36,589 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the six months ended June 30, 2010 | | | | | Guarantor | | | Non-Guarantor | | | | |
| | | Parent | | | Subsidiaries | | | Subsidiaries | | | Consolidated | |
Cash Flow from Operating Activities: | | | | | | | | | | | | |
| Net cash provided/(used) by operating activities | | $ | (3,737 | ) | | $ | 24,585 | | | $ | (571 | ) | | $ | 20,277 | |
Cash Flow from Investing Activities: | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (10 | ) | | | (11,454 | ) | | | (478 | ) | | | (11,942 | ) |
| Business combinations, net of cash acquired | | | - | | | | 83 | | | | 6 | | | | 89 | |
| Proceeds from sale of property and equipment | | | - | | | | (30 | ) | | | - | | | | (30 | ) |
| Other uses - net | | | (89 | ) | | | (171 | ) | | | (26 | ) | | | (286 | ) |
| Net cash used by investing activities | | | (99 | ) | | | (11,572 | ) | | | (498 | ) | | | (12,169 | ) |
Cash Flow from Financing Activities: | | | | | | | | | | | | | | | | |
| Change in cash overdrafts payable | | | 1,338 | | | | (2,652 | ) | | | - | | | | (1,314 | ) |
| Change in intercompany accounts | | | 9,830 | | | | (11,478 | ) | | | 1,648 | | | | - | |
| Dividends paid to shareholders | | | (5,481 | ) | | | - | | | | - | | | | (5,481 | ) |
| Purchases of treasury stock | | | (10,083 | ) | | | - | | | | (42 | ) | | | (10,125 | ) |
| Proceeds from exercise of stock options | | | 3,475 | | | | - | | | | - | | | | 3,475 | |
| Realized excess tax benefit on share based compensation | | | 702 | | | | 1,100 | | | | - | | | | 1,802 | |
| Other sources - net | | | - | | | | - | | | | 199 | | | | 199 | |
| Net cash provided/ (used) by financing activities | | | (219 | ) | | | (13,030 | ) | | | 1,805 | | | | (11,444 | ) |
| Net increase/(decrease) in cash and cash equivalents | | | (4,055 | ) | | | (17 | ) | | | 736 | | | | (3,336 | ) |
| Cash and cash equivalents at beginning of year | | | 109,331 | | | | (1,221 | ) | | | 4,306 | | | | 112,416 | |
| Cash and cash equivalents at end of period | | $ | 105,276 | | | $ | (1,238 | ) | | $ | 5,042 | | | $ | 109,080 | |
| | | | | | | | | | | | | | | | | |
| For the six months ended June 30, 2009 | | | | | | Guarantor | | | Non-Guarantor | | | | | |
| | | Parent | | | Subsidiaries | | | Subsidiaries | | | Consolidated | |
Cash Flow from Operating Activities: | | | | | | | | | | | | | | | | |
| Net cash provided/(used) by operating activities | | $ | (7,802 | ) | | $ | 49,192 | | | $ | 1,730 | | | $ | 43,120 | |
Cash Flow from Investing Activities: | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (13 | ) | | | (7,912 | ) | | | (211 | ) | | | (8,136 | ) |
| Business combinations, net of cash acquired | | | - | | | | (1,859 | ) | | | - | | | | (1,859 | ) |
| Proceeds from sale of property and equipment | | | 1,280 | | | | 216 | | | | - | | | | 1,496 | |
| Other uses - net | | | (365 | ) | | | (110 | ) | | | - | | | | (475 | ) |
| Net cash provided/(used) by investing activities | | | 902 | | | | (9,665 | ) | | | (211 | ) | | | (8,974 | ) |
Cash Flow from Financing Activities: | | | | | | | | | | | | | | | | |
| Change in cash overdrafts payable | | | 1,242 | | | | (2,023 | ) | | | - | | | | (781 | ) |
| Change in intercompany accounts | | | 39,429 | | | | (37,625 | ) | | | (1,804 | ) | | | - | |
| Dividends paid to shareholders | | | (2,711 | ) | | | - | | | | - | | | | (2,711 | ) |
| Purchases of treasury stock | | | (526 | ) | | | - | | | | - | | | | (526 | ) |
| Proceeds from exercise of stock options | | | 68 | | | | - | | | | - | | | | 68 | |
| Realized excess tax benefit on share based compensation | | | 313 | | | | - | | | | - | | | | 313 | |
| Repayment of long-term debt | | | (17,700 | ) | | | (99 | ) | | | - | | | | (17,799 | ) |
| Other sources/(uses) - net | | | (93 | ) | | | 148 | | | | 239 | | | | 294 | |
| Net cash provided/ (used) by financing activities | | | 20,022 | | | | (39,599 | ) | | | (1,565 | ) | | | (21,142 | ) |
| Net increase/(decrease) in cash and cash equivalents | | | 13,122 | | | | (72 | ) | | | (46 | ) | | | 13,004 | |
