EXHIBIT 13
[CHEMED CORPORATION LOGO]
CHEMED CORPORATION 2004 ANNUAL REPORT
[CHEMED LOGO]
PUBLICLY TRADED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL
CHE, CHEMED CORPORATION OPERATES THROUGH TWO WHOLLY OWNED SUBSIDIARIES, VITAS
HEALTHCARE CORPORATION AND ROTO-ROOTER. VITAS IS THE NATION'S LARGEST PROVIDER
OF HOSPICE CARE, AND ROTO-ROOTER IS NORTH AMERICA'S LARGEST PROVIDER OF PLUMBING
AND DRAIN CLEANING SERVICES.
[VITAS LOGO]
VITAS FOCUSES ON NONCURATIVE HOSPICE CARE THAT HELPS MAKE
TERMINALLY ILL PATIENTS' FINAL DAYS AS COMFORTABLE AND PAIN-FREE 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. AT
YEAR-END 2004, VITAS CARED FOR MORE THAN 9,300 PATIENTS DAILY IN 12 STATES,
PRIMARILY IN THE PATIENTS' OWN HOMES, BUT ALSO IN VITAS' INPATIENT UNITS LOCATED
IN HOSPITALS, NURSING HOMES, AND ASSISTED-LIVING/ RESIDENTIAL-CARE FACILITIES.
[ROTO-ROOTER LOGO]
ROTO-ROOTER OPERATES THROUGH MORE THAN 110 COMPANY-OWNED BRANCHES
AND INDEPENDENT CONTRACTORS AND APPROXIMATELY 500 FRANCHISEES. THE TOTAL
ROTO-ROOTER SYSTEM OFFERS SERVICES TO MORE THAN 91% OF THE U.S. POPULATION AND
APPROXIMATELY 46% OF THE CANADIAN POPULATION. ROTO-ROOTER ALSO HAS LICENSED
MASTER FRANCHISEES IN CHINA, INCLUDING HONG KONG; THE REPUBLICS OF INDONESIA AND
SINGAPORE; JAPAN; MEXICO; THE PHILIPPINES; AND THE UNITED KINGDOM.
FOUNDED IN 1971, CHEMED IS HEADQUARTERED IN CINCINNATI, OHIO.
2004 BUSINESS HIGHLIGHTS
- - RAISED MORE THAN $435 MILLION IN CAPITAL
- - ACQUIRED REMAINING 63% OF VITAS HEALTHCARE CORPORATION
- - COMPLETED REENGINEERING OF ROTO-ROOTER'S INFRASTRUCTURE
- - DISCONTINUED SERVICE AMERICA NETWORK INC.
- - DELIVERED EXCEPTIONAL REVENUE, EARNINGS, AND CASH FLOW
CONTENTS
Letter to Shareholders......................... 1
Operations Review.............................. 3
Financial Review............................... 5
Officers & Directors Listing and Corporate
Information.................................. Inside Back Cover
Roto-Rooter(R) and America's Neighborhood Plumber(R) are registered trademarks
of Roto-Rooter Corporation.
VITAS(R) and Innovative Hospice Care(R) are registered trademarks of VITAS
Healthcare Corporation.
TO OUR FELLOW SHAREHOLDERS March 15, 2005
2004 certainly will be remembered as one of the most dynamic periods in
Chemed's 33-year history. In the last twelve months, we raised over $435 million
in capital, took our 37% ownership of VITAS to 100%, finalized the reengineering
of Roto-Rooter's operational infrastructure and entered into an agreement to
divest our Service America operation. The end result of these changes was to
deliver exceptional revenue, earnings and cash flow growth in 2004. The outlook
for Chemed in terms of future opportunity and financial performance has never
looked better.
FINANCIAL RESULTS*
2004 net service revenue and sales from continuing operations, in
accordance with Generally Accepted Accounting Principles (GAAP), increased 182%
over the prior year, reaching $735 million. Income from continuing operations
was $19 million in 2004, 71% higher than in 2003. Diluted earnings per share
from continuing operations increased 39% to $1.56.
Our 2004 financial results were enhanced by the inclusion of 100% of VITAS
since February 2004. Internally we evaluate operating results on an Adjusted Pro
forma basis. This assumes Chemed owned VITAS effective January 1, 2003 and
eliminates transaction expenses related to the merger as well as other specific
items (Adjusted Pro forma). Although this perspective is on a non-GAAP basis, we
believe this two-year comparison better reflects the fundamental performance of
our operations. On an Adjusted Pro forma basis, service revenues and sales were
$808 million, an increase of 15%. Adjusted Pro forma earnings before interest,
taxes, depreciation and amortization (EBITDA) was $98 million, up 44% and
Adjusted Pro forma income from continuing operations was $24 million, up 93%.
SEGMENT OPERATIONS
VITAS produced record revenue and operating results in 2004. Adjusted Pro
forma revenue was $532 million, an increase of 21% over the equivalent
prior-year period. Pro forma Adjusted EBITDA was $65 million, an increase of
53%, and Pro forma net income was $33 million, up 64%. Adjusted Pro forma EBITDA
margins were 12.2% in 2004, up from 9.6% in the prior year. This increase in
margin is the result of effectively managing general and administrative, or
central support, costs at a slower growth rate than revenue. Although a constant
challenge, our focus will continue to be on managing these support costs at a
rate well below our revenue growth.
The growth in VITAS has been almost exclusively organic. Of the $91
million in revenue growth, $84 million came from established programs, $6
million was derived from our start-up programs and the remaining $1 million came
from our Atlanta and Phoenix acquisitions.
The VITAS growth strategy is focused on a three-pronged approach. First
and foremost is garnering increased market penetration in established programs.
This is accomplished by providing quality hospice care to all of our patients
and their families. Market recognition of VITAS' high level of care will
continue to positively impact our ability to attract referrals and admissions
earlier into a patient's terminal diagnosis.
Our second area of growth opportunity at VITAS is through our new-start
programs. This strategy begins by identifying communities with unmet hospice
needs. We enter the community with a hospice care team and commence the process
of obtaining state and federal certification. In 2004, we established six new
programs and incurred over $5 million in start-up losses. We view these start-up
expenses as long-term investments that will become a significant source of
future revenue and profitability growth.
A third area of growth is in acquisitions. VITAS continues to evaluate
hospice programs that complement
*A reconciliation of GAAP earnings to Adjusted earnings can be found in Chemed's
fourth-quarter 2004 earnings press release, dated March 8, 2005, which is
available on the Chemed Web site at www.chemed.com.
1
[PHOTO OF CHEMED CORPORATE MANAGEMENT]
Chemed Corporate Management: (front, seated, l - r) Spencer S. Lee, Executive
Vice President and Chairman & Chief Executive Officer, Roto-Rooter; Edward L.
Hutton, Chairman of the Board; Kevin J. McNamara, President & Chief Executive
Officer; Timothy S. O'Toole, Executive Vice President and Chief Executive
Officer of VITAS Healthcare Corporation; (back, standing, l - r) David P.
Williams, Vice President & Chief Financial Officer; Naomi C. Dallob, Vice
President & Secretary; Thomas J. Reilly, Vice President; Lisa A. Dittman,
Assistant Secretary; Arthur V. Tucker, Vice President & Controller; and (not
pictured) Thomas C. Hutton, Vice President.
our culture of compassion and our deep commitment to end-of-life care. Ideally,
these acquisitions will enable VITAS to enter new geographic regions that will
provide a stable platform for future organic and new-start growth.
Roto-Rooter had an excellent year in terms of financial performance. Net
income, excluding the LTIP and certain litigation costs, totaled $22 million, an
increase of 64%. Aggregate EBITDA in 2004, excluding certain items, was $42
million, an increase of 37% over the prior year. This growth in profitability
was accomplished primarily through cost-saving benefits derived from our
reengineering of Roto-Rooter's infrastructure. Over the past two years, we have
focused on streamlining expenses in such areas as hiring, training, call centers
and dispatching. This resulted in significant cost savings compared to the prior
year.
Roto-Rooter will continue its focus on providing a high level of service
to both our residential and commercial customers in our existing territories. In
addition, we will continue to evaluate opportunities to acquire franchise
territories that are reasonably valued and can be leveraged into Roto-Rooter's
existing infrastructure.
OUTLOOK
VITAS, with its strong revenue growth and expanding margin improvement, is
well positioned to take advantage of the growing demand for quality hospice
care. Roto-Rooter, with its preeminent name and brand recognition, has returned
to historical profitability margins and free cash flow.
As a result, Chemed is well positioned to achieve sales and profitability
growth over the long term.
/s/ Kevin J. McNamara /s/ Edward L. Hutton
- ------------------------- -----------------------
Kevin J. McNamara Edward L. Hutton
President and Chairman of the Board
Chief Executive Officer
2
OPERATIONS REVIEW
VITAS HEALTHCARE CORPORATION
VITAS Healthcare Corporation is the nation's largest provider of
end-of-life care. Hospice care is focused on quality of life for the terminally
ill with the principal aim to control pain and other symptoms so the patient can
remain as alert and as comfortable as possible. VITAS' brand of Innovative
Hospice Care(R) is available to any person who can no longer benefit from
curative treatment. VITAS operates 35 hospice programs in 12 states -- Arizona,
California, Connecticut, Delaware, Florida, Georgia, Illinois, New Jersey, Ohio,
Pennsylvania, Texas and Wisconsin.
VITAS has evolved from its founding in 1976 as an all-volunteer
organization to a proven leader and innovator in the growth and development of
hospice care in the United States. At December 31, 2004, VITAS had 7,200
professionals who serve over 9,300 hospice patients each day. Patients receive
this care primarily in their homes. In addition, VITAS has established 24
inpatient hospice units located in hospitals, nursing homes, assisted living
facilities and residential care facilities.
During 2004, VITAS experienced strong organic growth in its established
programs. In addition, VITAS continues its aggressive development of new
programs serving Sacramento, California; Sonoma and Napa counties in northern
California; Waterbury, Connecticut; a six-county region in northeast New Jersey;
and Delaware. During the year, VITAS also received a Certificate of Need to
begin serving hospice patients in Volusia and Flagler counties on Florida's
Atlantic coast immediately north of its fast-growing Brevard County program.
VITAS also successfully completed two significant acquisitions in major
metropolitan markets in 2004, adding the former Haven House Hospice in Atlanta
and the former Premier Hospice and Palliative Care in Phoenix to the company's
growing roster of local hospice programs.
While the vast majority of hospice care is provided in the patient's
home -- whether that is a private residence, a skilled nursing facility or an
assisted living/residential care facility for the elderly -- inpatient hospice
units are an integral part of the continuum of care in hospice. Building on the
momentum gained from opening four new inpatient hospice units in 2003, VITAS
opened three new inpatient hospice units in 2004 in Miami, Fort Lauderdale and
Houston, while the
[PHOTO OF VITAS HEALTHCARE CORPORATE MANAGEMENT]
VITAS Healthcare Corporate Management: (seated, l - r) Peggy Pettit, Executive
Vice President & Chief Operating Officer; David A. Wester, President; (standing,
l - r) Deirdre Lawe, R.N., Executive Vice President of Development & Public
Affairs; Timothy S. O'Toole, Chief Executive Officer; and Barry M. Kinzbrunner,
M.D., F.A.C.P., Senior Vice President & Chief Medical Officer.
[PHOTO]
A pioneer and leader in the hospice movement in the United States, VITAS is a
company defined by the needs of the patients and families it assists. For more
than 25 years, VITAS has advocated for the rights of terminally ill patients and
their families. Today, VITAS continues to lead the industry because of its
commitment to its patients and to innovations in comfort management,
care-management technology, and service quality. The name "VITAS" is derived
from the Latin word for "lives." It symbolizes the VITAS mission to preserve the
quality of life for those who have a limited time to live. VITAS continues to
evolve to meet the changing needs of those with life-limiting illnesses and
their loved ones, and VITAS employees serve with one thought in mind: patients
and families come first.
3
Haven House acquisition in Atlanta added a fourth inpatient unit. In addition,
work progressed on additional new units for Miami, Central Florida and Dallas,
each of which opened in January 2005.
VITAS continues its concerted development efforts and investment in its
central support systems and processes. The core of these systems is VITAS'
proprietary IT products, including the Vx information management system and
VxCarePlanIT, the hardware platform and innovative software that support a new,
mobile electronic patient record. In addition, VITAS' growing corps of marketing
representatives now utilizes wireless PC tablets and a web-based customer
relationship management tool to better meet the information needs of referral
sources and other healthcare professionals.
ROTO-ROOTER
Founded in 1935, Roto-Rooter is the leading provider of plumbing and drain
cleaning services in the United States, consistently delivering exceptional
value to its customers via its highly trained workforce. This extensive network
of company-owned branches, independent contractors and franchisees offers
plumbing and drain cleaning services to approximately 91% of the U.S.
population.
Chemed acquired the Roto-Rooter operation in 1980. At that time,
Roto-Rooter derived the majority of its revenue from franchisee fees and product
sales. Since 1980, Roto-Rooter has methodically repurchased key franchise
territories throughout the United States. Today, Roto-Rooter has 110
company-owned territories covering more than 46% of the U.S. population.
Approximately 95% of Roto-Rooter's revenue is derived from these
company-owned territories, with the remainder coming from franchise fees and
product sales to our 500 plus franchisees. In addition, master franchise
operations have been established in Japan, Mexico, the Philippines, United
Kingdom, Hong Kong/China, and Indonesia/ Singapore.
During 2004 Roto-Rooter completed a number of initiatives designed to
improve the overall operating structure of the business. These infrastructure
changes included centralizing call and dispatch locations, as well as
instituting standardized procedures. This centralization provided the
opportunity for the efficient monitoring of technician scheduling and job
backlog, as well as removing significant non-value added administrative work
from the branches.
Roto-Rooter's core services are focused on providing plumbing and drain
cleaning services to both residential and commercial customers. The Roto-Rooter
mission is to provide our customers with the best-trained, highest-quality
plumbing and drain cleaning force in the industry, translating into significant
repeat business and continuing the Roto-Rooter cycle of success.
[PHOTO OF ROTO-ROOTER CORPORATE MANAGEMENT]
Roto-Rooter Corporate Management: (l - r) Gary H. Sander, Executive Vice
President; Spencer S. Lee, Chairman & Chief Executive Officer; Gary C. Burger,
President, Roto-Rooter Corporation; Rick L. Arquilla, President & Chief
Operating Officer, Roto-Rooter Services Company; and Robert P. Goldschmidt,
Senior Vice President, Business Development.
[PHOTO]
Satisfying customers is what Roto-Rooter does best. That's why more people
depend on Roto-Rooter than on any other company for plumbing and drain cleaning
services. Whether the problem is a flooded basement or a clogged drain, from
repairing a leaky faucet to replacing a water heater, homeowners and businesses
alike know they can trust Roto-Rooter, America's Neighborhood Plumber(R).
4
FINANCIAL REVIEW
CONTENTS
CONSOLIDATED STATEMENT OF OPERATIONS 6
CONSOLIDATED BALANCE SHEET 7
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY 8
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME/(LOSS) 8
CONSOLIDATED STATEMENT OF CASH FLOWS 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11
SELECTED FINANCIAL DATA 41
UNAUDITED SUMMARY OF QUARTERLY RESULTS 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 44
PRICEWATERHOUSECOOPERS LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Chemed Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows, changes in
stockholders' equity and comprehensive income/(loss) present fairly, in all
material respects, the financial position of Chemed Corporation ("Company") and
its subsidiaries at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 22, 2005
5
CONSOLIDATED STATEMENT OF OPERATIONS
Chemed Corporation and Subsidiary Companies
(in thousands, except per share data)
For the Years Ended December 31, 2004 2003 2002
- -------------------------------------------------------------------------- ---------- ---------- ----------
CONTINUING OPERATIONS
Service revenues and sales .......................................... $ 735,341 $ 260,776 $ 253,687
--------- --------- ---------
Cost of services provided and goods sold (excluding depreciation).... 507,078 146,818 140,946
Selling, general and administrative expenses ........................ 138,285 95,363 85,024
Depreciation ........................................................ 14,542 9,519 10,424
Amortization ........................................................ 3,779 302 152
Other expenses (Note 5) ............................................. 13,551 - -
--------- --------- ---------
Total costs and expenses ....................................... 677,235 252,002 236,546
--------- --------- ---------
Income from operations ......................................... 58,106 8,774 17,141
Interest expense .................................................... (21,158) (3,177) (3,948)
Loss on extinguishment of debt (Note 12) ............................ (3,330) - -
Other income--net (Note 8) .......................................... 3,469 10,849 3,947
--------- --------- ---------
Income before income taxes ..................................... 37,087 16,446 17,140
Income taxes (Note 9) ............................................... (13,796) (6,180) (6,033)
Equity in earnings/(loss) of affiliate (Note 3) ..................... (4,105) 922 -
--------- --------- ---------
Income from continuing operations .............................. 19,186 11,188 11,107
DISCONTINUED OPERATIONS, NET OF INCOME TAXES (NOTE 6) .................... 8,326 (14,623) (13,652)
--------- --------- ---------
NET INCOME/(LOSS) ........................................................ $ 27,512 $ (3,435) $ (2,545)
========= ========= =========
EARNINGS/(LOSS) PER SHARE (NOTES 17 AND 24)
Income from continuing operations ................................... $ 1.59 $ 1.13 $ 1.13
========= ========= =========
Net Income/(Loss) ................................................... $ 2.28 $ (0.35) $ (0.26)
========= ========= =========
DILUTED EARNINGS/(LOSS) PER SHARE (NOTES 17 AND 24)
Income from continuing operations ................................... $ 1.56 $ 1.12 $ 1.12
========= ========= =========
Net Income/(Loss) ................................................... $ 2.23 $ (0.35) $ (0.26)
========= ========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING (NOTES 17 AND 24)
Earnings/(loss) per share ........................................... 12,060 9,924 9,858
========= ========= =========
Diluted earnings/(loss) per share ................................... 12,318 9,954 9,885
========= ========= =========
The Notes to Consolidated Financial Statements are integral parts of this
statement
6
CONSOLIDATED BALANCE SHEET
Chemed Corporation and Subsidiary Companies
(in thousands, except shares and per share data)
December 31, 2004 2003
- ---------------------------------------------------------------------------------- --------- ---------
ASSETS
Current assets
Cash and cash equivalents (Note 10) .................................... $ 71,448 $ 50,688
Accounts receivable less allowances of $7,544 (2003 - $2,646) ......... 64,663 14,351
Inventories ............................................................ 7,019 6,011
Current deferred income taxes (Note 9) ................................. 31,250 8,430
Current assets of discontinued operations (Note 6) ..................... 13,397 15,583
Prepaid expenses and other current assets .............................. 9,842 6,411
--------- ---------
Total current assets ............................................. 197,619 101,474
Investments of deferred compensation plans held in trust (Note 14) .......... 18,317 17,391
Other investments (Notes 6 and 16) .......................................... 1,445 25,081
Note receivable (Notes 6 and 16) ............................................ 12,500 12,500
Properties and equipment, at cost, less accumulated depreciation (Note 11) .. 55,796 31,440
Identifiable intangible assets less accumulated amortization of $5,174
(2003 - $1,704) (Notes 4 and 7) ........................................ 76,924 592
Goodwill (Notes 4 and 7) .................................................... 432,732 105,335
Noncurrent assets of discontinued operations (Note 6) ....................... 5,705 10,954
Other assets ................................................................ 24,528 23,691
--------- ---------
Total Assets ................................................ $ 825,566 $ 328,458
========= =========
LIABILITIES
Current liabilities
Accounts payable ....................................................... $ 37,777 $ 6,081
Current portion of long-term debt (Note 12) ............................ 12,185 193
Income taxes (Note 9) .................................................. 10,944 6,633
Accrued insurance ...................................................... 26,350 14,382
Accrued salaries and wages ............................................. 17,030 1,210
Current liabilities of discontinued operations (Note 6) ................ 22,117 21,131
Other current liabilities (Note 13) .................................... 42,777 19,066
--------- ---------
Total current liabilities ......................................... 169,180 68,696
Deferred income taxes (Note 9) .............................................. 16,814 -
Long-term debt (Note 12) .................................................... 279,510 25,931
Convertible junior subordinated debentures (Note 20) ........................ - 14,126
Deferred compensation liabilities (Note 14) ................................. 18,311 17,380
Noncurrent liabilities of discontinued operations (Note 6) .................. 811 417
Other liabilities (Note 13) ................................................. 8,848 9,215
Commitments and contingencies (Notes 13, 15, 19, 22)
--------- ---------
Total Liabilities ............................................ 493,474 135,765
--------- ---------
STOCKHOLDERS' EQUITY
Capital stock - authorized 40,000,000 shares $1 par; issued 13,491,341 shares
(2003 - 13,452,907 shares) ............................................. 13,491 13,453
Paid-in capital ............................................................. 212,691 170,501
Retained earnings ........................................................... 141,542 119,746
Treasury stock - 983,128 shares (2003 - 3,508,663 shares), at cost .......... (33,873) (109,427)
Unearned compensation (Note 14) ............................................. (3,590) (2,954)
Deferred compensation payable in Company stock (Note 14) .................... 2,375 2,308
Notes receivable for shares sold (Note 18) .................................. (544) (934)
--------- ---------
Total Stockholders' Equity ................................... 332,092 192,693
--------- ---------
Total Liabilities and Stockholders' Equity ................... $ 825,566 $ 328,458
========= =========
The Notes to Consolidated Financial Statements are integral parts of this
statement.
