CHEMED CORPORATION
Providing
ESSENTIAL
SERVICES
TO
Home Owners
AND
Business
2001 ANNUAL REPORT
[LOGO] CHEMED
Chemed Corporation, headquartered in Cincinnati, offers essential repair and
maintenance services to home owners and businesses through two subsidiaries, as
well as home healthcare services through a third subsidiary. Chemed Capital
Stock is publicly traded on the New York Stock Exchange under the symbol CHE.
[LOGO] ROTO-
ROOTERS
Roto-Rooter Inc. is North America's largest provider of plumbing repair and
drain cleaning services. Through its network of company operations, independent
contractors, and franchisees, Roto-Rooter serves residential and commercial
customers in the United States, Canada, and a growing number of countries around
the world.
[LOGO] SERVICE
AMERICA
Service America provides major-appliance and heating, ventilating, and
air-conditioning (HVAC) repair services to contract customers in Florida and
Arizona and is expanding its presence in the retail repair, replacement, and
maintenance market as well.
[LOGO] patient
care inc.
Patient Care delivers home healthcare services, focusing on personal care
provided by its staff of professionally trained home health aides. A major force
in the New York, New Jersey, and Connecticut markets and with operations in the
South and Midwest, Patient Care is among the largest homecare providers in the
United States.
Contents
Financial Summary................. 1
Letter to Shareholders............ 2 - 3
Corporate Management.............. 4
Operations Review................. 5 - 8
Financial Review.................. 9 - 35
Officers and Directors............ 36
Corporate Information............. Inside back cover
Roto-Rooter(R) is a registered trademark of Roto-Rooter Inc.
Service America(TM)is a trademark of Service America Systems Inc.
Corporate Information
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Corporate Headquarters
Chemed Corporation
2600 Chemed Center
255 East Fifth Street
Cincinnati, Ohio 45202-4726
513-762-6900
www.chemed.com
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Transfer Agents & Registrars
Individuals 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 Chemed Capital Stock and Convertible Trust
Preferred Securities should direct their inquiries to the designated transfer
agent listed below.
Chemed Capital Stock Transfer Agent & Registrar:
Wells Fargo Bank Minnesota, N.A., Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone: 800-468-9716 (toll-free)
E-mail: stocktransfer@WellsFargo.com
Web site: www.wellsfargo.com/shareownerservices
All questions relating to administration of Chemed Capital Stock must be
handled by Wells Fargo.
Convertible Trust Preferred Securities Transfer Agent & Registrar:
U.S. Bank, N.A.
Corporate Trust Services
1555 North RiverCenter Drive, Suite 301
Milwaukee, Wisconsin 53212
Telephone: 800-637-7549 (toll-free)
Web site: www.firstarcorporatetrust.com
All questions relating to administration of Convertible Trust Preferred
Securities must be handled by U.S. Bank.
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Corporate Inquiries
Questions concerning company operations and financial results should be
directed to Timothy S. O'Toole, Executive Vice President & Treasurer, at Chemed
corporate headquarters by writing or by calling 800-2CHEMED (800-224-3633) or
513-762-6702.
Annual and quarterly reports, press releases, and other printed materials
may be obtained from Chemed Investor Relations by writing or by calling 800-
2CHEMED (800-224-3633) or 513-762-6463. Printed materials may also be viewed and
downloaded from Chemed's Web site at www.chemed.com.
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Independent Accountants
PricewaterhouseCoopers LLP
Cincinnati, Ohio
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Form 10-K
Additional information about Chemed is available in the Annual Report on
Form 10-K. Chemed Investor Relations will furnish copies without charge.
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Dividend Reinvestment Plan
for Holders of 25 or More Shares
The Chemed Automatic Dividend Reinvestment Plan is available to Chemed
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 Minnesota, N.A., at the
address listed above. Convertible Trust Preferred Securities are not eligible to
participate in this Plan.
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Annual Meeting
The Annual Meeting of Shareholders of Chemed Capital Stock will be held on
Monday, May 20, 2002, at 2 p.m. in the Grand Ballroom of The Phoenix Club, 812
Race Street, Cincinnati, Ohio.
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Number of Shareholders
The approximate number of shareholders of record of Chemed Capital Stock
was 3,686 on December 31, 2001. (This number does not include shareholders with
shares held under beneficial ownership or within clearinghouse positions of
brokerage firms and banks nor holders of preferred securities.)
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Stock Exchange Listings
Chemed Capital Stock is listed on the New York Stock Exchange under the
ticker symbol CHE. Chemed Convertible Trust Preferred Securities are listed on
the NASDAQ Over-the-Counter Bulletin Board under the symbol CHEQP.
- --------------------------------------------------------------------------------
Capital Stock & Dividend Data
The high and low closing prices for Chemed Capital Stock, as obtained from
the New York Stock Exchange Web site for 2001 and as reported in The Wall Street
Journal for 2000, and dividends per share paid by quarter during these years
are:
Closing Dividends
---------------
High Low Paid
- ------------------------------------------------
2001
First Quarter $39.00 $33.00 $ .11
Second Quarter 38.50 30.90 .11
Third Quarter 36.10 26.70 .11
Fourth Quarter 34.00 27.75 .11
2000
First Quarter $31.44 $27.00 $ .10
Second Quarter 31.19 27.50 .10
Third Quarter 32.31 27.75 .10
Fourth Quarter 36.56 30.94 .10
Financial Summary
Chemed Corporation and Subsidiary Companies
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For the Years Ended December 31, 2001 2000 1999 1998 1997
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Service Revenues and Sales
from Continuing Operations................ $ 477,116,000 $ 492,393,000 $ 445,599,000 $ 381,283,000 $ 341,729,000
Income/(Loss)
from Continuing Operations/(a)/........... $ (6,701,000) $ 20,727,000 $ 19,654,000 $ 19,909,000 $ 17,077,000
Net Income/(Loss)/(b)/....................... $ (10,375,000) $ 20,584,000 $ 19,696,000 $ 19,909,000 $ 30,237,000
Pro Forma Income
from Continuing Operations/(c)/........... $ 11,605,000 $ 18,466,000 $ 16,694,000 $ 11,964,000 $ 9,425,000
Earnings Per Share
Income/(Loss)
from Continuing Operations/(a)/......... $ (.69) $ 2.11 $ 1.88 $ 1.98 $ 1.72
Net Income/(Loss)/(b)/.................... $ (1.07) $ 2.09 $ 1.88 $ 1.98 $ 3.04
Pro Forma Income
from Continuing Operations/(c)/......... $ 1.19 $ 1.88 $ 1.59 $ 1.19 $ .95
Average Number
of Shares Outstanding................... 9,714,000 9,833,000 10,470,000 10,058,000 9,940,000
Dividends Per Share.......................... $ .44 $ .40 $ 2.12 $ 2.12 $ 2.09
Number of Shareholders....................... 3,686 3,850 4,864 5,271 5,365
Number of Employees.......................... 7,595 7,544 7,770 7,671 6,849
/(a)/ Amounts for the years 2001 through 1997 include aftertax capital gains
from the sales of investments of $703,000 ($.07 per share), $2,261,000
($.23 per share), $2,960,000 ($.29 per share), $7,945,000 ($.79 per
share), and $7,652,000 ($.77 per share), respectively.
/(b)/ Amounts for the years 2001 through 1999 include losses from discontinued
operations of $1,973,000 ($.20 per share) and $143,000 ($.02 per share)
and income from discontinued operations of $42,000 (nil per share),
respectively. Amounts for 1997 include discontinued operations of
$13,160,000 ($1.32 per share). Amounts for 2001 also include an
extraordinary loss of $1,701,000 ($.18 per share) from the extinguishment
of debt.
/(c)/ Pro forma amounts exclude aftertax restructuring and similar expenses and
other charges of $19,009,000 ($1.95 per share) in 2001. Amounts for all
periods exclude capital gains discussed in note (a).
Business Highlights
. Roto-Rooter Inc. achieved revenues of $269.4 million in 2001, the
second highest in its history after revenues of $281.1 million in
2000. International master franchise licenses were sold in
Mexico, Malaysia, and Spain.
. Service America centralized its call center, combining customer
service representatives, dispatchers, telemarketers, and
purchasing agents in one location in order to enhance customer
service and operating efficiencies.
. Patient Care Inc.'s net income for 2001 was $526,000 versus $2.1
million for 2000. On a pro forma basis, however, Patient Care
achieved a 24% increase in earnings on revenue growth of 3%.
1
To Our Fellow Shareholders
No doubt about it: 2001 was a tough year. Our flagship Roto-Rooter subsidiary
particularly felt the pinch of the weak economy as customers deferred optional
plumbing projects or took them on as do-it-yourselfers, and noncore HVAC
businesses struggled. Likewise, Service America experienced a shortfall in
retail sales as customers put off more economically sensitive purchases of new
air conditioners and major appliances, along with duct cleaning and other demand
repair services. Patient Care, however, having suffered from industrywide
reimbursement issues during the past few years, emerged from 2001 with a strong
operating performance.
As 2001 progressed, we carefully analyzed our businesses and identified
opportunities to streamline Chemed and optimize operations. We discontinued the
Cadre Computer Resources subsidiary and announced an important restructuring
effort which, when fully implemented, should result in significant savings and
enhanced profitability.
Financial Results
For the year ended December 31, 2001, Chemed recorded a net loss of $1.07 per
share, which included $1.95 per share in aftertax restructuring and similar
expenses and other charges, a loss of $.20 per share from discontinued
operations, an extraordinary loss of $.18 per share in debt prepayment
penalties, and capital gains from sales of investments of $.07 per share. Net
income of $2.09 per share in 2000 included capital gains of $.23 per share and a
loss from discontinued operations of $.02 per share. On a pro forma basis
excluding capital gains and restructuring and similar expenses and other
charges, Chemed's earnings from continuing operations were $1.19 per share for
2001 as compared with $1.88 per share in 2000.
Service revenues and sales from continuing operations for 2001 were $477.1
million, 3% below 2000's $492.4 million. For 2001, earnings before capital
gains, interest, taxes, depreciation, and amortization (EBITDA) were $30.6
million versus EBITDA of $59.2 million for 2000, and for 2001, EBITDA
represented 6% of revenues. Pro forma EBITDA for 2001 amounted to $48.0 million,
or 10% of revenues.
Operations
Roto-Rooter's revenues in 2001 of $269.4 million were 4% below prior year,
primarily due to revenue shortfalls in Roto-Rooter's plumbing and HVAC
businesses. The resulting negative leverage caused a 4.4 percentage point
decline (2.6 percentage points on a pro forma basis) in the gross margin, while
net income declined to $3.4 million in 2001 versus $20.0 million in 2000. On a
pro forma basis, Roto-Rooter's income for 2001 amounted to $13.8 million as
compared with $20.0 million in 2000.
As the economy improves, we expect Roto-Rooter's revenues will improve. We
are redoubling efforts to upgrade customer service and to improve the
compensation opportunity for Roto-Rooter technicians. We've initiated sales and
marketing efforts, including specific programs to gain commercial business.
We've been increasing service force staffing, a key driver of revenue growth. We
will continue to maintain tight expense controls at all levels, and the
restructuring of noncore HVAC and non-Roto-Rooter-branded plumbing operations
should position Roto-Rooter for improved results in the year ahead.
For 2001, Service America recorded a net loss of $686,000
- ---------------------------------- ---------------------------------------
Chemed Corporation Chemed Corporation
Revenues from Continuing Operating Profit from
Operations (000s) Continuing Operations*
Average Annual Growth: 18% (000s)
Average Annual Growth: 13%
92 $104,688 92 $ 10,467
93 $136,428 93 $ 13,562
94 $240,994 94 $ 17,904
95 $270,449 95 $ 19,963
96 $301,213 96 $ 23,802
97 $341,729 97 $ 26,240
98 $381,283 98 $ 27,839
99 $445,599 99 $ 35,146
00 $492,393 00 $ 42,236
01 $477,116 01 $ 32,144
*Before restructuring and similar
expenses and other charges.
March 4, 2002
versus net income of $1.1 million in 2000. On a pro forma basis, Service
America's earnings of $1.0 million in 2001 compare with $1.1 million in 2000.
Service America is beginning to see the benefits of centralization projects and
ongoing efforts to eliminate less-profitable contracts. Service America expects
both service improvements and cost efficiencies from its centralized call
center, dispatch, distribution, and purchasing operations. These improvements
and efficiencies, along with marketing targeted toward retail sales and
commercial accounts, should stabilize the contract base, boost retail revenues,
and lead to future growth.
Patient Care's net income of $526,000 in 2001 compares with net income of
$2.1 million for 2000. Pro forma earnings grew 24%, to $2.6 million, in 2001 on
revenue growth of 3%, to $141.4 million, as compared with earnings and revenues
in 2000. Patient Care achieved these results through its continued focus on
high-quality relationships with large referral sources and by providing
supplemental staffing to meet increasing demand--particularly from Medicare
agencies and assisted- living facilities--for healthcare personnel. Patient Care
also benefited from improved Medicare reimbursements.
Restructuring for Future Growth
We entered 2001 with high expectations, having achieved two years of
substantial growth led by outstanding results at Roto-Rooter. As growth
plateaued during the year, we reexamined every operation for opportunities and
began implementing corporate-wide restructuring initiatives. While these
initiatives created substantial aftertax charges, they provided the freedom to
move forward unencumbered by noncore and underperforming businesses.
Additionally, the prepayment and refinancing of our debt enabled us to take
advantage of attractive interest rates.
[PICTURE]
Kevin J. McNamara (left), President & Chief Executive Officer, and
Edward L. Hutton, Chairman
The restructuring and similar expenses and other charges comprise primarily
write-offs associated with exiting unprofitable businesses, costs of
restructuring long-term stock incentives, severance costs, and other
nonrecurring charges. Annual savings expected from the implementation of these
initiatives and the debt refinancing are estimated at $4 million to $5 million
after taxes.
