SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2005
Commission File Number 1-8351
CHEMED CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
- -------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio 45202
- --------------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(513) 762-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Amount Date
- -------------- ------------------------------ ---------
Capital Stock 25,655,906 Shares June 30,2005
$1 Par Value
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES
Index
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet -
June 30, 2005 and
December 31, 2004 3
Unaudited Consolidated Statement of Income -
Three and six months ended
June 30, 2005 and 2004 4
Unaudited Consolidated Statement of Cash Flows -
Six months ended
June 30, 2005 and 2004 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of 14
Operations
Item 3. Quantitative and Qualitative Disclosures 21
about Market Risk
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security 22
Holders
Item 6. Exhibits 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands except share and per share data)
June 30, December 31,
2005 2004
------------------- ------------------
ASSETS
Current assets
Cash and cash equivalents $ 17,870 $ 71,448
Accounts receivable less allowances of $7,844
(2004 - $7,544) 84,973 64,663
Inventories 7,309 7,019
Current deferred income taxes 20,687 31,250
Prepaid income taxes 8,360 -
Current assets of discontinued operations 4,656 13,397
Prepaid expenses and other current assets 9,499 9,842
------------------- ------------------
Total current assets 153,354 197,619
Investments of deferred compensation plans held in trust 19,610 18,317
Other investments 1,445 1,445
Note receivable 12,500 12,500
Properties and equipment, at cost, less accumulated
depreciation of $ 60,058 (2004 - $53,496) 59,432 55,796
Identifiable intangible assets less accumulated
amortization of $ 7,202 (2004 - $5,174) 74,896 76,924
Goodwill 437,738 432,732
Noncurrent assets of discontinued operations 681 5,705
Other assets 22,571 24,528
------------------- ------------------
Total Assets $ 782,227 $ 825,566
=================== ==================
LIABILITIES
Current liabilities
Accounts payable $ 39,899 $ 37,777
Current portion of long-term debt 1,176 12,185
Income taxes 6,922 10,944
Accrued insurance 27,392 26,350
Accrued salaries and wages 24,000 17,030
Current liabilities of discontinued operations 7,605 22,117
Other current liabilities 36,284 42,777
------------------- ------------------
Total current liabilities 143,278 169,180
Deferred income taxes 17,630 16,814
Long-term debt 234,541 279,510
Deferred compensation liabilities 19,555 18,311
Noncurrent liabilities of discontinued operations 779 811
Other liabilities 7,456 8,848
------------------- ------------------
Total Liabilities 423,239 493,474
------------------- ------------------
STOCKHOLDERS' EQUITY
Capital stock - authorized 40,000,000 shares $1 par; issued
27,896,618 shares (2004 - 13,491,341 pre-2005 stock
split shares) 27,897 13,491
Paid-in capital 222,160 212,691
Retained earnings 155,484 141,542
Treasury stock - 2,240,712 shares (2004 - 983,128 pre-2005
stock split shares), at cost (44,572) (33,873)
Unearned compensation (3,772) (3,590)
Deferred compensation payable in Company stock 2,333 2,375
Notes receivable for shares sold (542) (544)
------------------- ------------------
Total Stockholders' Equity 358,988 332,092
------------------- ------------------
Total Liabilities and Stockholders' Equity $ 782,227 $ 825,566
=================== ==================
See accompanying notes to unaudited financial statements.