7
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Chemed Corporation and Subsidiary Companies
Capital Paid-in
(in thousands, except per share data) Stock Capital
- ---------------------------------------------------------------------- --------- ----------
Balance at December 31, 2001 ......................................... $ 13,438 $ 167,542
Net loss ............................................................. - -
Dividends paid ($.45 per share) ...................................... - -
Decrease in unearned compensation (Note 14) .......................... - -
Stock awards and exercise of stock options (Note 18) ................. 23 974
Other comprehensive loss ............................................. - -
Decrease in notes receivable (Note 18) ............................... - -
Purchases of treasury stock .......................................... - -
Distribution of assets to settle deferred compensation liabilities.... - -
Other ................................................................ (13) (217)
-------- ---------
Balance at December 31, 2002 ..................................... 13,448 168,299
Net loss ............................................................. - -
Dividends paid ($.48 per share) ...................................... - -
Decrease in unearned compensation (Note 14) .......................... - -
Stock awards and exercise of stock options (Note 18) ................. 3 1,620
Other comprehensive loss ............................................. - -
Decrease in notes receivable (Note 18) ............................... - -
Purchases of treasury stock .......................................... - -
Distribution of assets to settle deferred compensation liabilities.... - -
Other ................................................................ 2 582
-------- ---------
BALANCE AT DECEMBER 31, 2003 ..................................... 13,453 170,501
NET INCOME ........................................................... - -
DIVIDENDS PAID ($.48 PER SHARE) ...................................... - -
STOCK AWARDS AND EXERCISE OF STOCK OPTIONS (NOTE 18) ................. 130 10,650
RETIREMENT OF TREASURY SHARES ........................................ (400) (12,076)
ISSUANCE OF COMMON SHARES (NOTE 7) ................................... - 32,722
DECREASE IN NOTES RECEIVABLE (NOTE 18) ............................... - -
PURCHASES OF TREASURY STOCK .......................................... - -
CONVERSION OF CONVERTIBLE PREFERRED SECURITIES ....................... 308 10,639
OTHER ................................................................ - 255
-------- ---------
BALANCE AT DECEMBER 31, 2004 ..................................... $ 13,491 $ 212,691
======== =========
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME/(LOSS)
Chemed Corporation and Subsidiary Companies
(in thousands)
For the Years Ended December 31, 2004 2003 2002
- -------------------------------------------------------------------- ------- -------- --------
Net income/(loss) .................................................. $27,512 $(3,435) $(2,545)
------- ------- -------
Other comprehensive income/(loss), net of income tax:
Unrealized holding gains/(losses) on available-for-sale
investments arising during the period ..................... - (334) 246
Less: Reclassification adjustment for gains on available-for-sale
investments arising during the period ..................... - (3,351) (775)
------- ------- -------
Total ....................................................... - (3,685) (529)
------- ------- -------
Comprehensive income/(loss) ........................................ $27,512 $(7,120) $(3,074)
======= ======= =======
The Notes to Consolidated Financial Statements are integral parts of these
statements.
8
Deferred
Compensation Accumulated Notes
Treasury Payable in Other Receivable
Retained Stock- Unearned Company Comprehensive for
Earnings at Cost Compensation Stock Income Shares Sold Total
- ---------- ----------- ------------ ------------ ------------- ----------- ----------
$ 135,040 $ (110,424) $ (7,436) $ 3,288 $ 4,214 $ (1,502) $ 204,160
(2,545) - - - - - (2,545)
(4,438) - - - - - (4,438)
- - 2,742 - - - 2,742
- (2,114) - - - - (1,117)
- - - - (529) - (529)
- (338) - - - 550 212
- (51) - - - - (51)
- 1,066 - (1,066) - - -
(119) 279 - 58 - - (12)
- --------- ---------- ---------- ---------- ----------- --------- ----------
127,938 (111,582) (4,694) 2,280 3,685 (952) 198,422
(3,435) - - - - - (3,435)
(4,761) - - - - - (4,761)
- - 1,740 - - - 1,740
- 2,216 - - - - 3,839
- - - - (3,685) - (3,685)
- (23) - - - 18 (5)
- (69) - - - - (69)
- 31 - (31) - - -
4 - - 59 - - 647
- --------- ---------- ---------- ---------- ---------- --------- ----------
119,746 (109,427) (2,954) 2,308 - (934) 192,693
27,512 - - - - - 27,512
(5,718) - - - - - (5,718)
- 771 (2,530) - - - 9,021
- 12,476 - - - - -
- 62,380 - - - - 95,102
- (10) - - - 390 380
- (63) 1,894 - - - 1,831
- - - - - - 10,947
2 - - 67 - - 324
- --------- ---------- ---------- ---------- ---------- --------- ----------
$ 141,542 $ (33,873) $ (3,590) $ 2,375 $ - $ (544) $ 332,092
========= ========== ========== ========== ========== ========= ==========
9
CONSOLIDATED STATEMENT OF CASH FLOWS
Chemed Corporation and Subsidiary Companies
(in thousands)
For the Years Ended December 31, 2004 2003 2002
- ------------------------------------------------------------------------------------------ ---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) ................................................................... $ 27,512 $ (3,435) $ (2,545)
Adjustments to reconcile net income/(loss) to net cash provided by operations:
Depreciation and amortization .................................................. 18,321 9,821 10,576
Discontinued operations (Note 6) ............................................... (8,326) 14,623 13,652
Provision for uncollectible accounts receivable ................................ 6,155 1,497 1,866
Noncash portion of long-term incentive compensation ............................ 5,808 - -
Provision for deferred income taxes (Note 9) ................................... 5,002 1,214 766
Amortization of debt issuance costs ............................................ 1,861 - -
Equity in loss/(earnings) of affiliate (Note 3) ................................ 4,105 (922) -
Gains on redemption and sales of available-for-sale investments ................ - (5,390) (1,141)
Asset impairment loss on available-for-sale investment ......................... - - 1,200
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations:
Increase in accounts receivable ...................................... (6,534) (1,843) (2,215)
Decrease/(increase) in inventories ................................... (986) (618) 752
Decrease/(increase) in prepaid expenses and other current assets ..... 11,659 (801) (654)
Increase/(decrease) in accounts payable and other current
liabilities ......................................................... (2,052) (423) 732
Increase in income taxes ............................................. 21,374 2,972 3,354
Decrease/(increase) in other assets .................................. 5,607 (2,041) (1,116)
Increase/(decrease) in other liabilities ............................. (627) 2,842 (659)
Noncash expense of internally financed ESOPs ................................... 1,894 1,740 2,742
Other sources/(uses) ........................................................... (1,044) 1,129 801
--------- -------- --------
Net cash provided by continuing operations ................................ 89,729 20,365 28,111
Net cash provided by discontinued operations (Note 6) ..................... 4,426 2,487 1,628
--------- -------- --------
Net cash provided by operating activities ................................. 94,155 22,852 29,739
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Business combinations, net of cash acquired (Note 7) ................................ (344,727) (3,850) (1,236)
Capital expenditures ................................................................ (18,290) (10,381) (8,440)
Deposit to secure merger offer ...................................................... 10,000 (10,000) -
Proceeds from sales of property and equipment ....................................... 772 555 2,056
Net proceeds/(uses) from sale of discontinued operations (Note 6) ................... (759) 1,091 50,676
Investing activities of discontinued operations (Note 6) ............................ (98) 1,396 (3,460)
Proceeds from redemption of available-for-sale securities (Notes 3 and 16) .......... - 27,270 -
Purchase of equity investment in affiliate (VITAS) (Notes 3 and 16) ................. - (17,999) -
Proceeds from sales of investments .................................................. - 4,493 1,917
Other uses .......................................................................... (107) (357) (497)
--------- -------- --------
Net cash provided/(used) by investing activities .......................... (353,209) (7,782) 41,016
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt (Note 12) .................................. 295,000 - 5,000
Repayment of long-term debt (Note 12) ............................................... (96,940) (92) (40,085)
Issuance of capital stock, net of costs (Note 7) .................................... 95,102 - -
Debt issuance costs ................................................................. (14,447) - -
Collection of stock subscription note receivable .................................... 8,053 - -
Dividends paid ...................................................................... (5,718) (4,761) (4,438)
Proceeds from exercise of stock options (Note 18) ................................... 3,721 3,287 1,547
Redemption of convertible junior subordinated securities (Note 20) .................. (2,735) - (42)
Purchases of treasury stock ......................................................... (2,654) (637) (3,214)
Financing activities of discontinued operations (Note 6) ............................ (255) (317) (293)
Other sources/(uses) ................................................................ 687 568 (8)
--------- -------- --------
Net cash provided/(used) by financing activities .......................... 279,814 (1,952) (41,533)
--------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS .................................................... 20,760 13,118 29,222
Cash and cash equivalents at beginning of year ........................................... 50,688 37,570 8,348
--------- -------- --------
Cash and cash equivalents at end of year ................................................. $ 71,448 $ 50,688 $ 37,570
========= ======== ========
The Notes to Consolidated Financial Statements are integral parts of this
statement.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Chemed Corporation and Subsidiary Companies
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Chemed
Corporation and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated. Long-term investments in affiliated companies
representing ownership interests of 20% to 50% were accounted for using the
equity method.
VARIABLE INTEREST ENTITIES
Effective January 1, 2004, we adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 46R "Consolidation of
Variable Interest Entities -- an interpretation of Accounting Research Bulletin
No. 51 (revised)" ("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
independent contractors may be VIEs. 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 VIEs or who is
the primary beneficiary of these potential VIE relationships. We have requested
and will continue to request appropriate information to enable us to evaluate
these potential VIE relationships. We believe consolidation, if required, of the
accounts of any VIEs for which the Company might be the primary beneficiary
would not materially impact the Company's financial position or results of
operations.
CASH EQUIVALENTS
Cash equivalents comprise short-term highly liquid investments that have
been purchased within three months of their dates of maturity.
ACCOUNTS AND LOANS RECEIVABLE AND CONCENTRATION OF RISK
Accounts and loans receivable are recorded at the principal credit balance
outstanding less estimated allowances for uncollectible accounts. For the
Roto-Rooter Group Inc. ("Roto-Rooter") segment, allowances for trade accounts
receivable are generally provided for accounts more than 90 days past due,
although collection efforts continue beyond that time. Due to the small number
of loans receivable outstanding, allowances for loan losses are determined on a
case-by-case basis. For the VITAS Healthcare Corporation ("VITAS") segment,
allowances for patient accounts receivable are provided on accounts more than
240 days old plus an appropriate percentage of accounts not yet 240 days old.
Final write-off of overdue accounts or loans receivable is made when all
reasonable collection efforts have been made and payment is not forthcoming.
Management closely monitors its receivables and periodically reviews procedures
for the granting of credit to ensure losses are held to a minimum.
As of December 31, 2004, approximately 56% and 32% of VITAS' total
accounts receivable balance were due from Medicare and various state Medicaid
programs, respectively. VITAS closely monitors its programs to ensure compliance
with Medicare and Medicaid regulations.
INVENTORIES
Substantially all of the inventories are either general merchandise or
finished goods. Inventories are stated at the lower of cost or market. For
determining the value of inventories, cost methods that reasonably approximate
the first-in, first-out ("FIFO") method are used.
OTHER INVESTMENTS
At December 31, 2004, other investments, all of which are classified as
available-for-sale, comprise a common stock purchase warrant in privately held
Patient Care Inc. ("Patient Care"), a former subsidiary of the Company. At
December 31, 2003, other investments included a 37% equity ownership interest in
the common stock of VITAS, one common stock purchase warrant of VITAS, and the
common stock purchase warrant in Patient Care.
Equity investments that are publicly traded are recorded at their fair
value with unrealized gains and losses, net of income taxes, included in other
comprehensive income on the balance sheet. The Company's investment in the
Patient Care warrant is carried at cost, subject to write-down for impairment.
Prior to acquiring 100% of VITAS, the Company's equity investment in VITAS was
accounted for using the equity method of accounting.
All investments are reviewed periodically for impairment based on
available market and financial data. If the market value or net realizable value
of the investment is less than the Company's cost and this decline is determined
to be other than temporary, a write-down to fair value is made, and a realized
loss is recorded in the statement of operations.
11
In calculating realized gains and losses on the sales of investments, the
specific-identification method is used to determine the cost of investments
sold.
DEPRECIATION AND PROPERTIES AND EQUIPMENT
Depreciation of properties and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease terms
(excluding option terms) or their useful lives. Expenditures for maintenance,
repairs, renewals and betterments that do not materially prolong the useful
lives of the assets are expensed as incurred. The cost of property retired or
sold and the related accumulated depreciation are removed from the accounts, and
the resulting gain or loss is reflected currently in income.
The weighted average lives of the Company's gross properties and equipment
at December 31, 2004, were:
Buildings 18.5 years
Transportation equipment 5.4
Machinery and equipment 6.1
Computer software 6.4
Furniture and fixtures 6.0
GOODWILL AND INTANGIBLE ASSETS
Identifiable intangible assets arise from purchase business combinations
and are amortized using either an accelerated method or the straight-line method
over the estimated useful lives of the assets. The selection of an amortization
method is based on which method best reflects the economic pattern of usage of
the asset. Goodwill is tested at least annually for impairment. The VITAS trade
name is considered to have an indefinite life and is tested at least annually
for impairment. The weighted average lives of the Company's gross identifiable
amortizable intangible assets at December 31, 2004, were:
Covenants not to compete 6.3 years
Referral network 10.0
Customer lists 13.3
LONG-LIVED ASSETS
The Company periodically makes an estimation and valuation of the future
benefits of its long-lived assets (other than goodwill) based on key financial
indicators. If the projected undiscounted cash flows of a major business unit
indicate that property and equipment or identifiable intangible assets have been
impaired, a write-down to fair value is made.
OTHER ASSETS
Debt issuance costs are included in other assets and are amortized using
the effective interest method over the life of the debt.
REVENUE RECOGNITION
Service revenues and sales are recognized when the services are provided
or the products are delivered. VITAS recognizes revenue at the estimated net
realizable amounts due from third-party payers, which are primarily Medicare and
Medicaid. Payers may deny payment for services in whole or in part on the basis
that such services are not eligible for coverage and do not qualify for
reimbursement. We estimate denials each period and make adequate provision in
the financial statements.
VITAS is subject to certain limitations on Medicare payments for services.
Specifically, if the number of inpatient care days any hospice program provides
to Medicare beneficiaries exceeds 20% of the total days of hospice care such
program provides to all patients for an annual period beginning September 28,
the days in excess of the 20% figure may be reimbursed only at the routine
homecare rate. None of VITAS' hospice programs exceeded the payment limits on
inpatient services in 2004.
VITAS is also subject to a Medicare annual per-beneficiary cap. Compliance
with the Medicare cap is measured by comparing the total Medicare payments
received under a Medicare provider number with respect to services provided to
all Medicare hospice care beneficiaries in the program or programs covered by
that Medicare provider number between November 1 of each year and October 31 of
the following year, and the product of the per-beneficiary cap amount and the
number of Medicare beneficiaries electing hospice care for the first time from
that hospice program or programs during the relevant period. None of VITAS'
hospice programs exceed the Medicare annual per-beneficiary cap in 2004.
12
Chemed Corporation and Subsidiary Companies
GUARANTEES
In the normal course of business, the Company enters into various
guarantees and indemnifications in its relationships with customers and others.
Examples of these arrangements include guarantees of service and product
performance. The Company's experience indicates guarantees and indemnifications
do not materially impact the Company's financial condition or results of
operations.
OPERATING EXPENSES
Cost of services provided and goods sold (excluding depreciation) includes
salaries, wages and benefits of service providers and field personnel, material
costs, medical supplies and equipment, pharmaceuticals, insurance costs, service
vehicle costs and other expenses directly related to providing service revenues
or generating sales. Selling, general and administrative expenses include
salaries, wages and benefits of selling, marketing and administrative employees,
advertising expenses, communications and branch telephone expenses, office rent
and operating costs, legal, banking and professional fees and other
administrative costs.
ADVERTISING
The Company expenses the production costs of advertising the first time
the advertising takes place. Costs of yellow pages listings are expensed when
the directories are placed in circulation. Other advertising costs are expensed
as incurred. Advertising expense for continuing operations for the year ended
December 31, 2004, was $19,950,000 (2003 -- $16,361,000; 2002 -- $16,698,000).
COMPUTATION OF EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of
shares of capital stock outstanding. Diluted earnings per share reflect the
dilutive impact of the Company's outstanding stock options and nonvested stock
awards. Diluted earnings per share also assumed the conversion of the
Convertible Junior Subordinated Debentures ("CJSD") into capital stock prior to
the redemption of the CJSD in 2004, only when the impact was dilutive on
earnings per share from continuing operations.
EMPLOYEE STOCK OWNERSHIP PLANS
Contributions to the Company's Employee Stock Ownership Plans ("ESOP") are
based on established debt repayment schedules. Shares are allocated to
participants based on the principal and interest payments made during the
period. The Company's policy is to record its ESOP expense by applying the
transition rule under the level-principal amortization concept.
STOCK-BASED COMPENSATION PLANS
The Company uses 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 cost recorded for stock options. Restricted stock is
recorded as compensation cost over the requisite vesting periods on a
straight-line basis, based on the market value on the date of grant.
13
Chemed Corporation and Subsidiary Companies
The following table illustrates the effect on net income/(loss) and
earnings/(loss) per share if the Company had applied the fair-value-recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation"
(in thousands, except per share data):
For the Years Ended December 31,
---------------------------------------
2004 2003 2002
---------- ---------- ----------
Net income/(loss), as reported $ 27,512 $ (3,435) $ (2,545)
Add: stock-based compensation expense
included in the determination of net
income/(loss), net of income taxes 3,940 95 120
Deduct: total stock-based employee
compensation determined under
a fair-value-based method for all
stock options and awards, net of
related income taxes (8,259) (952) (767)
---------- ---------- ----------
Pro forma net income/(loss) $ 23,193 $ (4,292) $ (3,192)
========== ========== ==========
Earnings/(loss) per share
As reported $ 2.28 $ (0.35) $ (0.26)
========== ========== ==========
Pro forma $ 1.92 $ (0.43) $ (0.32)
========== ========== ==========
Diluted earnings/(loss) per share
As reported $ 2.23 $ (0.35) $ (0.26)
========== ========== ==========
Pro forma $ 1.88 $ (0.43) $ (0.32)
========== ========== ==========
The above pro forma data were calculated using the Black-Scholes option
valuation method to value the Company's stock options granted in 2004 and prior
years. Key assumptions include:
For the Years Ended December 31,
---------------------------------------
2004 2003 2002
------------ ------------ -----------
Weighted average grant-date fair
value of options granted $ 13.59 $ 10.14 $ 11.18
Risk-free interest rate 3.9% 3.2% 4.8%
Expected volatility 30.3% 27.8% 25.1%
Expected life of options 5 yrs. 6 yrs. 6 yrs.
For options granted in 2002 and 2003, it was assumed that the annual
dividend would be increased $.01 per share per quarter biannually in the fourth
quarter. For options granted in 2004, it was assumed that the annual dividend
would remain at $.48 per share for the life of the options. These assumptions
were based on the facts and circumstances that existed at the time options were
granted and should not be construed to be an indication of future dividend
amounts to be paid.
INSURANCE ACCRUALS
The Company is self-insured for casualty insurance claims, subject to a
stop-loss policy with a maximum per-occurrence limit varying between $250,000
and $500,000, dependent upon policy year. Management consults with insurance
professionals and closely monitors and evaluates its historical claims
experience to estimate the appropriate level of accrual for claims. To calculate
the claims accrual, management uses historical loss development factors ("LDF")
that consider both reported losses and incurred but not reported ("IBNR")
losses. LDFs are updated annually.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Disclosures of aftertax expenses and adjustments are based on estimates
of the effective income tax rates for the applicable segments.
14
Chemed Corporation and Subsidiary Companies
RECLASSIFICATIONS
The results of operations and the balance sheet of the Company's Service
America segment were reclassified to discontinued operations in 2004 and prior
years. In addition, certain other amounts in prior years' financial statements
have been reclassified to conform to the 2004 presentation.
RECENT ACCOUNTING STATEMENTS
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004)
"Share-Based Payment" ("FASB123R"), which requires companies to recognize in the
income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and disallows the use of the
intrinsic value method of accounting for stock options, but expresses no
preference for a type of valuation model. This statement supersedes APB No. 25,
but does not change the accounting guidance for share-based payment transactions
with parties other than employees provided in FASB 123 as originally issued.
FASB123R is effective as of the beginning of the Company's third quarter of
2005. We are evaluating our stock incentive programs and most likely will
significantly reduce the number of stock options granted after June 30, 2005. In
March 2005, the Board of Directors approved immediate vesting of all unvested
stock options to avoid recognizing approximately $1.6 million of pretax expense
that would have been charged to income under FASB123R during the seven quarters
beginning on July 1, 2005. We estimate that the pretax expense for continuing
operations of accelerating the vesting of these stock options, which were
scheduled to vest in November 2005 and November 2006, to be approximately
$214,000 in the first quarter of 2005. As a result, we do not expect the
implementation of FASB123R in the third quarter of 2005 to have a significant
impact on our financial condition, results of operations or cash flows.
In December 2004, the FASB issued FASB Statement No. 151 "Inventory Costs,
an Amendment of ARB No. 43, Chapter 4" ("FASB No. 151"). FASB No. 151 clarifies
the accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material and requires that these items be recognized as current
period charges. FASB No. 151 applies to inventory costs incurred only during
periods beginning after the effective date and also requires that the allocation
of fixed production overhead to conversion costs be based on the normal capacity
of the production facilities. FASB No. 151 is effective for the Company's fiscal
year beginning January 1, 2005. We do not anticipate that implementation of this
statement will have a material impact on our financial condition, results of
operations or cash flows.