The restructuring process has been carefully considered, and while not an
easy one, the process has created a leaner Chemed poised for future growth. We
are already enjoying benefits from a number of these initiatives and expect an
improved year because of them. We remain viligant in seeking other opportunities
to cut costs, optimize operations, and increase efficiency in 2002.
Outlook
Chemed is now positioned for substantial ongoing savings and renewed growth. We
are optimistic that our subsidiaries have the right plans in place to grow their
business and profitability, any further deteriotation in economic conditions
notwithstanding. In the long term, each of our subsidiaries provides services
that home owners, families, and business require, and we believe that by
providing high quality and solid value, our businesses should prosper in the
years ahead.
/s/ Kevin J. McNamara /s/ Edward L. Hutton
Kevin J. McNamara Edward L. Hutton
President Chairman
Chief Executive Officer
3
Chemed Corporate Management
[PICTURE]
(Front row, left-right) Edward L. Hutton, Chairman; Kevin J. McNamara, President
& Chief Executive Officer; (center row, l-r) Sandra E. Laney, Executive Vice
President & Chief Administrative Officer, Timothy S. O'Toole, Executive Vice
President & Treasurer, Spencer S. Lee, Executive Vice President; Rick L.
Arquilla, President & Chief Operating Officer of Roto-Rooter Services Company;
John M. Mount, Vice President; (back row, l-r) Arthur V. Tucker, Jr., Vice
President & Controller; Thomas C. Hutton, Vice President; David G. Sparks, Vice
President; David J. Lohbeck, Vice President; (not pictured) Naomi C. Daliob,
Vice President & Secretary
4
Operations Review
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Roto-Rooter Inc.
Principal Services & Products
. Plumbing
. Sewer, drain & pipe cleaning
. Drain cleaning equipment
. Drain care products
Principal Markets
. Residential
. Industrial
. Business/Commercial
. Municipal
The Roto-Rooter system operates through an extensive network of more than 100
company-owned branches and independent contractors and 500 franchisees. This
makes Roto-Rooter the largest provider of plumbing and drain cleaning services
in North America. The total Roto-Rooter system offers services to more than 90%
of the U.S. population and approximately 55% of the Canadian population.
Roto-Rooter revenues in 2001 aggregated $269.4 million, 4% below revenues in
2000. This revenue decline was primarily the result of softening demand for
discretionary plumbing services during the year, as well as a management
decision to exit the HVAC market.
Revenues from plumbing services totaled $111.0 million in 2001, 5% below
revenues in 2000. This decline compares with double-digit plumbing revenues
growth generated in 1999 and 2000. Plumbing demand slowed in 2001 with the
economy, as commercial and residential customers deferred optional plumbing
services during the year.
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Roto-Roter Inc.
Operating Profit from
Continuing Operations*
(000s)
Average Annual Growth: 13%
92 $ 8,626
93 $ 9,854
94 $12,071
95 $13,134
96 $15,707
97 $17,256
98 $19,244
99 $26,310
00 $36,637
01 $25,725
* Before restructuring and similar expenses and other charges.
[PICTURE]
Commercial customers appreciate Roto-Rooter's preventive maintenance plans,
which can cost less than emergency service. Roto-Rooter benefits from
predictable service requirements and a sustained revenue stream.
HVAC revenues declined 26% in 2001, as the company executed its strategy of
exiting the unprofitable HVAC operations. Total HVAC revenues amounted to $9.9
million during the year.
Sewer and drain services are considered more recession-resistant than certain
plumbing services. As a result, Roto-Rooter's sewer and drain cleaning revenues
for 2001 approximated the revenues generated in 2000 and totaled $115.9 million
for the year.
Roto-Rooter continues to increase brand recognition in terms of quality and
service levels relative to its competition. In this regard, Roto-Rooter strives
for innovative and cost-effective ways to place the Roto-Rooter brand in front
of consumers. In 2001, Roto-Rooter expanded the use of its new toll-free number,
1-800-GET-ROTO, continued a national advertising campaign, and sponsored a car
in the NASCAR Winston West series. In 2002, Roto-Rooter will sponsor a truck in
the NASCAR Craftsman(R) Truck Series with excellent exposure on the ESPN
television network.
5
[PICTURE]
For plumbing and drain cleaning service, Roto-Rooter is the name you can trust.
Fast. Professional. Guaranteed. With 66 years of experience, we're the nation's
largest plumbing repair service. People trust Roto-Rooter because we do it right
the first time. So when you have a plumbing or drain cleaning emergency or need
planned service, you know who to call....
Visit us online at www.rotorooter.com.
Growth in 2002 and beyond will be generated through increased consumer
awareness of the Roto-Rooter brand and the associated high level of quality and
customer satisfaction Roto-Rooter brings to all of its services.
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Service America Systems Inc.
Principal Services & Products
. Service contracts for HVAC & major-appliance repair, minor plumbing &
electrical repairs
. Retail maintenance & repair services for major appliances & HVAC systems
. Air conditioner & major-appliance sales
. Duct cleaning
Principal Markets
. Retirees
. Absentee home owners
. Dual-income households
. Condominium & home owners' associations
Service America provides service contracts to more than 140,000 home and
business owners who don't want to risk a financial burden for repairs to their
air conditioning systems and major appliances. In addition, Service America
provides retail sales and service not covered by a contract, a major opportunity
for revenue growth.
Service America's ultimate goal is to grow its higher-margin retail business
to 50% of total revenues over the long term, while cultivating a profitable
contract base. The contract base is the best source of retail sales leads for
the company. Thus, Service America will work to maintain and grow its contract
base by improving its renewal rate, as well as by attracting new service
contract customers. To do this, Service America is focusing on improving service
levels, soliciting large accounts, increasing response times with its new
centralized call center, and expanding its successful preventive maintenance
program.
[PICTURE]
Roto-Rooter is sponsoring NASCAR driver Steve Portenga in the NASCAR
Craftsman(R) Truck Series. NASCAR is America's fastest-growing spectator sport
and fans are fiercely loyal to the sponsors.
7
[PICTURE]
Customers judge service providers' performance on reliability, responsiveness,
professionalism, and value received. Service America is committed to service
excellence from a customer's perspective and is continually training to meet
that vision.
Additionally, direct marketing efforts will be used to target sales outside the
contract base.
Ongoing centralization efforts, along with tight expense control and
marketing and sales efforts, should position Service America for future growth
and expansion.
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Patient Care Inc.
Principal Service Providers
. Registered nurses
. Licensed practical nurses
. Home health aides
. Live-in aides
. Physical, speech, respiratory & occupational therapists
. Medical social workers
. Nutritionists
Principal Markets
. Private individuals
. Nursing homes & assisted-living facilities
. Hospital-related homecare programs
. Hospice programs
. Certified home-healthcare agencies
. Insurance companies & managed-care organizations
With its first-rate reputation for quality care, Patient Care continues to be
an industry leader with a large market presence in the Northeast and six key
Southern, Southeastern, and Midwestern states, as well as Washington, D.C.
Patient Care offers a broad range of home healthcare services, focusing on
personal care, such as bathing, dressing, grooming, and preparing meals,
provided by a staff of nearly 6,500 home health aides. The majority of Patient
Care's services are now directed at providing highly trained home health aides
in staffing relationships with Medicare agencies and assisted-living facilities,
as well as with private individuals and well-funded state personal-care
programs.
[PICTURE]
Patient Care furnishes compassionate, In-home support services enabling the
elderly to live as fully and independently as possible. Quality assurance
programs provide peace of mind for clients and their families alike.
Financially, Patient Care has surmounted industrywide regulatory and Medicare
reimbursement pressures during the past several years and emerged from 2001 with
strong growth in pro forma operating profits. This trend should continue in 2002
as the high demand for home healthcare services continues to grow.
8
Financial Review
Contents
Statement of Accounting Policies........................ 10
Consolidated Statement of Operations.................... 11
Consolidated Balance Sheet.............................. 12
Consolidated Statement of Cash Flows.................... 13
Consolidated Statement of Changes
in Stockholders' Equity................................. 14
Consolidated Statement
of Comprehensive Income/(Loss).......................... 14
Notes to Financial Statements........................... 16
Segment Data............................................ 26
Selected Financial Data................................. 28
Supplemental Revenue and Profit
Statistics by Business Segment.......................... 30
Unaudited Summary of Quarterly Results.................. 31
Management's Discussion and
Analysis of Financial Condition
and Results of Operations............................... 32
PriceWaterhouseCoopers [LOGO]
Report of Independent Accountants
To the Stockholders and Board of Directors of Chemed Corporation
In our opinion, the consolidated financial statements appearing on pages 10
through 27 of this report present fairly, in all material respects, the
financial position of Chemed Corporation and its subsidiaries ("the Company") at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, 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 auditing standards generally accepted in the United States of
America, which 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
February 4, 2002
9
Statement of Accounting Policies
Chemed Corporation and Subsidiary Companies
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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.
Cash Equivalents
Cash equivalents comprise short-term highly liquid investments that have been
purchased within three months of their dates of maturity.
Other 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. In calculating realized gains and losses on the sales
of investments, the specific-identification method is used to determine the cost
of investments sold.
Inventories
Inventories are stated at the lower of cost or market. For determining the
value of inventories, the first-in, first-out ("FIFO") method is used.
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. 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.
Intangible Assets
Goodwill and identifiable intangible assets arise from purchase business
combinations and are amortized using the straight-line method over the estimated
useful lives of the assets, but not in excess of 40 years. Goodwill arising from
business combinations initiated after June 30, 2001, is not amortized, but is
tested periodically for impairment.
The lives and values (in thousands) of the Company's gross intangible assets
at December 31, 2001, were:
1 - 10 years $ 5,494
11 - 20 years 6,447
31 - 40 years 195,308
Not amortized 1,428
Impairment Assessments
The Company periodically makes an estimation and valuation of the future
benefits of its long-lived assets based on key financial indicators. If the
projected undiscounted cash flows of a major business unit indicate that
property and equipment, goodwill or identifiable intangible assets have been
impaired, a write-down to fair value is made.
Revenue Recognition
Revenues received under prepaid contractual service agreements are recognized
on a straight-line basis over the life of the contract. All other service
revenues and sales are recognized when the services are provided or the products
are delivered.
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 assume the conversion of the Convertible
Preferred Securities into capital stock.
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 pro rata
basis, based on the market value on the date of grant.
Insurance Accruals
The Company is self-insured for casualty insurance claims, subject to a
stop-loss policy with a maximum per-occurrence limit of $250,000. Management
closely monitors and continually evaluates its historical claims experience to
estimate the appropriate level of accrual for incurred claims.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified
to conform to the 2001 presentation.
10
Consolidated Statement of Operations
Chemed Corporation and Subsidiary Companies
- ---------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
For the Years Ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Continuing Operations
Service revenues and sales...................................... $477,116 $492,393 $445,599
-------- -------- --------
Cost of services provided and goods sold........................ 295,477 297,233 271,500
General and administrative expenses............................. 101,141 101,629 94,460
Selling and marketing expenses.................................. 45,569 44,835 40,101
Depreciation.................................................... 16,109 15,002 12,824
Restructuring and similar expenses (Note 2)..................... 26,126 -- --
-------- -------- --------
Total costs and expenses...................................... 484,422 458,699 418,885
-------- -------- --------
Income/(loss) from operations................................. (7,306) 33,694 26,714
Interest expense................................................ (5,424) (6,736) (6,858)
Distributions on preferred securities........................... (1,113) (1,197) --
Other income--net (Note 5)...................................... 3,780 7,709 11,027
-------- -------- --------
Income/(loss) before income taxes............................. (10,063) 33,470 30,883
Income taxes (Note 6)........................................... 3,362 (12,743) (11,229)
-------- -------- --------
Income/(loss) from continuing operations...................... (6,701) 20,727 19,654
Discontinued Operations (Note 3)................................... (1,973) (143) 42
-------- -------- --------
Income/(loss) before extraordinary loss............................ (8,674) 20,584 19,696
Extraordinary loss on extinguishment of debt (Note 9).............. (1,701) -- --
-------- -------- --------
Net Income/(Loss).................................................. $(10,375) $ 20,584 $ 19,696
-------- -------- --------
Earnings/(Loss) Per Share
Income/(loss) from continuing operations........................ $ (.69) $ 2.11 $ 1.88
-------- -------- --------
Income/(loss) before extraordinary loss......................... $ (.89) $ 2.09 $ 1.88
-------- -------- --------
Net income/(loss)............................................... $ (1.07) $ 2.09 $ 1.88
-------- -------- --------
Average number of shares outstanding............................ 9,714 9,833 10,470
-------- -------- --------
Diluted Earnings/(Loss) Per Share (Note 14)
Income/(loss) from continuing operations........................ $ (.69) $ 2.09 $ 1.87
-------- -------- --------
Income/(loss) before extraordinary loss......................... $ (.89) $ 2.07 $ 1.87
-------- -------- --------
Net income/(loss)............................................... $ (1.07) $ 2.07 $ 1.87
-------- -------- --------
Average number of shares outstanding............................ 9,714 10,305 10,514
-------- -------- --------
The Statement of Accounting Policies and the accompanying Notes to Financial
Statements are integral parts of this statement.
