SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2004
Commission File Number 1-8351
CHEMED CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip code)
(513) 762-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Amount Date
Capital Stock 12,468,835 Shares September 30,2004
$1 Par Value
Page 1 of 33
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2004 and
December 31, 2003 3
Consolidated Statement of Income -
Three and nine months ended
September 30, 2004 and 2003 4
Consolidated Statement of Cash Flows -
Nine months ended
September 30, 2004 and 2003 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 19
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 32
Page 2 of 33
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 51,261 $ 50,587
Accounts receivable, less allowances of $10,711 (2003-$2,919) 71,476 13,592
Inventories 8,391 8,256
Statutory deposits 7,924 9,358
Prepaid income taxes 10,493 3,625
Current deferred income taxes 24,247 10,056
Prepaid expenses and other current assets 8,354 6,611
---------- ----------
Total current assets 182,146 102,085
Investments of deferred compensation plans held in trust 19,302 17,743
Other investments 1,445 25,081
Note receivable 12,500 12,500
Properties and equipment, at cost less accumulated
depreciation of $66,684 (2003-$62,646) 58,422 41,004
Identifiable intangible assets less accumulated
amortization of $4,279 (2003-$1,704) 75,828 592
Goodwill 407,407 105,335
Other assets 24,754 24,729
---------- ----------
Total Assets $ 781,804 $ 329,069
========== ==========
LIABILITIES
Current liabilities
Accounts payable $ 39,406 $ 7,120
Current portion of long-term debt 5,401 448
Income taxes 401 26
Deferred contract revenue 15,987 14,362
Accrued insurance 23,729 16,013
Other current liabilities 56,368 21,123
---------- ----------
Total current liabilities 141,292 59,092
Convertible junior subordinated debentures - 14,126
Other long-term debt 288,311 25,931
Deferred compensation liabilities 19,306 17,733
Other liabilities 18,000 19,494
---------- ----------
Total Liabilities 466,909 136,376
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock-authorized 40,000,000 shares $1 par;
issued 13,436,883 shares (2003-13,452,907 shares) 13,437 13,453
Paid-in capital 209,564 170,501
Retained earnings 127,357 119,746
Treasury stock - 968,048 shares (2003-3,508,663 shares),
at cost (32,984) (109,427)
Unearned compensation (4,289) (2,954)
Deferred compensation payable in company stock 2,351 2,308
Notes receivable for shares sold (541) (934)
---------- ----------
Total Stockholders' Equity 314,895 192,693
---------- ----------
Total Liabilities and Stockholders' Equity $ 781,804 $ 329,069
========== ==========
See accompanying notes to unaudited financial statements.
Page 3 of 33
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2004 2003 2004 2003
-------- -------- --------- --------
Service revenues and sales $211,134 $ 75,172 $551,176 $230,088
-------- -------- -------- --------
Cost of services provided and goods sold
(excluding depreciation) 149,409 44,215 382,839 135,978
Selling, general and administrative
expenses 38,908 25,607 107,844 76,754
Depreciation 3,002 2,983 11,161 9,025
Long-term incentive compensation - - 9,058 -
-------- -------- -------- --------
Total costs and expenses 191,319 72,805 510,902 221,757
-------- -------- -------- --------
Income from operations 19,815 2,367 40,274 8,331
Interest expense (6,085) (755) (15,196) (2,429)
Loss on extinguishment of debt - - (3,330) -
Other income - net 398 3,049 2,208 9,766
-------- -------- -------- --------
Income before income taxes 14,128 4,661 23,956 15,668
Income taxes (3,647) (1,748) (8,983) (5,898)
Equity in income/(loss) of affiliate (VITAS) 131 - (3,153) -
-------- -------- -------- --------
Net Income $ 10,612 $ 2,913 $ 11,820 $ 9,770
======== ======== ======== ========
Earnings Per Share
Net income $ .85 $ .29 $ .99 $ .99
======== ======== ======== ========
Average number of shares outstanding 12,470 9,941 11,904 9,913
======== ======== ======== ========
Diluted Earnings Per Share
Net income $ .84 $ .29 $ .97 $ .98
======== ======== ======== ========
Average number of shares outstanding 12,701 9,988 12,136 9,940
======== ======== ======== ========
Cash Dividends Per Share $ .12 $ .12 $ .36 $ .36
======== ======== ======== ========
See accompanying notes to unaudited financial statements.
Page 4 of 33
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,820 $ 9,770
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,880 9,564
Gains on sales of available-for-sale
investments - (5,390)
Provision for deferred income taxes (1,635) 1,403
Provision for uncollectible accounts receivable 4,907 129
Noncash long-term incentive compensation 5,808 -
Changes in operating assets and liabilities,
excluding amounts acquired in business
combinations
Decrease/(increase) in accounts receivable (15,007) 1,204
Decrease/(increase) in inventories (135) 945
Decrease in statutory deposits 1,434 2,471
Decrease/(increase) in prepaid expenses and
other current assets 15,502 (1,077)
Decrease in accounts payable, deferred
contract revenue and other current
liabilities (7,150) (5,449)
Increase in income taxes 9,458 976
Decrease/(increase) in other assets 5,874 (1,253)
Increase in other liabilities 483 2,395
Equity in loss of affiliate 3,153 -
Noncash expense of internally financed ESOPs 1,420 1,305
Other sources/(uses) 164 (18)
--------- ----------
Net cash provided by operating activities 51,976 16,975
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Business combinations, net of cash acquired (329,294) (2,229)
Return of merger deposit 10,000 -
Capital expenditures (13,259) (8,520)
Net uses from discontinued operations (1,156) (1,119)
Proceeds from sales of property and equipment 416 511
Proceeds from sales of available-for-sale investments - 31,763
Other uses (59) (336)
---------- ----------
Net cash provided/(used) by investing activities (333,352) 20,070
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 295,000 -
Issuance of capital stock, net of issuance costs 97,429 1,519
Repayment of long-term debt (94,941) (320)
Debt issuance costs (14,436) -
Repayment of stock subscriptions note receivable 8,053 -
Redemption of convertible trust preferred securities (2,736) -
Dividends paid (4,210) (3,568)
Purchases of treasury stock (2,391) (274)
Other sources 282 474
--------- ----------
Net cash provided/(used) by financing activities 282,050 (2,169)
--------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 674 34,876
Cash and cash equivalents at beginning of year 50,587 37,731
--------- ----------
Cash and cash equivalents at end of period $ 51,261 $ 72,607
========= ==========
See accompanying notes to unaudited financial statements.
Page 5 of 33
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements
1. BASIS OF PRESENTATION
As used herein, the terms "We", "Company" and "Chemed" refer to
Chemed Corporation or Chemed Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited consolidated financial
statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.
Consequently, we have omitted certain disclosures required under generally
accepted accounting principles for complete financial statements. However, in
our opinion, the financial statements presented herein contain all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position, results of operations and cash flows of the Company. These
financial statements should be read in conjunction with the Consolidated
Financial Statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003. Certain 2003 amounts have
been reclassified to conform with the current period presentation.
We use Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, to account for stock-based
compensation. Since the Company's stock options qualify as fixed options under
APB 25 and since the option price equals the market price on the date of grant,
there is no compensation expense for stock options. Stock awards are expensed
during the period the related services are provided.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair-value-recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No. 123,
Accounting for Stock-Based Compensation (as amended) (in thousands, except per
share data):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2004 2003 2004 2003
--------- ---------- --------- ---------
Net Income as reported $ 10,612 $ 2,913 $ 11,820 $ 9,770
Add: stock-based compensation expense
included in net income as reported,
net of income tax effects 92 28 3,915 73
Deduct: total stock-based employee compensation
determined under a fair-value-based
method for all stock options and
awards, net of income tax effects (1,968) (249) (6,988) (708)
--------- --------- --------- ---------
Pro Forma net income $ 8,736 $ 2,692 $ 8,747 $ 9,135
========= ========= ========= =========
Earning Per Share
As reported $ 0.85 $ 0.29 $ 0.99 $ 0.99
========= ========= ========= =========
Pro forma $ 0.70 $ 0.27 $ 0.73 $ 0.92
========= ========= ========= =========
Diluted earning per share
As reported $ 0.84 $ 0.29 $ 0.97 $ 0.98
========= ========= ========= =========
Pro forma $ 0.69 $ 0.27 $ 0.72 $ 0.92
========= ========= ========= =========
We calculated the above data using the Black-Scholes option-valuation
method to value the Company's options granted in 2004 and prior
years.
2. SEGMENTS
Due to the significant impact of our acquisition of VITAS Healthcare
Corporation ("VITAS") in February 2004, we re-evaluated the Company's segment
reporting of administrative expenses of the Corporate Office headquarters.
Previously, we included such expenses in the Plumbing and Drain Cleaning segment
because it comprised in excess of 80% of our business. Currently, Roto-Rooter
comprises 32% of Chemed's
Page 6 of 33
consolidated revenues and sales and 42% of its income from operations.
Accordingly, we now report corporate administrative expenses and unallocated
investing and financing income and expense not directly related to any one
segment as "Corporate." Corporate administrative expenses include the
stewardship, Sarbanes-Oxley compliance related, accounting and reporting, legal,
tax and other costs of operating a publicly-held corporation. Corporate
investing and financing income and expenses include the costs and income
associated with corporate debt and investment arrangements.