In December 2004, FASB issued FASB Statement No. 153 "Exchanges of
Non-monetary Assets, An Amendment of APB Opinion No. 29" ("FASB No. 153"). FASB
No. 153 eliminates the exception for exchange of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. FASB No. 153 is effective for nonmonetary assets
and exchanges occurring in fiscal periods beginning after June 15, 2005. As we
do not engage in exchanges of non-monetary assets, we do not anticipate
implementation of this statement will have significant impact on our financial
conditions, results of operations or cash flows.
2. SEGMENTS AND NATURE OF THE BUSINESS
Due to the significant impact of our acquisition of VITAS in February
2004, we reevaluated the Company's segment reporting of administrative expense
of the Corporate Office headquarters. Previously, we included such expenses in
the Plumbing and Drain Cleaning segment since it comprised in excess of 80% of
our business. Currently, Roto-Rooter comprises 38% of Chemed's consolidated
revenues from continuing operations and 36% 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 expense includes the
stewardship, 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. Also, in December 2004, the Board of Directors of the Company
authorized the discontinuance of the Company's Service America segment, the
disposal of which is expected to be completed in the first half of 2005.
The Company's segments now comprise the VITAS segment and the Roto-Rooter
segment (formerly the Plumbing and Drain Cleaning segment). Service America has
been reclassified to discontinued operations for all periods presented.
The VITAS segment provides palliative medical care and related services to
terminally ill patients through state licensed and federally certified hospice
programs, and the Roto-Rooter segment provides plumbing and drain cleaning
services. Relative contributions of each segment to service revenues and sales
were 62% and 38%, respectively, in 2004.
15
Chemed Corporation and Subsidiary Companies
The reportable segments have been defined along service lines which is
consistent with the way the businesses are managed. In determining reportable
segments, the Roto-Rooter Services, Roto-Rooter Franchising and Products and
Roto-Rooter Heating, Ventilating and Air Conditioning ("HVAC") and
non-Roto-Rooter brand operating segments of the Roto-Rooter segment have been
aggregated on the basis of possessing similar operating and financial
characteristics. The characteristics of these operating segments and the basis
for aggregation are reviewed annually. Accordingly, the reportable segments are
defined as follows:
- The VITAS segment provides 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. Hospice care is typically available
to patients who have been initially certified as terminally
ill (i.e., a prognosis of six months or less) by their
attending physician, if any, and the hospice physician. VITAS
offers all levels of hospice care in a given market, including
routine home care, inpatient care and continuous care.
Approximately 96% of VITAS' revenues are derived through
Medicare and Medicaid reimbursement programs.
- The Roto-Rooter segment provides repair and maintenance
services to residential and commercial accounts using the
Roto-Rooter service mark. Such services include plumbing and
sewer, drain and pipe cleaning. They are delivered through
company-owned, independent-contractor-operated and franchised
locations. This segment also manufactures and sells products
and equipment used to provide such services.
Substantially all of the Company's service revenues and sales from
continuing operations are generated from business within the United States.
Management closely monitors accounts receivable balances and has established
policies regarding the extension of credit and compliance therewith.
16
Chemed Corporation and Subsidiary Companies
Segment data for the Company's continuing operations are set forth below
(in thousands, except footnote data):
For the Years Ended December 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
REVENUES BY TYPE OF SERVICE
VITAS
Routine homecare $ 316,374 $ - $ -
Continuous care 78,669 - -
General inpatient 63,051 - -
Other 636 - -
--------- --------- ---------
Total segment 458,730 - -
--------- --------- ---------
Roto-Rooter
Sewer and drain cleaning 111,867 106,127 106,125
Plumbing repair and maintenance 107,642 101,590 98,812
Industrial and municipal sewer and drain cleaning 16,075 15,581 14,660
Contractors 16,360 14,125 12,350
HVAC repair and maintenance 3,111 3,044 3,746
Other products and services 21,556 20,309 17,994
--------- --------- ---------
Total segment 276,611 260,776 253,687
--------- --------- ---------
Total service revenues and sales $ 735,341 $ 260,776 $ 253,687
--------- --------- ---------
AFTERTAX SEGMENT EARNINGS/ (LOSS) (A) (B)
VITAS $ 29,139 $ - $ -
Roto-Rooter 18,795 13,176 14,108
--------- --------- ---------
Total segment earnings 47,934 13,176 14,108
Corporate (24,643) (2,910) (3,001)
Equity in VITAS earnings/(loss) (4,105) 922 -
Discontinued operations 8,326 (14,623) (13,652)
--------- --------- ---------
Net income/(loss) $ 27,512 $ (3,435) $ (2,545)
========= ========= =========
INTEREST INCOME
VITAS $ 1,091 $ - $ -
Roto-Rooter 1,180 863 621
--------- --------- ---------
Subtotal 2,271 863 621
Corporate 1,403 2,155 2,511
Intercompany eliminations (1,800) (595) (237)
--------- --------- ---------
Total interest income $ 1,874 $ 2,423 $ 2,895
========= ========= =========
(a) For 2004, includes payouts under the Company's 2002 Executive Long-term
Incentive Plan of $4,455,000 aftertax (Corporate) and $982,000 aftertax
(Roto-Rooter), the prepayment penalty incurred on the early extinguishment
of the Company's debt of $2,030,000 aftertax (Corporate), the estimated
cost for the anticipated settlement of a lawsuit of $1,897,000 aftertax
(Roto-Rooter), expenses related to debt registration of $727,000 aftertax
(Corporate), the Company's aftertax share of VITAS' charges related to the
Company's acquisition of VITAS amounting to $4,621,000 (Equity in VITAS
earnings/(loss)), additional VITAS transaction costs and adjustments of a
charge of $1,008,000 aftertax (VITAS) and a credit of $786,000 aftertax
(Corporate), and favorable tax adjustments and settlements from prior year
returns of $990,000 aftertax (Corporate) and $630,000 (Roto-Rooter).
(b) Includes severance charges of $2,358,000 aftertax (Corporate) in 2003, an
investment impairment charge of $780,000 aftertax (Corporate) in 2002, and
aftertax capital gains on the sales and redemption of investments
(Corporate) for the years 2003 and 2002 amounting to $3,351,000 and
$775,000, respectively.
17
Chemed Corporation and Subsidiary Companies
For the Years Ended December 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
INTEREST EXPENSE
VITAS $ 128 $ - $ -
Roto-Rooter 206 170 101
--------- --------- ---------
Subtotal 334 170 101
Corporate 20,824 3,007 3,847
--------- --------- ---------
Total interest expense $ 21,158 $ 3,177 $ 3,948
========= ========= =========
INCOME TAX PROVISION (A)
VITAS $ 20,030 $ - $ -
Roto-Rooter 10,611 8,054 8,871
--------- --------- ---------
Subtotal 30,641 8,054 8,871
Corporate (16,845) (1,874) (2,838
--------- --------- ---------
Total income tax provision $ 13,796 $ 6,180 $ 6,033
========= ========= =========
IDENTIFIABLE ASSETS
VITAS $ 502,810 $ - $ -
Roto-Rooter 174,310 172,257 165,503
--------- --------- ---------
Total identifiable assets 677,120 172,257 165,503
Corporate (b) 129,344 129,664 121,673
Discontinued operations 19,102 26,537 50,646
--------- --------- ---------
Total assets $ 825,566 $ 328,458 $ 337,822
========= ========= =========
ADDITIONS TO LONG-LIVED ASSETS (C)
VITAS $ 434,509 $ - $ -
Roto-Rooter 8,690 12,610 9,433
--------- --------- ---------
Subtotal 443,199 12,610 9,433
Corporate (b) 785 1,621 184
--------- --------- ---------
Total additions $ 443,984 $ 14,231 $ 9,617
========= ========= =========
DEPRECIATION AND AMORTIZATION (D)
VITAS $ 9,061 $ - $ -
Roto-Rooter 8,702 9,481 10,149
--------- --------- ---------
Subtotal 17,763 9,481 10,149'
Corporate 558 340 427
--------- --------- ---------
Total depreciation and amortization $ 18,321 $ 9,821 $ 10,576
========= ========= =========
(a) For 2004, includes favorable tax adjustments and settlements from prior
year returns of $990,000 (Corporate) and $630,000 (Roto-Rooter).
(b) Corporate assets consist primarily of cash and cash equivalents,
marketable securities, properties and equipment and other investments.
(c) Long-lived assets include goodwill, identifiable intangible assets and
property and equipment.
(d) Depreciation and amortization include amortization of identifiable
intangible assets and stock awards.
18
Chemed Corporation and Subsidiary Companies
3. EQUITY INTEREST IN AFFILIATE (VITAS)
Until February 23, 2004, the Company held a 37% interest in privately held
VITAS. On August 18, 2003, VITAS retired the Company's investment in the 9%
Redeemable Preferred Stock of VITAS. Cash proceeds to the Company totaled $27.3
million, and the Company realized a pretax gain of $1,846,000 ($1,200,000
aftertax or $.12 per share) on the redemption of preferred stock in the third
quarter of 2003. During 2003, the dividends and amortization of preferred stock
discount on this investment contributed $1,585,000 to the aftertax earnings of
the Company. On October 14, 2003, the Company exercised two of its three
warrants to purchase 4,158,000 common shares of VITAS, or 37%, for $18 million
in cash. See Note 7 regarding the acquisition of the 63% of VITAS the Company
did not own in 2003.
During the period January 1 through February 23, 2004, VITAS recognized a
net loss of $18,335,000 due to the recognition of approximately $20.9 million of
aftertax costs related to VITAS' sale of its business to the Company. Included
in these costs are the following (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 issuance costs 2,698
Other 592
---------
Total $ 20,930
=========
The Company's aftertax share of VITAS' loss for this period was
$4,105,000.
Summarized unaudited financial data for VITAS follow (in thousands):
AS OF AND FOR As of and
THE PERIOD FROM for the Three As of and for the
JANUARY 1 TO Months Ended Years Ended September 30,
FEBRUARY 23, December 31, --------------------------
2004 2003 2003 2002
---------------- ------------- ---------- ------------
Statement of Operations
Revenues $ 72,870 $ 121,062 $ 420,074 $ 359,200
Gross profit 14,022 27,515 88,254 77,841
Income/(loss) from operations (19,956) 10,727 32,022 28,019
Net income/(loss) (18,335) 5,396 13,689 13,789
Net income/(loss) available for common stockholders (18,335) 5,396 5,678 9,727
Financial Position
Current assets $ 101,394 $ 79,619 $ 69,891 $ 51,780
Noncurrent assets 63,844 63,746 62,660 59,687
Current liabilities 101,062 62,963 54,046 46,881
Noncurrent liabilities 60,310 68,553 90,053 59,006
Redeemable preferred stock - - - 22,006
Stockholders' equity/(deficit) 3,866 11,849 (11,548) (16,426)
4. GOODWILL AND INTANGIBLE ASSETS
Amortization of definite-lived intangible assets from continuing
operations was (in thousands):
For the Years Ended December 31,
- ---------------------------------------
2004 2003 2002
- -------- ------- --------
$ 3,468 $ 130 $ 152
19
Chemed Corporation and Subsidiary Companies
The following is a schedule by year of projected amortization expense for
definite-lived intangible assets (in thousands):
2005 $ 4,021
2006 4,012
2007 3,978
2008 3,971
2009 3,963
The balance in identifiable intangible assets comprises the following (in
thousands):
Gross Accumulated Net Book
DECEMBER 31, 2004 Asset Amortization Value
- ----------------- --------- ------------ --------
REFERRAL NETWORK $ 20,900 $ (2,348) $ 18,552
COVENANTS NOT TO COMPETE 8,676 (2,043) 6,633
CUSTOMER LISTS 1,222 (783) 439
--------- ------------ --------
SUBTOTAL 30,798 (5,174) 25,624
VITAS TRADE NAME 51,300 - 51,300
--------- ------------ --------
TOTAL $ 82,098 $ (5,174) $ 76,924
========= ============ ========
DECEMBER 31, 2003
- -----------------
Covenants not to compete $ 1,075 $ (999) $ 76
Customer lists 1,221 (705) 516
--------- ------------ --------
Total $ 2,296 $ (1,704) $ 592
========= ============ ========
The changes in the carrying amount of goodwill for the years ended
December 31, 2002 and 2003, are as follows (in thousands):
Roto-
VITAS Rooter Total
--------- --------- -----------
December 31, 2002 $ - $ 100,806 $ 100,806
Acquired in business combinations - 4,246 4,246
Other adjustments - 283 283
--------- --------- -----------
DECEMBER 31, 2003 - 105,335 105,335
ACQUIRED IN BUSINESS COMBINATIONS 324,330 2,918 327,248
OTHER ADJUSTMENTS - 149 149
--------- --------- -----------
DECEMBER 31, 2004 $ 324,330 $ 108,402 $ 432,732
========= ========= ===========
As required by FASB No. 142 "Goodwill and Intangible Assets" ("FASB No.
142"), the Company performed goodwill impairment tests for all of its reporting
units as of December 31, 2004 and 2003, based on valuations prepared by
professional valuation firms. For all reporting units included in continuing
operations, these tests indicated that none of the Company's goodwill is
impaired. Service America, which was reclassified to discontinued operations in
2004, recognized goodwill impairment losses of $10.0 million and $20.3 million
in 2003 and 2002, respectively, largely due to declining revenues and poor
operating results for several years. For the purpose of impairment testing, the
Company considers the reporting components of its continuing operations to be
VITAS, Roto-Rooter Services (plumbing and drain cleaning services) and
Roto-Rooter Franchising and Products (franchising and manufacturing and sale of
plumbing and drain cleaning products).
20
Chemed Corporation and Subsidiary Companies
5. OTHER EXPENSES
Other expenses from continuing operations for 2004 include the following
pretax charges (in thousands):
LONG-TERM INCENTIVE COMPENSATION $ 8,783
ACCRUAL FOR LAWSUIT SETTLEMENT 3,135
VITAS TRANSACTION-RELATED COSTS AND ADJUSTMENTS 442
PROFESSIONAL FEES INCURRED TO REGISTER FLOATING RATE NOTES 1,191
---------
TOTAL OTHER EXPENSES $ 13,551
=========
The long-term incentive compensation was awarded in the first quarter of
2004 under the 2002 Executive Long-Term Incentive Plan ("LTIP") because the
price of the Company's stock exceeded $50 for 10 consecutive trading days,
fulfilling one of the performance targets of the LTIP. The aftertax expense was
$5,437,000. The LTIP has been amended to provide for additional targets as
described in Note 19.
The charge for the lawsuit settlement represents Roto-Rooter's anticipated
cost of settling a class-action lawsuit in Madison, IL. The proposed settlement
has not yet been finalized by the parties nor approved by the court. The
aftertax cost of this charge is $1,897,000.
VITAS' transaction-related costs and adjustments are expense adjustments
related to the acquisition of VITAS and netted $222,000 aftertax expense.
The professional fees incurred to register the Company's Floating Rate
Notes were expensed in 2004 and amounted to $727,000 aftertax. The Floating Rate
Notes were called in February 2005 as discussed in Note 12.
The aggregate impact of these charges reduced income from continuing
operations by $8,283,000.
6. DISCONTINUED OPERATIONS
Discontinued operations comprise (in thousands, except per share amounts):
For the Years Ended December 31,
------------------------------------------
2004 2003 2002
------- --------- ---------
Service America (2004):
Loss before income taxes $ (535) $ (16,118) $ (19,543)
Income taxes 222 1,431 (418)
------- --------- ---------
Loss from operations, net of income taxes (313) (14,687) (19,961)
Gain on disposal, net of income tax benefit of $14,230 8,872 - -
------- --------- ---------
Total Service America 8,559 (14,687) (19,961)
------- --------- ---------
Patient Care (2002):
Income before income taxes - - 5,233
Income taxes - - (2,142)
------- --------- ---------
Income from operations, net of income taxes - - 3,091
Gain on disposal, net of income taxes of $594 - - 304
------- --------- ---------
Total Patient Care - - 3,395
------- --------- ---------
Adjustment to accruals of operations discontinued in prior years:
Environmental and sublease accruals (1991) (700) - (1,145)
Allowance for uncollectible notes receivable (2001) 383 99 477
Severance and other accruals (1997) - - 180
------- --------- ---------
Gain/(loss) before income taxes (317) 99 (488)
Income tax refund (1997) - - 2,861
All other income taxes 84 (35) 541
------- --------- ---------
Total adjustments (233) 64 2,914
------- --------- ---------
Total discontinued operations $ 8,326 $ (14,623) $ (13,652)
======= ========= =========
Earnings/(loss) per share $ 0.69 $ (1.47) $ (1.38)
======= ========= =========
Diluted earnings/(loss) per share $ 0.68 $ (1.47) $ (1.38)
======= ========= =========
21
Chemed Corporation and Subsidiary Companies
In December 2004, the Board of Directors of the Company authorized the
discontinuance of the Company's Service America segment through an asset sale to
employees of Service America. The disposal is subject to certain regulatory and
other approvals and is expected to be completed during the first half of 2005.
Our decision to dispose of Service America, which provides major-appliance and
heating/air conditioning repair, maintenance and replacement services, is based
on declining operating results and projected operating losses. The acquiring
corporation will purchase the substantial majority of Service America's assets
in exchange for assuming substantially all of Service America's liabilities.
Included in the assets to be acquired is a receivable from the Company for
approximately $4.7 million. The Company will pay $1 million of this receivable
upon closing and the remainder over the following year in 11 equal installments.
We recognized a tax benefit of approximately $14.2 million on this disposal in
2004, primarily due to the recognition of non-deductible impairment losses in
prior years. In addition, we project we will incur pretax losses of
approximately $800,000 (unaudited) from Service America in 2005, prior to the
date of disposal. These losses are largely related to the finalization of
severance, lease and other arrangements and will be included in discontinued
operations in 2005.
During 2004, we also increased our accrual for environmental liabilities
related to the disposal of DuBois Chemicals, Inc. ("DuBois") in 1991 by
$700,000. The adjustment is based on an assessment by the Company's
environmental attorney and ongoing discussions with the U.S. Environmental
Protection Agency.
The $383,000, $99,000 and $477,000 accrual adjustments and reductions to
the allowance for uncollectible notes receivable from Cadre Computer Resources
Co. ("Cadre Computer") (sold in 2001) are attributable to Cadre Computer's
experiencing better-than-anticipated financial results and to the expiration and
nonuse of $350,000 of Cadre Computer's line of credit with the Company. In
anticipation that Cadre Computer would draw down the full $500,000 line of
credit to finance operating losses, this line of credit had been fully reserved
in 2001 when Cadre Computer was sold to its employees. The remainder of the
adjustment in 2002 ($127,000) and 2003 ($99,000) was recorded because Cadre
Computer began making payments on its existing notes that previously were fully
reserved.
During 2002, the Company sold Patient Care to an investor group that
included Schroder Ventures Life Sciences Group, Oak Investment Partners,
Prospect Partners and Salix Ventures. Patient Care provides home-healthcare
services primarily in the New York-New Jersey-Connecticut area. The proceeds to
the Company from the sale of Patient Care comprised the following (in
thousands):
Cash $ 52,500
Note receivable 12,500
Cash placed in escrow 5,000
Common stock purchase warrants 1,445
Purchase price adjustment due to seller 1,251
---------
Total $ 72,696
=========
The note receivable is a senior subordinated note ("Note") due October 11,
2007, that bears interest at the annual rate of 7.5% through September 30, 2004,
8.5% from October 1, 2004 through September 30, 2005, and 9.5% thereafter. The
Note is presented on a separate line in the consolidated balance sheet. The
$5,000,000 cash placed in escrow is subject to the collection of Patient Care's
receivables with third-party payers. Of this amount, $2,500,000 was distributed
as of October 2003 and $1,731,000 was distributed in 2004. The remaining
$769,000 was withheld, pending settlement of a pre-acquisition receivable. Based
on the previous collection experience of Patient Care, the Company expects to
collect substantially all of the funds remaining in escrow. The common stock
purchase warrant permits the Company to purchase up to 2% of Patient Care. The
warrant was recorded at its estimated fair value on the date acquired and is
included in other investments in the consolidated balance sheet. Patient Care
has not provided the Company with financial statements since the first quarter
of 2004. When, and if, the current Patient Care financial information is
provided, it is possible that the Company may have to recognize an impairment
loss on its investment in Patient Care for all or a portion of the carrying
value of the warrant. The final value of the estimated balance sheet is expected
to be determined in 2005, based on Patient Care's closing balance sheet, and
could impact the amount of the gain recorded on the sale of Patient Care. The
Company's current receivables from Patient Care (total of $2.8 million at
December 31, 2004) are currently in litigation.
The adjustment to the sublease accrual in 2002 was made to cover rental
charges for vacant space previously occupied by DuBois. Although the Company was
able to sublease varying amounts of space during recent years, as of December
31, 2003, the Company was unable to sublease one of the floors covered under its
lease. The adjustments made in 2002 decreased the amount of sublease rentals
that were assumed to be received to include rentals only from current
sublessees. As a result, the sublease accrual covers the cost of all unoccupied
space and the shortfall of current subleased rentals versus lease rental rates
and operating costs.
The $2,861,000 federal income tax refund received in 2002 related to the
tax provision recorded as a part of the sale of The Omnia Group ("Omnia") in
1997. As a result of a tax case settled in 2001, the Company filed an amended
1997
22
Chemed Corporation and Subsidiary Companies
federal income tax return in August 2001 and claimed a tax benefit on its loss
on the sale of Omnia, a loss previously treated as nondeductible.