3
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ -------------
Continuing operations
Service revenues and sales $ 226,309 $ 199,135 $ 444,946 $ 319,475
------------ ------------ ------------ -------------
Cost of services provided and goods sold
(excluding depreciation) 161,120 140,070 314,072 218,919
Selling, general and administrative expenses 36,802 34,476 73,397 62,688
Depreciation 3,928 4,097 7,848 7,158
Amortization 1,231 1,097 2,423 1,558
Other expenses 1,166 (1,368) 2,490 7,415
------------ ------------ ------------ ------------
Total costs and expenses 204,247 178,372 400,230 297,738
------------ ------------ ------------ -------------
Income from operations 22,062 20,763 44,716 21,737
Interest expense (5,039) (6,204) (10,874) (9,104)
Loss on extinguishment of debt - - (3,971) (3,330)
Other income--net 600 149 1,327 1,628
------------ ------------ ------------ -------------
Income before income taxes 17,623 14,708 31,198 10,931
Income taxes (6,512) (6,381) (12,182) (5,755)
Equity in loss of affiliate - - - (4,105)
------------ ------------ ------------ -------------
Income from continuing operations 11,111 8,327 19,016 1,071
Discontinued operations, net of income taxes (2,226) (9) (2,015) 137
------------ ------------ ------------ -------------
Net income $ 8,885 $ 8,318 $ 17,001 $ 1,208
============ ============ ============ =============
Earnings Per Share
Income from continuing operations $ 0.44 $ 0.34 $ 0.75 $ 0.05
============ ============ ============ =============
Net income $ 0.35 $ 0.34 $ 0.67 $ 0.05
============ ============ ============ =============
Average number of shares outstanding 25,489 24,650 25,319 23,238
============ ============ ============ =============
Diluted Earnings Per Share
Income from continuing operations $ 0.42 $ 0.33 $ 0.73 $ 0.05
============ ============ ============ =============
Net income $ $0.34 $ 0.33 $ 0.65 $ 0.05
============ ============ ============ =============
Average number of shares outstanding 26,214 25,354 26,059 23,696
============ ============ ============ =============
Cash Dividends Per Share $ 0.06 $ 0.06 $ 0.12 $ 0.12
============ ============ ============ =============
See accompanying notes to unaudited financial statements.
4
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
------------------------------------------
2005 2004
------------------- --------------------
Cash Flows from Operating Activities
Net income $ 17,001 $ 1,208
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,271 8,716
Write off unamortized debt issuance costs 2,871 -
Provision for deferred income taxes (2,206) 50
Provision for uncollectible accounts receivable 3,343 2,932
Noncash long-term incentive compensation 2,574 4,988
Amortization of debt issuance costs 962 782
Discontinued operations 2,015 (137)
Equity in loss of affiliate - 4,105
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations:
Decrease/(increase) in accounts receivable (23,653) 27
Increase in inventories (290) (407)
Decrease in prepaid expenses and other
current assets 343 13,435
Decrease in accounts payable, and other current liabilities (2,673) (17,345)
Increase in income taxes 7,859 4,895
Decrease/(increase) in other assets (1,328) 4,495
Increase in other liabilities 390 631
Noncash expense of internally financed ESOPs 572 947
Other sources/(uses) 676 (512)
------------------- --------------------
Net cash provided by continuing operations 18,727 28,810
Net cash provided/(used) by discontinued operations (1,559) 3,651
------------------- --------------------
Net cash provided by operating activities 17,168 32,461
------------------- --------------------
Cash Flows from Investing Activities
Capital expenditures (11,455) (7,512)
Business combinations, net of cash acquired (5,495) (327,427)
Net uses from disposals of discontinued operations (5,478) (1,082)
Proceeds from sales of property and equipment 96 300
Return of merger deposit - 10,000
Other uses (107) (92)
------------------- --------------------
Net cash used by investing activities (22,439) (325,813)
------------------- --------------------
Cash Flows from Financing Activities
Repayment of long-term debt (140,978) (93,434)
Proceeds from issuance of long-term debt 85,000 295,000
Increase in cash overdraft payable 7,347 9,541
Issuance of capital stock, net of issuance costs 8,766 97,054
Debt issuance costs (1,755) (13,837)
Dividends paid (3,060) (2,707)
Purchases of treasury stock (3,574) (2,228)
Repayment of stock subscriptions note receivable - 8,053
Redemption of convertible trust preferred securities - (2,736)
Other uses (53) (23)
------------------- --------------------
Net cash provided/(used) by financing activities (48,307) 294,683
------------------- --------------------
Increase/(Decrease) in Cash and Cash Equivalents (53,578) 1,331
Cash and cash equivalents at beginning of year 71,448 50,688
------------------- --------------------
Cash and cash equivalents at end of period $ 17,870 $ 52,019
=================== ====================
See accompanying note to unaudited financial statements.