The Company's segments now comprise VITAS (palliative medical care
and related services to terminally ill patients through state- licensed and
federally-certified hospice programs), Roto-Rooter (sewer and drain cleaning and
plumbing repair and maintenance services to residential and commercial accounts)
and Service America (heating, ventilating and air conditioning ("HVAC") repair,
maintenance and replacement services to residential customers through service
contracts and retail sales). Prior period data have been reclassified to
maintain comparability.
Service revenues and sales and aftertax earnings by business segment
follow (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2004 2003 2004 2003
--------- --------- ---------- ---------
Service Revenues and Sales
VITAS (a) $ 135,101 $ - $ 316,453 $ -
Roto-Rooter 66,785 63,342 204,907 192,659
Service America 9,248 11,830 29,816 37,429
--------- --------- --------- ---------
Total $ 211,134 $ 75,172 $ 551,176 $ 230,088
========= ========= ========= =========
Aftertax Earnings
VITAS (a) $ 8,975 $ - $ 19,479 $ -
Roto-Rooter 6,067 (b,c) 2,788 15,454 (b,d) 11,101
Service America (124) 64 (5) (e) 167
--------- --------- --------- ---------
Total segment earnings 14,918 2,852 34,928 11,268
Corporate (4,437)(f,g) 61 (h,i) (19,955)(f,j) (1,498)(i,k)
Equity in income/(loss) of affiliate
(VITAS)(l) 131 - (3,153) -
--------- --------- --------- ---------
Net Income (m) $ 10,612 $ 2,913 $ 11,820 $ 9,770
========= ========= ========= =========
(a) Amounts include consolidated operations of VITAS beginning on February
24, 2004, the date the Company acquired the controlling interest in
VITAS. Adjustments to revise the VITAS purchase price allocation and
related depreciation and amortization expense increased VITAS' aftertax
earnings by $315,000 for the three months ended September 30, 2004.
(b) Adjustments of income taxes related to the finalization of prior-year
returns increased Roto-Rooter's aftertax earnings by $630,000 for the
three months ended September 30, 2004.
(c) A cumulative adjustment of the effective state and local income tax
rate increased Roto-Rooter's aftertax earnings by $217,000 for the
three and nine-month periods ended September 30, 2004.
(d) Amount includes $982,000 aftertax cost of payout under the Company's
Executive Long-Term Incentive Plan ('LTIP") for the nine months ended
September 30, 2004.
(e) Amount includes $170,000 aftertax cost of payout under the LTIP for the
nine months ended September 30, 2004.
(f) Adjustments of income taxes related to the finalization of prior-year
returns reduced the Corporate aftertax loss by $390,000 for the three-
and nine-month periods ended September 30, 2004.
(g) A cumulative adjustment of the effective state and local income tax
rate reduced the Corporate aftertax loss by $881,000 for the three
months ended September 30, 2004.
(h) Amounts include an aftertax capital gain of $1,200,000 from the
redemption of the Company's investment in VITAS preferred stock in the
third quarter of 2003.
(i) Amounts for the three- and nine-month periods ended September 30,
include aftertax dividend income from VITAS preferred stock of $328,000
and $1,585,000, respectively.
(j) Amount includes $4,455,000 aftertax cost of the LTIP and $2,030,000
aftertax loss on extinguishment of debt.
(k) Amount includes aftertax severance charges of $2,358,000 and $3,351,000
aftertax gain on the redemption of VITAS preferred stock and the sales
of investments in the first nine months of September 30, 2003.
(l) Amount for 2004 represents the Company's 37% equity in the loss of
VITAS through February 23, 2004, including adjustments to the equity
interest occurring later in 2004. During the period January 1, 2004
through February 23, 2004, VITAS incurred the following aftertax
expenses related to the sale of its business to the Company (in
thousands):
Accrual for potential severance costs under key employee employment agreements $ 10,975
Legal and valuation costs 6,665
Loss on write off of VITAS' deferred debt costs 2,698
Other 592
--------
Total $ 20,930
========
These charges reduced the Company's equity in VITAS by
approximately $4,621 during the first quarter of 2004. Subsequent
adjustment to the estimated severance accrual in the second and
third quarters of 2004 increased the Company's equity earnings in
VITAS by $821 and $131, respectively.
Page 7 of 33
(m) Adjustments and special items discussed in notes (a) through (k)
increased/(reduced) aftertax earnings by the following amounts (in
thousands):
Three months ended September 30, 2004 $ 2,433
Three months ended September 30, 2003 1,528
Nine months ended September 30, 2004 (6,617)
Nine months ended September 30, 2003 2,578
3. DILUTED EARNINGS PER SHARE
Earnings per common share are computed using the weighted average number
of shares of capital stock outstanding. Diluted earnings per share for 2004 and
2003 are computed as follows (in thousands, except per share data):
Income Shares Income
(Numerator) (Denominator) Per Share
------------- ------------- -----------
For the Three Months Ended September 30,
2004
Net income $ 10,612 12,470 $ 0.85
===========
Dilutive stock options - 224
Nonvested stock awards - 7
---------- ----------
Diluted income $ 10,612 $ 12,701 $ 0.84
========== ========== ===========
2003 (a)
Net income $ 2,913 $ 9,941 $ 0.29
===========
Dilutive stock options - 47
---------- ----------
Diluted income $ 2,913 $ 9,988 $ 0.29
========== ========== ===========
For the Nine Months Ended September 30,
2004 (a)
Net income $ 11,820 11,904 $ 0.99
===========
Dilutive stock options - 229
Nonvested stock awards - 3
---------- ----------
Diluted income $ 11,820 $ 12,136 $ 0.97
========== ========== ===========
2003 (a)
Net income $ 9,770 $ 9,913 $ 0.99
===========
Dilutive stock options - 27
---------- ----------
Diluted income $ 9,770 $ 9,940 $ 0.98
========== ========== ===========
(a) The impact of the convertible junior subordinated debentures has been
excluded from these computations because it is antidilutive to earnings
per share.
Due to the Company's level of earnings for the third quarter of 2003 and
for the first nine months of 2004 and 2003, the Convertible Junior Subordinated
Debentures were anti-dilutive in those periods, and, therefore, were excluded
from the computation of diluted earnings per share.
4. OTHER INCOME-NET
Other income-net comprises the following (in thousands):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ---------- ----------
Interest income $ 549 $ 647 $ 1,661 $ 2,166
Market valuation gain/(loss)
trading securities (89) 282 696 847
Gain/(loss) on disposal of properties
and equipment (67) (30) (213) (229)
Dividend income - 317 - 1,540
Gain/(loss) on disposal of investments - 1,846 - 5,390
All other 5 (13) 64 52
---------- ---------- --------- ---------
Total $ 398 $ 3,049 $ 2,208 $ 9,766
========== ========== ========= =========
Page 8 of 33
5. COMPREHENSIVE INCOME
We had total comprehensive income of $1,696,000 and $6,085,000,
respectively, for the three-month and nine-month periods ended September 30,
2003. The difference between our net income and our comprehensive income in 2003
relates to the cumulative unrealized appreciation/depreciation on
available-for-sale investments. For the 2004 periods, our total comprehensive
income equals our net income.
6. BUSINESS COMBINATIONS
On February 24, 2004, we completed the acquisition of the 63% of VITAS
Healthcare Corporation ("VITAS") common stock we did not previously own for cash
consideration of $323.4 million ("Acquisition"). The total investment in VITAS,
including $3.2 million of estimated expenses and the Company's $18.4 million
prior investment in VITAS, was $360.6 million.
The revised allocation of the purchase price to VITAS' assets and
liabilities is (in thousands):
Cash and cash equivalents $ 24,377
Other current assets 96,210
Property and equipment 15,691
VITAS trade name 48,200
Referral network 22,200
Noncompetition agreement 7,410
Goodwill 296,101
Other assets 11,127
Current liabilities(including
severance of $15,062) (97,287)
Long-term debt (59,571)
Other liabilities (3,874)
--------
Subtotal 360,584
Less: investment in VITAS on
February 23, 2004 (18,381)
--------
Total purchase price 342,203
Plus: subsequent payments of
acquisition related accruals 5,584
Less: cash and cash equivalents
acquired (24,377)
--------
Net cash outlay $323,410
========
We began including the consolidated VITAS results of operations in the Company's
financial statements as of February 24, 2004.
We recorded the Acquisition using the purchase method of accounting using
revised estimates of the fair values of VITAS' assets and liabilities as of the
date of the Acquisition. With the assistance of a professional valuation firm we
adjusted our estimates of the fair values of VITAS' assets and liabilities. We
expect to further revise VITAS' valuation during the fourth quarter of 2004, but
do not expect material adjustments to be made to values that have been recorded
to date.
Adjustments to the purchase price of VITAS, recorded during the third
quarter of 2004, are (in thousands):
<Table>
<Caption>
Revised Prior Increased/
Value Value (Decrease)
-------- ------- ----------
Property and equipment $ 15,691 $ 22,332 $ (6,641)
VITAS trade name 48,200 -- 48,200
Referral network 22,200 -- 22,200
Noncompetition agreement 7,410 18,000 (10,590)
Consulting agreement -- 7,000 (7,000)
Goodwill 296,101 342,794 (46,693)
Other assets/(liabilities) (66,192) (67,251) 1,059
-------- -------- --------
Total purchase price $323,410 $322,875 $ 535
======== ======== ========
</Table>
Page 9 of 33
The referral network and noncompetition agreement have a combined weighted
average life of 9.1 years. The referral network is being amortized on an
accelerated basis that results in writing off 79% of the asset value during the
first 58% of its life. The noncompetition agreement is being amortized on a
straight line basis which reflects the basis on which the benefit is estimated
to occur. The VITAS trade name and Goodwill are assumed to have indefinite
lives, and will be reviewed at least annually for impairment.