During 2001, the Company discontinued its Cadre Computer segment, and on
August 31, 2001, completed the sale of the business and assets of Cadre Computer
to a company owned by the former Cadre Computer employees for a note receivable
that was fully reserved on the date of sale. During 2002, Cadre Computer
borrowed an additional $150,000 from the Company and made principal payments of
$31,000 on the first note. During 2003, Cadre Computer made principal payments
of $96,000 on the first note. As of December 31, 2004, the Company's notes
receivable from Cadre Computer totaled $323,000. We consider the balances in the
notes receivable from Cadre Computer to be fully collectible at December 31,
2004.
Revenues generated by discontinued operations comprise (in thousands):
For the Years Ended December 31,
--------------------------------------------
2004 2003 2002
----------- ----------- ---------
Service America $ 38,986 $ 48,095 $ 60,489
Patient Care - - 116,191
----------- ----------- ---------
Total $ 38,986 $ 48,095 $ 176,680
=========== =========== =========
At December 31, 2004, other current liabilities include accruals of
$6,425,000 and other liabilities include accruals of $5,028,000 for costs
related to discontinued operations. The estimated timing of payments of these
liabilities, relating primarily to sublease and environmental liabilities,
follows (in thousands):
2005 $ 6,425
2006 1,702
2007 1,016
2008 822
2009 822
2010 AND LATER 666
---------
TOTAL $ 11,453
=========
The Company's Chairman of the Board, President and Chief Executive Officer
and the former Chief Administrative Officer (currently a director of the
Company) are directors of Cadre Computer. In addition, our former Chief
Administrative Officer holds a 41% equity ownership interest in Cadre Computer
at December 31, 2004 and is Chairman and Chief Executive Officer of Cadre
Computer.
23
Chemed Corporation and Subsidiary Companies
7. BUSINESS COMBINATIONS
On February 24, 2004, we completed the acquisition of the 63% of VITAS
common stock we did not previously own for cash consideration of $323.8 million.
The total investment in VITAS, including $3.1 million of acquisition expenses
and the Company's $18.0 million prior investment in VITAS, was $366.2 million.
The Company has completed its purchase price allocation and the excess of the
purchase price over the fair value of the net assets acquired in purchase
business combinations is classified as goodwill. A summary of net assets
acquired in the VITAS transaction follows (in thousands):
Cash and cash equivalents $ 24,377
Accounts receivable, net 49,762
Current deferred income taxes 13,449
Prepaid income taxes 13,399
Other current assets 25,299
Property and equipment 19,073
VITAS trade name 51,300
Referral network 20,900
Covenants not to compete 7,600
Goodwill 306,298
Other assets 10,401
Accounts payable (40,554)
Current portion of long-term debt (7,940)
Accrued expenses (43,169)
Long-term debt (59,571)
Deferred income taxes (21,171)
Other liabilities (3,259)
---------
Total net assets 366,194
Less: prior investment in VITAS (18,032)
Less-cash and cash equivalents
acquired (24,377)
---------
Net cash used $ 323,785
=========
We began including the consolidated VITAS results of operations in the
Company's financial statements as of February 24, 2004. We recorded the
acquisition of VITAS using the purchase method of accounting. The referral
network and noncompetition agreement have a weighted average life of
approximately 9.1 years. The referral network is being amortized on an
accelerated basis that results in writing off 77% 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 were determined to have indefinite
lives and will be reviewed at least annually for impairment. The first such test
was performed as of December 31, 2004 and indicated these assets are not
impaired.
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 35 operating
programs covering many of the large population areas in the U.S. including
Florida, California, Texas and Illinois. To fund the acquisition and retire
VITAS' and the Company's long- term debt, we completed the following
transactions 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 4.5%.
- 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 $19.3 million.
24
Chemed Corporation and Subsidiary Companies
We acquired the 63% of VITAS not previously owned to enhance our minority
investment in VITAS. 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.
Also during 2004, we completed two business combinations within the
Roto-Rooter segment and two within the VITAS segment for an aggregate purchase
price of $20.9 million in cash. The VITAS businesses acquired provide hospice
services in the Phoenix, AZ and the Atlanta, GA areas, and the two Roto-Rooter
businesses acquired provide drain cleaning and plumbing services using the
Roto-Rooter name in Harrisburg, PA and Spokane, WA. The results of operations of
all of these businesses are included in the Company's results of operations from
the date of acquisition. The results of operations of these businesses for 2004
are not material to the Company's results of operations.
During 2003, six purchase business combinations were completed within the
Roto-Rooter segment for a total of $3.9 million in cash. During 2002, one
purchase business combination was completed within the Roto-Rooter segment for a
purchase price of $1.2 million in cash. All of the 2003 and 2002 business
combinations involved operations primarily in the business of providing plumbing
repair and drain cleaning services.
The excess of the purchase price over the fair value of the net assets
acquired in purchase business combinations is classified as goodwill. On a
preliminary basis, the purchase price of all businesses (except VITAS) has been
allocated as follows (in thousands):
For the Years Ended December 31,
--------------------------------
2004 2003 2002
------- -------- -------
Working capital $ - $ (114) $ 60
Identifiable intangible
assets - - 50
Goodwill 20,950 4,246 1,110
Other assets and
liabilities-net (8) (282) 16
------- -------- -------
Total net assets $20,942 $ 3,850 $ 1,236
======= ======== =======
Approximately $20,936,000 of the goodwill related to the VITAS acquisition
and all of the goodwill related to business combinations completed in 2004, 2003
and 2002 is expected to be deductible for income tax purposes. Of the goodwill
acquired in 2004, $15 million relates to the purchase of the hospice business in
Phoenix, AZ, which was completed in December. This amount is based on a
preliminary purchase price allocation that will be finalized during 2005. We
will perform a thorough search for all potential intangible assets in 2005 and
it is possible that other intangible assets may be identified.
The unaudited pro forma results of operations, assuming purchase business
combinations completed in 2004 and 2003 were completed on January 1 of the
preceding year, are presented below (in thousands, except per share data):
For the Years Ended December 31,
--------------------------------
2004 2003
------------ --------------
Service revenues and sales $ 816,173 $ 709,528
Net income/(loss) 34,199 (1,695)
Earnings/(loss) per share 2.77 (0.14)
Diluted earnings/(loss) per share 2.71 (0.14)
25
Chemed Corporation and Subsidiary Companies
8. OTHER INCOME -- NET
Other income -- net from continuing operations comprises the following (in
thousands):
For the Years Ended December 31,
---------------------------------------------
2004 2003 2002
----------- ------------- ------------
Interest income $ 1,874 $ 2,423 $ 2,895
Market value gains/(losses) on trading
investments of employee benefit trusts 1,859 1,580 (1,189)
Loss on disposal of property and equipment (350) (253) (583)
Dividend income - 1,540 2,461
Gains on sales and redemption
of investments - 5,390 1,141
Investment impairment charge - - (1,200)
Other - net 86 169 422
----------- ------------- ------------
Total other income - net $ 3,469 $ 10,849 $ 3,947
=========== ============= ============
9. INCOME TAXES
The provision for income taxes comprises the following (in thousands):
For the Years Ended December 31,
---------------------------------------------
2004 2003 2002
----------- ------------- ------------
Continuing Operations:
Current
U.S. federal $ 7,065 $ 3,611 $ 3,316
U.S. state and local 1,214 1,102 1,810
Foreign 515 253 141
Deferred
U.S. federal, state and local 5,093 1,230 782
Foreign (91) (16) (16)
----------- ------------- ------------
Total $ 13,796 $ 6,180 $ 6,033
=========== ============= ============
Discontinued Operations:
Current U.S. federal $ (2,373) $ (442) $ (2,332)
Current U.S. state and local (60) 77 897
Deferred U.S. federal, state and local (12,104) (1,031) 1,187
----------- ------------- ------------
Total $ (14,537) $ (1,396) $ (248)
=========== ============= ============
26
Chemed Corporation and Subsidiary Companies
A summary of the significant temporary differences for continuing
operations that give rise to deferred income tax assets/(liabilities) follows
(in thousands):
December 31,
----------------------------
2004 2003
------------ ------------
Accruals related to discontinued operations $ 14,313 $ 2,872
Accrued insurance expense 9,090 4,735
Deferred compensation 7,594 6,891
Severance payments 2,995 1,779
Allowances for uncollectible accounts receivable 2,715 956
Lawsuit settlements 2,407 -
State net operating loss carry forwards 2,671 741
Deferred financing costs 1,225 -
Accrued state taxes 1,185 974
Employee benefit accruals 1,135 381
Market valuation of investments 772 510
Other 2,864 1,769
------------ ------------
Deferred income tax assets 48,966 21,608
Valuation allowance (1,403) (741)
------------ ------------
Deferred income tax assets, less allowance 47,563 20,867
------------ ------------
Amortization of intangibles (23,172) (647)
Accelerated tax depreciation (6,746) (3,171)
Prepaid insurance (1,459) -
Investments basis difference - (2,050)
Other (1,396) (1,615)
------------ ------------
Deferred income tax liabilities (32,773) (7,483)
------------ ------------
Net deferred income tax assets $ 14,790 $ 13,384
============ ============
Included in other assets at December 31, 2004, are deferred income tax
assets of $354,000 (December 31, 2003 -- $4,954,000). Based on the Company's
history of prior operating earnings and its expectations for future growth,
management has determined that the operating income of the Company will, more
likely than not, be sufficient to ensure the full realization of the deferred
income tax assets, less allowances. The valuation allowance has been provided to
reduce the state net operating loss carry forwards to the value expected to be
realized.
The difference between the actual income tax provision for continuing
operations and the income tax provision calculated at the statutory U.S. federal
tax rate is explained as follows (in thousands):
For the Years Ended December 31,
------------------------------------
2004 2003 2002
--------- ---------- --------
Income tax provision calculated using the statutory rate of 35% $ 12,980 $ 5,756 $ 5,999
State and local income taxes, less federal income tax effect 2,253 717 1,212
Unfavorable/(favorable) adjustments related to prior year issues (1,751) 102 (316)
Domestic dividend exclusion - (441) (686)
Other-net 314 46 (176)
--------- ---------- --------
Income tax provision $ 13,796 $ 6,180 $ 6,033
========= ========== ========
Effective tax rate 37.2% 37.6% 35.2%
========= ========== ========
Income tax benefits attributable to the exercise of non-qualified employee
stock options were $1,871,000 during the year ended December 31, 2004 (2003 --
$960,000; 2002 - $122,000) and were credited directly to additional paid-in
capital.
27
Chemed Corporation and Subsidiary Companies
Income taxes included in the components of other comprehensive
income/(loss) are as follows (in thousands):
For the Years Ended December 31,
-----------------------------------------
2004 2003 2002
-------- --------- ----------
Unrealized holding gains/(losses) $ - $ (180) $ 132
Reclassification adjustment - (2,039) (366)
Summarized below are the total amounts of income taxes paid/(refunded)
during the years ended December 31 (in thousands):
2004 $ (13,131)
2003 2,715
2002 (910)
Provision has not been made for additional taxes on $34,070,000 of
undistributed earnings of the Company's domestic subsidiaries. Should the
Company elect to sell its interest in all of these businesses rather than to
effect a tax-free liquidation, additional taxes amounting to approximately
$12,436,000 would be incurred based on current income tax rates.
At December 31, 2004, the Company has net operating loss ("NOL") carry
forwards in the following states (in thousands):
NOL EXPIRATION DATES
--------- ---------------------
STATE OF OHIO $ 17,011 DECEMBER 2020 TO 2024
STATE OF MARYLAND 2,033 DECEMBER 2021 TO 2022
STATE OF FLORIDA 12,472 DECEMBER 2023
STATE OF PENNSYLVANIA 4,627 DECEMBER 2023
A valuation allowance for 100% of the potential deferred tax benefits on the NOL
carry forwards relating to the State of Ohio has been established because we
believe it is more likely than not that the benefit will expire unutilized. None
of the NOL carry forwards will be lost due to the continuity of business
requirement.
10. CASH EQUIVALENTS
Included in cash and cash equivalents at December 31, 2004, are cash
equivalents in the amount of $62,997,000 (2003 -- $49,356,000). The cash
equivalents at both dates consist of investments in various money market funds
and repurchase agreements yielding interest at a weighted average rate of 2.0%
in 2004 and 0.9% in 2003.
From time to time throughout the year, the Company invests its excess cash
in repurchase agreements directly with major commercial banks. The Company does
not physically hold the collateral, but the term of such repurchase agreements
is less than 10 days. Investments of significant amounts are spread among a
number of banks, and the amounts invested in each bank are varied constantly.
The Company occasionally invests in high-quality commercial paper.
28
Chemed Corporation and Subsidiary Companies
11. PROPERTIES AND EQUIPMENT
A summary of properties and equipment follows (in thousands):
December 31,
-------------------------
2004 2003
----------- ---------
Land $ 1,713 $ 1,390
Buildings 20,803 12,958
Transportation equipment 13,114 13,790
Machinery and equipment 36,290 33,266
Computer software 17,050 2,308
Furniture and fixtures 17,201 15,764
Projects under construction 3,122 -
----------- ---------
Total properties and equipment 109,293 79,476
Less accumulated depreciation (53,497) (48,036)
----------- ---------
Net properties and equipment $ 55,796 $ 31,440
=========== =========
12. LONG-TERM DEBT AND LINES OF CREDIT
A summary of the Company's long-term debt follows (in thousands):
December 31,
-------------------------
2004 2003
--------- ---------
New Fixed rate notes due 2011 $ 150,000 $ -
Floating rate notes due 2010 110,000 -
Term loan due 2005 - 2009 30,487 -
Senior notes, due 2005-2009 - 25,000
Other 1,208 1,124
--------- ---------
Subtotal 291,695 26,124
Less current portion (12,185) (193)
--------- ---------
Long-term debt, less
current portion $ 279,510 $ 25,931
========= =========
2004 CREDIT AGREEMENTS
On February 24, 2004, in conjunction with the Company's acquisition of the
VITAS shares not previously owned, 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 this acquisition and retire the Senior Notes, the Company
issued 2 million shares of capital stock in a private placement and borrowed
$335 million as follows:
- $150 million from the issuance of privately placed 8.75%
senior notes ("Fixed Rate Notes") due 2011. Semiannual
interest payments began in August 2004 and payment of unpaid
principal and interest will be due February 2011. The Fixed
Rate Notes are unsecured and are effectively subordinated to
our secured indebtedness. 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 identical to those of the Fixed Rate Notes.
Pursuant to the Company's exchange offer, all holders of the
Fixed Rate Notes exchanged their notes for like principal
amounts of the New Fixed Rate Notes.
Prior to February 24, 2007 up to a maximum of 35% of the
principal of the New Fixed Rate Notes may be redeemed under
specified circumstances at a price of 108.75% plus accrued
interest. After February 24, 2007, the New Fixed Rate Notes
may be redeemed, in whole or in part, at redemption prices
ranging from 104.375% (beginning on February 24, 2007) to 100%
(beginning on February 24, 2010) plus accrued interest.
29
Chemed Corporation and Subsidiary Companies
- $110 million from the issuance of privately placed floating
rate senior secured notes ("Floating Rate Notes") due 2010.
Quarterly interest payments (LIBOR + 3.75%) began in May 2004,
and payment of unpaid principal and interest was due February
2010. At December 31, 2004, the rate of interest on the
Floating Rate Notes was 6.04% per annum.
- $75 million drawn down under a $135 million secured revolving
credit/term loan facility ("2004 Credit Facility") with
JPMorgan Chase Bank (formerly Bank One). The facility
comprised a $35 million term loan and $100 million revolving
credit facility, including up to $40 million in letters of
credit. For the term loan, quarterly principal payments of
$1,250,000 plus interest (LIBOR + margin) began in June 2004.
For the revolving line of credit, interest payments (LIBOR +
margin) were due periodically beginning in March 2004. Payment
of unpaid principal and interest was due February 2009. At
December 31, 2004, the margin for the term loan was 3.25%
resulting in an interest rate of 5.67% per annum.
The Company had approximately $72.1 million of unused lines of credit at
December 31, 2004 under the 2004 Credit Facility.
SENIOR NOTES
In March 1997, the Company borrowed $25,000,000 in a private placement at
an interest rate of 7.31% per annum. On February 24, 2004, in connection with
entering into the 2004 Credit Agreements, the Company retired its Senior Notes
and incurred a $3,330,000 prepayment penalty ($2,030,000 aftertax).
OTHER
Other long-term debt has arisen from loans in connection with acquisitions
of various businesses and properties. Interest rates range from 5% to 8%, and
the obligations are due on various dates through December 2009.
The following is a schedule by year of required long-term debt payments as
of December 31, 2004 (in thousands):
2005 $ 12,185
2006 5,203
2007 5,209
2008 5,162
2009 3,936
AFTER 2009 260,000
-------------
TOTAL LONG-TERM DEBT $ 291,695
=============
At December 31, 2004, the current portion of long-term debt includes $11.7
million due under terms of the Company's 2004 Credit Facility with JPMorgan
Chase. This credit facility was amended in February 2005, and as result, the
principal payment due in 2005 under the amended agreement has been reduced to
$638,000.
Summarized below are the total amounts of interest paid during the years
ended December 31 (in thousands):
2004 $ 17,255
2003 3,197
2002 3,979
During 2004, interest totaling $72,000 was capitalized. No interest was
capitalized during the years ended December 31, 2003 and 2002.
2005 CREDIT FACILITY
In February 2005, the Company amended its bank credit facility with
JPMorgan Chase Bank. The Amended and Restated Credit Agreement ("ARCA") provides
for an increase in the term loan ("TL") from $35 million to $85 million at a
current rate of LIBOR plus 2.0% and an increase of the revolving credit facility
("RCF") from $100 million to $175 million at a current rate of LIBOR plus 2.5%.
The TL has 21 quarterly principal payments of $212,500, beginning on June 30,
2005, with the balance due August 24, 2010. The RCF has a termination date of
February 24, 2010. Commitment fees include an annual fee of $100,000 plus a fee
of .375% per annum of the unused RCF, payable quarterly.
Loans under the ARCA are secured by the assets of the Company and
substantially all of its subsidiaries. In addition, the Company must comply with
customary financial and other covenants as stipulated in the ARCA. Among these
is an annual limitation on capital expenditures ($30 million), an annual
limitation on acquisitions ($80 million in the aggregate and $50 million
individually) and an annual limitation on payments under operating leases ($30
million). Should
30
Chemed Corporation and Subsidiary Companies
the Company generate excess cash flow ("ECF") during a year, as defined in ARCA,
an additional principal payment must be made. Generally, ECF represents the
excess of EBITDA less net working capital requirements, less income taxes paid,
less capital expenditures, less interest expense, less principal payments on the
TL, less cash used for acquisitions and less cash dividends paid. Based on the
Company's results as of and for the year ended December 31, 2004, no additional
term loan payment would have been required in 2005, had the ARCA been in place
during 2004.
Also in February 2005, the Company used proceeds from borrowings under the
ARCA ($85 million TL and $3.5 million RCF) plus $54.4 million of its cash
balances to retire its previous term loan ($30.5 million), to redeem the entire
$110 million aggregate principal amount of its Floating Rate Notes due 2010, to
pay $1.1 million prepayment penalty for the Floating Rate Notes and to pay $1.4
million of fees for the ARCA.
DEBT COVENANTS
Collectively, the ARCA and the New Fixed Rate Notes provide for
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 to the extent dividends
exceed $5.0 million in any fiscal year), with exceptions for existing
employee benefit plans and stock option 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,
- maximum annual limit for acquisitions of $80 million (no single
acquisition to exceed $50 million),
- maximum annual expenditures for operating leases of $30 million, and
- maximum annual capital expenditures of $30 million.
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 March 31, 2005:
- a minimum net worth requirement, which requires a net worth of at least
(i) 85% of consolidated net worth at December 31, 2004, plus (ii) 50%
of consolidated net income (if positive) earned in each fiscal quarter
beginning with the quarter ending March 31, 2005, plus (iii) the amount
of all net cash proceeds resulting from issuances of capital stock of
the Company or any subsidiary or other equity interest to a person
other than the Company or a subsidiary. At December 31, 2004, our net
worth was $332.1 million versus a requirement of $282.3 million;
- a maximum leverage ratio, calculated quarterly, based upon the ratio of
consolidated funded debt to consolidated earnings before interest,
taxes, depreciation and amortization ("EBITDA"), which requires
maintenance of a ratio of 5.50 to 1.00 through December 31, 2004, a
ratio of 4.00 to 1.00 from January 1, 2005, through December 31, 2006,
a ratio of 3.75 to 1.00 from January 1, 2007, through December 31,
2008, and 3.50 to 1.00 thereafter. At February 28, 2005, our leverage
ratio was 2.78 to 1.00;
- 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
requires maintenance of a ratio of 3.375 to 1.00 through December 31,
2004, a ratio of 3.00 to 1.00 from January 1 through December 31, 2005,
and 2.75 to 1.00 thereafter. At February 28, 2005, our senior leverage
ratio was 1.21 to 1.00; and
31
Chemed Corporation and Subsidiary Companies
- 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 requires maintenance of a ratio of 1.15 to
1.00 through December 31, 2004, 1.25 to 1.00 from January 1 through
December 31, 2005, 1.375 to 1.00 from January 1 through December 31,
2006, and 1.50 to 1.00 thereafter. For 2004, our fixed charge coverage
ratio was 1.44 to 1.00.
The Company is in compliance with all debt covenants as of December 31, 2004 and
projects that it will remain in compliance during 2005. As of February 28, 2005,
the Company has approximately $147.6 million (unaudited) of unused lines of
credit available and eligible to be drawn down under the RCF.