| Cash and cash equivalents at beginning of year | | | 65 | | | | 202 | | | | 3,361 | | | | 3,628 | |
| Cash and cash equivalents at end of period | | $ | 13,187 | | | $ | 130 | | | $ | 3,315 | | | $ | 16,632 | |
| | | | | | | | | | | | | | | | | |
Executive Summary
We operate through our two wholly owned subsidiaries, VITAS Healthcare Corporation and Roto-Rooter Group, Inc. VITAS focuses on hospice care that helps make terminally ill patients’ final days as comfortable as possible. Through its teams of doctors, nurses, home health aides, social workers, clergy and volunteers, VITAS provides direct medical services to patients, as well as spiritual and emotional counseling to both patients and their families. Roto-Rooter’s services are focused on providing plumbing and drain cleaning services to both residential and commercial customers. Through its network of company-owned branches, independent contractors and franchisees, Roto-Rooter offers plumbing and drain cleaning service to over 90% of the U.S. population.
The following is a summary of the key operating results for the three and six months ended June 30, 2010 and 2009 (in thousands except per share amounts):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Service revenues and sales | | $ | 314,995 | | | $ | 295,255 | | | $ | 623,808 | | | $ | 590,193 | |
| Net income | | $ | 18,855 | | | $ | 17,250 | | | $ | 38,213 | | | $ | 36,589 | |
| Diluted EPS | | $ | 0.82 | | | $ | 0.76 | | | $ | 1.66 | | | $ | 1.61 | |
| Adjusted EBITDA* | | $ | 44,887 | | | $ | 43,650 | | | $ | 87,957 | | | $ | 85,874 | |
| Adjusted EBITDA as a % of revenue | | | 14.3 | % | | | 14.8 | % | | | 14.1 | % | | | 14.6 | % |
*See pages 27 - 28 for reconciliation to GAAP measures.
For the three months ended June 30, 2010, the increase in consolidated service revenues and sales was driven by a 7.3% increase at VITAS while Roto-Rooter revenues increased by 5.2%. The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 5.6%, driven by an increase in admissions of 4.2%, combined with Medicare price increases of approximately 1.3%. Roto-Rooter was driven by an approximate 6.0% price and mix shift increase offset by a 0.7% decrease in job count. Consolidated net income increased 9.3% mainly as a result of the increase in revenues and lower corporate expenses due to the 2009 costs associated with the contested proxy solicitation. Diluted EPS increased as the result of increased earnin gs. Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) increased 2.8% from the second quarter of 2009 to the second quarter of 2010.
For the six months ended June 30, 2010, the increase in consolidated service revenues and sales was driven by a 7.1% increase at VITAS and a 2.2% increase at Roto-Rooter. The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 5.3%, driven by an increase in admissions of 4.5%, combined with Medicare price increases of approximately 1.3%. Roto-Rooter was driven by an approximate 6.3% price and mix shift increase offset by a 4.0% decrease in job count. Consolidated net income increased 4.4% over prior year. Diluted EPS increased as a result of increased earnings. Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) increased 2.4% for the six month pe riod ended June 30, 2010 compared to the same period in 2009.
EBITDA and Adjusted EBITDA are not measures derived in accordance with GAAP and exclude components that are important to understanding our financial performance. We use Adjusted EBITDA as a measure of earnings for our LTIP awards. We provide EBITDA and Adjusted EBITDA to help readers evaluate our operating results, compare our operating performance with that of similar companies that have different capital structures and help evaluate our ability to meet future debt service, capital expenditure and working capital requirements. Our EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP. A reconciliation of our net income to our Adjusted EBITDA is presented on pages 27 - 28.