As a result of the changes in appraised values and estimated lives of
VITAS' identifiable intangible assets and property and equipment, the Company
recognized net reduction of depreciation and amortization expense of $526,000
during the third quarter of 2004 ($315,000 aftertax), relating to adjustments of
prior quarters depreciation and amortization expense.
VITAS is the nation's largest provider of hospice services for patients
with severe, life-limiting illnesses. This type of care is aimed at making the
terminally ill patient's final days as comfortable and pain free as possible.
VITAS provides a comprehensive range of hospice services through 32 operating
programs covering many of the large population areas in the U.S. including
Florida, California, Texas and Illinois. VITAS has over 6,800 employees,
including approximately 3,000 nurses and 1,800 home health aides. To fund the
Acquisition and retire VITAS' and the Company's long- term debt, we completed
the following transactions ("Financing") on February 24, 2004:
- We borrowed $75.0 million under a new $135 million revolving credit/term
loan agreement at an initial weighted average interest rate of 4.46%.
Principal payments of $1.25 million are due quarterly under the term loan
beginning June 2004. The credit agreement matures in February 2009.
- We sold 2 million shares of the Company's capital stock in a private
placement at a price of $50 per share, before expenses.
- We issued $110 million principal amount of floating rate senior secured
notes due February 2010 at an initial interest rate of 4.88%.
- We issued $150 million principal amount of 8.75% fixed rate senior notes
due February 2011.
- We incurred estimated financing and transaction fees and expenses of
approximately $17.6 million.
Page 10 of 33
The unaudited pro forma operating data of the Company for the three months
ended September 30, 2004 and 2003 and for the nine months ended September 30,
2004 and 2003, giving effect to the Acquisition and Financing as if they had
occurred on January 1, 2003 follow (in thousands, except per share amounts):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Service revenues and sales $ 211,134 $ 188,700 $ 624,046 $ 550,043
--------- --------- --------- ---------
Cost of services provided and goods
sold (excluding depreciation) 149,409 132,587 441,687 387,953
Selling, general and administrative
expenses 38,597 40,536 116,634 118,895 (a)
Depreciation 3,839 3,617 11,641 11,350
Long-term incentive compensation - - 9,058 (b) -
--------- --------- --------- ---------
Total costs and expenses 191,845 176,740 579,020 518,198
--------- --------- --------- ---------
Income from operations 19,289 11,960 45,026 31,845
Interest expense (6,085) (6,560) (18,598) (19,287)
Loss on extinguishment of debt - - (3,330) (c) (3,330) (c)
Other income-net 398 1,000 2,249 6,647 (d)
--------- --------- --------- ---------
Income before income taxes 13,602 6,400 25,347 15,875
Income taxes (3,436)(e) (2,902) (9,594)(f) (7,573)
--------- --------- --------- ---------
Net income/(loss)(g) $ 10,166 $ 3,498 $ 15,753 $ 8,302
========= ========= ========= =========
Earnings Per Share (g)
Net income $ 0.82 $ 0.29 $ 1.26 $ 0.70
========= ========= ========= =========
Average shares outstanding 12,470 11,941 12,453 11,913
========= ========= ========= =========
Diluted Earnings Per Share (g)
Net income $ 0.80 $ 0.29 $ 1.24 $ 0.70
========= ========= ========= =========
Average shares outstanding 12,701 11,988 12,685 11,940
========= ========= ========= =========
(a) Amount includes severance charges of $3,627,000 ($2,358,000 aftertax).
(b) Amount represents the cost of the payout under the Company's Executive
Long-Term Incentive Plan for 2004. The aftertax impact of this charge was
$5,607,000.
(c) The aftertax cost of the debt extinguishment, incurred in connection with
financing the acquisition of VITAS, as $2,030,000 in 2004 and $2,164,000
in 2003.
(d) The amount for the nine-month period includes $3,544,000 total pretax
capital gains ($2,151,000 aftertax) from the sales of investments in 2003.
(e) Adjustments of income taxes related to the finalization of prior-year
returns increased net income by $1,020,000 for the three months ended
September 30, 2004. A cumulative adjustment of the effective state and
local income tax rate increased net income by $1,098,000 for the three
months ended September 30, 2004.
(f) Adjustments of income taxes related to the finalization of prior-year
returns increased net income by $1,020,000 for the nine months ended
September 30, 2004.
(g) Adjustments and special items discussed in notes (a) through (f)
increased/(reduced) net income by the following amounts (in thousands,
except per share data):
Three months ended September 30, 2004 $ 2,118 ($.17 per share)
Nine months ended September 30, 2004 (6,617) ($.54 per share and $.52 per diluted share)
Nine months ended September 30, 2003 (2,371) ($.20 per share and $.19 per diluted share)
We acquired the 63% of VITAS we did not previously own to enhance our
minority investment in VITAS, the nation's largest provider of hospice services.
We believe the investment will be financially advantageous to our shareholders
because the hospice market is fragmented and VITAS has the infrastructure to
capitalize on the growing hospice services market.
During the first nine months of 2004, we completed three business
combinations within the VITAS and Roto-Rooter segments for an aggregate purchase
price of $5.9 million in cash. The VITAS business acquired provides hospice
services in the Atlanta area and the two Roto-Rooter businesses acquired provide
drain cleaning and plumbing services under the Roto-Rooter name in Harrisburg,
PA and Spokane WA. The results of operations of these businesses are not
material to the Company's results of operations.
Page 11 of 33
On a preliminary basis, we allocated the aggregate purchase price of
these businesses as follows (in thousands):
Goodwill $ 5,918
Other (34)
-------
Total $ 5,884
=======
7. 2002 EXECUTIVE LONG-TERM INCENTIVE PLAN
During January 2004, the price of the Company's stock exceeded $50 per
share for more than 10 consecutive trading days, fulfilling one of the
performance targets of the 2002 Executive Long-Term Incentive Plan ("LTIP"). In
February the Compensation/Incentive Committee of the Board of Directors
("CIC")approved a payout under the LTIP in the aggregate amount of $7.8 million
($2.8 million in cash and 84,633 shares of capital stock). The pretax expense of
this award, including payroll taxes and benefit costs, was $9,058,000
($5,607,000 aftertax).
During June, the CIC approved guidelines covering the establishment of a
pool of 125,000 capital shares ("2004 LTIP Pool") to be distributed to eligible
members of management upon attainment of the following during the period January
1, 2004 through December 31, 2007:
- 44,000 shares will be awarded if Chemed's cumulative pro forma
adjusted EBITDA (including the results of VITAS beginning on
January 1, 2004) reaches $365 million within the four year
period.
- 44,000 shares will be awarded if Chemed's stock price reaches the
following during any 30 trading days out of any 60- trading day
period during the four-year period:
- 11,000 shares for a stock price of $70.00
- an additional 16,500 shares for a stock price of $77.50
- an additional 16,500 shares for a stock price of $85.00.
- 22,000 shares represent a retention element, subject to a
four-year, time based vesting.
- 15,000 shares may be awarded at the discretion of the CIC.
On June 22, 2004, the CIC awarded 22,000 restricted shares of stock to key
employees of management under the retention component of the 2004 LTIP Pool.
These shares vest on December 31, 2007 for all participants still employed by
the Company. The cost of these awards, based on the fair value of the stock on
June 22, 2004, ($1,071,000) is being amortized on a straight line basis over the
42- month period ending December 31, 2007.
As of September 30, 2004, no accrual for awards under the
remaining components of the 2004 LTIP Pool was made since it is not
probable that any of the awards will be earned and paid.
8. PREPAID INCOME TAXES
Prepaid income taxes at September 30, 2004 totals $10,493,000, and
includes the estimated benefit on the tax loss incurred by VITAS prior to
its merger with the Company.
Page 12 of 33
9. OTHER CURRENT LIABILITIES
Other current liabilities include the following (in thousands):
September 30, December 31,
2004 2003
------------- -----------
Accrued salaries and wages $ 23,190 $ 1,945
Accrued severance 8,476 1,462
Accrued incentive compensation 3,800 4,140
Accrued savings and retirement 3,533 3,338
Other 17,369 10,238
-------- --------
Total $ 56,368 $ 21,123
======== ========
The increase in accrued salaries and wages is due to the acquisition of
VITAS in 2004. Accrued severance includes $ 7,192,000 for potential costs under
employment contracts for fifteen employees of VITAS. Under the contracts these
key employees have the right, during the two-year period following the Company's
acquisition of VITAS, to terminate their employment and receive up to two years'
compensation as severance pay. As of September 30, 2004, six employees exercised
their rights under the employment contracts and are entitled to estimated
payouts aggregating $4,736,000, of which $3,789,000 has been paid as of
September 30, 2004.
We have offered the remaining key employees replacement employment
contracts ("REC"). Under the REC's the key employees will receive stock awards
and stock options and may not be terminated without cause, but will forego the
unilateral right to voluntarily terminate their employment and receive severance
pay. As of September 30, 2004, eight VITAS employees, who previously held
employment contracts with VITAS, signed REC's and received restricted stock
awards covering 27,547 shares of Chemed capital stock ($1,211,000). These awards
vest during the seven-year periods ending in 2011 at the annual rates of 5%, 5%,
10%, 10%, 20%, 25% and 25%, respectively. Expense is recognized in proportion to
the shares vesting during each annual period.