5
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements
1. Basis of Presentation
As used herein, the terms "We," "Company" and "Chemed" refer to Chemed
Corporation or Chemed Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited consolidated financial
statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.
Consequently, we have omitted certain disclosures required under generally
accepted accounting principles in the United States for complete financial
statements. However, in our opinion, the financial statements presented herein
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position, results of operations and
cash flows of the Company. These financial statements are prepared on the same
basis as and should be read in conjunction with the Consolidated Financial
Statements and related notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 2004. Certain 2004 amounts have been
reclassified to conform with the current period presentation.
We use Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, to account for stock-based
compensation. Since the Company's stock options qualify as fixed options under
APB 25 and since the option price equals the market price on the date of a
grant, there is no compensation expense for stock options. Stock awards are
expensed during the period the related services are provided.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair-value-recognition provisions of
Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for
Stock-Based Compensation (as amended) (in thousands, except per share data):
Three Months Ended June 30,
------------------------------------
2005 2004
----------- -----------
Net income as reported $ 8,885 $ 8,318
Add: stock -based compensation expense
included in net income as reported,
net of income tax effects 1,349 23
Deduct: total stock-based employee
compensation determined under a
fair-value- based method for all
stock options and awards, net of
income tax effects (4,016) (1,001)
---------- ---------
Pro forma net income $ 6,218 $ 7,340
========== =========
Earnings per share
As reported $ 0.35 $ 0.34
========== =========
Pro forma $ 0.24 $ 0.30
========== =========
Diluted earnings per share
As reported $ 0.34 $ 0.33
========== =========
Pro forma $ 0.24 $ 0.29
========== =========
6
Six Months Ended June 30,
------------------------------------
2005 2004
---------- ---------
Net income as reported $ 17,001 $ 1,208
Add: stock -based compensation expense
included in net income as reported,
net of income tax effects 2,488 3,823
Deduct: total stock-based
employee compensation determined under
a fair-value- based method for all
stock options and awards, net of
income tax effects (6,314) (5,020)
---------- ---------
Pro forma net income $ 13,175 $ 11
========== =========
Earnings per share
As reported $ 0.67 $ 0.05
========== =========
Pro forma $ 0.52 $ -
========== =========
Diluted earnings per share
As reported $ 0.65 $ 0.05
========== =========
Pro forma $ 0.51 $ -
========== =========
We calculated the above data using the Black-Scholes option-valuation method to
value the Company's options granted in 2005 and prior years.
2. Capital Stock Split
On March 11, 2005, the Board of Directors of the Company approved a
2-for-1 stock split in the form of a 100% stock dividend to shareholders of
record at the close of business on April 22, 2005. This stock split was paid May
11, 2005. Under Delaware law, the par value of the capital stock remains $1 per
share. Prior period per share data have been restated to retroactively reflect
the impact of the stock split on the average number of shares outstanding. The
shares outstanding and in treasury prior to May 11, 2005 have not been restated.
3. Revenue Recognition
We actively monitor each of our hospice programs, by provider number,
as to their specific admission, discharge rate and average length of stay data
in an attempt to determine whether they are likely to exceed the annual
per-beneficiary Medicare cap ("Medicare Cap"). Should we determine that a
provider number is likely to exceed the Medicare Cap based on projected trends,
we attempt to institute corrective action to influence the patient mix or to
increase patient admissions. However, should we project our corrective action
will not avoid exceeding this Medicare Cap, we estimate the amount we would be
required to repay at the end of the Medicare Cap year and accrue that amount,
which is proportional to the number of months already past in the Medicare Cap
year, as a reduction to patient revenue.
As discussed in Note 8, during the second quarter of 2005, VITAS
recorded a $1.0 million Medicare Cap liability for its Phoenix program, which
was acquired in December 2004. Given that the Medicate Cap liability is related
to patients being cared for at the time of acquisition, this liability is
considered to be a pre-acquisition contingency of this program. None of VITAS'
other hospice programs are currently projected to exceed the Medicare Cap for
the 2005 measurement period.