VITAS expects to achieve full-year 2010 revenue growth, prior to Medicare cap, of 6.0% to 7.0%. Admissions are estimated to increase 3.0% to 4.0%. Adjusted EBITDA margin prior to Medicare cap is estimated to be 15.0% to 15.5%. Roto-Rooter expects full-year 2010 revenue growth of 4.0% to 4.5%. 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 to be in the range of 17.5% to 18.0%. We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.
Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2009 to June 30, 2010 include the following:
| • | A $48.3 million increase in accounts receivable primarily at VITAS, related to timing of Medicare payments and refund of overpayments from prior years. |
| • | A $4.7 million increase in income taxes payable, related to timing of payments. |
Net cash provided by operating activities decreased $22.8 million due primarily to the increase in accounts receivable, partially offset by a decrease in accounts payable and other current liabilities. 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.
We have issued $28.3 million in standby letters of credit as of June 30, 2010, for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of June 30, 2010, we have approximately $146.7 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the expansion feature. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.
Commitments and Contingencies
Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly. In connection therewith, we are in compliance with all financial and other debt covenants as of June 30, 2010 and anticipate remaining in compliance throughout 2010.
On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from Roto-Rooter and Chemed. They also seek payment of penalties, interest and Plaintiffs’ attorney fees. We contest these allegations. In June 2010, the Court conditionally certified a nationwide class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment. There has been no final determination of the merits of collective treatment of the case. The lawsuit is in its early stage and we are unable to estimate ou r potential liability, if any with respect to these allegations.
VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White. This case alleges failure to pay overtime and failure to provide meal and rest periods to a purported class of California admissions nurses, chaplains and sales representatives. The case seeks payment of penalties, interest and Plaintiffs’ attorney fees. VITAS contests these allegations. In December 2009, the trial court denied Plantiffs’ motion for class certification. The lawsuit is in its early stages and we are unable to estimate our potential liability, if any, with respect to these allegations.
In April 2005, the Office of Inspector General (“OIG”) for the Department of Health and Human Services served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services. As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review. It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges. During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us. The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florid a with prejudice in July 2007. The plaintiffs appealed this dismissal, which the Court of Appeals affirmed. The government continues to investigate the complaint’s allegations. In March 2009, we received a letter from the government reiterating the basis of their investigation.
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the OIG documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter. In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review. In February 2010, VITAS received a companion civil investigative demand from the state of Texas Attorney General’s office, seeking related documents. Based on the early stage of the investigation and the limited information we have at this time, we cannot predict the outcome of this investigation. We believe that we are in materia l compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
We are unable to predict the outcome of these matters or the impact, if any, that the investigation may have on our business, results of operations, liquidity or capital resources. Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.
Results of Operations
Three months ended June 30, 2010 versus 2009 - Consolidated Results
Our service revenues and sales for the second quarter of 2010 increased 6.7% versus services and sales revenues for the second quarter of 2009. Of this increase, $15.3 million was attributable to VITAS and $4.4 million was attributable to Roto-Rooter. The following chart shows the components of those changes (dollar amounts in thousands):
| | | | | Increase/(Decrease) | |
| | | | | Amount | | | Percent | |
| VITAS | | | | | | | | |
| | Routine homecare | | | 11,506 | | | | 7.6 | % |
| | Continuous care | | | 1,977 | | | | 5.6 | % |
| | General inpatient | | | 2,322 | | | | 9.8 | % |
| | Medicare cap | | | (470 | ) | | | -93.1 | % |
| Roto-Rooter | | | | | | | | | |
| | Plumbing | | | | 4,039 | | | | 10.6 | % |
| | Drain cleaning | | | (245 | ) | | | -0.7 | % |
| | Other | | | | 611 | | | | 5.1 | % |
| | | Total | | $ | 19,740 | | | | 6.7 | % |
The increase in VITAS’ revenues for the second quarter of 2010 versus the second quarter of 2009 was a result of increased ADC of 5.6% driven by an increase in admissions of 4.2%, combined with Medicare reimbursement rate increases of approximately 1.3%. The ADC increase was driven by a 5.5% increase in routine homecare, an increase of 9.9% in general inpatient and a 3.0% increase in continuous care. In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.