11
___________________________
Consolidated Balance Sheet
Chemed Corporation and Subsidiary Companies
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
December 31, 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (Note 7)......................................................... $ 9,008 $ 10,280
Accounts receivable less allowances of $4,941 (2000--$5,137)............................... 49,238 54,571
Inventories, primarily general merchandise and finished goods.............................. 10,424 10,503
Statutory deposits......................................................................... 13,331 14,046
Current deferred income taxes (Note 6)..................................................... 9,862 10,667
Prepaid expenses........................................................................... 8,190 6,403
---------- ----------
Total current assets.................................................................... 100,053 106,470
Other investments (Note 13).................................................................. 38,273 37,099
Properties and equipment, at cost less accumulated depreciation (Note 8)..................... 67,588 75,177
Identifiable intangible assets less accumulated amortization of $8,024 (2000--$7,749)........ 4,037 5,308
Goodwill less accumulated amortization of $35,541 (2000--$31,524)............................ 161,075 175,408
Other assets (Note 11)....................................................................... 25,485 21,913
---------- ----------
Total Assets.......................................................................... $ 396,511 $ 421,375
========== ==========
Liabilities
Current liabilities
Accounts payable........................................................................... $ 11,651 $ 11,102
Current portion of long-term debt (Note 9)................................................. 353 14,376
Income taxes (Note 6)...................................................................... 1,262 11,862
Deferred contract revenue.................................................................. 22,194 24,973
Other current liabilities (Note 10)........................................................ 49,650 44,629
---------- ----------
Total current liabilities............................................................... 85,110 106,942
Long-term debt (Note 9)...................................................................... 61,037 58,391
Other liabilities (Note 10).................................................................. 27,842 27,637
Commitments and contingencies (Notes 10 and 12)
---------- ----------
Total Liabilities..................................................................... 173,989 192,970
---------- ----------
Mandatorily Redeemable Convertible Preferred Securities
of the Chemed Capital Trust (Note 16)........................................................ 14,239 14,641
---------- ----------
Stockholders' Equity
Capital stock--authorized 15,000,000 shares $1 par;
issued 13,437,781 shares (2000--13,317,906 shares)......................................... 13,438 13,318
Paid-in capital.............................................................................. 167,542 162,618
Retained earnings............................................................................ 139,163 153,909
Treasury stock--3,606,085 shares (2000--3,467,753 shares), at cost........................... (110,424) (105,249)
Unearned compensation (Note 11).............................................................. (7,436) (16,683)
Deferred compensation payable in Company stock (Note 11)..................................... 3,288 5,500
Accumulated other comprehensive income....................................................... 4,214 3,237
Notes receivable for shares sold (Note 15)................................................... (1,502) (2,886)
---------- ----------
Total Stockholders' Equity............................................................ 208,283 213,764
---------- ----------
Total Liabilities and Stockholders' Equity............................................ $ 396,511 $ 421,375
========== ==========
The Statement of Accounting Policies and the accompanying Notes to Financial
Statements are integral parts of this statement.
12
_____________________________________
Consolidated Statement of Cash Flows
Chemed Corporation and Subsidiary Companies
- -----------------------------------------------------------------------------------------------------------------
(in thousands)
For the Years Ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income/(loss)......................................................... $ (10,375) $ 20,584 $ 19,696
Adjustments to reconcile net income/(loss) to net cash provided by
operations:
Depreciation and amortization........................................... 24,116 23,131 19,733
Noncash restructuring and impairment charges............................ 16,069 -- --
Provision for deferred income taxes..................................... (4,400) 2,065 115
Provision for uncollectible accounts receivable......................... 2,546 2,277 2,196
Discontinued operations................................................. 1,973 143 (42)
Gains on sales of investments........................................... (993) (3,399) (4,661)
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations:
Decrease/(increase) in accounts receivable......................... 1,230 (1,800) (12,775)
Decrease in statutory reserve requirements......................... 715 208 2,444
Decrease/(increase) in inventories................................. 79 (706) 135
Increase in prepaid expenses....................................... (1,847) (917) (674)
Increase in accounts payable, deferred contract
revenue and other current liabilities........................... 8,458 3,530 4,449
Increase/(decrease) in income taxes................................ (6,068) 4,651 (3,163)
Other--net.............................................................. 2,914 1,981 120
--------- --------- ---------
Net cash provided by continuing operations.............................. 34,417 51,748 27,573
Net cash provided/(used) by discontinued operations..................... (55) 90 (31)
--------- --------- ---------
Net cash provided by operating activities............................... 34,362 51,838 27,542
--------- --------- ---------
Cash Flows from Investing Activities
Capital expenditures...................................................... (15,302) (19,235) (21,995)
Net uses for discontinued operations (Note 3)............................. (6,332) (3,695) (2,533)
Business combinations, net of cash acquired (Note 4)...................... (1,555) (11,504) (15,518)
Proceeds from sales of investments........................................ 1,377 4,290 7,701
Purchase of Roto-Rooter minority interest................................. (820) (1,236) (1,708)
Other--net................................................................ 3,543 60 1,879
--------- --------- ---------
Net cash used by investing activities................................... (19,089) (31,320) (32,174)
--------- --------- ---------
Cash Flows from Financing Activities
Repayment of long-term debt (Note 9)...................................... (46,377) (18,164) (2,982)
Proceeds from issuance of long-term debt (Note 9)......................... 35,000 1,200 10,000
Dividends paid............................................................ (4,384) (4,022) (22,456)
Purchases of treasury stock............................................... (1,226) (5,728) (1,724)
Acquisition of shares for stock purchase plan (Note 15)................... -- -- (2,731)
Other--net................................................................ 442 (806) 449
--------- --------- ---------
Net cash used by financing activities................................... (16,545) (27,520) (19,444)
--------- --------- ---------
Decrease in cash and cash equivalents........................................ (1,272) (7,002) (24,076)
Cash and cash equivalents at beginning of year............................... 10,280 17,282 41,358
--------- --------- ---------
Cash and cash equivalents at end of year..................................... $ 9,008 $ 10,280 $ 17,282
========= ========= =========
The Statement of Accounting Policies and the accompanying Notes to Financial
Statements are integral parts of this statement.
13
===========================================================
Consolidated Statement of Changes in Stockholders' Equity
Chemed Corporation and Subsidiary Companies
------------------------------------------------------------------------------
(in thousands, except per share data)
Capital Paid-in
Stock Capital
--------------------------------------------------------------------------------------------
Balance at December 31, 1998...................................... $ 13,605 $ 162,252
Net income........................................................ -- --
Dividends paid ($2.12 per share).................................. -- --
Other comprehensive income........................................ -- --
Decrease in unearned compensation (Note 11)....................... -- --
Sale of shares for notes.......................................... -- --
Purchases of treasury stock....................................... -- --
Stock awards (Note 15)............................................ 54 1,690
Other............................................................. 6 607
-------- ---------
Balance at December 31, 1999................................... 13,665 164,549
Net income........................................................ -- --
Dividends paid ($.40 per share)................................... -- --
Exchange of capital stock for trust securities.................... (576) (7,971)
Purchases of treasury stock....................................... -- --
Decrease in unearned compensation (Note 11)....................... -- --
Stock awards and exercise of stock options (Note 15).............. 226 6,266
Other comprehensive income........................................ -- --
Other............................................................. 3 (226)
-------- ---------
Balance at December 31, 2000................................... 13,318 162,618
Net loss.......................................................... -- --
Dividends paid ($.44 per share)................................... -- --
Other comprehensive income........................................ -- --
Decrease in unearned compensation (Note 11)....................... -- --
Stock awards and exercise of stock options (Note 15).............. 119 5,055
Transfer of deferred compensation payable to other liabilities.... -- 14
Purchases of treasury stock....................................... -- --
Payments on notes receivable...................................... -- --
Other............................................................. 1 (145)
-------- ---------
Balance at December 31, 2001................................... $ 13,438 $ 167,542
-------- ---------
=======================================================
Consolidated Statement of Comprehensive Income/(Loss)
Chemed Corporation and Subsidiary Companies
------------------------------------------------------------------------------
(in thousands)
For the Years Ended December 31, 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------
Net income/(loss)............................................................... $ (10,375) $ 20,584 $ 19,696
--------- -------- ---------
Other comprehensive income/(loss), net of income tax:
Unrealized holding gains/(losses) arising during the period.................. 1,680 2,106 (6,910)
Less reclassification adjustment for gains included in net income/(loss)..... (703) (2,261) (2,960)
--------- --------- ---------
Total........................................................................ 977 (155) (9,870)
--------- --------- ---------
Comprehensive income/(loss)..................................................... $ (9,398) $ 20,429 $ 9,826
--------- --------- ---------
The Statement of Accounting Policies and the accompanying Notes to Financial
Statements are integral parts of these statements.
14
Deferred
Compensation Accumulated Notes
Treasury Payable in Other Receivable
Retained Stock-- Unearned Company Comprehensive for
Earnings at Cost Compensation Stock Income Shares Sold Total
- ---------------------------------------------------------------------------------------------------------
$ 146,961 $ (97,237) $ (20,558) $ 5,071 $ 13,262 $ -- $ 223,356
19,696 -- -- -- -- -- 19,696
(22,456) -- -- -- -- -- (22,456)
-- -- -- -- (9,870) -- (9,870)
-- -- 4,498 -- -- -- 4,498
-- 2,731 -- -- -- (2,731) --
-- (4,455) -- -- -- -- (4,455)
-- (326) (996) -- -- -- 422
121 (150) -- 269 -- -- 853
--------- --------- ---------- -------- -------- -------- ---------
144,322 (99,437) (17,056) 5,340 3,392 (2,731) 212,044
20,584 -- -- -- -- -- 20,584
(4,022) -- -- -- -- -- (4,022)
(6,992) -- -- -- -- -- (15,539)
-- (5,320) -- -- -- -- (5,320)
-- -- 3,617 -- -- -- 3,617
-- (408) (3,244) -- -- -- 2,840
-- -- -- -- (155) -- (155)
17 (84) -- 160 -- (155) (285)
--------- --------- ---------- -------- -------- -------- ---------
153,909 (105,249) (16,683) 5,500 3,237 (2,886) 213,764
(10,375) -- -- -- -- -- (10,375)
(4,384) -- -- -- -- -- (4,384)
-- -- -- -- 977 -- 977
-- -- 4,109 -- -- -- 4,109
-- (3,654) 5,138 -- -- -- 6,658
-- (14) -- (2,293) -- -- (2,293)
-- (219) -- -- -- -- (219)
-- (1,288) -- -- -- 1,484 196
13 -- -- 81 -- (100) (150)
--------- --------- ---------- -------- -------- -------- ---------
$ 139,163 $(110,424) $ (7,436) $ 3,288 $ 4,214 $ (1,502) $ 208,283
========= ========= ========== ======== ======== ======== =========
15
Notes to Financial Statements
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
1. Segments and Nature of the Business
Chemed is a diversified public corporation with strategic positions in
plumbing, drain cleaning, and heating, ventilating and air conditioning ("HVAC")
services (Roto-Rooter); home healthcare services (Patient Care); and residential
appliance and air conditioning repair services (Service America). Relative
contributions to service revenues and sales were 57%, 29% and 14% in 2001,
respectively.
The reportable segments have been defined along service lines, consistent
with the way the businesses are managed. In determining reportable segments, no
operating segments have been aggregated. Accordingly, the reportable segments
are defined as follows:
. The Roto-Rooter segment includes the combined operations of the Roto-Rooter
Group ("Roto-Rooter"), a group of wholly owned businesses that provide
repair and maintenance services to residential and commercial accounts.
Such services include plumbing; sewer, drain and pipe cleaning; and HVAC
services. They are delivered through company-owned, contractor-operated and
franchised locations. Roto-Rooter also manufactures and sells products and
equipment used to provide such services.
. The Patient Care segment includes the consolidated operations of the wholly
owned businesses comprising the Patient Care Group ("Patient Care"), which
offers complete home-healthcare services primarily in the New York-New
Jersey-Connecticut area. Services provided include skilled nursing; home
health aid; physical, speech, respiratory and occupational therapies;
medical social work; and nutrition.
. The Service America segment includes the consolidated operations of the
wholly owned businesses comprising the Service America Systems Group
("Service America"). The group provides HVAC and appliance repair and
maintenance services primarily to residential customers through service
contracts and through retail sales. In addition, Service America sells air
conditioning equipment and duct cleaning services.
Substantially all of the Company's service revenues and sales from continuing
operations are generated from business within the United States. Within the
Patient Care segment, balances due from the U.S. federal government and Visiting
Nurse Services of New York at December 31, 2001, accounted for approximately 14%
and 16%, respectively, of the Company's consolidated accounts receivable
balance. No other single customer's balance at December 31, 2001, accounted for
more than 10% of the Company's consolidated accounts receivable balance. In
addition, substantially all of Patient Care's accounts receivable at December
31, 2001 ($34.1 million), was generated from customers located in the
northeastern United States.
Management closely monitors accounts receivable balances and has established
policies regarding the extension of credit. The Patient Care segment
historically has experienced a relatively low level of losses on the collection
of its receivables.
Approximately 35% of Patient Care's net revenues are derived from services
provided directly to patients with coverage under the federal government's
Medicare program or under joint federal-and-state-sponsored Medicaid programs.
In addition, 37% of Patient Care's revenues arise from contracts with other
certified home-health agencies to provide services to recipients under these
entitlement programs.
Financial data by business segment shown on pages 26 and 27 of this annual
report are integral parts of these financial statements.
2. Restructuring and Similar Expenses
During 2001, the Company recorded pretax restructuring and similar expenses
in the amount of $26,126,000 comprising the cost of exiting Roto-Rooter's
underperforming HVAC and non-Roto-Rooter-branded plumbing operations
($11,205,000), the charge for accelerating vesting of all restricted stock
awards in connection with restructuring the Company's long-term incentive plans
($5,492,000), the cost of severance arrangements with 11 individuals resulting
from staff reductions at Chemed headquarters and each of the continuing segments
($4,087,000), the cost of resolving a U.S. Department of Labor investigation of
Roto-Rooter's overtime pay practices ($2,749,000), the write-down of impaired
property and equipment ($1,422,000) and the cost of Service America's closing
its Tucson branch ($1,171,000). The cost of exiting Roto-Rooter's
underperforming HVAC and non-Roto-Rooter-branded plumbing operations included
$9,793,000 for impaired goodwill, $477,000 for impaired identifiable intangible
assets, $380,000 for impaired property and equipment and $555,000 for other
costs. Similarly, the cost of closing Service America's Tucson branch included
an $833,000 charge for impaired goodwill, $50,000 for impaired identifiable
intangible assets and $288,000 for other costs. Approximately $3.5 million of
the $26.1 million restructuring charges are accrued and outstanding at December
31, 2001.