At the present time it is not possible to estimate how many additional
VITAS employees will elect to receive payments under their current employment
contracts.
10. 2003 SEVERANCE CHARGES
In March 2003, the Company and a corporate officer reached agreement
providing for termination of the officer's employment in exchange for payment
under her employment contract. The payments comprise a $1,000,000 lump sum
payment made in March 2003 and monthly payments of $52,788 beginning March 2003
and ending May 2007. The present value of these payments ($3,627,000) is
included in selling, general and administrative expenses.
11. CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES
We adopted the provisions of FASB Interpretation No. 46R ("FIN 46R"),
Consolidation of Variable Interest Entities-an interpretation of Accounting
Research Bulletin No. 51 (revised), effective January 1, 2004. Under FIN 46R,
the Company is not the primary beneficiary of the Chemed Capital Trust ("CCT")
and is not permitted to consolidate the accounts of the CCT. As a result, we
deconsolidated the Mandatorily Redeemable Preferred Securities of the Chemed
Capital Trust
Page 13 of 33
("Preferred Securities") and replaced them in the Company's consolidated balance
sheet with the Convertible Junior Subordinated Debentures ("CJSD"), which are
the sole assets of the CCT. The CJSD were scheduled to mature March 15, 2030 and
bore interest at the rate of $2.00 per annum per $27.00 principal amount, the
same rate as distributions on the Preferred Securities. Distributions on the
Preferred Securities have been reclassified as interest expense in the
consolidated statement of income. Other than the change in account captions,
this change in accounting has no impact on the Company's financial statements.
On April 7, 2004, we announced the calling of all Preferred Securities
outstanding as of May 18, 2004, at face value ($27.00 per security) plus accrued
dividends ($.35 per security). As a result, during the second quarter of 2004,
417,256 Preferred Securities were converted into 304,597 shares of capital stock
and 101,282 Preferred Securities were redeemed for $2,735,000 in cash. At
September 30, 2004 there are no CJSD's or Preferred Securities outstanding.
12. OTHER LONG-TERM DEBT
In conjunction with the VITAS acquisition the Company retired its senior
notes due 2005 through 2009 and canceled its revolving credit agreement with
Bank One, N.A. ("Bank One"). To fund the Acquisition, the Company issued two
million shares of capital stock in a private placement and borrowed $335 million
as follows:
- $75 million drawn down under a $135 million secured
revolving credit/term loan facility ("New Credit Facility")
with Bank One. The facility comprises a $35 million term
loan ("TL") and $100 million revolving credit facility
("RCF"), including up to $40 million in letters of credit.
For the TL, principal payments of $1,250,000 plus interest
(LIBOR plus 3.25%) are due quarterly beginning in June
2004. For the RCF, interest payments (LIBOR plus 3.00%) are
due at the end of the interest period (30, 60, 90 or 180
days as selected by the Company). The current rate of
interest on the TL is 5.00% per annum. Payment of unpaid
principal and interest is due February 2009. At September
30, 2004, $5 million of the TL is included in current
liabilities.
- $110 million from the issuance of privately placed floating
rate senior secured notes ("Floating Rate Notes") due 2010.
Interest payments (LIBOR plus 3.75%) are due quarterly
beginning in May 2004 and payment of unpaid principal and
interest is due February 2010. The current rate of interest
on the Floating Rate Notes is 5.46% per annum.
- $150 million from the issuance of privately placed 8.75%
senior notes ("Original Fixed Rate Notes") due 2011. Semi-
annual interest payments are due beginning in August 2004 and
payment of unpaid principal and interest is due February
2011.
In the second quarter of 2004, we filed a registration statement
covering up to $150 million principal amount of new 8.75% senior notes due 2011
("New Fixed Rate Notes"). Except for the lack of transfer restrictions, the
terms of the New Fixed Rate Notes are substantially
Page 14 of 33
identical to those of the Original Fixed Rate Notes. Pursuant to the
Company's exchange offer, all holders of the Original Fixed Rate Notes
exchanged their notes for like principal amounts of the New Fixed Rate Notes.
At September 30, 2004, long-term debt comprises the following (in
thousands):
New Credit Facility
Term Loan $ 32,500
Floating Rate Notes 110,000
New Fixed Rate Notes 150,000
Other 1,212
----------
Subtotal 293,712
Less: current portion (5,401)
----------
Long-term debt $ 288,311
==========
At September 30, 2004, the Company has drawn down $27.9 million of letters of
credit ("LOC") under the New Credit Facility. At September 30, 2004, the Company
has $72.1 million of unused lines of credit under the New Credit Facility. Fees
for the New Credit Facility comprise an annual fee of $100,000 plus .5% per
annum (paid quarterly) for the unused portion of the RCF
Bank One anticipates creating a borrowing syndicate to support the New
Credit Facility later in 2004. Should credit conditions change, Bank One, after
consultation with us, may change the terms of the New Credit Facility, including
the rates of interest payable and the required leverage and other financial
ratios.
Collectively, the New Credit Facility, the Floating Rate Notes and the
New Fixed Rate Notes provide for significant affirmative and restrictive
covenants including, without limitation, requirements or restrictions (subject
to exceptions) related to the following:
- use of proceeds of loans,
- restricted payments, including payments of dividends and
retirement of stock (permitting $.48 per share dividends so long
as the aggregate amount of dividends in any fiscal year does not
exceed $7.0 million and providing for additional principal
prepayments on the TL to the extent dividends exceed $5.0 million
in any fiscal year), with exceptions for existing employee
benefit plans and stock incentive plans,
- mergers and dissolutions,
- sales of assets,
- investments and acquisitions, liens, transactions with
affiliates, hedging and other financial contracts,
- restrictions on subsidiaries,
- contingent obligations, operating leases,
- guarantors,
- collateral,
- sale and leaseback transactions,
- prepayments of indebtedness, and
- maximum annual capital expenditures of $20 million subject to
one-year carry-forwards on amounts not used during the
previous year.
Page 15 of 33
In addition, the credit agreements provide that the Company will be
required to meet the following financial covenants, to be tested quarterly,
beginning with the quarter ending June 30, 2004:
- a minimum net worth requirement, which requires a net worth of at
least (i) $232 million plus (ii) 50% of consolidated net income
(if positive) beginning with the quarter ending June 30, 2004,
plus (iii) the net cash proceeds from issuance of the Company's
capital stock or capital stock of the Company's subsidiaries;
- a maximum leverage ratio, calculated quarterly, based upon the
ratio of consolidated funded debt to consolidated EBITDA, which
will require maintenance of a ratio of 5.5 to 1.00 through
December 31, 2004, a ratio of 4.75 to 1.00 from January 1 through
December 31, 2005, and 4.25 to 1.00 thereafter;
- a maximum senior leverage ratio, calculated quarterly, based upon
the ratio of senior consolidated funded debt to consolidated
EBITDA (which ratio excludes indebtedness in respect of the Fixed
Rate Notes), which will require maintenance of a ratio of 3.375
to 1.00 through December 31, 2004, a ratio of 2.875 to 1.00 from
January 1 through December 31, 2005, and 2.625 to 1.00
thereafter; and
- a minimum fixed charge coverage ratio, based upon the ratio
of consolidated EBITDA minus capital expenditures to
consolidated interest expense plus consolidated current
maturities (including capitalized lease obligations) plus
cash dividends paid on equity securities plus expenses for
taxes, which will require maintenance of a ratio of 1.15 to
1.00 through December 31, 2004, a ratio of 1.375 to 1.00 from
January 1 through December 31, 2005, and 1.50 to 1.00
thereafter.
Our calculations and projections indicate that we are in compliance with
all financial and debt covenants as of September 30, 2004.
All of the borrowings under the New Credit Facility and the Floating Rate
Notes are guaranteed by the assets of and secured by the securities of
substantially all of the Company's subsidiaries.
Pursuant to the terms of the Floating Rate Notes, we filed a preliminary
registration statement registering the Floating Rate Notes within 90 days of
February 24, 2004. We are also required to file an effective registration
statement within 180 days of February 24, 2004. We have not yet filed an
effective registration statement for the Floating Rate Notes and have begun
incurring a .25% per annum interest penalty on the Floating Rate Notes starting
August 20, 2004. This penalty increases .25% per annum for each additional
90-day period the Floating Rate Notes remain unregistered, up to a maximum of 1%
per annum.
13. LOANS RECEIVABLE FROM INDEPENDENT CONTRACTORS
The Plumbing and Drain Cleaning segment sublicenses with
independent contractors to operate certain plumbing repair and drain cleaning
businesses in lesser-populated areas of the United States and Canada. At
September 30, 2004, the Company had notes receivable from its independent
contractors totaling $3,095,000 (December 31, 2003-$2,599,000). In most cases
these loans are fully or partially secured by equipment owned by the contractor.
The interest rates on the
Page 16 of 33
loans range from 5% to 8% per annum and the remaining terms of the loans range
from one month to 6 years at September 30, 2004. During the quarter ended
September 30, 2004, we recorded revenues of $3,819,000 (2003-$3,449,000) and
pretax profits of $1,495,000 (2003-$1,290,000) from our independent contractors.
During the nine months ended September 30, 2004, we recorded revenues of
$11,842,000 (2003-$10,270,000) and pretax profits of $4,032,000
(2003-$3,595,000) from our independent contractors.