The increase in plumbing revenues for the second quarter of 2010 versus 2009 is attributable to a 6.4% increase in the average price per job and a 4.5% increase in the number of jobs performed. The increase in the plumbing price per job was a combination of increased pricing and favorable job mix shift to more expensive jobs such as excavation. Our excavation job count increased by 18.2% compared to 2009. Drain cleaning revenues for the second quarter of 2010 versus 2009 reflect a 3.2% decline in the number of jobs, while the average price per job increased 2.5%. The increase in other revenues is attributable to an increase in our independent contractor operations and an increase in product sales.
The consolidated gross margin was 29.0% in the second quarter of 2010 as compared with 29.8% in the second quarter of 2009. On a segment basis, VITAS’ gross margin was 22.7% in the second quarter of 2010 and 23.3% in the second quarter of 2009. The decrease in VITAS’ gross margin is attributable to higher labor costs for admissions and Medicare compliance personnel and the opening of inpatient units which carry significant one time start-up costs as capacity begins to ramp-up. The Roto-Rooter segment’s gross margin was 45.2% for the second quarter of 2010 as compared with 46.2% for the second quarter of 2009. The decrease in Roto-Rooter’s gross margin was attributable to continued mix shift to excavation which has higher revenue per job but a slightly lower gross margin percentage per job as well as an unfavorable adjustment to casualty insurance.
Selling, general and administrative expenses ("SG&A") for the second quarter of 2010 and 2009 comprise (in thousands):
| | | 2010 | | | 2009 | |
| SG&A expenses before long-term incentive | | | | | | |
| compensation and the impact of market gains and | | | | |
| losses of deferred compensation plans | | | 48,240 | | | | 46,381 | |
| Long-term incentive compensation | | | 1,799 | | | | - | |
| Impact of market value gains/(losses) on liabilities | | | | | | | | |
| held in deferred compensation trusts | | | (83 | ) | | | 3,199 | |
| Total SG&A expenses | | $ | 49,956 | | | $ | 49,580 | |
Normal salary increases and revenue related expense increases between periods account for the change in SG&A from $46.4 million in the second quarter of 2009 to $48.2 million in the second quarter of 2010.
Depreciation expense increased $856,000 to $6.2 million in the second quarter of 2010 due to the installation of patient capture software at our VITAS segment.
Other income for the second quarter of 2010 and 2009 comprise (in thousands):
| | | 2010 | | | 2009 | |
| Interest income | | | 150 | | | | 207 | |
| Market value gains/(losses) on assets held in deferred | | | | | | | | |
| compensation trusts | | | (83 | ) | | | 3,199 | |
| Loss on disposal of property and equipment | | | (58 | ) | | | (78 | ) |
| Other | | | 1 | | | | 30 | |
| Total other income | | $ | 10 | | | $ | 3,358 | |
Our effective income tax rate of 38.9% in the second quarter of 2010 was essentially flat with the second quarter of 2009.
Net income for both periods included the following after-tax items/adjustments that increased/ (reduced) after-tax earnings (in thousands):
| | | 2010 | | | 2009 | |
| VITAS | | | | | | |
| Costs associated with the OIG investigation | | $ | (74 | ) | | $ | (53 | ) |
| Roto-Rooter | | | | | | | | |
| Costs of class action lawsuit | | | (63 | ) | | | - | |
| Corporate | | | | | | | | |
| Stock option expense | | | (1,484 | ) | | | (1,544 | ) |
| Long-term incentive compensation | | | (1,124 | ) | | | - | |
| Noncash interest expense related to accounting for | | | | | | | | |
| conversion feature of the convertible notes | | | (1,068 | ) | | | (987 | ) |
| Expenses of contested proxy solicitation | | | - | | | | (2,180 | ) |
| Impact of non-deductible losses and non-taxable gains on | | | | | | | | |
| investments held in deferred compensation trusts | | | - | | | | 20 | |
| Total | | $ | (3,813 | ) | | $ | (4,744 | ) |
Three months ended June 30, 2010 versus 2009 - Segment Results
The change in after-tax earnings for the second quarter of 2010 versus the second quarter of 2009 is due to (dollars in thousands):
| | | Increase/(Decrease) | |
| | | Amount | | | Percent | |
| VITAS | | $ | 1,159 | | | | 6.8 | % |
| Roto-Rooter | | | 62 | | | | 0.7 | % |
| Corporate | | | 384 | | | | 4.4 | % |
| | | $ | 1,605 | | | | 9.3 | % |
Six months ended June 30, 2010 versus 2009 - Consolidated Results