The following is a schedule by year of required long-term debt payments as
of February 28, 2005 (in thousands) (unaudited):
2005 $ 1,103
2006 1,053
2007 1,059
2008 1,012
2009 1,019
AFTER 2009 234,462
---------
TOTAL LONG-TERM DEBT $ 239,708
=========
13. OTHER LIABILITIES
At December 31, 2004 and 2003, other current liabilities comprised the
following (in thousands):
December 31,
----------------------
2004 2003
--------- ----------
Accrued incentive compensation $ 8,115 $ 4,063
Accrued divestiture expenses 4,232 3,731
Accrued savings and retirement
contribution 2,639 4,012
Other 27,791 7,260
--------- ----------
Total other current liabilities $ 42,777 $ 19,066
========= ==========
At December 31, 2004, the Company's accrual for its estimated liability
for potential environmental cleanup and related costs arising from the sale of
DuBois amounted to $2,951,000. Of this balance, $1,051,000 is included in other
liabilities and $1,900,000 is included in other current liabilities. The Company
is contingently liable for additional DuBois-related environmental cleanup and
related costs up to a maximum of $15,999,000. On the basis of a continuing
evaluation of the Company's potential liability, management believes it is not
probable this additional liability will be paid. Accordingly, no provision for
this contingent liability has been recorded. The potential liability is not
insured, and the recorded liability does not assume the recovery of insurance
proceeds. Also, the environmental liability has not been discounted because it
is not possible to reliably project the timing of payments. It is currently
expected that approximately $1,900,000 of the liability will be paid out in
2005; the timing of the remainder of the payments is not currently estimable.
Management believes that any adjustments to its recorded liability will not
materially adversely affect its financial position or results of operations.
At December 31, 2004, the Company's accrual for losses on subleases of
office space formerly occupied by DuBois amounted to $1,575,000 (2003 --
$2,847,000), of which $1,200,000 (2003 -- $1,200,000) is included in other
current liabilities. The accrual is based on the expectation that space
currently unoccupied will not be sublet during the remainder of the lease term,
which ends April 2006.
14. PENSION AND RETIREMENT PLANS
Retirement obligations under various plans cover substantially all
full-time employees who meet age and/or service eligibility requirements. The
major plans providing retirement benefits to the Company's employees are defined
contribution plans.
The Company has established two employee stock ownership plans ("ESOPs")
that purchased a total of $56,000,000 of the Company's capital stock. In
December 1997, the Company restructured the ESOP loans and internally financed
$16,201,000 of the $21,766,000 ESOP loans outstanding at December 31, 1997.
Substantially all eligible employees of the Roto-Rooter segment and the
Corporate Office participate in the ESOPs. Eligible employees of the Company are
also covered by other defined contribution plans.
32
Chemed Corporation and Subsidiary Companies
Expenses charged to continuing operations for the Company's pension and
profit-sharing plans, ESOPs, excess benefit plans and other similar plans
comprise the following (in thousands):
For the Years Ended December 31,
--------------------------------------
2004 2003 2002
----------- ----------- -----------
Compensation cost of ESOPs $ 1,811 $ 1,138 $ 1,746
Pension, profit-sharing
and other similar plans 5,639 3,674 3,015
----------- ----------- -----------
Total $ 7,450 $ 4,812 $ 4,761
=========== =========== ===========
Dividends on ESOP shares
used for debt service $ 129 $ 138 $ 197
=========== =========== ===========
At December 31, 2004, there were 243,717 allocated shares (2003 -- 227,346
shares) and 18,608 unallocated shares (2003 - 52,212 shares) in the ESOP
trusts.
The Company has excess benefit plans for key employees whose participation
in the qualified plans is limited by ERISA rules. Benefits are determined based
on theoretical participation in the qualified ESOPs. Prior to September 1, 1998,
the value of these benefits was invested in shares of the Company's stock and in
mutual funds, which were held by grantor trusts. Currently, benefits are only
invested in mutual funds, and participants are not permitted to diversify
accumulated benefits invested in shares of the Company's stock. Trust assets
invested in shares of the Company's capital stock are included in treasury
stock, and the corresponding liability is included in a separate component of
shareholders' equity. At December 31, 2004, these trusts held 68,313 shares or
$2,390,000 of the Company's stock (December 31, 2003 -- 67,174 shares or
$2,328,000). The diversified assets of the Company's excess benefit and deferred
compensation plans, all of which are invested in various mutual funds, totaled
$18,317,000 at December 31, 2004 (December 31, 2003 -- $17,391,000), and are
included in other assets. The corresponding liabilities are included in other
liabilities.
15. LEASE ARRANGEMENTS
The Company, as lessee, has operating leases that cover its corporate
office headquarters, various warehouse and office facilities, office equipment
and transportation equipment. The remaining terms of these leases range from one
year to 14 years, and in most cases, management expects that these leases will
be renewed or replaced by other leases in the normal course of business.
Substantially all equipment is owned by the Company.
The following is a summary of future minimum rental payments and sublease
rentals to be received under operating leases that have initial or remaining
noncancelable terms in excess of one year at December 31, 2004 (in thousands):
2005 $ 17,169
2006 12,707
2007 8,880
2008 6,367
2009 5,248
AFTER 2009 10,016
----------
TOTAL MINIMUM RENTAL PAYMENTS 60,387
LESS: MINIMUM SUBLEASE RENTALS (2,394)
----------
NET MINIMUM RENTAL PAYMENTS $ 57,993
==========
Total rental expense incurred under operating leases for continuing
operations follows (in thousands):
For the Years Ended December 31,
----------------------------------
2004 2003 2002
--------- --------- ----------
Total rental payments $ 13,569 $ 5,776 $ 5,489
Less: sublease rentals (1,640) (1,603) (1,195)
--------- --------- ----------
Net rental expense $ 11,929 $ 4,173 $ 4,294
========= ========= ==========
33
Chemed Corporation and Subsidiary Companies
16. FINANCIAL INSTRUMENTS
The following methods and assumptions are used in estimating the fair
value of each class of the Company's financial instruments:
- 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.
- For other investments and other assets, fair value is based upon
quoted market prices for these or similar securities, if available.
Included in other investments at December 31, 2003, was the
Company's investment in VITAS.
- The carrying values of the Company's investment in the Patient Care
warrant and the Note receivable due from Patient Care ($12,500,000)
are considered to be the best indicator of fair value available at
the present time. Patient Care is privately held and the Company has
been unable to obtain current financial data since February 2004. In
addition, the Company and Patient Care are currently in litigation
over the collection of other amounts due the Company. Patient Care
is current on its payments of interest on its note payable to the
Company. Nonetheless, when additional information becomes available
it is possible that such data would indicate the fair value of these
investments is less than their respective carrying values. It is
also possible that such decline could be considered other than
temporary. In those circumstances, a write down to fair value would
be required.
- The fair value of the Company's CJSDs is based on the quoted market
value at the end of the period.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
December 31,
------------------------------------------------------------------
2004 2003
----------------------------- ---------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------------ ------------- --------------- --------------
Available-for-sale investments:
Other investments--
Equity investment in VITAS $ - $ - $ 21,035 $ 124,747
Investment in VITAS warrants - - 2,601 40,091
Investment in Patient Care warrant 1,445 1,445 1,445 1,445
------------ ------------- --------------- --------------
Subtotal 1,445 1,445 25,081 166,283
Note receivable 12,500 12,500 12,500 12,500
------------ ------------- --------------- --------------
Total available-for-sale investments $ 13,945 $ 13,945 $ 37,581 $ 178,783
============ ============= =============== ==============
Long-term debt $ 291,695 $ 306,328 $ 26,124 $ 28,045
CJSD - - 14,126 17,657
Disclosures regarding the Company's equity investments, all of which are
included in other investments and classified as available-for-sale, are
summarized below (in thousands):
December 31,
-------------------------
2004 2003
--------- -----------
Aggregate fair value $ 1,445 $ 166,283
Gross unrealized holding gains - -
Gross unrealized holding losses - -
Amortized cost 1,445 25,081
34
Chemed Corporation and Subsidiary Companies
The chart below summarizes information with respect to available-for-sale
securities sold during the period (in thousands):
For the Years Ended
December 31,
---------------------
2003 2002
--------- --------
Proceeds from redemption and sales $ 31,763 $ 1,917
Gross realized gains 7,157 1,223
Gross realized losses 1,767 82
17. EARNINGS/(LOSS) PER SHARE
The computation of earnings/(loss) per share follows:
Income from Continuing Operations Net Income/(Loss)
-------------------------------------------- -----------------------------------------
Income Shares Income Income Shares Income
(Numerator) (Denominator) Per Share (Numerator) (Denominator) Per Share
-------------- ------------- --------- ----------- ------------- ---------
2004
Earnings $ 19,186 12,060 $ 1.59 $ 27,512 12,060 $ 2.28
========= =========
Dilutive stock options - 251 - 251
Nonvested stock awards - 7 - 7
-------------- ------ ----------- ------
Diluted earnings $ 19,186 12,318 $ 1.56 $ 27,512 12,318 $ 2.23
============== ====== ========= =========== ====== =========
2003
Earnings/(loss) $ 11,188 9,924 $ 1.13 $ (3,435) 9,924 $ (0.35)
========= =========
Dilutive stock options - 30 - 30
-------------- ------ ----------- ------
Diluted earnings/(loss) $ 11,188 9,954 $ 1.12 $ (3,435) 9,954 $ (0.35)
============== ====== ========= =========== ====== =========
2002
Earnings/(loss) $ 11,107 9,858 $ 1.13 $ (2,545) 9,858 $ (0.26)
========= =========
Dilutive stock options - 27 - 27
-------------- ------ ----------- ------
Diluted earnings/(loss) $ 11,107 9,885 $ 1.12 $ (2,545) 9,885 $ (0.26)
============== ====== ========= =========== ====== =========
The impact of the CJSDs was excluded from the above computations because it was
antidilutive to earnings per share for all periods. All of the remaining CJSDs
were either converted or retired as of May 18, 2004. The debentures were
convertible into an average of 137,000 shares for the year ended December 31,
2004 (2003 -- 383,000; 2002 -- 384,000).
During 2003 and 2002, certain stock options, whose exercise prices were
greater than the average market price during most of the year, were excluded
from the computation of diluted earnings per share. Those options comprise the
following:
Number of Options Outstanding
at December 31,
Exercise -----------------------------
Grant Date Price 2003 2002
- ---------- --------- ----------- --------------
May 2002 $ 36.90 256,800 265,600
March 1998 39.13 130,700 153,250
May 1996 38.75 117,625 159,275
April 1998 40.53 12,000 12,000
May 1997 35.94 - 152,600
------- -------
Total 517,125 742,725
======= =======
During 2004, there were no options outstanding whose exercise prices
exceeded the market price for any significant period of time.
35
Chemed Corporation and Subsidiary Companies
18. STOCK INCENTIVE PLANS
The Company has nine Stock Incentive Plans under which 3,850,000 shares of
Chemed Corporation Capital Stock are issued to key employees pursuant to the
grant of stock awards and/or options to purchase such shares. All options
granted under these plans provide for a purchase price equal to the market value
of the stock at the date of grant. The latest plan, covering a total of 700,000
shares, was adopted in May 2004.
The stock option plans are not qualified, restricted or incentive stock
option plans under the Internal Revenue Code. Options granted under these plans
prior to 2004 generally become exercisable in four annual installments
commencing six months after the date of grant. Options granted in 2004 generally
become exercisable in full six months after the date of grant. Under the
Long-Term Incentive Plan, adopted in 1999, up to 250,000 shares may be issued to
employees who are not officers or directors of the Company or its subsidiaries.
Data relating to the Company's stock issued to employees follow:
2004 2003 2002
---------------------------- --------------------------- ----------------------------
NUMBER WEIGHTED Number Weighted Number Weighted
OF AVERAGE of Average of Average
SHARES PRICE Shares Price Shares Price
----------- ------------- ---------- ------------- ------------ ------------
Stock options:
Outstanding at January 1 1,172,865 $ 35.92 1,243,600 $ 35.50 1,059,088 $ 34.91
Granted 401,534 44.63 241,100 35.85 268,600 36.90
Exercised (231,997) 35.25 (245,184) 33.10 (66,738) 31.87
Forfeited (11,000) 35.51 (300) 28.56 (17,350) 34.76
Expired - - (66,351) 38.23 - -
--------- --------- --------- -
Outstanding at December 31 1,331,402 38.67 1,172,865 35.92 1,243,600 35.50
========= ========= =========
Exercisable at December 31 1,147,661 39.06 860,187 35.79 1,037,771 35.23
========= ========= =========
Stock awards issued 148,356 52.76 4,606 34.72 9,034 37.51
========= ========= =========
Options outstanding at December 31, 2004, comprise the following:
Range of Exercise Prices
------------------------------------
$32.19 to $40.53 $43.36 to $56.16
---------------- ----------------
Options outstanding 945,789 385,613
Average exercise price of options outstanding $ 36.25 $ 44.62
Average contractual life 5.3 yrs. 9.4 yrs.
Options exercisable 762,048 385,613
Average exercise price of options exercisable $ 36.25 $ 44.62
There were 303,921 shares available for granting of stock options and awards at
December 31, 2004.
Total compensation cost recognized for stock awards for continuing
operations was $6,018,000 in 2004 (2003 -- $147,000; 2002 -- $184,000). The
shares of capital stock were issued to key employees and directors at no cost
and generally are restricted as to the transfer of ownership.
During 1999, the Company purchased 101,500 shares of its capital stock in
open-market transactions and sold these shares to certain employees at fair
market value in exchange for interest-bearing notes secured by the shares.
Interest rates on these notes are set at the beginning of each year based on
rates used by the Internal Revenue Service for demand loans (1.70% for 2004;
1.80% for 2003; 2.73% for 2002).
The notes receivable have no maturity date but become immediately due and
payable at the option of the Company upon the occurrence of any of the
following: (a) the Company, as noteholder, deems itself not adequately secured,
(b) the death, insolvency, assignment for the benefit of creditors, or the
commencement of any bankruptcy or insolvency proceedings of, or against, the
employee, (c) any attempted transfer by the employee of the shares of capital
stock purchased by the employee with the notes, or (d) termination of
employment. The terms of the notes receivable place restrictions upon the sale
of the underlying shares of stock, but the shares of stock are not physically
restricted from sale. Should the Company demand payment of the notes and the
value of the underlying shares be insufficient to satisfy the remaining note
liability, the employee would be required to pay the Company the difference in
cash.
36
Chemed Corporation and Subsidiary Companies
Activity in the notes receivable accounts, which are presented as a
reduction of stockholders' equity in the consolidated balance sheet, is
summarized below (in thousands):
Balance at December 31, 2001 $ 1,502
Accrual of interest 26
Cash payments (239)
Value of shares surrendered (337)
---------
Balance at December 31, 2002 952
Accrual of interest 16
Cash payments (11)
Value of shares surrendered (23)
---------
BALANCE AT DECEMBER 31, 2003 934
ACCRUAL OF INTEREST 10
CASH PAYMENTS (391)
VALUE OF SHARES SURRENDERED (9)
---------
BALANCE AT DECEMBER 31, 2004 $ 544
=========
Shares surrendered in payment of notes receivable are valued at their fair
market value on the date of surrender.
19. EXECUTIVE LONG-TERM INCENTIVE PLAN
In May 2002, the shareholders of the Company approved the adoption
of the 2002 Executive Long-Term Incentive Plan ("LTIP") covering officers and
key employees of the Company. The LTIP is administered by the
Compensation/Incentive Committee ("CIC") of the Board of Directors and was
adopted to replace the restricted stock program, which was terminated at the end
of 2001. Based on guidelines established by the CIC, the LTIP covers the
granting of cash awards based on two independent elements: 1) a totally
discretionary award based on operating performance of the Company covering a
period greater than one year and less than four years and 2) an award based on
the attainment of a target stock price of $50 per share during 10 consecutive
trading days prior to the fourth anniversary of the plan.
As of December 31, 2003, no accrual for awards under the LTIP was
made since it was not possible to estimate the amount of such awards, if any,
which was earned.
During January 2004, the price of the Company's stock exceeded $50
per share for more than 10 consecutive trading days. In February 2004, the 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, totaled $9.1 million. Of this
amount, $8,783,000 relates to continuing operations and is included in other
expenses for 2004 ($5,437,000 aftertax).
During June 2004, 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
hurdles 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 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 hurdles 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 total cost of these awards is $1,071,000, based on the fair
value of the stock on June 22, 2004. Of this amount, $1,037,000 relates to
continuing operations and is being amortized on a straight-line basis over the
42-month period ending December 31, 2007.
37
Chemed Corporation and Subsidiary Companies
As of December 31, 2004, no accrual for the cost of possible awards
under the remaining components of the 2004 LTIP Pool was made since it was not
probable at that time any of the awards would be earned and paid. On March 11,
2005, the CIC approved the grant of 12,500 shares of capital stock to key
employees. The award was based on the attainment of a $70.00 per share stock
price for 30 trading days in 2005 and includes 1,500 shares awarded from the
discretionary portion of the 2004 LTIP Pool. The approximate pretax cost of this
award, including payroll taxes and benefit costs, is $1,144,000 ($709,000
aftertax). This expense will be recorded in the first quarter of 2005.
20. CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES
Effective February 1, 2000, the Company completed an Exchange Offer
whereby stockholders exchanged 575,503 shares of capital stock for shares of
Preferred Securities of the wholly owned Chemed Capital Trust ("CCT") on a
one-for-one basis. The Preferred Securities, which carried a redemption value of
$27.00 per security, paid an annual cash distribution of $2.00 per security
(payable at the quarterly rate of $.50 per security commencing March 2000) and
were convertible into capital stock at a price of $37.00 per security. The
Preferred Securities had a maturity of 30 years from date of issuance and were
callable beginning March 15, 2003, at a price of $27.27 for each $27.00
principal amount. On March 15, 2004, and later, the Preferred Securities were
callable without premium.
Prior to redemption in 2004, the sole assets of the CCT were CJSDs
of the Company in the principal amount of $27 per security. The CJSDs were
scheduled to mature March 15, 2030, and the interest rate of the CJSDs was $2.00
per annum per $27.00 principal amount.
Effective January 1, 2004, we adopted the provisions of FIN 46R.
Under FIN 46R, the Company is not the primary beneficiary of the CCT and is not
permitted to consolidate the accounts of the CCT. As a result, we deconsolidated
the Preferred Securities of the CCT and replaced them in the Company's
consolidated balance sheet with the CJSDs, the sole assets of the CCT.
Distributions on the CJSDs are now classified as interest expense for all
periods presented.
On April 7, 2004, we announced the call 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 redeemed for 304,597 shares of capital stock
and 101,282 Preferred Securities were redeemed for $2,735,000 in cash. As a
result, at December 31, 2004, there are no CJSDs or Preferred Securities
outstanding.
The number of Preferred Securities purchased and converted and
shares of capital stock issued upon conversion are summarized below:
For the Years Ended December 31,
-------------------------------
2004 2003 2002
------- ----- -----
Preferred Securities purchased 101,282 - 1,533
Preferred Securities converted 422,002 2,229 432
Shares of Capital Stock issued upon
conversion of Preferred Securities 307,979 1,626 315
21. LOANS RECEIVABLE FROM INDEPENDENT CONTRACTORS
At December 31, 2004, the Company has contractual arrangements with
59 small businesses ("Independent Contractors") to provide plumbing repair and
drain cleaning services under sublicensing agreements using the Roto-Rooter name
in lesser-populated areas of the United States and Canada. The arrangements give
the Independent Contractors the right to conduct a plumbing and drain cleaning
business using the Roto-Rooter name in a specified territory in exchange for a
royalty based on a percentage of cash labor sales, generally approximately 40%.
The Company also pays for yellow pages advertising in these areas and provides
operating manuals to be used as guidelines for operating a plumbing and drain
cleaning business. The contracts are generally cancelable upon 90 days' written
notice (without cause) or upon a few days' notice (with cause). The Independent
Contractors are responsible for running the businesses as they believe best.
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 Independent Contractors may be VIEs.
Due to the limited financial data available from these Independent Contractors
we have not been able to perform the required analysis to determine which, if
any, of these relationships are VIEs or if the Company is the primary
beneficiary of these potential VIE relationships. We are continuing to request
appropriate information to enable us to evaluate these potential VIE
relationships. We believe consolidation, if required, of the accounts of any
VIEs for which the Company might be the primary beneficiary would not materially
impact the Company's financial position or results of operations. Instead,
consolidation of some, if any, of these arrangements is more likely to result in
a "grossing up" of amounts such as revenues and expenses with no net change to
the Company's net income or cash flows.
38
Chemed Corporation and Subsidiary Companies
The Company's maximum exposure to loss from its arrangements with
its Independent Contractors at December 31, 2004, is approximately $2.8 million
($2.6 million at December 31, 2003). At December 31, 2004, the Company has notes
receivable from its Independent Contractors totaling $2,781,000 (December 31,
2003 - $2,599,000). In most cases, these loans are partially secured by
equipment owned by the contractor. The interest rates on the loans range from 5%
to 9% per annum, and the remaining terms of the loans range from one month to
six years at December 31, 2004. During 2004, the Company recorded revenues of
$16,360,000 (2003 - $14,125,000; 2002 - $12,350,000) and pretax profits of
$5,130,000 (2003 - $4,356,000; 2002 - $4,866,000) from all of its Independent
Contractors.
The Company has 13 contractors that entered into independent
contractor agreements with the Company during 2004 ("2004 Contractors"). The
Company has loans totaling $933,000 receivable from the 2004 Contractors that
are secured by equipment with an estimated value of $281,000. Information to
determine whether the Company's contractual interests, including the loans
receivable, are variable interests that are required to be consolidated under
FIN 46R is not available. Based on an analysis of Roto-Rooter's operating
results relative to these operations, management believes that consolidation of
these 13 businesses would not yield materially different results for the
Company. During 2004, the Company recorded $2,898,000 of service revenues and
combined operating income of $331,000 related to the 2004 Contractors.