Effective January 1, 2004, we adopted the provisions of FIN 46R
relative to the Company's contractual relationships with its independent
contractors. FIN 46R requires the primary beneficiary of a Variable Interest
Entity ("VIE") to consolidate the accounts of the VIE. We have evaluated our
relationships with our independent contractors based upon guidance provided in
FIN 46R and have concluded that many of the contractors who have loans payable
to us may be VIE's. Due to the limited financial data available from these
independent entities we have not been able to perform the required analysis to
determine which, if any, of these relationships are VIE's or the primary
beneficiary of these potential VIE relationships. We are continuing to request
appropriate information to enable us to evaluate this potential VIE
relationship. We believe consolidation, if required, of the accounts of any
VIE's for which the Company might be the primary beneficiary would not
materially impact the Company's financial position or results of operations.
14. 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, ESOP's, excess benefit plans and other similar plans comprise the
following (in thousands):
For the three months ended September 30, 2004 $ 1,744
For the three months ended September 30, 2003 1,382
For the nine months ended September 30, 2004 6,587
For the nine months ended September 30, 2003 4,344
15. LITIGATION
The Company is party to a class action lawsuit filed in the Third
Judicial Circuit Court of Madison County, Illinois, in June of 2000 by Robert
Harris, alleging certain Roto-Rooter plumbing was performed by unlicensed
employees. The Company contests these allegations and believes them without
merit. Plaintiff moved for a certification of a class of customers in 32 states
who allegedly paid for plumbing work performed by unlicensed employees.
Plaintiff also moved for a partial summary judgment on grounds the licensed
apprentice plumber who installed his faucet did not work under the direct
personal supervision of a licensed plumber. On June 19, 2002, the trial judge
certified an Illinois-only plaintiffs class and granted summary judgment for the
named party Plaintiff on the issue of liability, finding violation of the
Illinois Plumbing License Act and the Illinois Consumer Fraud Act, through
Roto-Rooter's representation of the licensed apprentice as a plumber. The court
has not yet ruled on certification of a class in the remaining 31 states. Due to
complex legal and other issues involved, it is not presently possible to
estimate the amount of liability, if any, related to this matter. Regardless of
outcome, such litigation can
Page 17 of 33
adversely affect the Company through defense costs, diversion of management's
time, and related publicity.
On April 5, 2002, Michael Linn, an attorney, filed a class action
complaint against the Company in the Court of Common Pleas, Cuyahoga County,
Ohio. He alleged Roto-Rooter Services Company's miscellaneous parts charge,
ranging from $4.95 to $12.95 per job, violates the Ohio Consumer Sales Practices
Act. The Company contends that this charge, which is included within the
estimate approved by its customers, is a fully disclosed component of its
pricing. On February 25, 2003, the trial court certified a class of customers
who paid the charge from October 1999 to July 2002. The Company appealed this
order and on May 20, 2004 the Eighth District Court of Appeals of Ohio
overturned the certification of this class action. Mr. Linn sought review of the
decertification by the Ohio Supreme Court. In October 2004, the Ohio Supreme
Court declined jurisdiction of the Plaintiffs' appeal of the Court of Appeals
decision.
The District Attorney of Suffolk County, New York brought legal
proceedings in September 2004 against Roto-Rooter Services Company, an indirect
subsidiary of the Company, arising out of the disposal of restaurant grease trap
waste, originating in adjacent Nassau County, in Suffolk County disposal sites.
This matter was resolved without a material effect on the Company's financial
condition.
16. RELATED PARTY AGREEMENT
In October 2004, VITAS entered into a pharmacy services agreement
("Agreement") with Omnicare, Inc. ("OCR") whereby OCR will provide specified
pharmacy services for VITAS and its hospice patients in geographical areas
served by both VITAS and OCR. The Agreement has an initial term of three years
that renews automatically thereafter for one-year terms. Either party may cancel
the Agreement at the end of any term by giving written notice at least 90 days
prior to the end of said term.
Mr. E. L. Hutton is non-executive Chairman and a director of the Company
and OCR. Nonetheless, we believe that the terms of the Agreement are no less
favorable to VITAS than we could negotiate with an unrelated party.
Page 18 of 33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The changes in most of the balance sheet accounts from December 31, 2003
to September 30, 2004 are due primarily to the acquisition of VITAS in February
2004. Explanations for other changes in the balance sheet since December 31,
2003 include:
- The increase in prepaid income taxes from $3.6 million at December 31,
2003 to $10.5 million at September 30, 2004 is attributable to the tax
benefits recorded by VITAS on transaction costs of the merger and to tax
benefit on the Company's losses recorded in the first quarter of 2004.
- The decline in other investments from $25.1 million at December 31, 2003
to $1.4 million at September 30, 2004, is attributable to reclassifying
our investment in VITAS from an equity-method investment to an
investment in a consolidated subsidiary, which is now eliminated in
consolidation.
- The current portion of long-term debt increased from $448,000 at
December 31, 2003 to $5.4 million at September 30, 2004 due to the
Company's borrowing under the term loan provisions of its New Credit
Facility, under which principal payments of $1.25 million are payable
quarterly.
- The convertible junior subordinated debentures decreased from $14.1
million at December 31, 2003 to nil at September 30, 2004, due to our
calling these securities in April 2004. As a result, $11.3 million of
the debentures were converted into 304,597 shares of capital stock and
$2.7 million were redeemed for cash.
- Other long-term debt increased from $25.9 million at December 31, 2003
to $288.3 million at September 30, 2004 due to the Company's borrowing
under the New Credit Facility ($27.5 million), the Floating Rate Notes
($110.0 million) and the Fixed Rate Notes ($150.0 million). Proceeds
from these loans were used to finance the purchase of VITAS, retire
VITAS' debt ($67.0 million including current portion) and retire the
Company's senior debt due 2005 to 2009 ($28.3 million including a
prepayment penalty of $3.3 million).
- From December 31, 2003 to September 30, 2004, paid in capital increased
$39.1 million and treasury stock declined $76.4 million largely due to
the issuance of 2 million shares of capital stock from treasury at $50
per share to finance the purchase of VITAS.
Net cash provided by operating activities increased from $17.0 million for
the first nine months of 2003 to $52.0 million for the first nine months of
2004, due to (in millions):
Operating cash generated by VITAS, acquired
in February 2004 $ 37.1
Increase in operating cash used at the corporate level, primarily due to
higher interest costs on debt used to finance the
VITAS acquisition (5.0)
Other 2.9
-------
Total $ 35.0
=======
Page 19 of 33
VITAS' operating cash was favorably impacted by paying significantly less
income taxes than has been provided in the income statement ($13.6 million).
This is attributable to the tax deduction for VITAS' stock options exercised
immediately prior to VITAS' merger with Chemed. As a result VITAS had a $14.8
million balance in prepaid income taxes on the date the merger was completed. On
a consolidated basis, we expect to receive a refund of these prepaid taxes in
the fourth quarter of 2004.
The $15.0 million increase in accounts receivable (excluding amounts
acquired in business combinations) since December 31, 2003 is primarily due to
the timing of VITAS' receipt of prospective cash payments from Medicare as of
September 30, 2004 and to higher level of revenues in August and September 2004
versus the two months of 2004 preceding the acquisition of VITAS.
At September 30, 2004, we had approximately $72.1 million available
borrowing capacity under our revolving credit agreement with Bank One.
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 the credit agreements provide that the Company
is required to meet various financial covenants, to be tested quarterly,
beginning with the quarter ending June 30, 2004. In connection therewith, we are
in compliance with all financial and other debt covenants as of September 30,
2004.
Under the New Credit Facility we are limited to investing a maximum of $3
million on acquisitions of businesses during the term of the agreement. For the
period beginning February 24, 2004 and ending September 30, 2004, we spent in
excess of that limit, having received a waiver of this covenant prior to
exceeding the limit. Should we desire to complete additional acquisitions, we
will again request a waiver of this covenant from the lender. There can be no
assurance that it would grant such waiver.
At September 30, 2004, we have current accounts receivable from Patient
Care ("PC"), a former subsidiary, aggregating $2,630,000. This amount comprises
$1,251,000 for the estimated post-closing balance sheet adjustment due us based
on delivery of sufficient net worth and $1,379,000 for reimbursement for
expenses we have paid on behalf of PC. In addition, we have an investment in a
common stock warrant of PC ($1,445,000) and a long-term note receivable due in
2007 ($12.5 million). PC is current on its interest payments on the long-term
note, but is in arrears with respect to accounts receivable balances. During the
second quarter of 2004, we filed suit for collection of the balances due from PC
and in July, PC filed a counterclaim and third-party complaint alleging
violation of certain non-compete provisions of Chemed's Stock Purchase Agreement
with PC related to Chemed's acquisition of VITAS. We believe PC's counterclaim
is without merit. PC's business has been adversely impacted by a difficult
Medicaid reimbursement climate. As of February, 2004, PC has reduced its bank
debt and was in compliance with its debt covenants.
Page 20 of 33
Should PC's business deteriorate significantly during the remainder of 2004, we
may be required to record an impairment loss on our investments in or
receivables due from PC. At the present time we believe the balances are fully
collectible.
RESULTS OF OPERATIONS
THIRD QUARTER 2004 VERSUS THIRD QUARTER 2003-CONSOLIDATED RESULTS
The Company's service revenues and sales for the third quarter of 2004
increased 181% versus revenues for the third quarter of 2003. This $136.0
million increase was attributable to the following (dollar amounts in
thousands):
Increase/(Decrease)
-----------------------------
Amount Percent
-------- -------
VITAS $135,101 n.a.%
Plumbing and Drain Cleaning
Drain cleaning 1,443 5.8
Plumbing 1,369 5.4
Other 630 4.8
Service America
Service contracts (1,783) (19.7)
Demand services (798) (28.5)
--------
Total $135,962 180.9%
========
VITAS' revenues for the third quarter of 2004 included revenues from
the following sources (in thousands):
Routine home care $ 94,265
Continuous home care 22,474
General inpatient care 18,126
Respite and custodial care 236
--------
Total $135,101
========
Approximately 96% of VITAS' revenues for the period was from Medicare and
Medicaid.