7
4. Segments
Service revenues and sales and aftertax earnings by business segment
follow (in thousands):
Three Months Ended June 30,
-----------------------------------
2005 2004
--------------- --------------
Service Revenues and Sales
- --------------------------
VITAS $ 153,748 $ 130,240
Roto-Rooter 72,561 68,895
--------- ---------
Total $ 226,309 $ 199,135
========= ==========
Aftertax Earnings
- -----------------
VITAS $ 10,149 (a) $ 7,907
Roto-Rooter 5,676 (b) 5,150
--------- ----------
Total segment earnings 15,825 13,057
Corporate (4,714)(c) (4,730) (c)
Discontinued operations (f) (2,226) (9)
--------- ---------
Net income $ 8,885 $ 8,318
========= ==========
Six Months Ended June 30,
-----------------------------------
2005 2004
--------------- --------------
Service Revenues and Sales
- --------------------------
VITAS $ 299,738 $ 181,352 (d)
Roto-Rooter 145,208 138,123
--------- ----------
Total $ 444,946 $ 319,475
========= ==========
Aftertax Earnings
- -----------------
VITAS $ 19,518 (a) $ 10,504 (d)
Roto-Rooter 12,821 (b) 9,387 (b)
--------- ----------
Total segment earnings 32,339 19,891
Corporate (13,323)(c) (14,715) (c)
Equity in loss of affiliate (VITAS) -- (4,105) (e)
Discontinued operations (f) (2,015) 137
--------- ----------
Net income $ 17,001 $ 1,208
========= ==========
(a) Amounts for the three and six months ended June 30, 2005 include
aftertax costs of $365,000 and $547,000, respectively, for awards made
under the long-term incentive plan ("LTIP") in 2005. Amounts for 2005
also include aftertax costs of $160,000 for legal expenses incurred in
connection with the Office of Inspector General ("OIG") investigation
during the second quarter and six months ended June 30, 2005.
(b) Amounts for the three and six months ended June 30, 2005 include
aftertax costs of $187,000 and $340,000, respectively, for awards made
under the LTIP in 2005. Amount for the six months ended June 30, 2005
includes favorable adjustment to casualty insurance of $1,014,000
aftertax related to prior quarters' favorable experience. Amount for
the six months ended June 30, 2004 includes $982,000 aftertax cost of
the LTIP in March 2004.
(c) Amounts for the three and six months ended June 30, 2005 include
aftertax cost of $600,000 and $960,000, respectively, for awards made
under the LTIP. Amounts for 2005 and 2004 include aftertax favorable
adjustments to transaction-related costs of the VITAS acquisition of
$671,000 and $821,000, respectively. Amounts for the six months ended
June 30, 2005 include a noncash aftertax charge of $137,000 for
accelerating the vesting on stock options and $2,523,000 aftertax loss
on the extinguishment of debt. Amount for six months ended June 30,
2004 includes $2,164,000 aftertax loss on the extinguishment of debt
and $4,741,000 aftertax cost for awards made under the LTIP.
(d) Amounts include consolidated operations of VITAS beginning on February
24, 2004, the date the Company acquired the controlling interest in
VITAS. Total service revenues for VITAS for the six months ended June
30, 2004 were $254,222,000.
(e) Amount for 2004 represents the Company's 37% equity in the loss of
VITAS through February 23, 2004. During the period from January 1, 2004
through February 23, 2004, VITAS incurred the following aftertax
expenses related to the sale of its business to the Company (in
thousands):
Accrual for potential severance costs under key employee
employment agreements $ 10,975
Legal and valuation costs 6,665
Loss on write off of VITAS' deferred debt costs 2,698
Other 592
---------
Total $ 20,930
=========
(f) Amounts for 2005 include an aftertax loss of $2,350,000 resulting from
finalizing the disposal of Service America in May 2005. Amounts for the
three and six months ended June 30, 2005 include aftertax income from
the operations of Service America of $124,000 and $335,000,
respectively. Amounts for 2004 represent the income from the operations
of Service America, discontinued in the fourth quarter of 2004.