22. 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 certification of a class of customers in 32 states
who allegedly paid for plumbing work performed by unlicensed employees.
Plaintiff also moved for partial summary judgment on grounds the licensed
apprentice plumber who installed his faucet did not work under the direct
personal supervision of a licensed master 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. In
December 2004, the Company reached a tentative resolution of this matter with
the plaintiff. This proposed settlement has not yet been finalized by the
parties nor approved by the court. Nonetheless, the Company, in anticipation of
such approval, accrued $3.1 million as the anticipated cost of settling this
litigation.
VITAS is party to a class action lawsuit filed in the Superior Court
of California, Los Angeles County, in April of 2004 by Ann Marie Costa, Ana
Jimenez, Mariea Ruteaya and Gracetta Wilson alleging failure to pay overtime
wages and to provide meal and break periods to California nurses, home health
aides and licensed clinical social workers. The Company contests these
allegations and believes them without merit. Due to the complex legal and other
issues involved, it is not presently possible to estimate the amount of
liability, if any, related to this case. Management cannot provide assurance the
Company will ultimately prevail in it. Regardless of outcome, such litigation
can 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, violated the Ohio Consumer Sales Practices
Act. The Company contended that the charge, which is included within the
estimate approved by its customers, is a fully disclosed component of its
pricing. Plaintiff dismissed the case without payment and with prejudice
following the Ohio Supreme Court's denial of review of the Eighth District Court
of Appeals decertification of this class action.
23. RELATED PARTY TRANSACTIONS
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 said term. Under the Agreement, VITAS made purchases
of $344,000 from OCR during 2004.
Mr. E. L. Hutton is nonexecutive Chairman of the Board and a
director of the Company and of OCR. Also, Mr. Joel F. Gemunder, President and
Chief Executive Officer of OCR, and Ms. Sandra E. Laney are directors of both
OCR and the Company. Nonetheless, we believe that the terms of the Agreement are
no less favorable to VITAS than we could negotiate with an unrelated party.
39
Chemed Corporation and Subsidiary Companies
24. CAPITAL STOCK SPLIT (UNAUDITED)
On March 11, 2005, the Board of Directors of the Company approved a
2-for-1 stock split in the form of a 100% stock dividend to shareholders of
record at the close of business on April 22, 2005. This stock split is not
reflected in these financial statements.
When the stock split becomes effective in April 2005, there will be
twice as many shares of capital stock outstanding as there were prior to the
split. Had the stock split occurred on December 31, 2004, the value of capital
stock would have increased $13,491,000 and the value of paid in capital would
have declined by the same amount, with no net effect on shareholders' equity.
Under Delaware law, the par value of the capital stock remains $1 per share.
Once the stock split is effective in 2005, all prior earnings per
share data will be restated to retroactively reflect the impact of the stock
split on the average number of shares outstanding (i.e. a doubling of the
average number of shares outstanding). Accordingly, the share and
earnings/(loss) per share data for 2004, 2003 and 2002 will be restated as
follows (in thousands, except per share data):
For the Years Ended December 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Earnings/(Loss) Per Share
Income from continuing operations $ 0.80 $ 0.56 $ 0.56
======== ======== ========
Net Income/(Loss) $ 1.14 $ (0.17) $ (0.13)
======== ======== ========
Diluted Earnings/(Loss) Per Share
Income from continuing operations $ 0.78 $ 0.56 $ 0.56
======== ======== ========
Net Income/(Loss) $ 1.12 $ (0.17) $ (0.13)
======== ======== ========
Average Number of Shares Outstanding
Earnings/(loss) per share 24,120 19,848 19,716
======== ======== ========
Diluted earnings/(loss) per share 24,636 19,908 19,770
======== ======== ========
40
SELECTED FINANCIAL DATA
Chemed Corporation and Subsidiary Companies
(in thousands, except per share and footnote data, ratios, percentages and
personnel)
2004(e) 2003 2002 2001 2000
--------- --------- --------- --------- ---------
SUMMARY OF OPERATIONS
Continuing operations (a)
Service revenues and sales ....................... $ 735,341 $ 260,776 $ 253,687 $ 269,353 $ 281,077
Gross profit (excluding depreciation) ............ 228,263 113,958 112,741 117,800 131,758
Depreciation ..................................... 14,542 9,519 10,424 10,750 10,469
Amortization ..................................... 3,779 302 152 3,737 3,664
Income/(loss) from operations (b) ................ 58,106 8,774 17,141 (10,609) 27,152
Income/(loss) from continuing operations (c) ..... 19,186 11,188 11,107 (10,052) 16,972
Net income/(loss) (c) ............................ 27,512 (3,435) (2,545) (12,185) 19,971
Earnings/(loss) per share
Income/(loss) from continuing operations ......... $ 1.59 $ 1.13 $ 1.13 $ (1.03) $ 1.73
Net income/(loss) ................................ 2.28 (0.35) (0.26) (1.25) 2.03
Average number of shares outstanding ............. 12,060 9,924 9,858 9,714 9,833
Diluted earnings/ (loss) per share
Income/ (loss) from continuing operations ........ $ 1.56 $ 1.12 $ 1.12 $ (1.03) $ 1.71
Net income/ (loss) ............................... 2.23 (0.35) (0.26) (1.25) 2.01
Average number of shares outstanding ............. 12,318 9,954 9,885 9,714 9,927
Cash dividends per share ............................ $ 0.48 $ 0.48 $ 0.45 $ 0.44 $ 0.40
Net income/(loss) excluding goodwill amortization (d)
Net income/(loss) ................................ $ 27,512 $ (3,435) $ (2,545) $ (7,564) $ 24,579
Earnings/(loss) per share ........................ 2.28 (0.35) (0.26) (0.78) 2.50
Diluted earnings/(loss) per share ................ 2.23 (0.35) (0.26) (0.78) 2.48
FINANCIAL POSITION--YEAR-END
Cash and cash equivalents ........................... $ 71,448 $ 50,688 $ 37,570 $ 8,348 $ 10,080
Working capital/(deficit) ........................... 28,439 32,778 20,075 9,732 (3,792)
Current ratio ....................................... 1.17 1.48 1.28 1.11 0.96
Properties and equipment, at cost less
accumulated depreciation ......................... $ 55,796 $ 31,440 $ 30,912 $ 36,728 $ 43,204
Total assets ........................................ 825,566 328,458 337,822 399,560 421,171
Long-term debt ...................................... 279,510 25,931 25,348 60,439 57,526
Convertible junior subordinated debentures .......... - 14,126 14,186 14,239 14,641
Stockholders' equity ................................ 332,092 192,693 198,422 204,160 211,451
OTHER STATISTICS--CONTINUING OPERATIONS
Capital expenditures ................................ $ 18,290 $ 10,381 $ 8,440 $ 9,761 $ 9,838
Number of employees ................................. 9,822 2,894 2,736 3,035 2,997
- ---------------------------
(a) Continuing operations exclude Service America, discontinued in 2004,
Patient Care, discontinued in 2002, and Cadre Computer Resources,
discontinued in 2001.
(b) Income/(loss) from operations includes payouts under the Company's 2002
Executive Long-term Incentive Plan of $8,783,000, the estimated cost for
the anticipated settlement of a lawsuit of $3,135,000, expenses related to
debt registration of $1,191,000, and additional VITAS transaction costs
and adjustments of $442,000 in 2004, severance charges of $3,627,000 in
2003, and restructuring and similar expenses and other charges of
$24,448,000 in 2001.
(c) Income/(loss) from continuing operations and net income/(loss) includes
payouts under the Company's 2002 Executive Long-term Incentive Plan of
$5,437,000 aftertax, the prepayment penalty incurred on the early
extinguishment of the Company's debt of $2,030,000 aftertax, the estimated
cost for the anticipated settlement of a lawsuit of $1,897,000 aftertax,
expenses related to debt registration of $727,000 aftertax, the Company's
aftertax share of VITAS' charges related to the Company's acquisition of
VITAS amounting to $4,621,000, additional VITAS transaction costs and
adjustments of $222,000 aftertax, and favorable tax adjustments and
settlements from prior year returns of $1,620,000 aftertax in 2004,
severance charges of $2,358,000 aftertax in 2003, and the prepayment
penalty incurred on the early extinguishment of the Company's debt of
$1,701,000 aftertax and restructuring and similar expenses and other
charges of $15,271,000 aftertax in 2001. Aftertax capital gains on the
sales and redemption of investments for the years 2003 through 2000
amounted to $3,351,000, $775,000, $703,000, and $2,261,000, respectively.
In accordance with FASB Statement No. 142, amortization of goodwill ceased
December 31, 2001. Aftertax amortization of goodwill for continuing
operations for the years 2001 and 2000 was $3,081,000 and $3,063,000,
respectively.
(d) In accordance with FASB Statement No. 142, amortization of goodwill ceased
December 31, 2001. Aftertax amortization of goodwill for all operations
for the years 2001 and 2000 was $4,621,000 and $4,608,000, respectively.
(e) The financial results of VITAS are included in the consolidated results of
the Company beginning on February 24, 2004, the date the Company acquired
the remaining 63% of VITAS it did not over, bringing its ownership in
VITAS to 100%.
41
UNAUDITED SUMMARY OF QUARTERLY RESULTS
Chemed Corporation and Subsidiary Companies
(in thousands, except per share and footnote data)
FIRST SECOND THIRD FOURTH TOTAL
FOR THE YEAR ENDED DECEMBER 31, 2004 QUARTER QUARTER QUARTER QUARTER YEAR
- -------------------------------------------------------- --------- --------- --------- --------- ---------
CONTINUING OPERATIONS
TOTAL SERVICE REVENUES AND SALES ........................ $ 120,340 $ 199,135 $ 201,885 $ 213,981 $ 735,341
========= ========= ========= ========= =========
GROSS PROFIT ............................................ $ 41,491 $ 59,065 $ 59,755 $ 67,952 $ 228,263
========= ========= ========= ========= =========
INCOME FROM OPERATIONS (a,b,c,d) ........................ $ 974 $ 20,763 $ 20,289 $ 16,080 $ 58,106
INTEREST EXPENSE ........................................ (2,900) (6,204) (6,083) (5,971) (21,158)
LOSS ON EXTINGUISHMENT OF DEBT .......................... (3,330) - - (3,330)
OTHER INCOME-NET ........................................ 1,479 149 336 1,505 3,469
--------- --------- --------- --------- ---------
INCOME/(LOSS) BEFORE INCOME TAXES (a,b,c,d) .......... (3,777) 14,708 14,542 11,614 37,087
INCOME TAXES (e) ........................................ 626 (6,381) (3,805) (4,236) (13,796)
EQUITY IN LOSS OF AFFILIATE (f) ......................... (4,105) - - - (4,105)
--------- --------- --------- --------- ---------
INCOME/(LOSS) FROM CONTINUING OPERATIONS (a,b,c,d,e,f)... (7,256) 8,327 10,737 7,378 19,186
DISCONTINUED OPERATIONS ..................................... 146 (9) (125) 8,314 8,326
--------- --------- --------- --------- ---------
NET INCOME/(LOSS) (a,b,c,d,e,f).............................. $ (7,110) $ 8,318 $ 10,612 $ 15,692 $ 27,512
========= ========= ========= ========= =========
EARNINGS/(LOSS) PER SHARE (a,b,c,d,e,f)
INCOME/(LOSS) FROM CONTINUING OPERATIONS ................ $ (0.66) $ 0.68 $ 0.86 $ 0.59 $ 1.59
========= ========= ========= ========= =========
NET INCOME/(LOSS) ....................................... $ (0.65) $ 0.67 $ 0.85 $ 1.26 $ 2.28
========= ========= ========= ========= =========
DILUTED EARNINGS/(LOSS) PER SHARE (a,b,c,d,e,f)
INCOME/(LOSS) FROM CONTINUING OPERATIONS ................ $ (0.66) $ 0.66 $ 0.85 $ 0.57 $ 1.56
========= ========= ========= ========= =========
NET INCOME/(LOSS) ....................................... $ (0.65) $ 0.66 $ 0.84 $ 1.22 $ 2.23
========= ========= ========= ========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING
EARNINGS/(LOSS) PER SHARE ............................... 10,912 12,325 12,470 12,497 12,060
========= ========= ========= ========= =========
DILUTED EARNINGS/(LOSS) PER SHARE ....................... 10,912 12,677 12,701 12,836 12,318
========= ========= ========= ========= =========
- ---------------------------
(a) Amounts include a pretax charge of $8,783,000 ($5,723,000 aftertax) from
payouts under the Company's 2002 Executive Long-term Incentive Plan in the
first quarter and for the year except as follows: during the third
quarter, the Company adjusted its effective tax rate resulting in a
reduction in the aftertax amount to $5,437,000 for the year.
(b) Amounts include a pretax charge of $3,135,000 ($1,897,000 aftertax) from
the proposed settlement of a lawsuit in the fourth quarter and for the
year.
(c) Amounts include a pretax charge of $1,191,000 ($727,000 aftertax) for
expenses related to debt registration in the fourth quarter and for the
year.
(d) Amounts include VITAS transaction costs and adjustments as follows: second
quarter - a credit of $1,368,000 ($821,000 aftertax); third quarter- a
credit of $219,000 ($131,000 aftertax); fourth quarter - a charge of
$2,029,000 ($1,174,000 aftertax); for the year - a charge of $442,000
($222,000 aftertax).
(e) Amounts include favorable prior-period tax adjustments and settlements as
follows: third quarter - $2,118,000; fourth quarter - $600,000; for the
year - $1,620,000.
(f) Amount includes equity in the loss of VITAS prior to the Company's
acquiring control of 100% of VITAS.
42
UNAUDITED SUMMARY OF QUARTERLY RESULTS
Chemed Corporation and Subsidiary Companies
(in thousands, except per share and footnote data)
First Second Third Fourth Total
For the Year Ended December 31, 2003 Quarter Quarter Quarter Quarter Year
- --------------------------------------------- --------- --------- --------- --------- ---------
Continuing Operations
Total service revenues and sales .......... $ 64,725 $ 64,592 $ 63,342 $ 68,117 $ 260,776
========= ========= ========= ========= =========
Gross profit .............................. $ 28,286 $ 28,434 $ 27,759 $ 29,479 $ 113,958
========= ========= ========= ========= =========
Income from operations (a) ................ $ 2,327 $ 3,578 $ 2,270 $ 599 $ 8,774
Interest expense .......................... (796) (858) (747) (776) (3,177)
Other income--net (b,c) ................... 4,177 2,334 2,983 1,355 10,849
--------- --------- --------- --------- ---------
Income before income taxes (a,b,c) 5,708 5,054 4,506 1,178 16,446
Income taxes .............................. (2,190) (1,789) (1,644) (557) (6,180)
Equity in earnings of affiliate (d) ....... - - - 922 922
--------- --------- --------- --------- ---------
Income from continuing operations (a,b,c,d) 3,518 3,265 2,862 1,543 11,188
Discontinued Operations ....................... 39 35 51 (14,748) (14,623)
--------- --------- --------- --------- ---------
Net Income/(Loss) (a,b,c,d).................... $ 3,557 $ 3,300 $ 2,913 $ (13,205) $ (3,435)
========= ========= ========= ========= =========
Earnings/(Loss) Per Share (a,b,c,d)
Income from continuing operations ......... $ 0.36 $ 0.33 $ 0.29 $ 0.16 $ 1.13
========= ========= ========= ========= =========
Net income/(loss) ......................... $ 0.36 $ 0.33 $ 0.29 $ (1.33) $ (0.35)
========= ========= ========= ========= =========
Diluted Earnings/(Loss) Per Share (a,b,c,d)
Income from continuing operations ......... $ 0.36 $ 0.33 $ 0.29 $ 0.15 $ 1.12
========= ========= ========= ========= =========
Net income/(loss) ......................... $ 0.36 $ 0.33 $ 0.29 $ (1.32) $ (0.35)
========= ========= ========= ========= =========
Average number of shares outstanding
Earnings/(loss) per share ................. 9,890 9,908 9,941 9,954 9,924
========= ========= ========= ========= =========
Diluted earnings/(loss) per share ......... 9,903 9,942 9,988 10,000 9,954
========= ========= ========= ========= =========
- ---------------------------
(a) Amounts include a pretax charge of $3,627,000 ($2,358,000 aftertax or
$.24 per share) from severance charges in the first quarter and for the
year.
(b) Amounts include a pretax gain of $1,846,000 ($1,200,000 aftertax or $.12
per share) from the redemption of VITAS preferred stock in the third
quarter and for the year.
(c) Amounts include a pretax capital gain of $3,544,000 ($2,151,000 aftertax
or $.22 per share) from the sales of investments in the third quarter and
for the year.
(d) Amount includes equity in the earnings of VITAS prior to the Company's
acquiring control of 100% of VITAS.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Chemed Corporation and Subsidiary Companies
LIQUIDITY AND CAPITAL RESOURCES
Significant factors affecting our cash flows during 2004 and financial
position at December 31, 2004, include the following:
- Our continuing operations generated cash of $89.7 million, including
income tax refunds totaling $14.6 million relating to the VITAS
pre-acquisition expenses;
- We spent net cash of $344.7 million on business combinations,
including $323.8 million for the 63% of VITAS we did not previously
own;
- We received $280.6 million of net proceeds from the issuance of
long-term debt (net of issuance costs) and issued two million shares
of capital stock for $95.1 million, net of costs;
- We repaid $96.9 million of long-term debt, including $67.0 million
of VITAS' debt; and,
- We spent $18.3 million on capital expenditures.
The ratio of total debt to total capital was 46.8% at December 31, 2004,
as compared with 17.3% at December 31, 2003. The Company's current ratio at
December 31, 2004, was 1.2 as compared with 1.5 at December 31, 2003.
We had $72.1 million of unused lines of credit at December 31, 2004. After
the February 2005 modification of our debt agreements, we have $147.6 million of
unused lines of credit eligible to be drawn down.
CASH FLOW
The Company's cash flows for 2004, 2003 and 2002 are summarized as follows
(in millions):
For the Years Ended December 31,
------------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Net cash provided by operating activities $ 94.20 $ 22.90 $ 29.70
Capital expenditures (18.3) (10.4) (8.4)
----------- ----------- -----------
Operating cash excess after capital expenditures 75.9 12.5 21.3
Business combinations (344.7) (3.9) (1.2)
Proceeds from issuance of long-term debt, net of costs 280.6 - 5
Repayment of long-term debt (96.9) - (40.1)
Issuance of capital stock, net of costs 95.1 - -
Return/(payment) of VITAS merger deposit 10 (10) -
Net proceeds/(uses) from sale of discontinued operations (0.8) 1.1 50.7
Proceeds from redemption of available-for-sale securities - 27.3 -
Investment in VITAS equity interest - (18) -
Other--net 1.6 4.1 (6.5)
----------- ----------- -----------
Increase in cash and cash equivalents $ 20.80 $ 13.10 $ 29.20
=========== =========== ===========
For 2004, the operating cash excess after capital expenditures was $75.9
million as compared with $12.5 million in 2003 and $21.3 million in 2002. This
excess was used to reduce long-term debt in 2004. In 2003, this excess, along
with the proceeds from the redemption of VITAS preferred stock, was used to
purchase 37% of VITAS common stock, to place a deposit of $10.0 million to
secure the Company's merger offer for VITAS' remaining common stock, to pay cash
dividends and to increase the Company's available cash and cash equivalents. For
2002, the operating excess after capital expenditures and the proceeds from the
sale of Patient Care were used to retire funded debt, to pay cash dividends and
to increase the Company's available cash and cash equivalents.
44
Chemed Corporation and Subsidiary Companies
COMMITMENTS AND CONTINGENCIES
In connection with the sale of DuBois Chemicals, Inc. ("DuBois") in 1991,
the Company provided allowances and accruals relating to several long-term
costs, including income tax matters, lease commitments and environmental costs.
Also, in conjunction with the sales of The Omnia Group ("Omnia") and National
Sanitary Supply Company in 1997, the sale of Cadre Computer Resources, Inc.
("Cadre Computer") in 2001 and the discontinuance of Service America Network
Inc. ("Service America") in 2004, the Company provided long-term allowances and
accruals relating to costs of severance arrangements, lease commitments and
income tax matters. Additionally, we will retain liability for Service America's
casualty insurance claims that were incurred prior to the disposal date. At
December 31, 2004 Service America's accrued insurance liability is approximately
$3.7 million. In the aggregate, the Company believes these allowances and
accruals are adequate as of December 31, 2004. We anticipate incurring
additional losses of approximately $800,000 in 2005 related largely to
finalizing severance, lease and other arrangements when the disposal of Service
America is completed in 2005. When the disposal of Service America closes, we
will contribute cash of approximately $4.7 million to the purchasing company
($1.0 million payable at closing, the remainder payable in 11 equal monthly
payments during the year following closing). Based on reviews of its
environmental-related liabilities under the DuBois sale agreement, the Company
has estimated its remaining liability to be $3.0 million. As of December 31,
2004, the Company is contingently liable for additional cleanup and related
costs up to a maximum of $16.0 million, for which no provision has been recorded
in accordance with the applicable accounting guidance.