The increase in the drain cleaning revenues for the third quarter of
2004 versus 2003 comprises a .4% increase in the number of jobs performed and a
5.4% increase in the average price per job. The increase in plumbing revenues
for the third quarter of 2004 versus 2003 comprised a 3.8% increase in the
number of jobs and a 1.6% increase in the average price per job. On a same-store
basis the number of drain cleaning and plumbing jobs in 2004 increased .4% and
4.6%, respectively, versus 2003. The increase in other revenues for the third
quarter of 2004 versus 2003 is attributable primarily to increases in
independent contractor operations and other services.
The decline in Service America's service contract revenues is
attributable to selling insufficient new service contracts to replace contracts
canceled or not renewed. The number of contracts in place during 2004 was 17%
lower than 2003. As revenues from demand services are largely dependent upon
service contract customers, the decline in service contracts in place was
largely responsible for the decline in demand services in 2004.
Page 21 of 33
The consolidated gross margin was 29.2% in the third quarter of 2004 as
compared with 41.2% in the third quarter of 2003, largely due to the acquisition
of VITAS in 2004. On a segment basis, VITAS' gross margin was 21.8%. The
Roto-Rooter segment's gross margin increased 1.6% points to 45.4%, largely due
to lower training wages as a percentage of revenues, in the third quarter of
2004 versus 2003. Service America's gross margin declined 5.7% points to 21.3%,
due largely to higher labor and related costs as a percent of revenues and
higher materials costs as a percent of revenues. These increases are due to a
declining contract base and significantly lower retail sales in the third
quarter of 2004.
Selling, general and administrative expenses ("SG&A") for the third
quarter of 2004 were $38,908,000, an increase of $13,301,000 (51.9%) versus the
third quarter of 2003. The increase is attributable to the following (in
thousands):
Increase/
(Decrease)
----------
VITAS SG&A (acquired in 2004) $ 14,214
Reduction in Roto-Rooter SG&A, due
to lower advertising costs in 2004,
and an overall reduction in
administrative expenses in 2004 (1,403)
Higher SG&A at the Corporate Office due primarily to consulting fees
incurred in connection with complying with the internal controls
provisions
of the Sarbanes-Oxley Act of 2002 ("SOX") 1,112
Reduction in Service America SG&A
due primarily to a reduction in staff
resulting from fewer service contracts (627)
Other 5
--------
Total $ 13,301
========
Income from operations increased $17,448,000 from $2,367,000 in the
third quarter of 2003 to $19,815,000 in the third quarter of 2004. The increase
comprises (in thousands):
Increase/
(Decrease)
----------
Income from operations of VITAS (acquired in 2004) $ 14,721
Higher gross profit of Roto-Rooter segment
due primarily to increase in service
revenues and gross profit 2,592
All other 135
--------
Total $ 17,448
========
Interest expense, substantially all of which is incurred at Corporate,
increased from $755,000 in the third quarter of 2003 to $6,085,000 in the 2004
quarter. This increase is due to higher debt levels in 2004 as the result of
borrowing $335 million to fund the acquisition of VITAS in February 2004.
Page 22 of 33
Other income declined $2,651,000 in the third quarter of 2004 versus
the third quarter of 2003. The decline is attributable to (in thousands):
Increase/
(Decrease)
---------
Gain on redemption of VITAS preferred stock
in the third quarter of 2003 $ (1,846)
Losses on market valuation adjustments
to assets held in employee benefit
trusts, versus gains in 2003 (371)
Lack of income from VITAS preferred stock
in 2004 (redeemed August 2003) (371)
All other (63)
---------
Total $ (2,651)
=========
The above decline in market adjustments for assets held in employee
benefit trusts in the 2003 quarter is entirely offset by lower expenses in the
SG&A category of the statement of income.
Our effective income tax rate declined from 37.5% in the third quarter
of 2003 to 25.8% in the third quarter of 2004. The lower rate in 2004 is
attributable to favorable tax adjustments resulting from the finalization of
prior years' returns in the third quarter of 2004 ($1,020,000) and to a
cumulative reduction in the effective state and local income tax rate resulting
from the implementation of multi-state tax planning strategies in the third
quarter ($1,098,000 aftertax). The effective rate in 2003 benefitted from the
domestic dividend exclusion (1.9% points) and a lower effective state and local
tax rate (1.5% points).
Equity in the loss of VITAS for 2004 represents the Company's 37% share
of VITAS' loss for the period from January 1, 2004 through February 23, 2004,
prior to our acquiring a controlling interest in VITAS. During the third quarter
of 2004, VITAS' liability for pre-acquisition transaction expenses was reduced
based on changed circumstances. Of the total adjustment, 63% was recorded as a
reduction of goodwill and 37% (net of deferred income taxes) was recorded as an
adjustment of our equity in the earnings of VITAS ($131,000).
Net income for the third quarter of 2004 was $10,612,000 ($.85 per
share and $.84 per diluted share) as compared with $2,913,000 ($.29 per share)
in 2003. Net income for both periods included the following aftertax special
items/adjustments that increased/(reduced) net income (in thousands, except per
share data):
For the Three Months Ended
September 30,
--------------------------
2004 2003
--------- -----------
Adjustments to revise VITAS purchase
price allocation and the related
depreciation and amortization $ 315 $ --
Tax adjustments resulting from the
finalization of prior-year income tax
returns in the third quarter of 2004 1,020 --
Tax adjustments from the cumulative
reduction of estimated state and
local income tax rates 1,098 --
Adjustment to equity in the earnings
of VITAS (prior to consolidation) 131 --
Gain on the redemption of VITAS preferred
stock in August 2003 -- 1,200
Income from VITAS preferred stock in 2003 -- 328
--------- -----------
Total impact on net income $ 2,564 $ 1,528
========= ===========
Impact on earnings per share $ .20 $ .15
Impact on diluted earnings
per share $ .21 $ .15
Page 23 of 33
THIRD QUARTER 2004 VERSUS THIRD QUARTER 2003-SEGMENT RESULTS
The change in aftertax earnings for the third quarter of 2004 versus
the third quarter of 2003 is due to (in thousands):
Increase/
(Decrease)
---------
Earnings of VITAS, acquired in 2004 $ 8,975
Higher earnings of the Roto-Rooter
segment in 2004 3,279
Lower earnings/(loss) of the Service America
segment in 2004 (188)
Higher aftertax corporate costs in 2004 (4,498)
Favorable adjustment to the equity earnings
of VITAS in 2004 131
---------
Increase in net income in 2004 $ 7,699
=========
The higher aftertax earnings of Roto-Rooter in the third quarter of
2004 are attributable to higher gross profit and lower SG&A expense in 2004 and
to favorable tax adjustments which increased Roto-Rooter's net income by
$847,000 in the third quarter of 2004.
Higher aftertax corporate expenses in 2004 are attributable to (in
thousands):
Increase/
(Decrease)
---------
Higher aftertax interest expense in 2004
due to debt incurred to acquire VITAS $ 3,441
Gain on the redemption of VITAS preferred
stock in the 2003 third quarter 1,200
Favorable tax adjustments in 2004 resulting
from the cumulative adjustment of the
effective state and local income tax
rates in the third quarter of 2004 (881)
Favorable tax adjustments in 2004 resulting
from the finalization of prior-years'
income tax returns in the third quarter (390)
Lack of income from VITAS preferred stock
in 2004 328
Higher aftertax administrative costs in
2004 due largely to professional fees
incurred in connection with Sarbanes-
Oxley compliance efforts and higher
insurance costs in 2004 726
All other 74
---------
Increase in corporate costs in 2004 $ 4,498
=========
For the third quarter of 2004, the second full quarter of operations
under Chemed ownership, VITAS' service revenues and operating profit increased
19% and 50%, respectively, versus results for the third quarter of 2003. Driving
these increases was a 17% increase in average daily census ("ADC") of patients
from 7,643 in the third quarter of 2003 to 8,949 patients in the third quarter
of 2004.
Page 24 of 33
FIRST NINE MONTHS OF 2004 VERSUS
FIRST NINE MONTHS OF 2003-CONSOLIDATED RESULTS
The Company's service revenues and sales for the first nine months of
2004 increased 140% versus revenues for the first nine months of 2003. This
$321.1 million increase was attributable to the following (dollar amounts in
thousands):
Increase/(Decrease)
---------------------------
Amount Percent
--------- ---------
VITAS $ 316,453 n.a.%
Plumbing and Drain Cleaning
Drain cleaning 4,705 6.0
Plumbing 4,343 5.8
Other 3,200 8.2
Service America
Service contracts (4,789) (17.1)
Demand services (2,824) (29.9)
---------
Total $ 321,088 139.6%
=========
VITAS' revenues for 2004 (since the date of acquisition) included
revenues from the following sources (in thousands):
Routine home care $217,628
Continuous home care 54,270
General inpatient care 44,081
Respite and custodial care 474
--------
Total $316,453
========
Approximately 96% of VITAS' revenues for the period came from Medicare and
Medicaid.