In addition, other unusual or nonrecurring charges ("other charges") of
$4,263,000 incurred in 2001 comprised the cost of an unfavorable adjustment to
Patient Care's prior years' cost reports ($1,488,000), an adjustment to Roto-
Rooter's casualty insurance accruals related to adverse claims experience
($1,411,000), the cost of terminating lease obligations ($532,000) and various
other costs ($732,000). These other charges are included in the consolidated
statement of operations as a reduction of sales ($2,188,000), a charge to cost
of sales ($2,027,000) and a charge to general and administrative expenses
($48,000).
The combined pretax impact of the restructuring and similar expenses and
other charges for 2001 is $30,389,000 ($19,009,000 aftertax or $1.95 per share).
Roto-Rooter's underperforming operations, which are being divested, generated
revenues of $17,386,000, $20,286,000 and $20,455,000, respectively, for the
years 2001, 2000 and 1999. Also, these operations recorded income/(losses) from
operations of $(97,000), $1,044,000 and $1,213,000, respectively.
Service America's Tucson branch, which was closed at the end of 2001,
generated revenues of $1,664,000, $2,342,000 and $1,157,000, respectively, for
the years 2001, 2000 and 1999. Also, this operation recorded losses from
operations of $430,000, $487,000 and $344,000, respectively.
16
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
3. Discontinued Operations
During 2001, Chemed discontinued its Cadre Computer Resources Inc. ("Cadre
Computer") segment and on August 31, 2001, completed the sale of the business
and assets of this segment to a company owned by the former Cadre Computer
employees for a note receivable ($399,000) that has been fully reserved. For the
eight months ended August 31, 2001, and for the years ended December 31, 2000
and 1999, Cadre Computer generated revenues of $5,089,000, $8,292,000 and
$7,994,000, respectively.
Discontinued operations comprise (in thousands, except per share amounts):
For the Years Ended
December 31,
-----------------------------
2001 2000 1999
------ ------ ------
Cadre Computer segment:
Income/(loss) before
income taxes $ (734) $ (240) $ 70
Income taxes 255 81 (28)
Minority interest 46 16 --
-------- ------- -------
Income/(loss) from
operations, net of
income taxes (433) (143) 42
Loss on disposal, net
of income tax benefit
of $829 (1,540) -- --
-------- ------- -------
Total Cadre
Computer (1,973) (143) 42
-------- ------- -------
Adjustment to accruals of
operations discontinued
in prior years:
Adjustment of sublease
accrual (1991) (1,700) -- --
Adjustment of severance
accruals (1997) (170) (275) --
-------- ------- -------
Income/(loss) before
income taxes (1,870) (275) --
Income tax benefit,
including
$1,700 reduction
in state income tax
accrual in 2001
relative to operations
discontinued in 1997 1,870 275 --
-------- ------- -------
Total adjustments -- -- --
-------- ------- -------
Total discontinued
operations $ (1,973) $ (143) $ 42
======== ======= =======
Earnings/(loss) per share $ (.20) $ (.02) $ --
======== ======= =======
Diluted earnings/(loss)
per share $ (.20) (.02) $ --
======== ======= =======
4. Business Combinations
During 2001, two purchase business combinations were completed within the
Roto-Rooter segment for an aggregate purchase price of $1.6 million in cash.
During 2000, three purchase business combinations were completed within the
Roto-Rooter segment for an aggregate purchase price of $11.5 million in cash.
During 1999, 10 purchase business combinations were completed within the
Roto-Rooter, Patient Care and Service America segments for aggregate purchase
prices of $15.5 million in cash.
All of the aforementioned Roto-Rooter business combinations involved
operations primarily in the business of providing plumbing repair, HVAC and
drain cleaning services. All of the Patient Care acquisitions involved
operations primarily in the business of providing home healthcare services, and
the Service America acquisitions provide HVAC and appliance repair and
maintenance services.
The Company's unaudited pro forma service revenues and sales, assuming the
purchase business combinations completed in 2001, 2000 and 1999 were completed
on January 1 of the preceding year, are $477,449,000, $493,953,000 and
$460,048,000, respectively, for the years ended December 31, 2001, 2000, and
1999. The results of operations of these business combinations are immaterial to
the consolidated operations of the Company.
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 purchase business combinations follows (in thousands):
For the Years Ended
December 31,
--------------------------------
2001 2000 1999
------ ------ ------
Working capital $ -- $ 89 $ 2,935
Identifiable intangible
assets 90 210 765
Goodwill 1,428 11,059 11,893
Other assets and
liabilities--net 37 146 (75)
------- -------- --------
Total net assets $ 1,555 $ 11,504 $ 15,518
======= ======== ========
All of the goodwill related to business combinations completed in 2001 is
expected to be deductible for income tax purposes. Since these transactions were
initiated after June 30, 2001, the related goodwill is not being amortized. The
weighted average life of the identifiable intangible assets acquired in 2001 is
6.1 years.
17
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
Total amortization of intangible assets for the year ended December 31,
2001, was $5,794,000 (2000--$6,181,000; 1999--$5,830,000). The following is a
schedule by year of projected amortization expense for intangible assets (in
thousands):
2002 $787
2003 730
2004 418
2005 359
2006 272
In June 2001, the Financial Accounting Standards Board approved the
issuance of Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
Business Combinations, and Statement of Financial Accounting Standards No. 142
("SFAS 142"), Goodwill and Other Intangible Assets. For Chemed, these statements
will generally become effective January 1, 2002, although business combinations
initiated after June 30, 2001, are subject to the non-amortization and purchase
accounting provisions.
Specifically, SFAS 142 stipulates that goodwill is no longer subject to
amortization, but must be evaluated annually for impairment beginning January 1,
2002. This first evaluation must be completed by June 30, 2002.
Chemed estimates that the non-amortization provision will increase its
diluted earnings per share by approximately $.45 per share in 2002. The
assessment of goodwill for impairment is a complex issue in which a company must
determine, among other things, the fair value of each defined component of its
operating segments. It is, therefore, not possible at this time to predict the
impact, if any, which the impairment assessment provisions of SFAS 142 will have
on Chemed's financial statements.
5. Other Income--Net
Other income--net from continuing operations comprises the following (in
thousands):
For the Years Ended
December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Dividend income $ 2,548 $ 2,563 $ 2,626
Interest income 1,665 1,535 1,589
Gain on sales of investments 993 3,399 4,661
Unrealized gains/(losses) on
investments held in deferred
compensation trusts (820) 388 1,966
Other--net (606) (176) 185
-------- -------- --------
Total other income--net $ 3,780 $ 7,709 $ 11,027
-------- -------- --------
6. Income Taxes
The provision for income taxes comprises the following (in thousands):
For the Years Ended
December 31,
-------------------------------------
Continuing Operations 2001 2000 1999
- --------------------- --------- --------- --------
Current
U.S. federal $ 803 $ 8,423 $ 9,009
U.S. state and local 306 2,151 1,917
Foreign (71) 104 188
Deferred
U.S. federal (4,366) 2,113 158
Foreign (34) (48) (43)
--------- --------- --------
Total $ (3,362) $ 12,743 $ 11,229
--------- --------- --------
Discontinued Operations
- -----------------------
Current U.S. federal $ (2,935) $ (1,238) $ (755)
Current U.S. state and local (1,700) -- --
Deferred U.S. federal 1,681 882 783
--------- --------- --------
Total $ (2,954) $ (356) $ 28
--------- --------- --------
A summary of the significant temporary differences that give rise to
deferred income tax assets/(liabilities) follows (in thousands):
December 31,
---------------------
2001 2000
-------- --------
Accrued insurance expense $ 6,561 $ 5,608
Deferred compensation 6,411 6,958
Accruals related to discontinued operations 4,057 5,530
Severance payments 2,058 478
Amortization of intangibles 2,146 --
Allowances for uncollectible accounts receivable 1,778 1,797
Accrued state taxes 1,128 1,600
Other 3,600 2,690
-------- --------
Gross deferred income tax assets 27,739 24,661
-------- --------
Accelerated tax depreciation (7,381) (8,088)
Market valuation of investments (2,126) (1,946)
Cash to accrual adjustments (3,605) (2,100)
Other (1,586) (1,673)
-------- --------
Gross deferred income tax liabilities (14,698) (13,807)
-------- --------
Net deferred income tax assets $ 13,041 $ 10,854
-------- --------
Included in other assets at December 31, 2001, are deferred income tax
assets of $3,179,000 (December 31, 2000--$187,000). 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.
15
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
The difference between the effective tax rate for continuing operations and
the statutory U.S. federal income tax rate is explained as follows:
For the Years Ended
December 31,
--------------------------
2001 2000 1999
------ ------ ------
Statutory U.S. federal income tax rate 35.0 % 35.0 % 35.0 %
Nondeductible amortization of goodwill (13.7) 4.2 4.5
Work opportunity tax credit 7.0 (2.2) (1.7)
Domestic dividend exclusion 7.0 (2.1) (2.3)
State and local income taxes, less federal
income tax benefit (1.9) 4.2 4.0
Tax benefit on dividends paid to ESOPs .9 (.2) (1.3)
Tax adjustments related to finalization of
prior years' audits -- -- (1.7)
Other--net (.9) (.8) (.1)
------ ------ ------
Effective tax rate 33.4 % 38.1 % 36.4 %
------ ------ ------
Income taxes included in the components of other comprehensive income are
as follows (in thousands):
For the Years Ended
December 31,
---------------------------
2001 2000 1999
------- ------- -------
Unrealized holding gains/(losses) $ 905 $ 1,134 $(3,721)
Reclassification adjustment (290) (1,138) (1,701)
The total amount of income taxes paid during the year ended December 31,
2001, was $5,772,000 (2000--$6,154,000; 1999--$13,982,000).
7. Cash Equivalents
Included in cash and cash equivalents at December 31, 2001, are cash
equivalents in the amount of $6,549,000 (2000--$7,063,000). 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 1.3% in
2001 and 5.2% in 2000.
From time to time throughout the year, the Company invests its excess cash
in repurchase agreements directly with major commercial banks. The collateral is
not physically held by the Company, 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.
8. Properties and Equipment
A summary of properties and equipment follows (in thousands):
December 31,
----------------------
2001 2000
--------- ---------
Land $ 2,568 $ 2,568
Buildings 19,951 19,050
Transportation equipment 35,301 40,219
Machinery and equipment 33,391 32,688
Computer software 20,499 21,921
Furniture and fixtures 20,627 21,516
Projects under construction 4,989 1,972
--------- ---------
Total properties and equipment 137,326 139,934
Less accumulated depreciation (69,738) (64,757)
--------- ---------
Net properties and equipment $ 67,588 $ 75,177
--------- ---------
9. Long-Term Debt and Lines of Credit
A summary of the Company's long-term debt follows (in thousands):
December 31,
----------------------
2001 2000
--------- ----------
Senior notes:
7.31%, due 2005 - 2009 $ 25,000 $ 25,000
8.15%, retired 2001 -- 40,000
10.67%, retired 2001 -- 3,000
Revolving credit agreements:
2.91% (2000--6.92%), due 2003 35,000 3,000
Other 1,390 1,767
--------- ---------
Subtotal 61,390 72,767
Less current portion (353) (14,376)
--------- ---------
Long-term debt, less current portion $ 61,037 $ 58,391
--------- ---------
Revolving Credit Agreement and Lines of Credit
In December 2001, the Company entered into a revolving credit agreement
with Bank One, N.A. ("Credit Agreement"), to borrow up to $40,000,000 at any
time during the two-year period ending December 21, 2003. At December 31, 2001,
the balance outstanding of the Credit Agreement totaled $35,000,000 and is due
on December 21, 2003. The interest rate of 2.91%, which is fixed through June
28, 2002, is based on various stipulated market rates of interest.
In addition to the Credit Agreement, the Company had approximately
$18,500,000 of unused short-term lines of credit with various banks at December
31, 2001.
19
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
Senior Notes
In March 1997, the Company borrowed $25,000,000 from several insurance
companies. Principal is repayable in five annual installments of $5,000,000
beginning on March 15, 2005, and bears interest at the rate of 7.31% per annum.
Interest is payable on March 15 and September 15 of each year.
On December 31, 2001, the Company prepaid the outstanding balances of its
8.15% senior notes due 2002 through 2004 and its 10.67% senior notes due 2002
through 2003. The principal balances outstanding at the time of prepayment were
$30,000,000 and $2,000,000, respectively. Penalties incurred on these
prepayments aggregated $1,701,000 or $.18 per share (net of income tax benefit
of $916,000) and are presented as extraordinary losses on extinguishment of debt
in the statement of operations.
Other
Other long-term debt has arisen from the assumption of loans in connection
with various acquisitions. Interest rates range from 7.3% to 8.0%, and the
obligations are due on various dates through February 2009.
The following is a schedule by year of required long-term debt payments as
of December 31, 2001 (in thousands):
2002 $ 353
2003 35,435
2004 334
2005 5,070
2006 5,073
After 2006 15,125
---------
Total long-term debt $ 61,390
---------
The various loan agreements contain certain covenants that could restrict
the amount of cash dividend payments, net rental payments, treasury stock
purchases and certain other transactions of the Company. The Company does not
anticipate that the restrictions imposed by the agreements will materially
restrict its future operations or ability to pay dividends.
The total amount of interest paid during the year ended December 31, 2001,
was $7,007,000 (2000--$7,345,000; 1999--$6,706,000). No interest was capitalized
during the year ended December 31, 2001 (2000--$500,000; 1999--$927,000).
10. Other Liabilities
At December 31, 2001, other current liabilities included accrued insurance
liabilities of $19,125,000 (2000--$15,808,000), accrued wages of $6,866,000
(2000--$6,958,000) and accrued savings and retirement plan contributions of
$5,344,000 (2000--$5,035,000). Other liabilities at December 31, 2001, included
deferred compensation liabilities totaling $15,029,000 (2000--$14,381,000).
At December 31, 2001, the Company's accrual for its estimated liability for
potential environmental cleanup and related costs arising from the sale of
DuBois Chemicals Inc. ("DuBois") amounted to $2,286,000. Of this, $786,000 is
included in other liabilities and $1,500,000 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 $17,970,000. On the
basis of a continuing evaluation of the Company's potential liability,
management believes that it is not probable this additional liability will be
paid. Accordingly, no provision for this contingent liability has been recorded.