Our service revenues and sales for the first six months of 2010 increased 5.7% versus services and sales revenues for the first six months of 2009. Of this increase, $29.8 million was attributable to VITAS and $3.8 million was attributable to Roto-Rooter. The following chart shows the components of those changes (dollars in thousands):
| | | | | Increase/(Decrease) | |
| | | | | Amount | | | Percent | �� |
| VITAS | | | | | | | | |
| | Routine homecare | | $ | 21,678 | | | | 7.2 | % |
| | Continuous care | | | 5,060 | | | | 7.3 | % |
| | General inpatient | | | 3,522 | | | | 7.2 | % |
| | Medicare cap | | | 1,548 | | | | 658.7 | % |
| | BNAF | | | | (1,950 | ) | | | -100.0 | % |
| Roto-Rooter | | | | | | | | | |
| | Plumbing | | | | 5,167 | | | | 6.8 | % |
| | Drain cleaning | | | (2,188 | ) | | | -3.1 | % |
| | Other | | | | 778 | | | | 3.2 | % |
| | | Total | | $ | 33,615 | | | | 5.7 | % |
The increase in VITAS’ revenues for the first six months of 2010 versus the first six months of 2009 was a result of increased ADC of 5.3% driven by an increase in admissions of 4.5%, combined with Medicare reimbursement rate increases of approximately 1.3%. The ADC increase was driven by a 5.3% increase in routine homecare, an increase of 7.6% in general inpatient and a 4.8% increase in continuous care. In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.
The increase in plumbing revenues for the first six months of 2010 versus 2009 is attributable to a 7.8% increase in the average price per job and a 0.5% decrease in the number of jobs performed. The increase in the plumbing price per job was a combination of increased pricing and favorable job mix shift to more expensive jobs such as excavation. Our excavation job count increased by 15.5% compared to 2009. Drain cleaning revenues for the first six months of 2010 versus 2009 reflect a 5.7% decline in the number of jobs, while the average price per job increased 2.7%. The increase in other revenues is attributable to an increase in our independent contractor operations and an increase in product sales.
The consolidated gross margin was 29.0% in the first six months of 2010 as compared with 29.8% in the first six months of 2009. On a segment basis, VITAS’ gross margin was 22.7% in the first six months of 2010 and 23.3% in the first six months of 2009. The decrease in VITAS’ gross margin is attributable to higher labor costs for admissions and Medicare compliance personnel and the opening of inpatient units which carry significant one time start-up costs as capacity begins to ramp-up. The Roto-Rooter segment’s gross margin was 45.2% for the first six months of 2010 as compared with 45.7% for the first six months of 2009. The decrease in Roto-Rooter’s gross margin is attributable to continued mix shift to excavation which has higher revenue per job but slightly lower gross margin percentage per job.
Selling, general and administrative expenses ("SG&A") for the six months of 2010 and 2009 comprise (in thousands):
| | | 2010 | | | 2009 | |
| SG&A expenses before long-term incentive | | | | | | |
| compensation and the impact of market gains and | | | | |
| losses of deferred compensation plans | | $ | 96,590 | | | $ | 93,788 | |
| Long-term incentive compensation | | | 1,799 | | | | - | |
| Impact of market value gains/(losses) on liabilities | | | | | | | | |
| held in deferred compensation trusts | | | 105 | | | | 1,585 | |
| Total SG&A expenses | | $ | 98,494 | | | $ | 95,373 | |
Normal salary increases and revenue related expense increases between periods account for the change in SG&A from $93.8 million for the first six months of 2009 to $96.6 million of the first six months of 2010.
Depreciation expense increased $1.0 million in the first six months of 2010 to $11.7 million due to the installation of patient capture software at our VITAS segment.
Other income for the first six months of 2010 and 2009 comprise (in thousands):
| | | 2010 | | | 2009 | |
| Interest income | | | 225 | | | | 289 | |
| Market value gains/(losses) on assets held in deferred | | | | | | | | |
| compensation trusts | | | 105 | | | | 1,585 | |
| Loss on disposal of property and equipment | | | (152 | ) | | | (54 | ) |
| Non-taxable income from certain investments held | | | | | | | | |
| deferred compensation trusts | | | - | | | | 1,211 | |
| Other | | | 18 | | | | 51 | |
| Total other income | | $ | 196 | | | $ | 3,082 | |
Our effective income tax rate of 38.9% in the first six months of 2010 was essentially flat with the first six months of 2009.