In connection with the sale of Patient Care in 2002, $5.0 million of the
cash purchase price was placed in escrow pending collection of third-party payer
receivables on Patient Care's balance sheet at the sale date. To date, $4.2
million has been returned and the remainder is being withheld pending the
settlement of certain third-party payer claims. Based on Patient Care's
collection history, we believe that the significant majority of the disputed
amounts will be resolved in Patient Care's favor and most of the withheld escrow
will be returned to the Company. We also have accounts receivable from Patient
Care for the post-closing balance sheet valuation ($1,251,000) and for expenses
paid by us after closing on Patient Care's behalf. The Company is in litigation
with Patient Care over various issues, including the collection of these
amounts. We believe these balances represent valid claims, are fairly stated and
are fully collectible; nonetheless, an unfavorable determination by the courts
could result in the write-off of all or a portion of these balances.
The Company's various loan agreements and guarantees of indebtedness as of
December 31, 2004, contained certain restrictive covenants. The Company was in
compliance with all of the covenants at that time. In February 2005, the Company
called all $110 million of its Floating Rate Notes due 2010 and amended and
restated its credit agreement with JPMorgan Chase Bank ("ARCA"). We borrowed
$88.5 million under ARCA and used $54.4 million of our cash to retire the
Floating Rate Notes and our previous term loan ($30.5 million). As a result of
prepaying the Floating Rate Notes, we incurred a prepayment penalty of $1.1
million and wrote off $2.3 million of deferred issuance costs in the first
quarter of 2005. The interest rates under ARCA are tied to LIBOR and are lower
than rates under the Floating Rate Notes and our previous credit agreement with
JPMorgan Chase. We anticipate realizing annual interest savings of $3.3 million
beginning in March 2005.
LIQUIDITY AND COMMITMENTS AFTER DEBT REFINANCING IN 2005
The table below summarizes the Company's debt and contractual obligations,
giving effect to the 2005 debt refinancing and modifications (in thousands):
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
---------- ----------- ----------- ----------- ---------
Long-term debt obligations $ 239,708 $ 1,103 $ 2,112 $ 2,031 $ 234,462
Operating lease obligations 60,387 17,169 21,587 11,615 10,016
Severance obligations 4,785 2,200 2,231 354 -
Purchase obligations (a) 37,777 37,777 - - -
Other current obligations (b) 17,030 17,030 - - -
Other long-term obligations (c) 25,385 1,253 3,317 2,504 18,311
---------- ----------- ----------- ----------- ---------
Total contractual cash obligations $ 385,072 $ 76,532 $ 29,247 $ 16,504 $ 262,789
========== =========== =========== =========== =========
- -----------------
(a) Purchase obligations primarily consist of accounts payable at December 31,
2004.
(b) Other current obligations consist of accrued salaries and wages at December
31, 2004.
(c) Other long-term obligations comprises largely pension and excess benefit
obligations.
45
Chemed Corporation and Subsidiary Companies
Collectively, our debt agreements provide that the Company will be required to
meet the following financial covenants, to be tested quarterly, beginning with
the quarter ending March 31, 2005:
- a minimum net worth requirement, which requires a net worth of at
least (i) 85% of consolidated net worth at December 31, 2004, plus
(ii) 50% of consolidated net income (if positive) earned in each
fiscal quarter beginning with the quarter ending March 31, 2005,
plus (iii) the amount of all net cash proceeds resulting from
issuances of capital stock of the Company or any subsidiary or other
equity interest to a person other than the Company or a subsidiary.
At December 31, 2004, our net worth was $332.1 million versus a
requirement of $282.3 million;
- a maximum leverage ratio, calculated quarterly, based upon the ratio
of consolidated funded debt to consolidated EBITDA, which requires
maintenance of a ratio of 5.5 to 1.00 through December 31, 2004, a
ratio of 4.00 to 1.00 from January 1, 2005 through December 31,
2006, a ratio of 3.75 to 1.00 from January 1, 2007 through December
31, 2008, and 3.50 to 1.00 thereafter. At February 28, 2005, our
leverage ratio was 2.78 to 1.00;
- 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 requires maintenance of a ratio of 3.375 to 1.00
through December 31, 2004, a ratio of 3.00 to 1.00 from January 1
through December 31, 2005, and 2.75 to 1.00 thereafter. At February
28, 2005, our senior leverage ratio was 1.21 to 1.00; 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 requires maintenance of a
ratio of 1.15 to 1.00 through December 31, 2004, 1.25 to 1.00 from
January 1 through December 31, 2005, 1.375 to 1.00 from January 1
through December 31, 2006, and 1.50 to 1.00 thereafter. For 2004,
our fixed charge coverage ratio was 1.44 to 1.00.
Among other provisions, the debt agreements provide for the
following:
- a maximum annual limit for acquisitions of $80 million (no single
acquisition to exceed $50 million),
- a maximum annual limit for operating lease payments of $30 million,
and
- a maximum annual capital expenditure limit of $30 million.
We are in compliance with all of our debt covenants as of December 31,
2004 and project that we will remain in compliance during 2005. It is our
opinion that the Company has no long-range commitments that will have a
significant impact on its liquidity, financial condition or the results of its
operations in the foreseeable future. Due to the nature of the environmental
liabilities, we are not able to forecast the timing of the cash payments for
these potential liabilities. Based on the Company's available credit lines,
sources of borrowing and cash and cash equivalents, management believes its
sources of capital and liquidity are satisfactory for the Company's needs for
the foreseeable future.
The debt refinancing in 2005 has reduced the Company's variable interest
rate debt from $140.5 million at December 31, 2004 to $88.5 million at February
28, 2005. Nonetheless, our annual interest expense will increase or decrease
$885,000 for each percentage point increase or decrease in LIBOR during the
period.
46
Chemed Corporation and Subsidiary Companies
RESULTS OF OPERATIONS
2004 VERSUS 2003-CONSOLIDATED RESULTS
Set forth below are the year-to-year changes in the components of the
statement of operations relating to continuing operations for 2004 versus 2003
(in thousands, except percentages):
Increase/(Decrease)
---------------------------
Amount Percent
---------- -------
Service revenues and sales
VITAS $ 458,730 n.a.%
Roto-Rooter 15,835 6
----------
Total 474,565 182
Cost of services provided and goods sold 360,260 245
Selling, general and administrative expenses 42,922 45
Depreciation 5,023 53
Amortization 3,477 1,151
Other expenses 13,551 n.a.
----------
Income from operations 49,332 562
Interest expense 17,981 566
Loss on extinguishment of debt 3,330 n.a.
Other income--net (7,380) (68)
----------
Income before income taxes 20,641 126
Income taxes 7,616 123
Equity in loss of affiliate (5,027) n.a.
----------
Income from continuing operations $ 7,998 71%
==========
The Company's service revenues and sales for the year ended December 31,
2004 increased $474.6 million, or 182%, versus revenues for the year ended
December 31, 2003. The VITAS segment, acquired in February 2004, accounted for
$458.7 million of this increase and Roto-Rooter accounted for the remaining
$15.8 million of the increase. VITAS' revenues for 2004 comprised the following
(in thousands):
Routine homecare $ 316,374
Continuous care 78,669
General inpatient 63,051
Other 636
---------
Total revenues $ 458,730
=========
The increase in Roto-Rooter's service revenues and sales for 2004 versus
2003 is attributable to the following (in thousands):
Plumbing $ 6,052
Sewer and drain cleaning 5,740
Other 4,043
---------
Total increase $ 15,835
=========
Plumbing revenues for 2004 increased $6,052,000, or 6.0%, versus revenues for
2003 due to a 4.4% increase in the number of jobs performed and a 1.6% increase
in the average price per job. Sewer and drain cleaning revenues increased
$5,740,000 or 5.4%, versus revenues for 2003 due to a .5% decline in the number
of jobs which was more than offset by a 5.9% increase in the average price per
job. On a same-store basis, the number of plumbing jobs increased 4.9% and the
number of sewer and drain cleaning jobs declined .7%. The increase in other
revenues is attributable primarily to increases in independent contractor
operations and other services.
The consolidated gross margin was 31.0% in 2004 as compared with 43.7% in
2003 largely due to the acquisition of VITAS in 2004. On a segment basis, VITAS'
gross margin was 22.2% and Roto-Rooter's gross margin increased from
47
Chemed Corporation and Subsidiary Companies
43.7% in 2003 to 45.7% in 2004. This increase is largely due to lower training
wages as a percent of revenues in 2004 versus 2003 and lower health insurance
costs as a percent of revenues in 2004.
Selling, general and administrative expenses ("SG&A") for 2004 increased
$42,922,000 versus 2003 as summarized below (in thousands):
VITAS SG&A for 2004 $ 42,946
Corporate severance in 2003 (3,627)
Professional fees at the Corporate Office related to complying with the
internal controls provisions of the Sarbanes-Oxley Act 2,301
Higher Roto-Rooter advertising costs in 2004 2,226
Other (924)
-----------
Total increase $ 42,922
===========
Depreciation for 2004 increased $5,023,000, or 53%, versus 2003 primarily
as a result of the VITAS acquisition. Similarly, most of the increase in
amortization is attributable to the amortization of VITAS' intangible assets,
including the referral network and the covenant not to compete.
Income from operations for 2004 increased $49,332,000 versus 2003 as
summarized below (in thousands):
VITAS income from operations for 2004 $ 48,242
Higher gross profit of the Roto-Rooter segment in 2004 12,377
Long-term incentive compensation in 2004 (8,783)
Corporate Office severance in 2003 3,627
Anticipated cost in 2004 of settling Roto-Rooter litigation (3,135)
Professional fees at the Corporate Office related to complying with the
internal controls provisions of the Sarbanes-Oxley Act (2,301)
Other (695)
-----------
Total increase $ 49,332
===========
Our effective income tax rate was 37.2% in 2004 versus 37.6% in 2003.
Favorable income tax adjustments in 2004 related to prior-period tax issues
reduced our effective rate by 4.7 percentage points. Our effective state and
local income tax rate for 2004 was 6.1% as compared with 4.4% for 2003. This
increase is due largely to the higher effective state and local tax rate of
VITAS. We anticipate that future tax planning in 2005 will yield an overall
effective income tax rate between 39% and 40% of income before income taxes.
Income from continuing operations for 2004 increased $7,998,000 versus
2003 as summarized below (in thousands):
Net income of VITAS in 2004 $ 29,139
Higher net income of Roto-Rooter 5,619
Higher interest costs in 2004 related to debt incurred to fund the
acquisition of VITAS (11,314)
Long-term incentive compensation for the Corporate Office in 2004 (4,455)
Equity in the loss of VITAS prior to the merger in 2004 (4,105)
Capital gains on the sales and redemption of available-for-sale
investments in 2003 (3,351)
Income from VITAS' preferred dividend and equity earnings in 2003 (2,507)
Corporate severance in 2003 2,358
Loss on extinguishment of debt in 2004 (2,030)
Professional fees at the Corporate Office related to complying with the
internal controls provisions of the Sarbanes-Oxley Act (1,461)
Favorable income tax adjustments in 2004 for the Corporate Office related
to prior years' issues 990
Professional fees related to registering debt in 2004 (727)
Other (158)
--------
Total increase $ 7,998
========
48
Chemed Corporation and Subsidiary Companies
Income/(loss) from discontinued operations for 2004 and 2003 follows (in
thousands):
For the Years Ended
December 31,
--------------------------------
2004 2003
------- ---------
Service America 8,559 (14,687)
Adjustment to accruals of operations discontinued in prior years
(233) 64
------- ---------
Income/(loss) from discontinued operations $ 8,326 $ (14,623)
======= =========
For 2004, the gain for Service America includes an estimated tax benefit on the
disposal of approximately $14.2 million, primarily due to the recognition of
non-deductible goodwill impairment losses in prior years. We anticipate the
disposal will be completed in the first half of 2005 and that during 2005 we
will incur pretax losses from Service America of approximately $800,000. These
adjustments are primarily related to employee severance, legal and other issues
arising during 2005 and to the recognition of other costs and adjustments not
incurred as of December 31, 2004. For 2003, the loss from Service America
includes aftertax impairment charges of $14,363,000. Of this amount, $10,037,000
was for goodwill impairment and the remainder was for impairment of computer
software and identifiable intangible assets.
The adjustments to accruals related to operations discontinued in prior
years primarily include favorable adjustments to accruals for note receivable
losses on the sale of Cadre Computer (discontinued in 2001) and unfavorable
adjustments to accruals related to the sale of DuBois in 1991. Cadre Computer
has been operating profitably since 2001 and is current on all amounts due the
Company. As a result, we reduced our allowances for losses on these notes
receivable from $422,000 at December 31, 2002 to $323,000 at December 31, 2003
and to nil at December 31, 2004. Adjustments to the DuBois accruals relate to
environmental liabilities we retained upon the sale of DuBois in 1991. We
believe amounts accrued are reasonable under the circumstances, but due to the
nature of the liabilities, we could be required to increase the accrual in
future years to cover additional charges.
2004 VERSUS 2003 - SEGMENT RESULTS
During 2004, VITAS generated net income of $29,139,000. These earnings
included aftertax transaction expenses totaling $1,008,000 related to the
Company's acquisition of VITAS in 2004. VITAS' average daily census ("ADC")
during 2004 increased from 7,979 during the fourth quarter of 2003 to 9,134
during the fourth quarter of 2004. During that same period, the quarterly
average length of stay increased from 59.0 days to 64.1 days, and the median
length of stay was 12.0 days during the fourth quarters of both 2004 and 2003.
Roto-Rooter's net income increased $5,619,000 (42.6%) from $13,176,000
during 2003 to $18,795,000 during 2004 as summarized below (in thousands):
Aftertax impact of higher gross profit in 2004 $ 7,649
Anticipated cost in 2004 of settling litigation (1,897)
Roto-Rooter's share of long-term compensation in 2004 (982)
Favorable income tax adjustments in 2004 related to prior years' issues 630
Other 219
-------
Total increase $ 5,619
=======
49
Chemed Corporation and Subsidiary Companies
Net Corporate aftertax expenses increased $21,733,000 from $2,910,000 in
2003 to $24,643,000 in 2004 as summarized below (in thousands):
Higher interest costs in 2004 related to debt incurred to fund the acquisition of VITAS $ 11,314
Corporate Office share of long-term compensation in 2004 4,455
Capital gains on the sales and redemption of available-for-sale investments in 2003 3,351
Corporate severance in 2003 (2,358)
Loss on extinguishment of debt in 2004 2,030
Income from VITAS preferred dividend in 2003 1,585
Professional fees at the Corporate Office related to complying with the
internal controls provisions of the Sarbanes-Oxley Act 1,461
Favorable income tax adjustments in 2004 for the Corporate Office related to prior years' issues (990)
Professional fees related to registering debt in 2004 727
Other 158
--------
Total increase $ 21,733
========
2003 VERSUS 2002 - CONSOLIDATED RESULTS
Set forth below are the year-to-year changes in the components of the
statement of operations relating to continuing operations for 2003 versus 2002
(in thousands, except percentages):
Increase/(Decrease)
------------------------
Amount Percent
-------- -------
Service revenues and sales $ 7,089 3%
Cost of services provided and goods sold 5,872 4
Selling, general and administrative expenses 10,339 12
Depreciation (905) (9)
Amortization 150 99
--------
Income from operations (8,367) (49)
Interest expense (771) (20)
Other income--net 6,902 175
--------
Income before income taxes (694) (4)
Income taxes 147 2
Equity in earnings/(loss) of affiliate 922 n.a.
--------
Income from continuing operations $ 81 1%
========
For 2003 and prior years, the Roto-Rooter segment was the only operating
segment in the Company's continuing operations. Within this segment, plumbing
repair and maintenance revenues increased $2,778,000, or 2.8%, drain cleaning
revenues were even with the prior year, contractor revenues increased
$1,775,000, or 14.4%, and other revenues increased $2,534,000, or 7.0%.
Of the increase in plumbing revenues, 2.4 percentage points are
attributable to an increase in the number of jobs completed during the year. The
remainder is attributable to an increase in the average price per job. The drain
cleaning business experienced a 2.8% decline in the number of jobs completed
during 2003 and a 2.8% increase in the average price per job. On a same-store
basis, the number of plumbing jobs increased 3.0% and the number of sewer and
drain cleaning jobs declined 2.9%. Of the 14.4% increase in contractor revenues,
5 percentage points are attributable to locations acquired in 2003. The gross
margin of the Roto-Rooter segment declined from 44.4% in 2002 to 43.7% in 2003,
primarily as a result of higher training wages in 2003. The increase in training
wages was directly attributable to hiring more service technicians in 2003.
50
Chemed Corporation and Subsidiary Companies
Selling, general and administrative expenses for 2003 increased
$10,339,000, or 12%, versus 2002 as summarized below (in thousands):
Corporate severance in 2003 $ 3,627
Expense charges from market-value adjustments to the deferred
compensation liabilities in 2003 versus expense credits from such
adjustments in 2002 2,769
Higher employee recruiting costs in 2003 as the result of hiring more service technicians 542
Higher legal fees in 2003 related to the costs of defending class action litigation 485
Other 2,916
--------
Total increase $ 10,339
========
Depreciation expense for 2003 declined $905,000, or 9%, versus 2002. This
decline is attributable to reduced capital expenditures over the past several
years, largely related to service vans.
The Company's income from operations declined $8,367,000 (49%) from
$17,141,000 in 2002 to $8,774,000 in 2003 as summarized below (in thousands):
Corporate severance in 2003 $(3,627)
Expense charges from market-value adjustments to the deferred
compensation liability in 2003 versus expense credits from such
adjustments in 2002 (2,769)
Other increases in operating expenses (1,971)
-------
Total decline $(8,367)
=======
The $771,000 decline in interest expense from 2002 to 2003 is attributable
to lower debt levels and lower interest rates in 2003.
Other income--net increased $6,902,000 from $3,947,000 in 2002 to
$10,849,000 in 2003, primarily as a result of the following (in thousands):
Higher capital gains on the sales and redemption of available-for-sale investments in 2003 $ 4,249
Gainson market-value adjustments to the deferred compensation
investments in 2003 versus losses on such adjustments in 2002 2,769
Impairment loss on available-for-sale investment in 2002 1,200
Eight months' dividend income on VITAS preferred stock in 2003 versus 12 months in 2002 (898)
Other (418)
--------
Total increase $ 6,902
========
The Company's effective income tax rate for continuing operations was
37.6% in 2003 as compared with 35.2% in 2002. The higher effective rate in 2003
is due primarily to unfavorable adjustments related to prior years issues in
2003 versus favorable adjustments in 2002.
Income from continuing operations increased $81,000 from $11,107,000 in
2002 to $11,188,000 in 2003 as summarized below (in thousands):
Higher capital gains on the sales and redemption of available-for-sale investments in 2003
($3,351 in 2003 versus $775 in 2002) $ 2,576
Corporate severance in 2003 (2,358)
Impairment loss on available-for-sale investment in 2002 780
Other (917)
-------
Total increase $ 81
=======
51
Chemed Corporation and Subsidiary Companies
The loss from discontinued operations for 2003 and 2002 follows (in
thousands):
For the Years Ended
December 31,
--------------------
2003 2002
-------- --------
Service America $(14,687) $(19,961)
Patient Care - 3,395
Adjustment to accruals of operations discontinued in prior years 64 2,914
-------- --------
Loss from discontinued operations $(14,623) $(13,652)
======== ========
For 2003, the loss from Service America includes aftertax impairment charges of
$14,363,000. Of this amount, $10,037,000 was for goodwill impairment and the
remainder was for impairment of computer software and identifiable intangible
assets. For 2002, the loss from Service America includes an aftertax charge of
$20,342,000 for the impairment of goodwill.
For 2002, income from Patient Care includes an aftertax gain of $304,000
from the disposal of Patient Care and aftertax income from Patient Care
operations of $3,091,000.
For 2002, the adjustments to accruals related to operations discontinued
in prior years primarily include favorable adjustments to accruals for note
receivable losses on the sale of Cadre Computer Resources (discontinued in
2001), unfavorable adjustments to accruals related to the sale of DuBois in 1991
and a federal income tax refund of $2,861,000 related to the sale of Omnia in
1997. The allowances for losses on the Cadre Computer notes receivable were
reduced from $899,000 at December 31, 2001 to $422,000 at December 31, 2002 and
to $323,000 at December 31, 2003. These reductions were based on Cadre
Computer's improved financial condition. Adjustments to the DuBois accruals in
2002 relate primarily to lease liabilities we retained upon the sale of DuBois
in 1991.
2003 VERSUS 2002 - SEGMENT RESULTS
Net income of the Roto-Rooter segment declined $932,000, or 6.6%, from
$14,108,000 in 2002 to $13,176,000 in 2003. This decline is attributable largely
to higher training and recruiting costs and higher legal costs in 2003.
Net Corporate aftertax expenses declined $91,000 from $3,001,000 in 2002
to $2,910,000 in 2003 as summarized below (in thousands):
Higher capital gains on the sales and redemption of available-for-sale investments in 2003
($3,351 in 2003 versus $775 in 2002) $ 2,576
Corporate severance in 2003 (2,358)
Impairment loss on available-for-sale investment in 2002 780
Other (907)
-------
Total $ 91
=======
CRITICAL ACCOUNTING POLICIES
INSURANCE ACCRUALS
For the Roto-Rooter segment, Chemed's Corporate Office and Chemed's
discontinued Service America segment, the Company self-insures for all casualty
insurance claims (workers' compensation, auto liability and general liability).