Although it is not presently possible to reliably project the timing of payments
related to the Company's potential liability for environmental costs, management
believes that any adjustments to its recorded liability will not materially
adversely affect its financial position or results of operations.
Also, at December 31, 2001, the Company's accrual for losses on subleases
of office space formerly occupied by DuBois amounted to $4,703,000 (2000--
$4,486,000) of which $1,500,000 (2000--$900,000) is included in other current
liabilities. The accrual is based on the expectation that space currently
unoccupied is sublet for a total of $2,556,000 during the last three years of
the lease (ending April 2006).
Net uses of cash for discontinued operations in the statement of cash flows
represent the payment of severance, lease and other liabilities relating to
operations disposed of in 1991, 1997 and 2001.
20
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
11. 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 ESOPs that purchased a total of $56.0
million of the Company's capital stock. In December 1997, the Company
restructured the ESOPs and internally financed approximately $16.2 million of
the $21.8 million ESOP loans outstanding at December 31, 1997.
Substantially all Chemed headquarters and eligible employees of Roto-Rooter
participate in the ESOPs. Eligible employees of Roto-Rooter, Patient Care and
Service America are also covered by other defined contribution plans.
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,
-------------------------------
2001 2000 1999
------- ------- -------
ESOPs:
Compensation cost $ 2,144 $ 1,577 $ 1,649
Interest expense -- -- 23
Pension, profit-sharing and other
similar plans 4,510 5,304 6,491
------- ------- -------
Total 6,654 6,881 8,163
======= ======= =======
Dividends on ESOP shares used for
debt service $ 280 $ 270 $ 1,502
======= ======= =======
At December 31, 2001, there were 489,742 allocated shares (2000--444,925
shares) and 135,457 unallocated shares (2000--217,258 shares) in the ESOP
trusts.
The Company has an excess benefit plan for key employees whose
participation in the ESOPs 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, held by grantor trusts. Currently, benefits are invested in
only 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, 2001, these trusts held 94,742 shares or $3,300,000 of
the Company's stock (December 31, 2000--158,123 shares or $5,538,000). The
diversified assets of these excess benefit plans and of Roto-Rooter and Service
America deferred compensation plans, all of which are invested in various mutual
funds, totaled $14,750,000 at December 31, 2001 (December 31, 2000--
$14,194,000), and are included in other assets. The corresponding liabilities
are included in other liabilities.
12. Lease Arrangements
The Company, as lessee, has operating leases which 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 17 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, 2001 (in thousands):
2002 $ 10,144
2003 8,789
2004 7,024
2005 6,195
2006 2,721
After 2006 1,061
--------
Total minimum rental payments 35,934
Less minimum sublease rentals (5,772)
--------
Net minimum rental payments $ 30,162
--------
Total rental expense incurred under operating leases for continuing
operations follows (in thousands):
For the Years Ended
December 31,
-----------------------------
2001 2000 1999
-------- -------- --------
Total rental payments $ 11,371 $ 12,135 $ 12,265
Less sublease rentals (929) (1,765) (1,914)
-------- -------- --------
Net rental expense $ 10,442 $ 10,370 $ 10,351
========= ======== ========
21
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
13. 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, statutory deposits
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 is the Company's investment in privately held Vitas
Healthcare Corporation ("Vitas"), which provides noncurative care to
chronically ill patients. In connection with Vitas' refinancing its debt
obligations in April 2001, the Company and Vitas agreed to extend the
maturity of the Vitas 9% Cumulative Preferred Stock ("Preferred") to
April 1, 2007. In addition, Vitas issued a Common Stock Purchase Warrant
("Warrant C") to the Company for the purchase of approximately 1,636,000
common shares and extended the expiration dates of the Company's other
Vitas Common Stock Purchase Warrants ("Other Warrants") to December 31,
2007. Warrant C was recorded at its estimated fair value of $2,601,000,
and at the same time, a discount of $2,601,000 to the Preferred was
recorded. The appraised value of the Other Warrants was estimated to be
$4,048,000 in 2001 (versus a carrying value of $1,500,000). The value of
the Preferred is based on the present value of the mandatory redemption
payments, using an interest rate of 9.0%, a rate which management
believes is reasonable in view of risk factors attendant to the
investment.
. The fair value of the Company's long-term debt is estimated by
discounting the future cash outlays associated with each debt instrument
using interest rates currently available to the Company for debt issues
with similar terms and remaining maturities.
. The fair value of the Mandatorily Redeemable Convertible Preferred
Securities of the Chemed Capital Trust ("Trust Securities") 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):
Carrying Fair
December 31, Amount Value
- ------------------------- -------------------------
2001
Other investments/(a)/ $ 38,273 $ 40,821
Long-term debt 61,390 61,891
Trust securities 14,239 14,112
2000
Other investments/(a)/ $ 37,099 $ 37,099
Long-term debt 72,767 75,476
Trust securities 14,641 15,184
(a) Amounts include $27,243,000 invested in the Preferred, which is recorded
in other investments.
Disclosures regarding the Company's investments, all of which are equity
securities classified as available-for-sale, are summarized below (in
thousands):
December 31,
----------------------
2001 2000
------- -------
Aggregate fair value $40,821 $37,099
Gross unrealized holding gains 9,145 5,153
Gross unrealized holding losses 114 173
Amortized cost 31,790 32,119
The chart below summarizes information with respect to available-for-sale
securities sold during the period (in thousands):
For the Years Ended
December 31,
--------------------------------
2001 2000 1999
------- ------- -------
Proceeds from sale $ 1,377 $ 4,290 $ 7,701
Gross realized gains 1,112 3,496 4,675
Gross realized losses 119 97 14
22
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
14. Diluted Earnings/(Loss) Per Share
Due to the Company's loss from continuing operations in 2001, all
potentially dilutive securities were antidilutive for 2001. Therefore, the
diluted loss per share was the same as the loss per share in 2001. Diluted
earnings per share for 2000 and 1999 were calculated as follows (in thousands,
except per share data):
Income from continuing operations
---------------------------------
Income Shares Income
For the Years Ended December 31, (Numerator) (Denominator) Per Share
----------------------------------------------------------------------- --------- ----------- ---------
2000
Earnings............................................................. $ 20,727 9,833 $ 2.11
------
Conversion of trust securities....................................... 777 378
Nonvested stock awards............................................... -- 93
Dilutive stock options............................................... -- 1
-------- ------
Diluted earnings.................................................. $ 21,504 10,305 $ 2.09
-------- ------ ------
1999
Earnings............................................................. $ 19,654 10,470 $ 1.88
------
Nonvested stock awards............................................... -- 43
Dilutive stock options............................................... -- 1
-------- ------ ------
Diluted earnings.................................................. $ 19,654 10,514 $ 1.87
-------- ------ ------
Income before extraordinary loss/
Net income
----------------------------------------
Income Shares Income
For the Years Ended December 31, (Numerator) (Denominator) Per Share
----------------------------------------------------------------------- ---------- ----------- ---------
2000
Earnings............................................................... $ 20,584 9,833 $ 2.09
------
Conversion of trust securities......................................... 777 378
Nonvested stock awards................................................. -- 93
Dilutive stock options................................................. -- 1
-------- ------
Diluted earnings.................................................... $ 21,361 10,305 $ 2.07
-------- ------ ------
1999
Earnings............................................................... $ 19,696 10,470 $ 1.88
------
Nonvested stock awards................................................. -- 43
Dilutive stock options................................................. -- 1
-------- ------
Diluted earnings.................................................... $ 19,696 10,514 $ 1.87
-------- ------ ------
During the last six months of 2001 and for most of the years 2000 and 1999,
the following options, whose exercise prices were greater than the average
market price during most of the respective periods and which were, therefore,
excluded from the computation of diluted earnings/(loss) per share, were
outstanding at December 31:
Exercise Number of Options
---------------------------
Grant Date Price 2001 2000 1999
-------------------------------------- ----- ---- ---- ----
May 1999.............................. $32.19 429,250 490,125 497,625
May 1996.............................. 38.75 159,425 161,923 162,793
May 1997.............................. 35.94 159,413 166,188 171,688
March 1998............................ 39.13 155,550 160,462 165,112
February 1995......................... 33.63 68,000 68,000 68,000
May 1995.............................. 32.19 39,950 83,713 89,713
March 1994............................ 32.13 24,825 34,925 37,925
April 1998............................ 40.53 12,000 12,000 12,000
May 1998.............................. 37.78 750 1,000 1,750
23
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
15. Stock Incentive Plans
The Company has eight Stock Incentive Plans under which 2,850,000 shares of
Chemed 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. Two plans, covering a total of 700,000 shares, were adopted in
May 1999.
Under the plan adopted in 1983, both nonstatutory and incentive stock options
have been granted. Incentive stock options granted under the 1983 plan become
exercisable in full six months following the date of the grant; nonstatutory
options granted under the 1983 plan become exercisable in four annual
installments commencing 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.
The other plans are not qualified, restricted or incentive stock option plans
under the Internal Revenue Code. Options generally become exercisable six months
following the date of grant in either three or four equal annual installments.
Data relating to the Company's stock issued to employees follow:
2001 2000 1999
-------------------- ---------------------- -------------------
Number Weighted Number Weighted Number Weighted
of Average of Average of Average
Shares Price Shares Price Shares Price
-------- --------- -------- -------- -------- --------
Stock options:
Outstanding at January 1 ...... 1,194,756 $ 34.62 1,226,756 $ 34.60 772,001 $ 36.31
Granted ....................... -- -- -- -- 510,650 32.19
Exercised...................... (103,538) 31.74 (6,000) 30.38 -- --
Forfeited...................... (25,725) 34.43 (26,000) 34.78 (55,895) 36.10
Expired........................ (6,405) 34.60 -- -- -- --
--------- --------- ---------
Outstanding at December 31..... 1,059,088 34.91 1,194,756 34.62 1,226,756 34.60
========= ========= =========
Exercisable at December 31..... 941,149 35.25 906,810 35.06 722,375 35.21
========= ========= =========
Stock awards issued............... 17,073 37.73 225,298 28.26 57,816 31.38
========= ========= =========
Options outstanding at December 31, 2001, comprise the following:
Range of Exercise Prices
----------------------------------------------------------
$25.38 - $28.56 $32.13 - $35.94 $37.78 - $40.53
--------------- --------------- ---------------
Options outstanding....................................... 9,925 721,438 327,725
Average exercise price of options outstanding............. $ 27.58 $ 33.15 $ 38.99
Average contractual life.................................. .8 yrs. 6.1 yrs. 5.3 yrs.
Options exercisable....................................... 9,925 603,499 327,725
Average exercise price of options exercisable............. $ 27.58 $ 33.34 $ 38.99
Also, there were 131,950 shares available for granting of stock options and
awards at December 31, 2001.
Total compensation cost recognized for stock awards for continuing operations
was $6,410,000 in 2001 (2000--$1,707,000; 1999--$1,529,000). The expense for
2001 included $4,303,000 resulting from the acceleration of vesting of
restricted awards in connection with the restructuring of the Company's
long-term incentive plans, effective December 31, 2001. The shares of capital
stock were issued to key employees and directors at no cost and generally were
previously restricted as to the transfer of ownership. In prior years,
restrictions covering between 7% and 33% of each holder's shares lapsed
annually.
24
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, requires the presentation of pro forma data assuming
all options granted after December 31, 1994, are recorded at fair value.
Summarized below are pro forma data developed by applying the Black-Scholes
valuation method to the Company's stock options (in thousands, except per share
data):
For the Years Ended
December 31,
----------------------------------
Pro Forma Results 2001 2000 1999
- ----------------- ---------- -------- --------
Net income/(loss) $ (10,706) $ 20,059 $ 18,972
Earnings/(loss) per share (1.10) 2.04 1.81
Diluted earnings/(loss)
per share (1.10) 2.02 1.80
Per share average
fair value of
options granted n.a. n.a. 3.43
Assumptions
- -----------------
Average risk-free
interest rate n.a. n.a. 5.8%
Expected volatility n.a. n.a. 19.7
Expected life
of options n.a. n.a. 6 yrs.
No options were granted in 2001 or 2000; however, for 1999, it was assumed
that the annual dividend would be increased $.01 per share per quarter in the
fourth quarter of every odd-numbered year. This assumption was 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.
During 1999, the Company purchased 101,500 shares of its capital stock in
open-market transactions and sold these shares to certain officers and other key
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 (5.88% for
2000 and 2001).
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, 1999........................... $ 2,731
Accrual of interest................................. 155
-------
Balance at December 31, 2000................... 2,886
Accrual of interest................................. 100
Cash payments....................................... (196)
Value of shares surrendered
at market value on date of surrender.............. (1,288)
-------
Balance at December 31, 2001................... $ 1,502
-------
16. Trust Securities
Effective February 1, 2000, the Company completed an Exchange Offer whereby
stockholders exchanged 575,503 shares of capital stock for shares of Trust
Securities of the wholly owned Chemed Capital Trust ("Trust") on a one-for-one
basis. The Trust Securities, which carry a redemption value of $27.00 per
security, pay an annual cash distribution of $2.00 per security (payable at the
quarterly rate of $.50 per security commencing March 2000) and are convertible
into capital stock at a price of $37.00 per security. The Trust Securities
mature 30 years from date of issuance and are callable beginning March 15, 2003,
at a price of $27.27 for each $27.00 principal amount. On March 15, 2004, and
later, the Trust Securities are callable without premium.
During 2001, the Company purchased 13,720 (2000--30,619) Trust Securities in
open market transactions, and security owners converted 1,200 (2000--2,598)
Trust Securities into 876 (2000--1,895) shares of capital stock. At December 31,
2001, there were 527,366 Trust Securities outstanding (December 31,
2000--542,286).