Net income for both periods included the following after-tax items/adjustments that increased/ (reduced) after-tax earnings (in thousands):
| | | 2010 | | | 2009 | |
| VITAS | | | | | | |
| Costs associated with the OIG investigation | | $ | (173 | ) | | $ | (61 | ) |
| Roto-Rooter | | | | | | | | |
| Costs of class action lawsuit | | | (63 | ) | | | - | |
| Corporate | | | | | | | �� | |
| Stock option expense | | | (2,782 | ) | | | (2,836 | ) |
| Long-term incentive compensation | | | (1,124 | ) | | | - | |
| Noncash interest expense related to accounting for | | | | | | | | |
| conversion feature of the convertible notes | | | (2,115 | ) | | | (1,955 | ) |
| Expenses of contested proxy solicitation | | | - | | | | (2,525 | ) |
| Impact of non-deductible losses and non-taxable gains on | | | | | | | | |
| investments held in deferred compensation trusts | | | - | | | | 756 | |
| Total | | $ | (6,257 | ) | | $ | (6,621 | ) |
Six months ended June 30, 2010 versus 2009 - Segment Results
The change in after-tax earnings for the first six months of 2010 versus the first six months of 2009 is due to (dollars in thousands):
| | | Increase/(Decrease) | |
| | | Amount | | | Percent | |
| VITAS | | $ | 2,427 | | | | 7.1 | % |
| Roto-Rooter | | | (354 | ) | | | -2.1 | % |
| Corporate | | | (449 | ) | | | -3.0 | % |
| | | $ | 1,624 | | | | 4.4 | % |
| CHEMED CORPORATION AND SUBSIDIARY COMPANIES |
| CONSOLIDATING STATEMENT OF INCOME |
| FOR THE THREE MONTHS ENDED JUNE 30, 2010 |
| (in thousands)(unaudited) |
| | | | | | | | | | | | | |
| 2010 (a) | | VITAS | | | Roto-Rooter | | | Corporate | | | | |
| Service revenues and sales | | $ | 226,638 | | | $ | 88,357 | | | $ | - | | | $ | 314,995 | |
| Cost of services provided and goods sold | | | 175,257 | | | | 48,445 | | | | - | | | | 223,702 | |
| Selling, general and administrative expenses | | | 18,404 | | | | 24,192 | | | | 7,360 | | | | 49,956 | |
| Depreciation | | | 4,103 | | | | 1,950 | | | | 141 | | | | 6,194 | |
| Amortization | | | 788 | | | | 132 | | | | 367 | | | | 1,287 | |
| Total costs and expenses | | | 198,552 | | | | 74,719 | | | | 7,868 | | | | 281,139 | |
| Income/(loss) from operations | | | 28,086 | | | | 13,638 | | | | (7,868 | ) | | | 33,856 | |
| Interest expense | | | (48 | ) | | | (64 | ) | | | (2,887 | ) | | | (2,999 | ) |
| Intercompany interest income/(expense) | | | 1,350 | | | | 773 | | | | (2,123 | ) | | | - | |
| Other income/(expense)—net | | | 45 | | | | 14 | | | | (49 | ) | | | 10 | |
| Income/(loss) before income taxes | | | 29,433 | | | | 14,361 | | | | (12,927 | ) | | | 30,867 | |
| Income taxes | | | (11,152 | ) | | | (5,501 | ) | | | 4,641 | | | | (12,012 | ) |
| Net income/(loss) | | $ | 18,281 | | | $ | 8,860 | | | $ | (8,286 | ) | | $ | 18,855 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| (a) The following amounts are included in net income (in thousands): | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | VITAS | | | Roto-Rooter | | | Corporate | | | | |
| Pretax benefit/(cost): | | | | | | | | | | | | |
| Stock option expense | | $ | - | | | $ | - | | | $ | (2,346 | ) | | $ | (2,346 | ) |
| Long-term incentive compensation | | | - | | | | - | | | | (1,799 | ) | | | (1,799 | ) |
| Noncash impact of accounting for convertible debt | | | - | | | | - | | | | (1,688 | ) | | | (1,688 | ) |