8
5. Earnings per Share
Earnings per share are computed using the weighted average number of
shares of capital stock outstanding. Earnings and diluted earnings per share for
2005 and 2004 are computed as follows (in thousands, except per share data):
Income Shares Income
(Numerator) (Denominator) Per Share
------------ -------------- ------------
Income from Continuing Operations -
For the Three Months Ended June 30,
- -----------------------------------------------
2005
Reported income $ 11,111 25,489 $ 0.44
Dilutive stock options - 627 ==========
Impact of LTIP shares issue July 2005 (a) - 35
Nonvested stock awards - 63
---------- -----------
Diluted income $ 11,111 26,214 $ 0.42
========== =========== ==========
2004
Reported income $ 8,327 24,650 $ 0.34
Impact of convertible junior subordinated ==========
debentures 94 336
Dilutive stock options - 366
Nonvested stock awards - 2
----------- -----------
Diluted income $ 8,421 25,354 $ 0.33
========== =========== ==========
Net Income -
For the Three Months Ended June 30,
- ------------------------------------------------
2005
Reported income $ 8,885 25,489 $ 0.35
Dilutive stock options - 627 ==========
Impact of LTIP shares issued July 2005 (a) - 35
Nonvested stock awards - 63
---------- -----------
Diluted income $ 8,885 26,214 $ 0.34
========== =========== ==========
2004
Reported income $ 8,318 24,650 $ 0.34
Impact of convertible junior subordinated ==========
debentures 94 336
Dilutive stock options - 366
Nonvested stock awards - 2
---------- -----------
Diluted income $ 8,412 25,354 $ 0.33
========== =========== ==========
Income from Continuing Operations -
For the Six Months Ended June 30,
- ------------------------------------------------
2005
Reported income $ 19,016 25,319 $ 0.75
Dilutive stock options - 665 ==========
Impact of LTIP shares issued July 2005 (a) - 17
Nonvested stock awards - 58
---------- -----------
Diluted income $ 19,016 26,059 $ 0.73
========== =========== ==========
2004 (b)
Reported income $ 1,071 23,238 $ 0.05
==========
Dilutive stock options - 456
Nonvested stock awards - 2
---------- ----------- ==========
Diluted income $ 1,071 23,696 $ 0.05
========== =========== ==========
Net Income -
For the Six Months Ended June 30,
- ------------------------------------------------
2005
Reported income $ 17,001 25,319 $ 0.67
Dilutive stock options - 665 ==========
Impact of LTIP shares issued July 2005 (a) - 17
Nonvested stock awards - 58
---------- -----------
Diluted income $ 17,001 26,059 $ 0.65
========== =========== ==========
2004 (b)
Reported income $ 1,208 23,238 $ 0.05
Dilutive stock options - 456 ==========
Nonvested stock awards - 2
---------- -----------
Diluted income $ 1,208 23,696 $ 0.05
========== =========== ==========
(a) These amount reflect the dilutive impact of issuing the LTIP shares at
the beginning of the second quarter rather than in June 2005 as assumed
for the computation of average shares outstanding.
(b) The impact of the convertible junior subordinated debentures is
anti-dilutive and has been excluded from the computation of average
shares outstanding for these periods.
9
6. Other Expenses
Other expenses from continuing operations for 2005 and 2004 include the
following (in thousands):
Three Months Ended June 30,
---------------------------
2005 2004
-------- ---------
Long-term incentive compensation
(see Note 9) $ 1,837 $ --
Adjustments to transaction-related
costs of the VITAS acquisition* (671) (1,368)
------- -------
Total other expenses $ 1,166 $(1,368)
======= =======
Six Months Ended June 30,
---------------------------
2005 2004
-------- ---------
Long-term incentive compensation
(see Note 9) $ 2,946 $ 8,783
Adjustments to transaction-related
costs of the VITAS acquisition* (671) (1,368)
Cost of accelerating the vesting
of stock options 215 --
------- -------
Total other expenses $ 2,490 $ 7,415
======= =======
* These adjustments are adjustments to the Company's share of certain
expenses of the acquisition of VITAS incurred by VITAS when it was a
37% equity investee of the Company.