The increase in drain cleaning revenues for the first nine months of
2004 versus 2003 was due to a .1% increase in the number of jobs and to a 5.9%
increase in the average price per job. The increase in plumbing revenues for the
first nine months of 2004 versus 2003 comprised a 4.2% increase in the number of
jobs and a 1.5% increase in the average price per job. On a same-store basis,
the number of drain cleaning jobs in 2004 declined .3% and the number of
plumbing jobs increased 4.5% versus 2003. The increase in other revenues for the
first nine months of 2004 versus 2003 is attributable primarily to increases in
independent contractor operations and product sales.
The decline in Service America's service contract revenues is
attributable to selling insufficient new service contracts to replace contracts
canceled or not renewed. The number of contracts in place during 2004 was 17%
lower than 2003. The decline in service contracts in place during 2004 was
largely responsible for the decline in demand services in 2004.
The consolidated gross margin was 30.5% in the first nine months of
2004 as compared with 40.9% in the first nine months of 2003, largely due to the
acquisition of VITAS in 2004. On a segment basis, VITAS' gross profit margin was
21.6%. Roto-Rooter's gross profit margin increased 1.0% point to 44.8%, largely
due to lower training wages as a percentage of revenues in the 2004 period.
Service America's gross profit margin increased 1.2% points to 26.9% due to
reduced material costs as a percent of revenues. The lower material costs, as a
percent of revenues, is due primarily to improved inventory and cost control in
Service America's warehouse and service trucks.
Page 25 of 33
SG&A for the first nine months of 2004 was $107,844,000, an increase of
$31,090,000 (40.5%) versus the first nine months of 2003. The increase is
attributable to the following (in thousands):
Increase/
(Decrease)
---------
VITAS SG&A (acquired in 2004) $ 32,935
Severance costs for a corporate officer
in 2003 (3,627)
Higher aftertax administrative costs in
2004 due largely to professional fees
incurred in connection with Sarbanes-
Oxley compliance efforts and higher
insurance costs 2,476
Reduction in Service America SG&A
due primarily to a reduction in staff
resulting from fewer service contracts (996)
All other 302
---------
Total $ 31,090
=========
Depreciation expense for the first nine months of 2004 increased
$2,136,000 (23.7%) from $9,025,000 in the first nine months of 2003 to
$11,161,000 in the 2004 period. This increase arises from the following (in
thousands):
Increase/
(Decrease)
---------
VITAS depreciation (acquired in 2004) $ 3,078
Lower depreciation for Service America due largely to lower asset
values in 2004 as a result of writing down assets in the fourth
quarter of 2003 (466)
Lower depreciation for the Roto-Rooter segment
due to lower depreciation on service vehicles
due to recent declines in capital outlays (399)
Corporate (77)
---------
Total $ 2,136
=========
Income from operations increased $31,943,000 from $8,331,000 in the first nine
months of 2003 to $40,274,000 in the first nine months of 2004. The increase
comprises (in thousands):
Increase/
(Decrease)
---------
Income from operations of VITAS (acquired in 2004) $ 32,469
Cost of LTIP in 2004 (9,058)
Higher gross profit of Roto-Rooter segment
due primarily to increase in service
revenues 7,351
Severance charges for corporate officer in 2003 3,627
Lower gross profit of Service America segment
due primarily to decline in revenues (1,607)
All other (839)
---------
Total $ 31,943
=========
Page 26 of 33
Interest expense, substantially all of which is incurred at Corporate,
increased from $2,429,000 in the first nine months of 2003 to $15,196,000 in the
2004 period. This increase is due to higher debt levels in 2004 to fund the
acquisition of VITAS.
Other income declined $7,558,000 in the first nine months of 2004
versus the first nine months of 2003. The decline is attributable to (in
thousands):
Increase/
(Decrease)
---------
Gains on the redemption and sales of
available-for-sale investments in 2003 $ (5,390)
Lack of income from VITAS preferred
stock in 2004 (redeemed August 2003) (1,794)
All other (374)
---------
Total $ (7,558)
=========
Our effective income tax rate was 37.6% in the first nine months of
2003 and 37.5% in the first nine months of 2004. The tax rate in 2004 was
favorably impacted by tax adjustments resulting from the finalization of prior
years returns in the third quarter of 2004 ($1,020,000). The effective rate in
2003 benefitted from the domestic dividend exclusion (2.8% points).
Equity in the loss of VITAS for 2004 represents the Company's 37% share
of VITAS' loss for the period from January 1, 2004 through February 23, 2004,
prior to our acquiring a controlling interest in VITAS. During the 2004 period
VITAS incurred aftertax expenses aggregating $16,641,000 related to the sale of
its business to the Company. The Company's aftertax share of these charges was
$3,669,000.
Net income for the first nine months of 2004 was $11,820,000 ($.99 per
share and $.97 per diluted share) as compared with $9,770,000 ($.99 per share
and $.98 per diluted share) in 2003. Net income for both periods included the
following aftertax special items/adjustments that increased/(reduced) net income
(in thousands, except per share data):
For the Nine Months Ended
September 30,
-------------------------
2004 2003
-------- ---------
Expense for payouts under the LTIP
in the first quarter of 2004 $(5,607) $ --
Loss on extinguishment of debt in the
first quarter of 2004 (2,030)
Tax adjustments resulting from the
finalization of prior-year income tax
returns in the third quarter of 2004 1,020 --
Equity in the loss of VITAS (prior to
consolidation) (3,153)
Gain on the redemption and sales of
available-for-sale investments in
2003 -- 3,351
Severance costs for a corporate officer
in 2003 -- (2,358)
Income from VITAS preferred stock in 2003 -- 1,585
------- ---------
Total impact on net income $(9,770) $ 2,578
======= =========
Impact on earnings per share $ (.82) $ .26
Impact on diluted earnings
per share $ (.81) $ .26
Page 27 of 33
FIRST NINE MONTHS OF 2004 VERSUS
FIRST NINE MONTHS OF 2003-SEGMENT RESULTS
The increase in aftertax earnings for the first nine months of 2004
versus the first nine months of 2003 is due to (in thousands):
Increase/
(Decrease)
---------
Earnings of VITAS, acquired in 2004 $ 19,479
Higher Corporate costs in 2004 (18,457)
Higher earnings of the Roto-Rooter
segment in 2004 4,353
Equity in VITAS' loss (attributable to
costs incurred by VITAS in connection
with the sale of VITAS to Chemed) (3,153)
Lower earnings of the Service America
segment in 2004 (172)
---------
Increase in net income in 2004 $ 2,050
=========
Higher aftertax corporate expenses in 2004 are attributable to (in
thousands):
Increase/
(Decrease)
---------
Higher aftertax interest expense in 2004
due to debt incurred to acquire VITAS $ 8,282
Aftertax cost of the LTIP in 2004 (corporate
office employees) 4,455
Capital gains on the sales of available-for-
sale investments in 2003 3,351
Aftertax cost of corporate severance in
2003 (2,358)
Loss on extinguishment of debt in 2004 2,030
Increases in other administrative costs in
2004 due largely to professional fees
incurred in connection with Sarbanes-
Oxley compliance efforts and higher
insurance costs 1,609
Lack of income from VITAS preferred
stock in 2004 1,585
Favorable tax adjustments in 2004 resulting
from the finalization of prior-years
income tax returns in the third quarter (390)
All other (107)
---------
Increase in corporate costs in 2004 $ 18,457
=========
The higher aftertax earnings of Roto-Rooter in the first nine months of
2004 are attributable to higher service revenues and gross profit, partially
offset by Roto-Rooter's share of the LTIP costs ($982,000 aftertax).
The following data update previously provided historical financial and
operating data of VITAS, acquired in February 2004 (in thousands, except
percentages, days and dollars per day):
Page 28 of 33
To provide background in analyzing the quarterly operations of
the Vitas segment during 2004, we are providing the following financial and
operating data for Vitas, prepared from Vitas' historical financial records (in
thousands, except percentages, days and dollars per day):
2003 2004
----------------------- ----------------------------------------------------
Third Year-to-Date January 1 to February 24 to Second Third
Quarter September February 23 March 31 (a) Quarter Quarter
--------- ------------ ------------ -------------- --------- ---------
STATEMENT OF OPERATIONS
Service revenues and sales $ 113,528 $ 319,955 $ 72,870 $ 51,112 $ 130,240 $ 135,101
--------- ------------ ------------ -------------- --------- ---------
Cost of services provided and goods sold
(excluding depreciation) 88,373 251,976 58,848 40,486 101,790 105,695
Selling, general and administrative expenses 13,894 39,036 8,186 5,391 13,329 14,215
Costs related to sale of business -- -- 24,956(b) -- -- --
Depreciation 1,244 4,155 836 748 1,861 469
--------- ------------ ------------ -------------- --------- ---------
Total costs and expenses 103,511 295,167 92,826 46,625 116,980 120,379
--------- ------------ ------------ -------------- --------- ---------
Income/(loss) from operations 10,017 24,788 (19,956) 4,487 13,260 14,722
Interest expense (1,843) (4,509) (919) (28) (30) (32)
Loss on extinguishment of debt (4,117) (4,117) (4,497)(b) -- --
Other income--net 168 521 41 31 176 382
--------- ------------ ------------ -------------- --------- ---------
Income/(loss) before income taxes 4,225 16,683 (25,331) 4,490 13,406 15,072
Income taxes (1,644) (6,622) 6,996 (1,893) (5,499) (6,097)
--------- ------------ ------------ -------------- --------- ---------
Net income/(loss) $ 2,581 $ 10,061 $ (18,335) $ 2,597 $ 7,907 $ 8,975
========= ============ ============ ============== ========= =========
EBITDA (c)
Net income/(loss) $ 2,581 $ 10,061 $ (18,335) $ 2,597 $ 7,907 $ 8,975
Add/(deduct)
Interest expense 1,843 4,509 919 28 30 32
Income taxes 1,644 6,622 (6,996) 1,893 5,499 6,097
Depreciation 1,244 4,155 836 748 1,861 469
Amortization 6 19 4 331 1,102 1,562
--------- ------------ ------------ -------------- --------- ---------
EBITDA $ 7,318 $ 25,366 $ (23,572) $ 5,597 $ 16,399 $ 17,135
========= ============ ============ ============== ========= =========
- ------------------
(a) We acquired Vitas on February 24, 2004 and recorded estimated
purchase accounting adjustments to the value of Vitas' assets as of
that date. Amortization of such adjustments for the February 24, 2004
to March 31, 2004 period totaled $202,000 for increased depreciation
and $327,000 for increased amortization of identifiable intangible
assets.