| Expenses of class action lawsuit | | | - | | | | (105 | ) | | | - | | | | (105 | ) |
| Expenses incurred in connection with the Office of Inspector | | | | | | | | | |
| General investigation | | | (118 | ) | | | - | | | | - | | | | (118 | ) |
| Total | | $ | (118 | ) | | $ | (105 | ) | | $ | (5,833 | ) | | $ | (6,056 | ) |
| | | | | | | | | | | | | | | | | |
| | | VITAS | | | Roto-Rooter | | | Corporate | | | Consolidated | |
| After-tax benefit/(cost): | | | | | | | | | | | | |
| Stock option expense | | $ | - | | | $ | - | | | $ | (1,484 | ) | | $ | (1,484 | ) |
| Long-term incentive compensation | | | - | | | | - | | | | (1,124 | ) | | | (1,124 | ) |
| Noncash impact of accounting for convertible debt | | | - | | | | - | | | | (1,068 | ) | | | (1,068 | ) |
| Expenses of class action lawsuit | | | - | | | | (63 | ) | | | - | | | | (63 | ) |
| Expenses incurred in connection with the Office of Inspector | | | | | | | | | |
| General investigation | | | (74 | ) | | | - | | | | - | | | | (74 | ) |
| Total | | $ | (74 | ) | | $ | (63 | ) | | $ | (3,676 | ) | | $ | (3,813 | ) |
| | | | | | | | | | | | | | | | | |
| CHEMED CORPORATION AND SUBSIDIARY COMPANIES |
| CONSOLIDATING STATEMENT OF INCOME |
| FOR THE THREE MONTHS ENDED JUNE 30, 2009 |
| (in thousands)(unaudited) |
| |
| | | | | | | | | | | | Chemed | |
| | | VITAS | | | Roto-Rooter | | | Corporate | | | Consolidated | |
| 2009 (a) | | | | | | | | | | | | |
| Service revenues and sales | | $ | 211,303 | | | $ | 83,952 | | | $ | - | | | $ | 295,255 | |
| Cost of services provided and goods sold | | | 162,175 | | | | 45,162 | | | | - | | | | 207,337 | |
| Selling, general and administrative expenses | | | 17,877 | | | | 22,844 | | | | 8,859 | | | | 49,580 | |
| Depreciation | | | 3,256 | | | | 2,035 | | | | 47 | | | | 5,338 | |
| Amortization | | | 1,187 | | | | 117 | | | | 314 | | | | 1,618 | |
| Other operating expenses | | | - | | | | - | | | | 3,444 | | | | 3,444 | |
| Total costs and expenses | | | 184,495 | | | | 70,158 | | | | 12,664 | | | | 267,317 | |
| Income/(loss) from operations | | | 26,808 | | | | 13,794 | | | | (12,664 | ) | | | 27,938 | |
| Interest expense | | | (326 | ) | | | (59 | ) | | | (2,757 | ) | | | (3,142 | ) |
| Intercompany interest income/(expense) | | | 1,023 | | | | 581 | | | | (1,604 | ) | | | - | |
| Other income-net | | | 123 | | | | 6 | | | | 3,229 | | | | 3,358 | |
| Income/(loss) before income taxes | | | 27,628 | | | | 14,322 | | | | (13,796 | ) | | | 28,154 | |
| Income taxes | | | (10,506 | ) | | | (5,524 | ) | | | 5,126 | | | | (10,904 | ) |
| Net income/(loss) | | $ | 17,122 | | | $ | 8,798 | | | $ | (8,670 | ) | | $ | 17,250 | |
| | | | | | | | | | | | | | | | | |
| (a) The following amounts are included in net income (in thousands): | | | | | | | | | | | | | | | | |
| | | VITAS | | | Roto-Rooter | | | Corporate | | | Chemed Consolidated | |
| Pretax benefit/(cost): | | | | | | | | | | | | |
| Stock option expense | | $ | - | | | $ | - | | | $ | (2,443 | ) | | $ | (2,443 | ) |
| Noncash impact of accounting for convertible debt | | | - | | | | - | | | | (1,561 | ) | | | (1,561 | ) |
| Expenses associated with contested proxy solicitation | | | - | | | | - | | | | (3,444 | ) | | | (3,444 | ) |
| Expenses incurred in connection with the Office of Inspector | | | | | | | | | |