7. Other Income-net
Other income-net comprises the following (in thousands):
Three Months Ended June 30,
--------------------------
2005 2004
------- --------
Interest income $ 263 $ 459
Market valuation losses on trading
investments of employee benefit
trusts (27) (235)
Gains on other investments of employee
benefit trusts 354 --
Gain/(loss) on disposal of property and
equipment 10 (98)
Other--net -- 23
------- -------
Total other income--net $ 600 $ 149
======= =======
Six Months Ended June 30,
--------------------------
2005 2004
------- --------
Interest income $ 913 $ 967
Market valuation gains on trading
investments of employee benefit
trusts 60 761
Gains on other investments of employee
benefit trusts 354 --
Loss on disposal of property and
equipment (19) (149)
Other--net 19 49
------- -------
Total other income--net $ 1,327 $ 1,628
======= =======
10
8. Business Combinations
During the first six months of 2005, we completed one business
combination in the VITAS segment and one business combination in the Roto-Rooter
segment. The VITAS business acquired provides hospice services in the
Pittsburgh, PA area and the Roto-Rooter business acquired provides drain
cleaning and plumbing services using the Roto-Rooter name in Greensboro, NC. The
results of operations of the Roto-Rooter businesses acquired were not material
to the Company's results of operations. The unaudited pro forma results of
operations, assuming all VITAS segment business combinations completed in 2004
and 2005 were completed on January 1, 2004, are presented below (in thousands,
except per share data):
Three Months Ended June 30,
--------------------------
2005 2004
-------- --------
Service revenues and sales $226,992 $201,944
Net income 8,898 8,034
Earnings per share 0.35 0.33
Diluted earnings per share 0.34 0.32
Six Months Ended June 30,
--------------------------
2005 2004
-------- --------
Service revenues and sales $445,629 $397,990
Net income 17,014 6,077
Earnings per share 0.67 0.25
Diluted earnings per share 0.65 0.24
The excess of the purchase price over the fair value of the net assets
acquired in purchase business combinations is classified as goodwill. On a
preliminary basis, the purchase price of all businesses acquired in the first
six months of 2005 has been allocated as follows (in thousands):
Working capital $ 316
Property and equipment 147
Goodwill 5,032
-------
Total $ 5,495
=======
Included in the above allocation is an adjustment of $1,027,000
increasing both goodwill and other current liabilities for the estimated
pre-acquisition liability related to the Medicare Cap for VITAS' Phoenix
acquisition (acquired in December 2004). This liability will be evaluated
further in the third and fourth quarter of 2005 when more data are available.
Adjustments to this preliminary estimate may be recorded at that time.
All of the goodwill acquired in 2005 is expected to be deductible for
tax purposes. Of the total goodwill acquired in 2005, $4,632,000 relates to the
VITAS segment and $400,000 to the Roto-Rooter segment.
9. 2002 Executive Long-Term Incentive Plan
During the second quarter of 2005, the price of the Company's stock
exceeded $38.75 per share for 30 trading days, fulfilling one of the performance
targets set forth in the 2002 Executive Long-Term Incentive Plan ("LTIP"). On
July 11, 2005, the Compensation/Incentive Committee of the Board of Directors
("CIC") approved a payout of 37,500 shares of capital stock under the LTIP. The
pretax expense of this award for continuing operations, including payroll taxes
and benefit costs, was $1,837,000 ($1,152,000 aftertax).
During the first quarter of 2005, the price of the Company's stock
exceeded $35 per share for 30 trading days, fulfilling one of the performance
targets set forth in the LTIP. On March 11, 2005, the CIC approved a payout of
25,000 shares of capital stock under the LTIP. The pretax expense of this award
for continuing operations, including payroll taxes and benefit costs, was
$1,109,000 ($695,000 aftertax).
During January 2004, the price of the Company's stock exceeded $50 per
share for more than 10 consecutive trading days, fulfilling one of the
performance targets of the LTIP. In February 2004, the CIC approved a payout
under the LTIP in the aggregate amount of $7.8 million ($2.8 million in cash and
84,633 shares of capital stock). The pretax expense of this award for continuing
operations, including payroll taxes and benefit costs, was $8,783,000
($5,723,000 aftertax).