The sole assets of the Trust are Junior Subordinated Debentures
("Debentures") of the Company in the principal amount of $15,917,000. The
Debentures mature March 15, 2030, and the interest rate of the Debentures is
$2.00 per annum per $27.00 principal amount. In February 2000, the Company
executed an Indenture relating to the Debentures, an Amended and Restated
Declaration of Trust relating to the Trust Securities and a Guarantee Agreement
for the benefit of the holders of the Trust Securities (collectively "Back-up
Undertakings"). Considered together, the Back-up Undertakings constitute a full
and unconditional guarantee by the Company of the Trust's obligations under the
Trust Securities.
25
Segment Data/(a)/
Chemed Corporation and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
For the Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues by Type of Service
Roto-Rooter
Sewer and drain cleaning .......................................... $ 115,902 $ 117,443 $ 96,629
Plumbing repair and maintenance ................................... 111,024 117,102 102,218
Industrial and municipal sewer and drain cleaning ................. 14,526 14,234 11,857
HVAC repair and maintenance ....................................... 9,859 13,412 14,928
Other products and services ....................................... 18,042 18,886 17,187
--------- --------- ---------
Total Roto-Rooter .............................................. 269,353 281,077 242,819
--------- --------- ---------
Patient Care
Home health aides ................................................. 98,124 90,473 90,580
Registered nurses ................................................. 21,324 22,540 19,900
Live-in aides ..................................................... 8,151 7,332 8,138
Other services .................................................... 11,609 16,741 10,262
--------- --------- ---------
Total Patient Care ............................................. 139,208/(b)/ 137,086 128,880
--------- --------- ---------
Service America
Repair services under contracts ................................... 51,299 55,048 57,520
Demand repair services ............................................ 17,256 19,182 16,380
--------- --------- ---------
Total Service America .......................................... 68,555 74,230 73,900
--------- --------- ---------
Total service revenues and sales ............................. $ 477,116 $ 492,393 $ 445,599
--------- --------- ---------
Aftertax Earnings/(Loss) by Segment
Roto-Rooter ....................................................... $ 3,367/(c)/ $ 20,032 $ 14,562
Patient Care ...................................................... 526/(c)/ 2,084 3,244
Service America ................................................... (686)/(c)/ 1,058 2,342
--------- --------- ---------
Total segment earnings ......................................... 3,207 23,174 20,148
Corporate
Gains on sales of investments .................................. 703 2,261 2,960
Overhead ....................................................... (10,322)/(c)/ (5,128) (4,701)
Net investing and financing income/(expense) ................... (289) 420 1,247
Discontinued operations ........................................ (1,973) (143) 42
Extraordinary loss on extinguishment of debt ................... (1,701) -- --
--------- --------- ---------
Net income/(loss) ............................................ $ (10,375) $ 20,584 $ 19,696
--------- --------- ---------
Interest Income
Roto-Rooter ....................................................... $ 243 $ 95 $ 19
Patient Care ...................................................... 12 16 15
Service America ................................................... 799 1,077 979
--------- --------- ---------
Subtotal ....................................................... 1,054 1,188 1,013
Corporate ......................................................... 791 564 847
Intercompany eliminations ......................................... (180) (217) (271)
--------- --------- ---------
Total interest income ........................................ $ 1,665 $ 1,535 $ 1,589
--------- --------- ---------
(a) Data are presented for continuing operations of the company.
(b) Revenues for Patient Care for 2001 were reduced by $2,188,000 for an
unfavorable adjustment to prior years' cost reports.
(c) Amounts for 2001 include aftertax restructuring and similar expenses and
other charges totaling $10,415,000 for Roto-Rooter, $2,066,000 for Patient
Care, $1,672,000 for Service America and $4,856,000 for the Corporate
Office.
26
Segment Data/(a)/ (continued)
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
(in thousands)
For the Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Interest Expense
Roto-Rooter.................................... $ 529 $ 2,016 $ 2,119
Patient Care................................... 1,215 1,676 760
Service America................................ -- -- --
--------- --------- ---------
Subtotal..................................... 1,744 3,692 2,879
Corporate...................................... 5,310 7,092 7,514
Intercompany eliminations...................... (1,630) (4,048) (3,535)
--------- --------- ---------
Total interest expense.................... $ 5,424 $ 6,736 $ 6,858
--------- --------- ---------
Income Tax Provision
Roto-Rooter.................................... $ 3,616 $ 14,797 $ 11,713
Patient Care................................... (264) 457 1,159
Service America................................ 437 1,570 2,404
--------- --------- ---------
Subtotal..................................... 3,789 16,824 15,276
Corporate...................................... (7,151) (4,081) (4,047)
--------- --------- ---------
Total income tax provision................ $ (3,362) $ 12,743 $ 11,229
--------- --------- ---------
Identifiable Assets
Roto-Rooter.................................... $ 175,584 $ 190,350 $ 183,797
Patient Care................................... 79,537 84,631 86,277
Service America................................ 70,592 72,364 69,632
--------- --------- ---------
Total identifiable assets.................... 325,713 347,345 339,706
Corporate assets/(d)/.......................... 70,798 74,030 81,597
--------- --------- ---------
Total assets.............................. $ 396,511 $ 421,375 $ 421,303
--------- --------- ---------
Additions to Long-Lived Assets/(e)/
Roto-Rooter.................................... $ 10,892 $ 20,811 $ 17,208
Patient Care................................... 845 1,649 12,001
Service America................................ 4,696 7,706 5,111
--------- --------- ---------
Subtotal..................................... 16,433 30,166 34,320
Corporate assets/(d)/.......................... 424 207 1,010
--------- --------- ---------
Total additions........................... $ 16,857 $ 30,373 $ 35,330
--------- --------- ---------
Depreciation and Amortization/(f)/
Roto-Rooter.................................... $ 14,128 $ 13,765 $ 11,707
Patient Care................................... 2,842 2,817 2,686
Service America................................ 4,951 4,273 3,790
--------- --------- ---------
Subtotal..................................... 21,921 20,855 18,183
Corporate assets/(d)/.......................... 2,195 2,276 1,550
--------- --------- ---------
Total depreciation and amortization....... $ 24,116 $ 23,131 $ 19,733
--------- --------- ---------
(d) Corporate assets consist primarily of cash and cash equivalents, marketable
securities, properties and equipment and other investments.
(e) Long-lived assets include goodwill, identifiable intangible assets and
property and equipment.
(f) Depreciation and amortization include amortization of goodwill, identifiable
intangible assets and other assets.
27
Selected Financial Data
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
(in thousands, except per share data, employee numbers,
footnote data, ratios and percentages)
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Summary of Operations
Continuing operations
Total service revenues and sales................................. $ 477,116 $ 492,393 $ 445,599
Gross profit..................................................... 181,639 195,160 174,099
Depreciation..................................................... 16,109 15,002 12,824
Income/(loss) from operations.................................... (7,306) 33,694 26,714
Income/(loss) from continuing operations......................... (6,701) 20,727 19,654
Discontinued operations/(a)/....................................... (1,973) (143) 42
Extraordinary loss on extinguishment of debt....................... (1,701) -- --
Cumulative effect of a change in accounting principle.............. -- -- --
Net income/(loss).................................................. (10,375) 20,584 19,696
Pro forma income from continuing operations/(b)/................... 11,605 18,466 16,694
Earnings/(loss) per share:
Income/(loss) from continuing operations......................... $ (.69) $ 2.11 $ 1.88
Net income/(loss)................................................ (1.07) 2.09 1.88
Pro forma income from continuing operations/(b)/................. 1.19 1.88 1.59
Average number of shares outstanding............................. 9,714 9,833 10,470
Diluted earnings/(loss) per share:
Income/(loss) from continuing operations......................... $ (.69) $ 2.09 $ 1.87
Net income/(loss)................................................ (1.07) 2.07 1.87
Pro forma income from continuing operations/(b)/................. 1.19 1.87 1.59
Average number of shares outstanding............................. 9,714 10,305 10,514
Cash dividends per share........................................... $ .44 $ .40 $ 2.12
Financial Position--Year-End
Cash, cash equivalents and marketable securities................... $ 9,008 $ 10,280 $ 17,382
Working capital.................................................... 14,943 (472) 13,374
Properties and equipment,
at cost less accumulated depreciation............................ 67,588 75,177 71,728
Total assets....................................................... 396,511 421,375 421,303
Long-term debt..................................................... 61,037 58,391 78,580
Stockholders' equity............................................... 208,283 213,764 212,044
Book value per share............................................... $ 21.18 $ 21.70 $ 20.40
Diluted book value per share....................................... 21.50 22.13 20.31
Other Statistics--Continuing Operations
Net cash provided/(used) by continuing operations.................. $ 34,417 $ 51,748 $ 27,573
Capital expenditures............................................... 15,302 19,235 21,995
Number of employees/(c)/........................................... 7,595 7,544 7,770
Number of service and sales representatives........................ 5,715 5,667 5,789
Dividend payout ratio/(d)/......................................... n.a.% 19.1% 112.8%
Debt to total capital ratio........................................ 21.6 24.2 29.9
Return on average equity/(d)/...................................... (4.8) 10.0 9.1
Return on average total capital employed/(d)/...................... (1.5) 8.3 7.7
Current ratio...................................................... 1.18 1.00 1.14
(a) Discontinued operations include Cadre Computer Resources, discontinued in
2001; National Sanitary Supply Company and The Omnia Group, discontinued in
1997; accrual adjustments in 1997 related to the gain on the sale of
Omnicare Inc. ("Omnicare"); Omnicare, discontinued in 1994; accrual
adjustments from 1992 through 1996 related to the gain on the sale of DuBois
Chemicals Inc. in 1991.
(b) Amounts exclude capital gains on sales of investments and exclude
restructuring and similar expenses and other charges in 2001 related
primarily to write-offs associated with exiting unprofitable businesses,
restructuring long-term incentives, severance costs, and the settlement of
overtime pay issues.
(c) Numbers reflect full-time-equivalent employees.
(d) These computations are based on net income and, with respect to return on
average capital employed, various related adjustments.
28
- -------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
$ 381,283 $ 341,729 $ 301,213 $ 270,449 $ 240,994 $ 136,428 $ 104,688
144,135 129,082 118,440 103,412 90,189 54,325 44,750
10,649 8,622 7,353 6,505 5,833 3,914 2,854
19,340 19,482 17,481 14,102 10,703 7,388 4,599
19,909 17,077 25,117 11,715 7,027 7,563 8,660
-- 13,160 7,211 11,467 36,895 10,266 6,991
-- -- -- -- -- -- --
-- -- -- -- -- 1,651 --
19,909 30,237 32,328 23,182 43,922 19,480 15,651
11,964 9,425 7,386 5,833 3,650 3,289 6,761
$ 1.98 $ 1.72 $ 2.56 $ 1.19 $ .71 $ .78 $ .89
1.98 3.04 3.30 2.36 4.47 2.00 1.60
1.19 .95 .75 .59 .37 .34 .69
10,058 9,940 9,801 9,830 9,830 9,756 9,783
$ 1.97 $ 1.71 $ 2.54 $ 1.18 $ .70 $ .76 $ .88
1.97 3.02 3.26 2.33 4.42 1.97 1.59
1.18 .94 .75 .59 .37 .33 .69
10,100 10,014 9,879 9,898 9,907 9,824 9,838
$ 2.12 $ 2.09 $ 2.08 $ 2.06 $ 2.04 $ 2.01 $ 2.00
$ 41,358 $ 70,958 $ 14,028 $ 30,497 $ 24,866 $ 20,133 $ 51,142
33,533 83,103 8,996 7,159 (14,573) (29,070) 5,574
61,721 53,089 40,661 37,860 35,677 33,873 26,419
429,704 448,838 509,361 476,732 453,801 385,922 363,960
80,407 83,720 158,140 85,317 92,033 97,906 103,580
223,356 228,120 217,891 208,657 186,320 137,151 133,511
$ 21.45 $ 22.64 $ 21.89 $ 21.18 $ 18.89 $ 14.00 $ 13.68
21.36 22.54 21.76 21.06 18.76 13.91 13.62
$ 20,778 $ 23,747 $ 13,519 $ 5,385 $ 13,378 $ 6,029 $ 8,583
21,997 20,117 10,988 9,219 9,606 7,420 3,835
7,671 6,849 5,884 5,278 4,497 2,711 1,726
5,759 5,101 4,315 3,835 3,203 1,832 1,090
107.1% 68.8% 63.0% 87.3% 45.6% 101.0% 125.0%
27.5 28.1 44.6 32.8 36.6 44.2 45.2
8.9 13.8 15.3 11.9 28.4 14.3 11.6
7.7 9.9 10.9 9.3 16.4 9.7 8.7
1.37 1.88 1.10 1.07 .86 .68 1.08
29
Supplemental Revenue and Profit Statistics by Business Segment
Chemed Corporation and Subsidiary Companies
- -------------------------------------------------------------------------------
(in thousands, except percentages and footnote data)
Continuing Operations
-------------------------------------------------------------
Roto- Patient Service
Rooter Care America Total
- --------------------------------------------------------------------------------------------------------------------------
Service Revenues and Sales
2001................................................. $ 269,353 $139,208 $ 68,555 $ 477,116
2000................................................. 281,077 137,086 74,230 492,393
1999................................................. 242,819 128,880 73,900 445,599
1998................................................. 192,050 118,282 70,951 381,283
1997................................................. 153,883 121,143 66,703 341,729
1996................................................. 140,163 99,565 61,485 301,213
1995................................................. 121,999 90,727 57,723 270,449
1994................................................. 109,098 69,064 62,832 240,994
1993................................................. 95,555 -- 40,873 136,428
1992................................................. 86,185 -- 18,503 104,688
Percent of Total
2001................................................. 57% 29% 14% 100%
1992................................................. 82 -- 18 100
Operating Profit/(Loss)/(a)/
2001................................................. $ 8,477/(b)/ $ 1,470/(b)/ $ (952)/(b)/ $ 8,995
2000................................................. 36,637 4,203 1,396 42,236
1999................................................. 26,310 5,157/(e)/ 3,679 35,146
1998................................................. 19,244/(c)/ 5,104 3,491 27,839
1997................................................. 17,256 5,541 3,443 26,240
1996................................................. 15,707 5,592 2,503 23,802
1995................................................. 13,134/(d)/ 4,923 1,906 19,963
1994................................................. 12,071 2,772 3,061 17,904
1993................................................. 9,854 -- 3,708 13,562
1992................................................. 8,626 -- 1,841 10,467
Percent of Total
2001................................................. 94% 16% (10)% 100%
1992................................................. 82 -- 18 100
(a) Operating profit is total service revenues and sales less operating expenses
and includes 100% of all consolidated operations. In computing operating
profit, none of the following items has been added or deducted: general
corporate expenses, interest expense, and other income--net.