| General investigation | | | (86 | ) | | | - | | | | - | | | | (86 | ) |
| Total | | $ | (86 | ) | | $ | - | | | $ | (7,448 | ) | | $ | (7,534 | ) |
| | | VITAS | | | Roto-Rooter | | | Corporate | | | Consolidated | |
| After-tax benefit/(cost): | | | | | | | | | | | | |
| Stock option expense | | $ | - | | | $ | - | | | $ | (1,544 | ) | | $ | (1,544 | ) |
| Noncash impact of accounting for convertible debt | | | - | | | | - | | | | (987 | ) | | | (987 | ) |
| Income tax impact of nondeductible losses on investments | | | | | | | | | |
| held in deferred compensation trusts | | | - | | | | - | | | | 20 | | | | 20 | |
| Expenses associated with contested proxy solicitation | | | - | | | | - | | | | (2,180 | ) | | | (2,180 | ) |
| Expenses incurred in connection with the Office of Inspector | | | | | | | | | |
| General investigation | | | (53 | ) | | | - | | | | - | | | | (53 | ) |
| Total | | $ | (53 | ) | | $ | - | | | $ | (4,691 | ) | | $ | (4,744 | ) |
| | | | | | | | | | | | | | | | | |
| CHEMED CORPORATION AND SUBSIDIARY COMPANIES |
| CONSOLIDATING STATEMENT OF INCOME |
| FOR THE SIX MONTHS ENDED JUNE 30, 2010 |
| (in thousands)(unaudited) |
| |
| | | | | | | | | | | | Chemed | |
| | | VITAS | | | Roto-Rooter | | | Corporate | | | Consolidated | |
| 2010 (a) | | | | | | | | | | | | |
| Service revenues and sales | | $ | 449,578 | | | $ | 174,230 | | | $ | - | | | $ | 623,808 | |
| Cost of services provided and goods sold | | | 347,350 | | | | 95,489 | | | | - | | | | 442,839 | |
| Selling, general and administrative expenses | | | 36,550 | | | | 48,950 | | | | 12,994 | | | | 98,494 | |
| Depreciation | | | 7,587 | | | | 3,901 | | | | 175 | | | | 11,663 | |
| Amortization | | | 1,559 | | | | 255 | | | | 697 | | | | 2,511 | |
| Total costs and expenses | | | 393,046 | | | | 148,595 | | | | 13,866 | | | | 555,507 | |
| Income/(loss) from operations | | | 56,532 | | | | 25,635 | | | | (13,866 | ) | | | 68,301 | |
| Interest expense | | | (80 | ) | | | (132 | ) | | | (5,739 | ) | | | (5,951 | ) |
| Intercompany interest income/(expense) | | | 2,639 | | | | 1,475 | | | | (4,114 | ) | | | - | |
| Other income/(expense)—net | | | 6 | | | | 24 | | | | 166 | | | | 196 | |
| Income/(loss) before income taxes | | | 59,097 | | | | 27,002 | | | | (23,553 | ) | | | 62,546 | |
| Income taxes | | | (22,378 | ) | | | (10,329 | ) | | | 8,374 | | | | (24,333 | ) |
| Net income/(loss) | | $ | 36,719 | | | $ | 16,673 | | | $ | (15,179 | ) | | $ | 38,213 | |
| | | | | | | | | | | | | | | | | |
| (a) The following amounts are included in net income (in thousands): | | | | | | | | | |
| | | VITAS | | | Roto-Rooter | | | Corporate | | | Chemed Consolidated | |
| Pretax benefit/(cost): | | | | | | | | | | | | |
| Stock option expense | | $ | - | | | $ | - | | | $ | (4,397 | ) | | $ | (4,397 | ) |
| Long-term incentive compensation | | | - | | | | - | | | | (1,799 | ) | | | (1,799 | ) |
| Noncash impact of accounting for convertible debt | | | - | | | | - | | | | (3,343 | ) | | | (3,343 | ) |
| Expenses of class action lawsuit | | | - | | | | (105 | ) | | | - | | | | (105 | ) |
| Expenses incurred in connection with the Office of Inspector | | | | | | | | | |
| General investigation | | | (278 | ) | | | - | | | | - | | | | (278 | ) |
| Total | | $ | (278 | ) | | $ | (105 | ) | | $ | (9,539 | ) | | $ | (9,922 | ) |