As of June 30, 2005, no accrual for awards under the earnings component
or the remaining market price component of the LTIP was made since it is not
probable that either of these awards will be earned and paid.
11
10. Long-term Debt and Extinguishment of Debt
In February 2005, we prepaid $110 million of the Floating Rate Notes
due 2010. In addition, we amended our term loan and revolving credit facility
with JPMorgan Chase Bank to provide for a term loan of $85 million due August
2010 and a $175 million revolving credit facility expiring February 2010. In
connection with these transactions we recorded a loss on the extinguishment of
debt of $3,971,000 in the first quarter of 2005 that comprised a prepayment
penalty of $1,100,000 on the Floating Rate Notes and the write-off of $2,871,000
of unamortized debt issuance costs for the Floating Rate Notes and the previous
term loan.
The Company is in compliance with all debt covenants as of June 30,
2005 and projects that it will remain in compliance during the remainder of
2005. As of June 30, 2005, the Company has approximately $147.3 million of
unused lines of credit available and eligible to be drawn down under its
revolving credit facility.
11. Loans Receivable from Independent Contractors
The Roto-Rooter segment sublicenses with approximately sixty
independent contractors to operate certain plumbing repair and drain cleaning
businesses in lesser-populated areas of the United States and Canada. As of June
30, 2005, the Company had notes receivable from its independent contractors
totaling $2,803,000 (December 31, 2004-$2,781,000). In most cases these loans
are fully or partially secured by equipment owned by the contractor. The
interest rates on the loans range from 5% to 8% per annum and the remaining
terms of the loans range from two months to 5.4 years at June 30, 2005. During
the quarter ended June 30, 2005, we recorded revenues of $4,433,000
(2004-$3,932,000) and pretax profits of $1,344,000 (2004-$986,000) from our
independent contractors. During the six months ended June 30, 2005, we recorded
revenues of $9,041,000 (2004-$8,023,000) and pretax profits of $3,027,000
(2004-$2,538,000) from our independent contractors.
Effective January 1, 2004, we adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 46R "Consolidation of
Variable Interest Entities--an interpretation of Accounting Research Bulletin
No. 51 (revised)" ("FIN 46R") relative to the Company's contractual
relationships with its independent contractors. FIN 46R requires the primary
beneficiary of a Variable Interest Entity ("VIE") to consolidate the accounts of
the VIE. We have evaluated our relationships with our independent contractors
based upon guidance provided in FIN 46R and have concluded that many of the
contractors who have loans payable to us may be VIE's. Due to the limited
financial data available from these independent entities we have not been able
to perform the required analysis to determine which, if any, of these
relationships are VIE's or the primary beneficiary of these potential VIE
relationships. We are continuing to request appropriate information to enable us
to evaluate these potential VIE relationships. We believe consolidation, if
required, of the accounts of any VIE's for which the Company might be the
primary beneficiary would not materially impact the Company's financial position
or results of operations. Instead, consolidation of some, if any, of these
arrangements is more likely to result in a "grossing up" of amounts such as
revenues and expenses with no net change in the Company's net income or cash
flow.
12. Pension and Retirement Plans
All of the Company's plans that provide retirement and similar benefits
are defined contribution plans. Expenses for the Company's pension and
profit-sharing plans, ESOP's, excess benefit plans and other similar plans
comprise the following (in thousands):
For the three months ended June 30, 2005 $ 2,651
For the three months ended June 30, 2004 1,362
For the six months ended June 30, 2005 5,351
For the six months ended June 30, 2004 4,734
13. Litigation
The Company is party to a class action lawsuit filed in the Third
Judicial Circuit Court of Madison County, Illinois in June of 2000 by Robert
Harris, alleging certain Roto-Rooter plumbing was performed by unlicensed
employees. The Company contests these allegations and believes them without
merit. Plaintiff moved for certification of a class of customers in 32 states
who allegedly paid for plumbing work performed by unlicensed employees.