(b) Amounts for 2001 include pretax restructuring and similar expenses and other
charges totaling $17,248,000 for Roto-Rooter, $3,178,000 for Patient Care
and $2,723,000 for Service America.
(c) Amount includes $752,000 of expenses incurred in connection with pooling-of-
interest business combinations in 1998.
(d) Amount includes nonrecurring charges of $538,000 incurred as a result of
discussions related to Chemed's proposal to acquire the 42% minority
interest in Roto-Rooter.
(e) Amount includes $1,453,000 pretax income from favorable adjustments to prior
years' cost reports.
30
Unaudited Summary of Quarterly Results
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
(in thousands, except per share data)
First Second Third Fourth Total
2001 Quarter Quarter Quarter Quarter Year
- ----------------------------------------------------------------------------------------------------------------------------------
Continuing Operations
Total service revenues and sales.............................. $ 121,200 $ 120,789 $ 117,498 $ 117,629 $ 477,116
--------- --------- --------- --------- ---------
Gross profit.................................................. $ 47,753 $ 47,356 $ 45,717 $ 40,813 $ 181,639
--------- --------- --------- --------- ---------
Income/(loss) from operations/(a)/............................ $ 7,517 $ 6,340 $ 1,568 $ (22,731) $ (7,306)
Interest expense.............................................. (1,486) (1,466) (1,373) (1,099) (5,424)
Distributions on preferred securities......................... (277) (278) (275) (283) (1,113)
Other income--net/(b)/........................................ 1,759 845 165 1,011 3,780
--------- --------- --------- --------- ---------
Income/(loss) before income taxes/(a,b)/.................... 7,513 5,441 85 (23,102) (10,063)
Income taxes.................................................. (2,899) (2,111) 7 8,365 3,362
--------- --------- --------- --------- ---------
Income/(loss) from continuing operations/(c)/................. 4,614 3,330 92 (14,737) (6,701)
Discontinued operations.......................................... (104) (1,869) -- -- (1,973)
--------- --------- --------- --------- ---------
Income/(loss) before extraordinary loss/(c)/..................... 4,510 1,461 92 (14,737) (8,674)
Extraordinary loss on extinguishment of debt..................... -- -- -- (1,701) (1,701)
--------- --------- --------- --------- ---------
Net Income/(Loss)/(c)/........................................... $ 4,510 $ 1,461 $ 92 $ (16,438) $ (10,375)
--------- --------- --------- --------- ---------
Earnings Per Share/(c)/
Income/(loss) from continuing operations...................... $ .47 $ .34 $ .01 $ (1.52) $ (.69)
--------- --------- --------- --------- ---------
Income/(loss) before extraordinary loss....................... $ .46 $ .15 $ .01 $ (1.52) $ (.89)
--------- --------- --------- --------- ---------
Net income/(loss)............................................. $ .46 $ .15 $ .01 $ (1.70) $ (1.07)
--------- --------- --------- --------- ---------
Average number of shares outstanding.......................... 9,746 9,728 9,690 9,690 9,714
--------- --------- --------- --------- ---------
Diluted Earnings Per Share/(c)/
Income/(loss) from continuing operations...................... $ .47 $ .34 $ .01 $ (1.52) $ (.69)
--------- --------- --------- --------- ---------
Income/(loss) before extraordinary loss....................... $ .46 $ .16 $ .01 $ (1.52) $ (.89)
--------- --------- --------- --------- ---------
Net income/(loss)............................................. $ .46 $ .16 $ .01 $ (1.70) $ (1.07)
--------- --------- --------- --------- ---------
Average number of shares outstanding.......................... 10,303 10,257 9,798 9,690 9,714
--------- --------- --------- --------- ---------
(a) Amounts for the third and fourth quarters and for the year include
restructuring and similar expenses and other charges totaling $4,031,000,
$26,358,000 and $30,389,000, respectively.
(b) Amounts for the first and second quarters and for the year include pretax
gains/(losses) from the sales of investments totaling $1,112,000,
$(119,000) and $993,000, respectively.
(c) Amounts for the first quarter and for the year include aftertax gains from
the sales of investments totaling $703,000 ($.07 per share). Amounts for
the third and fourth quarters and for the year include aftertax
restructuring and similar expenses and other charges of $2,420,000 ($.25
per share), $16,589,000 ($1.71 per share) and $19,009,000 ($1.95 per
share), respectively.
2000
- ----------------------------------------------------------------------------------------------------------------------------------
Continuing Operations
Total service revenues and sales............................ $ 119,387 $ 122,956 $ 121,652 $ 128,398 $ 492,393
--------- --------- --------- --------- ---------
Gross profit................................................ $ 46,611 $ 48,501 $ 48,739 $ 51,309 $ 195,160
--------- --------- --------- --------- ---------
Income from operations...................................... $ 7,473 $ 9,079 $ 7,948 $ 9,194 $ 33,694
Interest expense............................................ (1,782) (1,787) (1,664) (1,503) (6,736)
Distributions on preferred securities....................... (288) (286) (282) (341) (1,197)
Other income--net/(a)/...................................... 2,396 2,792 1,916 605 7,709
--------- --------- --------- --------- ---------
Income before income taxes............................... 7,799 9,798 7,918 7,955 33,470
Income taxes................................................ (2,939) (3,753) (3,210) (2,841) (12,743)
--------- --------- --------- --------- ---------
Income from continuing operations/(b)/...................... 4,860 6,045 4,708 5,114 20,727
Discontinued operations.......................................... 42 68 (73) (180) (143)
--------- --------- --------- --------- ---------
Net Income/(b)/.................................................. $ 4,902 $ 6,113 $ 4,635 $ 4,934 $ 20,584
--------- --------- --------- --------- ---------
Earnings Per Share/(b)/
Income from continuing operations............................. $ .48 $ .62 $ .48 $ .53 $ 2.11
--------- --------- --------- --------- ---------
Net income.................................................... $ .49 $ .62 $ .48 $ .51 $ 2.09
--------- --------- --------- --------- ---------
Average number of shares outstanding.......................... 10,064 9,797 9,742 9,728 9,833
--------- --------- --------- --------- ---------
Diluted Earnings Per Share/(b)/
Income from continuing operations............................. $ .48 $ .61 $ .48 $ .52 $ 2.09
--------- --------- --------- --------- ---------
Net income.................................................... $ .48 $ .61 $ .47 $ .50 $ 2.07
--------- --------- --------- --------- ---------
Average number of shares outstanding.......................... 10,171 10,295 10,253 10,276 10,305
--------- --------- --------- --------- ---------
(a) Amounts for the first, second and fourth quarters and for the year include
pretax gains from the sales of investments totaling $951,000, $1,711,000,
$737,000 and $3,399,000, respectively.
(b) Amounts for the first, second and fourth quarters and for the year include
aftertax gains from the sales of investments totaling $677,000 ($.06 per
share), $1,122,000 ($.12 per share and $.11 per diluted share), $462,000
($.05 per share) and $2,261,000 ($.23 per share and $.22 per diluted
share), respectively.
31
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
Financial Condition
Liquidity and Capital Resources
Significant factors affecting the Company's consolidated cash flows during
2001 and financial position at December 31, 2001, include the following:
. Operations generated cash of $34.4 million;
. Capital expenditures totaled $15.3 million; and
. The Company repaid $46.4 million of long-term debt and refinanced $35.0
million of this debt at lower interest rates.
The restructuring program commenced in the third quarter of 2001 did not
significantly impact the Company's cash or liquidity positions since
approximately 60% of the charges were noncash impairment charges. Further,
substantially all of the cash and noncash charges should generate tax savings in
the current year or early in subsequent years.
As a result of the net decline in debt, the ratio of total debt (excluding
the Trust Securities) to total capital declined from 24% at December 31, 2000,
to 22% at December 31, 2001. The Company's current ratio at December 31, 2001,
was 1.2 as compared with 1.0 at December 31, 2000.
The Company had $23.5 million of unused lines of credit with various banks
at December 31, 2001.
Cash Flow
The Company's cash flows for 2001 and 2000 are summarized as follows (in
millions):
For the Years Ended
December 31,
-------------------
2001 2000
------ ------
Cash from operations $ 34.4 $ 51.8
Capital expenditures (15.3) (19.2)
------ ------
Operating cash excess
after capital expenditures 19.1 32.6
Net decrease in long-term
debt (excluding ESOP debt) (11.4) (17.0)
Cash dividends (4.4) (4.0)
Net uses for discontinued operations (6.3) (3.7)
Business combinations (1.5) (11.5)
Proceeds from sales of investments 1.4 4.3
Purchases of treasury stock (1.2) (5.7)
Other--net 3.0 (2.0)
------ ------
Decrease in cash
and cash equivalents $ (1.3) $ (7.0)
------ ------
For 2001, the operating cash excess after capital expenditures was $19.1
million as compared with $32.6 million in 2000. This excess was available to
fund debt repayment, business combinations and dividend requirements.
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 and National Sanitary Supply
Company in 1997 and the sale of Cadre Computer in 2001, the Company provided
long-term allowances and accruals relating to costs of severance arrangements,
lease commitments and income tax matters. In the aggregate, the Company believes
these allowances and accruals are adequate as of December 31, 2001.
Based on a recent review of Chemed's environmental-related liabilities under
the DuBois sale agreement, the Company has estimated its remaining liability to
be $2.1 million. As of December 31, 2001, the Company is contingently liable for
additional cleanup and related costs up to a maximum of $18.0 million, for which
no provision has been recorded.
The Company's various loan agreements and guarantees of indebtedness contain
certain restrictive covenants; however, management believes that such covenants
will not adversely affect the operations of the Company. Under the most
restrictive of these covenants, the Company projects that it can incur
additional debt of approximately $61 million as of December 31, 2001.
Since 1991, the Company has carried an investment in the mandatorily
redeemable preferred stock ($27 million par value; $27.2 million carrying and
redemption values) of Vitas Healthcare Corporation ("Vitas"), a privately held
provider of hospice services to the terminally ill. During the past several
fiscal years, Vitas has increased its net income. During 2001, Vitas and the
Company agreed to extend the redemption dates on the preferred stock to December
31, 2007, to facilitate Vitas' pursuit of long-term financing alternatives. In
exchange for this extension, Vitas extended the maturity of the Vitas common
stock warrants held by the Company (Warrants A & B) and issued to the Company a
third warrant (Warrant C) for the purchase of approximately 1,636,000 shares of
Vitas common stock at a price of $5.50 per share. Warrant C is carried at its
estimated fair value of $2,601,000.
During 2001, Vitas made timely payment of its preferred dividends. In
addition, Vitas made timely payment of the fourth quarter preferred dividend due
in January 2002. On the basis of information currently available, management
believes its investment in Vitas is fully recoverable and that no impairment
exists.
Summarized below are the combined required long-term debt payments and
minimum lease obligations for each of the next five years subsequent to December
31, 2001 (in thousands):
Long-Term Minimum
Debt Lease
Payments Payments Total
-------- -------- --------
2002 $ 353 $ 10,144 $ 10,497
2003 35,435 8,789 44,224
2004 334 7,024 7,358
2005 5,070 6,195 11,265
2006 5,073 2,721 7,794
32
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
Based on recent projections and historical cash flows, management anticipates
that the Company will satisfy these obligations from internally generated
resources and minimal additional outside borrowings.
Additionally, it is management's opinion that the Company has no long-range
commitments that would have a significant impact on its liquidity, financial
condition or the results of its operations. Due to the nature of the
environmental liabilities, it is not possible to forecast the timing of the cash
payments for these potential liabilities. Based on the Company's available
credit lines, sources of borrowing and liquid investments, management believes
its sources of capital and liquidity are satisfactory for the Company's needs
for the foreseeable future.
Results of Operations
Set forth below by business segment are the increase/(decrease) in service
revenues and sales and the aftertax earnings margin:
Percent Increase/(Decrease)
in Service Revenues and Sales
-----------------------------
2001 2000
vs. 2000 vs. 1999
-------- --------
Roto-Rooter (4)% 16%
Patient Care 2 6
Service America (8) --
Total (3) 11
Aftertax Earnings/(Loss)
as a Percent of
Service Revenues and Sales
(Aftertax Margin)
---------------------------------------------
2001 2000 1999
--------------------------- ---- ----
Reported Pro Forma/(a)/
-------- ---------
Roto-Rooter 1.3% 5.1% 7.1% 6.0%
Patient Care .4 1.9 1.5 2.5
Service America (1.0) 1.4 1.4 3.2
Total .7 3.6 4.7 4.5
(a) Pro forma amounts exclude aftertax restructuring and similar expenses and
other charges of $10,415,000 for Roto-Rooter, $2,066,000 for Patient Care
and $1,672,000 for Service America (combined segment total of $14,153,000).