As a result, management closely monitors and frequently evaluates its historical
claims experience to estimate the appropriate level of accrual for insured
claims. The Company's third-party administrator ("TPA") processes claims on
behalf of the Company and reviews claims on a monthly basis. Currently, the
Company's exposure on any single claim is capped at $500,000. For most of the
prior years the caps for general liability and workers compensation were between
$250,000 and $500,000 per claim. In developing its estimates the Company
accumulates historical claims data for the previous 10 years to calculate loss
development factors ("LDF") by insurance coverage type. LDFs are applied to
known claims to estimate the ultimate potential liability for known and unknown
claims for each open policy year. LDFs are generally updated every three years
and reviewed by the Company's outside professional actuaries for reasonableness
in view of the Company's claims experience and insurance industry trends. The
current LDFs were last updated as of March 2003. Because this methodology relies
heavily on historical claims data, the key risk is whether the historical claims
are an accurate predictor of future claims exposure. The risk also exists that
certain claims have been incurred and not reported on a timely basis. To
mitigate these risks, the Company, in conjunction with its TPA, closely monitors
claims to ensure timely accumulation of data and compares its claims trends with
the industry experience of its TPA.
For the VITAS segment, the Company self insures for workers' compensation
exposures. Currently, VITAS' exposure on any single claim is capped at $500,000.
For most of the prior years the caps for workers' compensation were
52
Chemed Corporation and Subsidiary Companies
between $250,000 and $500,000 per claim. For VITAS' self-insurance accruals for
workers' compensation, we obtained an actuarial valuation of the liability as of
the date of acquisition by Chemed and as of November 30, 2004. The valuation
methods used by the actuary are similar to those used internally for the other
Chemed business units
As an indication of the sensitivity of the accrued liability to reported
claims, the Company's analysis indicates that a 1% across-the-board increase or
decrease in the amount of projected losses for all of its continuing operations
would increase or decrease the accrued insurance liability at December 31, 2004,
by $1,040,000 or 4%.
INVESTMENTS
Equity investments with readily determinable fair values are recorded at
their fair values. Other equity investments are recorded at cost, subject to
write-down for impairment. The Company regularly reviews its investments for
impairment. As a result of this review, in the fourth quarter of 2002, the
Company reduced the carrying value of its investment in the redeemable preferred
stock of Medic One from its original cost of $1,200,000 to nil. Medic One, a
privately held provider of ambulance and wheelchair transportation services, is
in violation of certain covenants under a line of credit that expired in
November 2002. The lender has not waived such violations and has the right to
call the debt. If the debt were called, Medic One could be forced into
bankruptcy.
The Company also has a Patient Care common stock purchase warrant ("PC
Warrant") for the purchase of up to 2% of privately held Patient Care. The PC
Warrant has a carrying value of $1,445,000, which was its estimated fair value
on the date of issuance in October 2002. Patient Care's operating results for
2003 declined from 2002 levels and Patient Care experienced losses in early
2004. The Company is currently in litigation with Patient Care over the
collection of amounts the Company believes Patient Care owes to the Company.
These amounts include a receivable for the post-closing balance sheet adjustment
due the Company ($1,251,000) and the accounts receivable balance from Patient
Care for expenses paid by the Company on behalf of Patient Care since 2002
($1,512,000). Patient Care is current in its quarterly interest payments on its
$12.5 million note due to the Company (maturing in October 2007). Patient Care
has not provided the Company with any financial information since February 2004.
When such financial information becomes available it is possible that the
Company may have to take an impairment charge on the PC Warrant and/or provide a
valuation allowance for the accounts receivable balances. Also, the outcome of
the litigation could impact the realizable value of the accounts receivable
balances included in the Company's balance sheet at December 31, 2004.
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS
The Company annually tests the goodwill balances and indefinite-lived
intangible assets of its reporting units for impairment using appraisals
performed by an independent valuation firm. The valuation of each reporting unit
is dependent upon many factors, some of which are market-driven and beyond the
Company's control. The valuations of goodwill for the Company's VITAS,
Roto-Rooter Services and Roto-Rooter Franchising and Products reporting units
indicate that the fair value of goodwill for each of these units exceeds its
respective book value by a significant amount. The recent valuation of the VITAS
trade name indicates that its fair value exceeds its carrying value at December
31, 2004. The valuations of Service America, which is now included in
discontinued operations, in 2003 and 2002 reduced goodwill for this reporting
unit to nil.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Amounts due from third-party payers, primarily Medicare and Medicaid, is
reported at the estimated net realizable amounts. VITAS' management estimates
denials each period and makes adequate provision for them in its financial
statements. Due to the complexity of the laws and regulations affecting the
Medicare and Medicaid programs, estimates may change by material amounts in
future periods.
VITAS receives biweekly payments for patient services from the Medicare
program under the Prospective Interim Payment ("PIP") System. These payments are
subsequently applied against specific Medicare accounts as claims are processed
by the fiscal intermediary. The unapplied portion of these biweekly PIP payments
is recorded as a reduction to patient accounts receivable.
VITAS maintains a policy of providing an allowance for uncollectible
accounts based on a formula tied to the aging of accounts receivable by payer
class and historical write-off rates. VITAS provides allowances for specific
accounts determined to be uncollectible when such determinations are made.
Accounts are written off when all collection efforts are exhausted.
INCOME TAXES
The Company estimates its tax assets and liabilities based on current tax
laws in the statutory jurisdictions in which it operates. These estimates
include judgments about deferred tax assets and liabilities resulting from
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities, as well as the realization of deferred tax
assets (including those relating to net operating losses). The deferred tax
assets and liabilities are determined based on the enacted tax rates expected to
apply in the periods in which the deferred tax assets or liabilities are
expected to be
53
Chemed Corporation and Subsidiary Companies
settled or realized. The Company periodically reviews its deferred tax assets
for recoverability and establishes a valuation allowance if it is more likely
than not that some portion or all of a deferred tax asset will not be realized.
The determination as to whether a deferred tax asset will be realized is made on
a jurisdictional basis and is based on the evaluation of positive and negative
evidence. This evidence includes historical taxable income, projected future
taxable income, the expected timing of the reversal of existing temporary
differences and the implementation of tax planning strategies. Projected future
taxable income is based on the Company's expected results and assumptions as to
the jurisdiction in which the income will be earned. The expected timing of the
reversals of existing temporary differences is based on current tax law and the
Company's tax methods of accounting. The Company also reviews its liabilities
under FASB Statement No. 5, "Accounting for Contingencies" which requires an
accrual for estimated losses when it is probable that a liability has been
incurred and the amount can be reasonably estimated. These projections may
change in the future as actual results become known.
If the Company is unable to generate sufficient future taxable income, or
if there is a material change in the actual effective tax rates or the time
period within which the underlying temporary differences become taxable or
deductible, or if the tax laws change unfavorably, then the Company could be
required to increase its valuation allowance against its deferred tax assets,
resulting in an increase in the effective tax rate.
The Company operates in multiple states with varying tax laws. The Company
is subject to both federal and state audits of tax returns. While the Company
believes it has provided adequately for income tax liabilities in its
consolidated financial statements, adverse determinations by these taxing
authorities could have a material adverse effect on the Company's financial
position, results of operations or cash flows. If the provisions for current or
deferred taxes are not adequate, if the Company is unable to realize certain
deferred tax assets or if the tax laws change unfavorably, the Company could
experience potential losses. Likewise, if provisions for current and deferred
taxes are in excess of those eventually needed, if the Company is able to
realize additional deferred tax assets or if tax laws change favorably, the
Company could experience potential gains. A one percentage point change in the
Company's overall 2004 effective tax rates for continuing operations would
impact income tax expense, income from continuing operations and net income by
$371,000 in 2004 ($0.03 per share).
RECENT ACCOUNTING STATEMENTS
FASB NO. 123R
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004)
"Share-Based Payment" ("FASB123R"), which requires companies to recognize in the
income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and disallows the use of the
intrinsic value method of accounting for stock options, but expresses no
preference for a type of valuation model. This statement supersedes APB No. 25,
but does not change the accounting guidance for share-based payment transactions
with parties other than employees provided in FASB 123 as originally issued.
FASB123R is effective as of the beginning of the Company's third quarter of
2005. We are evaluating our stock incentive programs and most likely will
significantly reduce the number of stock options granted after June 30, 2005. In
March 2005, the Board of Directors approved the immediate vesting of all
unvested stock options to avoid recognizing approximately $1.6 million of pretax
expense that would have been charged to income under FASB123R during the seven
quarters beginning on July 1, 2005. We estimate that the pretax expense for
continuing operations of accelerating the vesting of these stock options, which
were scheduled to vest in November 2005 and November 2006, to be approximately
$214,000 in the first quarter of 2005. As a result, we do not expect the
implementation of FASB123R in the third quarter of 2005 to have a significant
impact on our financial condition, results of operations or cash flows.
FASB NO. 151
In December 2004, the FASB issued FASB Statement No. 151 "Inventory Costs,
an Amendment of ARB No. 43, Chapter 4" ("FASB No. 151"). FASB No. 151 clarifies
the accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material and requires that these items be recognized as current
period charges. FASB No. 151 applies to inventory costs incurred only during
periods beginning after the effective date and also requires that the allocation
of fixed production overhead to conversion costs be based on the normal capacity
of the production facilities. FASB No. 151 is effective for the Company's fiscal
year beginning January 1, 2005. We do not anticipate that implementation of this
statement will have a material impact on our financial condition, results of
operations or cash flows.
FASB NO. 153
In December 2004, the FASB issued FASB Statement No. 153 "Exchanges of
Non-monetary Assets, An Amendment of APB Opinion No. 29" ("FASB No. 153"). FASB
No. 153 eliminates the exception for exchange of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. FASB 153 is effective for nonmonetary assets and
exchanges occurring in fiscal periods beginning after June 15, 2005. As we do
not engage in exchanges of non-monetary assets, we do not anticipate
implementation of this statement will have significant impact on our financial
conditions, results of operations or cash flows.
54
Chemed Corporation and Subsidiary Companies
SUPPLEMENTARY FINANCIAL DATA (VITAS)
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
-------------------------- --------------------------------------------
Fourth Year-to-Date January 1 to February 24 to Fourth
Quarter December February 23 September 30 (a) Quarter
--------- ------------ ------------- ---------------- ----------
STATEMENT OF OPERATIONS
Service revenues and sales $ 121,062 $ 441,017 $ 72,870 $ 316,453 $ 142,277
--------- ---------- ---------- ------------- ----------
Cost of services provided
(excluding depreciation) 93,214 345,190 58,848 247,971 108,830
Selling, general and administrative expenses 13,987 53,004 8,182 29,940 13,006
Depreciation 1,385 5,540 836 3,078 2,634
Amortization 7 26 4 2,995 354
Costs related to sale of business 1,541 (b) 1,541 (b) 24,956 (d) - 1,680 (d)
--------- ---------- ---------- ------------- ----------
Total costs and expenses 110,134 405,301 92,826 283,984 126,504
--------- ---------- ---------- ------------- ----------
Income/(loss) from operations 10,928 35,716 (19,956) 32,469 15,773
Interest expense (1,744) (6,253) (919) (90) (38)
Loss on extinguishment of debt - (4,117)(c) (4,497)(d) - -
Other income--net 162 683 41 589 466
--------- ---------- ---------- ------------- ----------
Income/(loss) before income taxes 9,346 26,029 (25,331) 32,968 16,201
Income taxes (3,833) (10,455) 6,996 (13,489) (6,541)
--------- ---------- ---------- ------------- ----------
Net income/(loss) $ 5,513 $ 15,574 $ (18,335) $ 19,479 $ 9,660
========= ========== ========== ============= ==========
EBITDA (e)
Net income/(loss) $ 5,513 $ 15,574 $ (18,335) $ 19,479 $ 9,660
Add/(deduct)
Interest expense 1,744 6,253 919 90 38
Income taxes 3,833 10,455 (6,996) 13,489 6,541
Depreciation 1,385 5,540 836 3,078 2,634
Amortization 7 26 4 2,995 354
--------- ---------- ---------- ------------- ----------
EBITDA $ 12,482 $ 37,848 $ (23,572) $ 39,131 $ 19,227
========= ========== ========== ============= ==========
- ----------
(a) We acquired Vitas on February 24, 2004 and recorded estimated purchase
accounting adjustments to the value of Vitas' assets as of that date.
(b) Costs related to sale of business incurred in 2003 include legal and other
professional fees amounting to $1,541,000 pretax (or $925,000 aftertax).
(c) Loss on extinguishment of debt totaled $4,117,000 ($2,470,000 aftertax)
and represents the cost of writing off deferred issuance costs at the time
Vitas refinanced its debt in the third quarter of 2003.
(d) Costs related to the sale of Vitas totaled $29,453,000 pretax ($20,930,000
aftertax) for January 1 through February 23, 2004. Additional transaction
costs totaled $1,680,000 pretax ($1,008,000 aftertax) in the fourth
quarter of 2004. Such costs include legal and professional fees, severance
costs and a loss on writing off deferred debt issuance costs.
(e) 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 an alternative for net income, income from
operations, net cash provided by operating activities or other financial
information determined under GAAP, and should not be considered as measure
of profitability or liquidity. We believe the line on the 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
----------------------------- -----------------------------------------------
Fourth Year-to-Date January 1 to February 24 to Fourth
Quarter December February 23 September 30 Quarter
--------- ------------ ------------ -------------- -------
Interest income $ 162 $ 683 $ 41 $ 190 142
Loss on extinguishment of debt - 4,117 4,497 - -
Costs related to sale of business 1,541 1,541 24,956 - 1,680
55
Chemed Corporation and Subsidiary Companies
2003 2004
------------------------------ ----------------------------------
Fourth Year-to-Date Fourth Year-to-Date
Quarter December Quarter December
---------- ------------ --------------- ------------
OPERATING STATISTICS
Net revenue
Homecare $ 83,313 $ 301,066 $ 98,746 $ 364,962
Inpatient 17,343 68,608 19,131 74,905
Continuous care 20,406 71,343 24,400 91,733
---------- ---------- --------------- ------------
Total $ 121,062 $ 441,017 $ 142,277 $ 531,600
========== ========== =============== ============
Net revenue as a percent of total
Homecare 68.8 % 68.3 % 69.4 % 68.7 %
Inpatient 14.3 15.6 13.4 14.1
Continuous care 16.9 16.1 17.2 17.2
---------- ---------- --------------- ------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
========== ========== =============== ============
Average daily census ("ADC") (days)
Homecare 4,194 3,873 5,053 4,763
Nursing home 3,046 2,849 3,241 3,107
---------- ---------- --------------- ------------
Routine homecare 7,240 6,722 8,294 7,870
Inpatient 341 345 366 367
Continuous care 398 361 474 457
---------- ---------- --------------- ------------
Total 7,979 7,428 9,134 8,694
========== ========== =============== ============
Total Admissions 10,979 43,652 11,558 46,537
Average length of stay (days) 59.0 55.8 64.1 (a) 60.0
Median length of stay (days) 12.0 12.0 12.0 12.0
ADC by major diagnosis
Neurological 29.9 % 29.2% 31.4 % 31.2 %
Cancer 24.5 25.5 21.9 22.7
Cardio 13.8 14.0 15.0 14.6
Respiratory 7.3 7.3 7.1 7.3
Other 24.5 24.0 24.6 24.2
---------- ---------- --------------- ------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
========== ========== =============== ============
Direct patient care margins (b)
Routine homecare 49.8 % 49.5 % 51.2 % 50.0 %
Inpatient 22.3 22.6 23.9 24.4
Continuous care 23.1 22.3 18.6 18.8
Homecare margin drivers
(dollars per patient day)
Labor costs $ 42.71 $ 41.47 $ 44.08 $ 42.96
Drug costs 8.74 8.81 7.63 8.48
Home medical equipment 5.75 5.69 5.56 5.71
Medical supplies 1.72 1.77 1.98 1.98
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 209.54 $ 195.89 $ 235.01 $ 213.28
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 410.49 $ 401.14 $ 437.43 $ 426.46
Bad debt expense as a percent of revenues 1.2 % 1.3 % 0.9 % 1.0 %
Accounts receivable --
days of revenue outstanding 36.8 36.8 38.1 38.1
- ----------
(a) 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 11.0 days to a high of 112.6 days for the fourth
quarter of 2004.
(b) Amounts exclude indirect patient care costs.
56
Chemed Corporation and Subsidiary Companies
CORPORATE GOVERNANCE
The Company submitted its Annual Certification of the Chief Executive
Officer to the New York Stock Exchange ("NYSE") regarding the NYSE corporate
governance listing standards on May 20, 2004. The Company also filed its
Certifications of the President and Chief Executive Officer, the Vice President
and Chief Financial Officer and the Vice President and Controller pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2 and 31.3,
respectively, to its Annual Report on Form 10-K for the year ended December 31,
2004.
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. Such forward-looking statements and trends
include, but are not limited to, the impact of laws and regulations on Company
operations, the Company's estimate of future effective income tax rates and the
recoverability of deferred tax assets. 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.
57
CORPORATE OFFICERS AND DIRECTORS
CORPORATE OFFICERS
EDWARD L. HUTTON
Chairman of the Board
KEVIN J. MCNAMARA
President & Chief Executive Officer
DAVID P. WILLIAMS
Vice President & Chief Financial Officer
TIMOTHY S. O'TOOLE
Executive Vice President
SPENCER S. LEE
Executive Vice President
ARTHUR V. TUCKER, JR.
Vice President & Controller
NAOMI C. DALLOB
Vice President & Secretary
THOMAS C. HUTTON
Vice President
THOMAS J. REILLY
Vice President
LISA A. DITTMAN
Assistant Secretary
DIRECTORS
EDWARD L. HUTTON
Chairman of the Board, Chemed Corporation
KEVIN J. MCNAMARA
President & Chief Executive Officer,
Chemed Corporation
DONALD BREEN, JR. (2)
Senior Vice President, John Morrell & Co.
CHARLES H. ERHART, JR. (1, 2*, 3*)
Former President, W.R. Grace & Co. (retired)
JOEL F. GEMUNDER (3)
President & Chief Executive Officer, Omnicare Inc.
PATRICK P. GRACE (1, 3)
President, MLP Capital Inc. (real estate and mining)
THOMAS C. HUTTON
Vice President, Chemed Corporation
SANDRA E. LANEY
Chairman & Chief Executive Officer,
Cadre Computer Resources Co.
TIMOTHY S. O'TOOLE
Executive Vice President, Chemed Corporation;
Chief Executive Officer,
VITAS Healthcare Corporation
DONALD E. SAUNDERS (1*)
Markley Visiting Professor,
Farmer School of Business Administration,
Miami University (Ohio)
GEORGE J. WALSH III
Partner, Thompson Hine LLP
(law firm, New York, New York)
FRANK E. WOOD (2)
President and Chief Executive Officer,
Secret Communications LLC (radio stations);
Principal, The Darwin Group (venture capital);
and Chairman, 8e6 Technologies Corporation
(software development)
1) Audit Committee
2) Compensation/Incentive Committee
3) Nominating Committee
* Committee Chairman
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Chemed Corporation
2600 Chemed Center
255 East Fifth Street
Cincinnati, Ohio 45202-4726
513-762-6900
www.chemed.com
TRANSFER AGENT & REGISTRAR
Shareholders of record needing address changes, account balances, account
consolidations, replacement of lost certificates or lost checks, dividend
reinvestment plan statements or cost-basis data, 1099s, or assistance with other
administrative matters relating to their Chemed Capital Stock should direct
their inquiries to:
Wells Fargo Bank, N.A., Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone: 800-468-9716 (TOLL-FREE)
Web site: www.wellsfargo.com/shareownerservices
All questions relating to administration of Chemed stock must be handled
by Wells Fargo.
CORPORATE INQUIRIES
Annual reports, press releases, corporate governance guidelines, Board
committee charters, Policies on Business Ethics, the Annual Report on Form 10-K,
and other printed materials may be obtained from Chemed Investor Relations
without charge by writing or by calling 800-2CHEMED or 800-224-3633. Printed
materials may also be viewed and downloaded from Chemed's Web site at
www.chemed.com.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Cincinnati, Ohio 45202
DIVIDEND REINVESTMENT PLAN FOR HOLDERS OF 25 OR MORE SHARES
The Chemed Automatic Dividend Reinvestment Plan is available to
shareholders of record owning a minimum of 25 shares of Chemed Capital Stock. A
plan brochure, including fee schedule, and enrollment information are available
from the Dividend Reinvestment Agent, Wells Fargo Bank, N.A., at the address
listed at left.
ANNUAL MEETING
The Annual Meeting of Shareholders of Chemed Corporation will be held on
Monday, May 16, 2005, at 11 a.m. in the Lower Level Conference Center of The
Queen City Club, 331 East Fourth Street, Cincinnati, Ohio.
NUMBER OF SHAREHOLDERS
The approximate number of shareholders of record of Chemed Capital Stock
was 3,385 on December 31, 2004. (This number does not include shareholders with
shares held under beneficial ownership or within clearinghouse positions of
brokerage firms and banks.)
STOCK EXCHANGE LISTING
Chemed Capital Stock is listed on the New York Stock Exchange under the
ticker symbol CHE.
CAPITAL STOCK & DIVIDEND DATA
The high and low closing prices for Chemed Capital Stock, as obtained from
the New York Stock Exchange NYSEnet Web site, and dividends per share paid by
quarter follow:
Closing
------------------ Dividends
High Low Paid
------- -------- ---------
2004
FIRST QUARTER $ 66.95 $ 48.95 $ 0.12
SECOND QUARTER 55.30 43.10 0.12
THIRD QUARTER 56.25 42.71 0.12
FOURTH QUARTER 67.44 55.11 0.12
2003
First Quarter $ 36.51 $ 31.55 $ 0.12
Second Quarter 40.20 32.98 0.12
Third Quarter 40.35 34.42 0.12
Fourth Quarter 51.78 33.69 0.12
CHEMED CORPORATION
2600 CHEMED CENTER
255 EAST FIFTH STREET
CINCINNATI, OHIO 45202-4726
Visit our Web sites at www.chemed.com, www.rotorooter.com, and www.vitas.com.
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