(b) Costs related to the sale of Vitas totaled $29,453,000 pretax
($20,930,000 aftertax). Such costs include legal and professional
fees, severance costs and a loss on writing off deferred debt
issuance costs.
(c) EBITDA is income before interest expense, income taxes, depreciation
and amortization. We use EBITDA, in addition to net income,
income/(loss) from operations and cash flow from operating
activities, to assess our performance and believe it is important for
investors to be able to evaluate us using the same measures used by
management. We believe that EBITDA is an important supplemental
measure of operating performance because it provides investors with
an indication of our ability to fund our operating capital
expenditures and debt service requirements through earnings. We also
believe that EBITDA is a supplemental measurement tool used by
analysts and investors to help evaluate a company's overall operating
performance by including only transactions related to core cash
operating business activities. EBITDA as calculated by us is not
necessarily comparable to similarly titled measures reported by other
companies. In addition, EBITDA is not prepared in accordance with
accounting principles generally accepted in the United States
("GAAP"), and should not be considered as alternatives for net
income, income from operations net cash provided by operating
activities or our other financial information determined under GAAP,
and should not be considered as measure of our profitability or
liquidity. We believe the line on our consolidated statement of
operations entitled net income/(loss) is the most directly comparable
GAAP measure to EBITDA. EBITDA, as calculated above includes interest
income, loss on extinguishment of debt and costs related to the sale
of Vitas to the Company as follows (in thousands):
2003 2004
----------------------- ----------------------------------------------------
Third Year-to-Date January 1 to February 24 to Second Third
Quarter September February 23 March 31 Quarter Quarter
--------- ------------ ------------ -------------- --------- ---------
Interest income $ 168 $ 521 $ 41 $ 31 $ 65 94
Loss on extinguishment of debt 4,117 4,117 4,497 -- --
Costs related to sale of business -- -- 24,956 -- --
Page 29 of 33
2003 2004
------------------------------- ----------------------------------
Third Year-to-Date Third Year-to-Date
Quarter September Quarter September
----------- ------------- ----------- -------------
OPERATING STATISTICS
Net revenue
Homecare $ 77,807 $ 217,753 $ 94,267 $ 266,216
Inpatient 17,009 51,265 18,362 55,774
Continuous care 18,712 50,937 22,472 67,333
----------- ------------- ----------- -------------
Total $ 113,528 $ 319,955 $ 135,101 $ 389,323
=========== ============= =========== =============
Net revenue as a percent of total
Homecare 68.5% 68.1% 69.8% 68.4%
Inpatient 15.0 16.0 13.6 14.3
Continuous care 16.5 15.9 16.6 17.3
----------- ------------- ----------- -------------
Total 100.0% 100.0% 100.0% 100.0%
=========== ============= =========== =============
Average daily census ("ADC") (days)
Homecare 3,982 3,765 4,940 4,665
Nursing home 2,942 2,783 3,198 3,061
----------- ------------- ----------- -------------
Routine homecare 6,924 6,548 8,138 7,726
Inpatient 342 347 362 367
Continuous care 377 348 449 451
----------- ------------- ----------- -------------
Total 7,643 7,243 8,949 8,544
=========== ============= =========== =============
Average length of stay (days) 55.4 54.7 60.8(d) 58.8
Median length of stay (days) 12.0 11.7 13.0 12.0
ADC by major diagnosis
Neurological 28.4% 28.7 31.6% 31.0%
Cancer 26.0 26.0 22.4 23.2
Cardio 14.4 14.2 14.8 14.5
Respiratory 7.5 7.4 7.1 7.3
Other 23.7 23.7 24.1 24.0
----------- ------------- ----------- -------------
Total 100.0% 100.0% 100.0% 100.0%
=========== ============= =========== =============
Direct patient care margins (e)
Routine homecare 50.1% 49.4% 50.1% 49.6%
Inpatient 22.4 22.6 20.8 24.6
Continuous care 21.4 22.0 18.5 18.9
Homecare margin drivers
(dollars per patient day)
Labor costs $ 39.90 $ 40.96 $ 42.21 $ 42.55
Drug costs 8.74 8.84 8.42 8.76
Home medical equipment 5.60 5.67 5.75 5.76
Medical supplies 1.80 1.78 2.08 1.98
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 191.57 $ 191.25 $ 217.34 $ 205.96
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 402.75 $ 394.37 $ 424.21 $ 422.60
Bad debt expense as a percent of revenues 1.3% 1.3% 1.0% 1.1%
Accounts receivable --
days of revenue outstanding 34.2 37.4 35.9 35.9
- ---------------------
(d) VITAS has six large (greater than 450 ADC), twelve medium (greater
than 200 but less than 450 ADC) and fourteen small (less than 200
ADC) hospice programs. The average length of stay for all programs,
in the aggregate, ranged from a low of 9.9 days to a high of 84.5
days for the third quarter of 2004.
(e) Amounts exclude indirect patient care costs.
Page 30 of 33
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 REGARDING FORWARD-LOOKING INFORMATION
In addition to historical information, this report contains
forward-looking statements and performance trends that are based upon
assumptions subject to certain known and unknown risks, uncertainties,
contingencies and other factors. Variances in any or all of the risks,
uncertainties, contingencies, and other factors from the Company's assumptions
could cause actual results to differ materially from these forward-looking
statements and trends. The Company's ability to deal with the unknown outcomes
of these events, many of which are beyond the control of the Company, may affect
the reliability of its projections and other financial matters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Chemed's primary market risk exposure relates to interest rate
risk exposure through its variable interest rate borrowings. At September 30,
2004, we have a total of $142,500,000 of variable rate debt outstanding. Should
the interest rate on this debt increase 100 basis points, our annual interest
expense would increase $1,425,000 The current market value of our 8.75% fixed
rate senior notes on November 4, 2004 is $156,750,000 (carrying value is
$150,000,000). We estimate that the fair value of the remainder of our debt
approximates book value at September 30, 2004 ($143,712,000).
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in the
Company's Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management to allow
timely decisions regarding required disclosure.
The Company recently carried out an evaluation, under the
supervision of the Company's President and Chief Executive Officer, and with the
participation of the Vice President and Chief Financial Officer and the Vice
President and Controller, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rules
13a-14/15d-14(a). Based upon the foregoing, the Company's President and Chief
Executive Officer, Vice President and Chief Financial Officer and Vice President
and Controller concluded that as of the date of this report the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company and its consolidated subsidiaries
required to be included in the Company's Exchange Act reports. There have been
no significant changes in internal control over financial reporting during the
first nine months of 2004.
Page 31 of 33
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
31.1 Certification by Kevin J. McNamara pursuant to Rule 13A - 14
of the Exchange Act of 1934.
31.2 Certification by David P. Williams pursuant to Rule 13A - 14
of the Exchange Act of 1934.
31.3 Certification by Arthur V. Tucker, Jr. pursuant to Rule 13A -
14 of the Exchange Act of 1934.
32.1 Certification by Kevin J. McNamara pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by David P. Williams pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.3 Certification by Arthur V. Tucker, Jr. pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
- We filed a Current Report on Form 8-K, dated July 2, 2004, on July
2, 2004. The report includes the Company's announcement to extend
by one week its offer to exchange its 8 3/4% Senior Notes Due 2011,
which have been registered under the U.S. Securities Act of 1933,
as amended.
- We filed a Current Report on Form 8-K, dated August 3, 2004, on
August 3, 2004. The report includes the Company's earnings
announcement for the second quarter.
- We filed a Current Report on Form 8-K, dated October 18, 2004, on
October 18, 2004. The report includes the Company's announcement
updating previous earnings estimates for the third quarter.
- We filed a Current Report on Form 8-K, dated October 25, 2004, on
October 26, 2004. The report includes the Company's earnings
announcement for the third quarter.
- We filed a Current Report on Form 8-K, dated November 5, 2004, on
November 5, 2004. The report includes a copy of the Company's
By-Laws, as amended to permit the issuance of shares in
uncertified or book-entry form and to permit the issuance of
fractional shares.
Page 32 of 33
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chemed Corporation
------------------
(Registrant)
Dated: November 9, 2004 By Kevin J. McNamara
--------------------------- -----------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
Dated: November 9, 2004 By David P. Williams
--------------------------- -----------------------
David P. Williams
(Vice President and Chief
Financial Officer)
Dated: November 9, 2004 By Arthur V. Tucker, Jr.
--------------------------- -----------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
Page 33 of 33