2001 Versus 2000
The Roto-Rooter segment recorded service revenues and sales of $269,353,000
during 2001, a decline of 4% versus revenues of $281,077,000 in 2000. This
decline was attributable primarily to Roto-Rooter's plumbing and HVAC (heating,
ventilating and air conditioning) businesses, which recorded revenue declines of
5% and 26%, respectively, for 2001. Additionally, drain cleaning revenues
declined 1% in 2001. The plumbing and drain cleaning declines are attributable
to lower job counts, partially offset by higher prices. The aftertax margin of
the Roto-Rooter segment declined from 7.1% in 2000 to 1.3% in 2001, primarily as
a result of incurring $10,415,000 of aftertax restructuring and similar expenses
and other charges in 2001. These charges included the aftertax cost of exiting
HVAC and non-Roto-Rooter-branded plumbing businesses ($6,765,000), the
resolution of overtime pay issues with the U.S. Department of Labor
($1,656,000), unfavorable adjustments to casualty insurance accruals related to
adverse claims experience ($839,000), charges for accelerating the vesting of
restricted stock awards ($546,000), impairment of fixed assets ($182,000),
severance ($72,000) and other nonrecurring charges (combined total of $355,000).
Excluding these charges, the pro forma aftertax margin for 2001 was 5.1% versus
7.1% for 2000. The remaining decline in aftertax margin is primarily
attributable to a lower gross profit margin resulting from higher labor costs
and higher insurance costs.
Revenues of the Patient Care segment increased 2% from $137,086,000 in 2000
to $139,208,000 in 2001. Excluding an unfavorable adjustment to prior years'
cost reports in 2001, revenues for this segment increased 3% versus revenues for
2000. The aftertax margin of this segment declined from 1.5% in 2000 to .4% in
2001, as a result of incurring $2,066,000 of aftertax restructuring and similar
expenses and other charges in 2001. These charges included the cost of the
unfavorable adjustment to prior years' cost reports ($967,000), the write-down
of impaired property and equipment ($597,000), severance ($274,000), the cost of
accelerating the vesting of restricted stock awards ($34,000) and other costs
($194,000). On a pro forma basis, excluding restructuring and similar expenses
and other charges, the aftertax margin for 2001 was 1.9% versus 1.5% for 2000.
The higher aftertax margin in 2001 is due primarily to a higher gross margin.
The Service America segment recorded total revenues of $68,555,000 during
2001, a decline of 8% versus 2000's revenues of $74,230,000. Retail sales of
Service America for 2001, which accounted for approximately 25% of total
revenues, declined 10% versus retail sales for 2000. Similarly, revenues from
service contracts for 2001 declined 7% versus such revenues for 2000. This
decline is largely the result of insufficient new service contracts to offset
the expiration of existing service contracts. The aftertax margin of this
segment declined from 1.4% in 2000 to (1.0)% in 2001, primarily due to aftertax
restructuring and similar expenses and other charges of $1,672,000 in 2001.
These charges included the cost of closing the Tucson branch ($707,000),
severance costs ($489,000), property and equipment impairment ($100,000), the
cost of accelerating the vesting of restricted stock awards ($87,000) and other
costs ($289,000). Excluding restructuring and similar expenses and other
charges, the pro forma aftertax margin for 2001 was 1.4%, the same as reported
in 2000.
Income/(loss) from operations declined from income of $33,694,000 in 2000
to a loss of $7,306,000 in 2001. This primarily resulted from restructuring and
similar expenses and other charges totaling $30,389,000 in 2001 and a decline in
operating profit of the Roto-Rooter segment (excluding restructuring and similar
expenses and other charges) in 2001.
EBITDA (earnings before interest, taxes, depreciation and amortization
excluding capital gains) were $30,608,000 in 2001, a decline of 48% versus
EBITDA for 2000. On a pro forma basis, excluding restructuring and similar
expenses and other charges, EBITDA for 2001 were $48,042,000, a decline of 19%
versus EBITDA for 2000.
33
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
Interest expense for 2001 totaled $5,424,000 versus expense of $6,736,000
recorded in 2000. This decline is primarily attributable to lower debt levels in
2001.
Other income declined from $7,709,000 in 2000 to $3,780,000 in 2001,
primarily as a result of lower gains on the sales of investments in 2001.
Unrealized losses on investments held in deferred compensation trusts in 2001
versus gains in 2000 also contributed to this decline.
The Company's effective income tax rate was 33.4% in 2001 as compared with
38.1% in 2000. The lower effective rate in 2001 is largely due to the impact of
nondeductible goodwill amortization on taxable income.
Income/(loss) from continuing operations declined from income of
$20,727,000 ($2.11 per share or $2.09 per diluted share) in 2000 to a loss of
$6,701,000 ($.69 per share) in 2001, largely as a result of aftertax
restructuring and similar expenses and other charges of $19,009,000 and of lower
operating profit from the Roto-Rooter segment. On a pro forma basis, excluding
restructuring and similar expenses and other charges in 2001 and gains on the
sales of investments in both periods, income from continuing operations in 2001
was $11,605,000 ($1.19 per share) versus $18,466,000 ($1.88 per share or $1.87
per diluted share) in 2000. The chart below reconciles net income/(loss) to pro
forma income from continuing operations (in thousands):
For the Years Ended
December 31,
-----------------------
2001 2000
--------- --------
Net income/(loss) $ (10,375) $ 20,584
Add restructuring and similar expenses
and other charges 19,009 --
Add loss from discontinued operations 1,973 143
Add extraordinary loss
on extinguishment of debt 1,701 --
Deduct gains on sales of investments (703) (2,261)
--------- --------
Pro forma income
from continuing operations $ 11,605 $ 18,466
========= ========
Net income/(loss) declined from income of $20,584,000 ($2.09 per share or
$2.07 per diluted share) in 2000 to a loss of $10,375,000 ($1.07 per share) in
2001. The net loss for 2001 included restructuring and similar expenses and
other charges of $19,009,000 ($1.95 per share), a loss from discontinued
operations of $1,973,000 ($.20 per share), an extraordinary loss from
extinguishment of debt of $1,701,000 ($.18 per share) and gains on the sales of
investments of $703,000 ($.07 per share). For 2000, net income of $20,584,000
included gains on the sales of investments of $2,261,000 ($.23 per share or $.22
per diluted share) and a loss from discontinued operations of $143,000 ($.02 per
share).
2000 Versus 1999
The Roto-Rooter segment recorded service revenues and sales of $281,077,000
during 2000, an increase of 16% versus revenues of $242,819,000 in 1999. This
growth was attributable primarily to Roto-Rooter's plumbing and sewer and drain
cleaning businesses, which recorded revenue increases of 15% and 22%,
respectively, for 2000. Excluding businesses acquired in 2000 and 1999, this
segment's total revenues and net income for 2000 increased 11% and 37%,
respectively, versus amounts recorded in 1999. Including acquisitions, Roto-
Rooter recorded a 38% increase in aftertax earnings for 2000. The aftertax
margin of this segment increased 1.1 percentage points, primarily due to the
favorable impact of pricing increases on the gross profit margin.
Revenues of the Patient Care segment increased 6% from $128,880,000 in 1999
to $137,086,000 in 2000. Higher labor costs, as a percent of revenues, are
primarily responsible for the decline in the aftertax margin from 2.5% in 1999
to 1.5% in 2000.
The Service America segment recorded total revenues of $74,230,000 during
2000, essentially the same level as 1999's revenues of $73,900,000. Retail sales
of Service America for 2000, which accounted for approximately 26% of total
revenues, increased 17% versus retail sales for 1999. As anticipated, revenues
from repair service contracts for 2000 declined 4% versus revenues in 1999. For
2000, aftertax earnings declined 55%, and the aftertax margin declined 1.8
percentage points in 2000 as compared with 1999 results. The reasons for these
declines were higher medical and casualty insurance costs and higher fuel costs
incurred in 2000.
Income from operations increased from $26,714,000 in 1999 to $33,694,000 in
2000, as a result of significantly higher operating profit recorded by Roto-
Rooter during 2000.
Also reflecting a strong operational performance by Roto-Rooter in 2000,
earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding capital gains and acquisition expenses, totaled $59,187,000 in 2000,
an increase of 14% versus EBITDA for 1999.
Interest expense for 2000 totaled $6,736,000 versus expense of $6,858,000
recorded in 1999.
Other income declined from $11,027,000 in 1999 to $7,709,000 in 2000,
primarily as a result of lower gains on the sales of investments and lower gains
on assets held in deferred compensation trusts in 2000.
The Company's effective income tax rate was 38.1% in 2000 as compared with
36.4% in 1999. The lower effective rate in 1999 was largely attributable to
adjustments recorded during 1999 from the finalization of federal income tax
audits for prior years.
34
Chemed Corporation and Subsidiary Companies
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Net income increased 5% from $19,696,000 ($1.88 per share or $1.87 per
diluted share) in 1999 to $20,584,000 ($2.09 per share or $2.07 per diluted
share) in 2000. Excluding discontinued operations of $(143,000) in 2000 and
$42,000 in 1999 and aftertax realized investment gains of $2,261,000 in 2000 and
$2,960,000 in 1999, earnings per share increased 18% from $1.59 per share to
$1.88 per share in 2000. Similarly, diluted earnings per share excluding
discontinued operations and investment gains increased 18% from $1.59 per share
in 1999 to $1.87 per share in 2000.
Critical Accounting Policies
As a result of self-insuring for casualty insurance claims, the Company
must closely monitor and continually evaluate its historical claims experience
to estimate the appropriate level of accrual for incurred claims. Management
consults with insurance professionals annually to ensure that appropriate
development factors are applied to claims experience to calculate period-to-
period accrual adjustments. Although significant fluctuations may occur in the
short term, the Company's experience indicates that its methodology provides
reasonable expense estimates in the long run.
Also, 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.
Lastly, the Company periodically makes an estimation and valuation of the
future benefits of its long-lived assets based on key financial indicators. If
the projected undiscounted cash flows of a major business unit indicate that
property and equipment, goodwill or identifiable intangible assets have been
impaired, a write-down to fair value is made.
Accounting for Business
Combinations and Intangible Assets
In June 2001, the Financial Accounting Standards Board approved the
issuance of Statement of Financial Accounting Standards No. 141 ("SFAS 141"),
Business Combinations, and Statement of Financial Accounting Standards No. 142
("SFAS 142"), Goodwill and Other Intangible Assets. For Chemed, these statements
will generally become effective January 1, 2002, although business combinations
initiated after June 30, 2001, are subject to the non-amortization and purchase
accounting provisions.
Specifically, SFAS 142 stipulates that goodwill is no longer subject to
amortization, but must be evaluated annually for impairment beginning January 1,
2002. The first evaluation must be completed by June 30, 2002.
Chemed estimates that the non-amortization provision will increase its
diluted earnings per share by approximately $.45 per share in 2002. The
assessment of goodwill for impairment is a complex issue in which a company must
determine, among other things, the fair value of each defined component of its
operating segments. It is, therefore, not possible at this time to predict the
impact, if any, which the impairment assessment provisions of SFAS 142 will have
on Chemed's financial statements.
Accounting for Asset Retirement
Obligations
In June 2001, the Financial Accounting Standards Board approved the
issuance of Statement of Financial Accounting Standards No. 143 ("SFAS 143"),
Accounting for Asset Retirement Obligations. This statement becomes effective
for fiscal years beginning after June 15, 2002, and requires all entities to
recognize legal obligations associated with the retirement of tangible long-
lived assets that result from the acquisition, construction or development
and/or normal operation of a long-lived asset.
Since the Company has no material asset retirement obligations, the
adoption of SFAS 143 in 2003 will not have a material impact on Chemed's
financial statements.
Accounting for the Impairment
or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board approved the
issuance of Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
Accounting for the Impairment or Disposal of Long-Lived Assets. This statement
becomes effective for fiscal years beginning after December 15, 2001, and
modifies accounting for impairment of long-lived assets to be held and used,
disposed of by sale or otherwise disposed. It is currently anticipated that
adoption of SFAS 144 in 2002 will not materially impact the Company's financial
statements.
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 subject to certain known and unknown
risks, uncertainties, contingencies and other factors. Such forward-looking
statements and trends include, but are not limited to, those relating to the
leveraging of costs, the impact of laws and regulations on Company operations,
the recoverability of deferred tax assets and other factors. Any or all of these
factors could cause actual results to differ materially from these 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.
35
Corporate Officers and Directors
Corporate Officers
Edward L. Hutton
Chairman
Kevin J. McNamara
President & Chief Executive Officer
Timothy S. O'Toole
Executive Vice President & Treasurer
Sandra E. Laney
Executive Vice President &
Chief Administrative Officer
Spencer S. Lee
Executive Vice President
Arthur V. Tucker, Jr.
Vice President & Controller
Naomi C. Dallob
Vice President & Secretary
Thomas C. Hutton
Vice President
David J. Lohbeck
Vice President
John M. Mount
Vice President
David G. Sparks
Vice President
Directors
Edward L. Hutton
Chairman, Chemed Corporation
Kevin J. McNamara
President & Chief Executive Officer,
Chemed Corporation
Rick L. Arquilla
President & Chief Operating Officer,
Roto-Rooter Services Company
Charles H. Erhart, Jr.
Former President, W.R. Grace & Co.
(retired)
Joel F. Gemunder
President, Omnicare Inc.
Patrick P. Grace
President & Chief Executive Officer,
Kingdom Group LLC
Thomas C. Hutton
Vice President, Chemed Corporation
Walter L. Krebs
Former Senior Vice President-Finance,
Chief Financial Officer & Treasurer,
Service America Systems Inc. (retired)
Sandra E. Laney
Executive Vice President &
Chief Administrative Officer,
Chemed Corporation
Spencer S. Lee
Executive Vice President,
Chemed Corporation; Chairman
& Chief Executive Officer,
Roto-Rooter Inc.
John M. Mount
Vice President, Chemed Corporation;
President & Chief Executive Officer,
Service America Systems Inc.
Timothy S. O'Toole
Executive Vice President & Treasurer,
Chemed Corporation; Chairman &
Chief Executive Officer, Patient Care Inc.
Donald E. Saunders
Markley Visiting Professor
School of Business
Department of Marketing
Miami University (Ohio)
George J. Walsh III
Partner, Gould & Wilkie LLP
(Law Firm, New York, New York)
36
Chemed Corporation
2600 Chemed Center
255 East Fifth Street
Cincinnati, Ohio 45202-4726
Visit our company Web sites at www.chemed.com, www.rotorooter.com,
www.serviceamerica.com, and www.patientcare.com.