Plaintiff also moved for partial summary judgment on grounds the licensed
apprentice plumber who installed his faucet did not work under the direct
personal supervision of a licensed master plumber. On June 19, 2002, the trial
judge certified an Illinois-only plaintiffs class and granted summary judgment
for the named party Plaintiff on the issue of liability, finding violation of
the Illinois Plumbing License Act and the Illinois Consumer Fraud Act through
Roto-Rooter's representation of the licensed apprentice as a plumber. The court
has not yet ruled on certification of a class in the remaining 31 states. In
December 2004, the Company reached a tentative resolution of this matter with
the plaintiff. This proposed settlement has not yet been finalized by the
parties nor approved by the court. Nonetheless, the Company, in anticipation of
such approval, accrued $3.1 million in the fourth quarter of 2004 as the
anticipated cost of settling this litigation.
12
VITAS is party to a class action lawsuit filed in the Superior Court of
California, Los Angeles County, in April of 2004 by Ann Marie Costa, Ana
Jimenez, Maria Ruteaya and Gracetta Wilson alleging failure to pay overtime
wages and to provide meal and break periods to California nurses, home health
aides and licensed clinical social workers. The Company contests these
allegations and believes them without merit. Due to the complex legal and other
issues involved, it is not presently possible to estimate the amount of
liability, if any, related to this case. Management cannot provide assurance the
Company will ultimately prevail in it. Regardless of outcome, such litigation
can adversely affect the Company through defense costs, diversion of
management's time, and related publicity.
14. Related Party Agreement
In October 2004, VITAS entered into a pharmacy services agreement
("Agreement") with Omnicare, Inc. ("OCR") whereby OCR will provide specified
pharmacy services for VITAS and its hospice patients in geographical areas
served by both VITAS and OCR. The Agreement has an initial term of three years
that renews automatically thereafter for one-year terms. Either party may cancel
the Agreement at the end of any term by giving written notice at least 90 days
prior to the end of said term. Under the agreement, VITAS made purchases of
$5,351,000 from OCR during the first six months of 2005. Mr. E. L. Hutton is
non-executive Chairman and a director of the Company and OCR. Also, Mr. Joel F.
Gemunder, President and Chief Executive Officer of OCR, Mr. Charles H. Erhart,
Jr. and Ms. Sandra Laney are directors of both OCR and the Company. Mr. Kevin J.
McNamara, President, Chief Executive Officer and a director of the Company, is a
director emeritus of OCR. Nonetheless, we believe that the terms of the
Agreement are no less favorable to VITAS than we could negotiate with an
unrelated party.
15. Discontinued Operations
Discontinued operations comprises the operating results and loss on
disposal of Service America, discontinued in December 2004 and disposed in May
2005(in thousands except per share data):
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
----------- ---------- -------- ---------
Operating Results
Income/(loss) before income taxes $ 244 $ (9) $ 576 $ 265
Income taxes (120) -- (241) (128)
----------- ---------- -------- ---------
Income/(loss) from operations,
net of income taxes 124 (9) 335 137
----------- ---------- -------- ---------
Loss on Disposal
Loss on disposal before income
income taxes (2,398) -- (2,398) --
Income taxes 48 -- 48 --
----------- ---------- -------- ---------
Loss on disposal, net of income
taxes (2,350) -- (2,350) --
----------- ---------- -------- ---------
Total discontinued operations $ (2,226) $ (9) $ (2,015) $ 137
=========== ========== ======== =========
Earnings per share $ (.09) $ -- $ (.08) $ --
=========== ========== ======== =========
Diluted earnings per share $ (.08) $ -- $ (.08) $ --
=========== ========== ======== =========
Service revenues and sales $ 2,682 $ 9,860 $ 10,716 $ 20,568
=========== ========== ======== =========
The loss on disposal of Service America in the second quarter of 2005
arises from the finalization of the asset and liability values and related tax
benefits resulting from closing the disposal in May 2005.
The corporation that acquired Service America, Service America
Enterprise, Inc. ("Enterprise"), purchased the substantial majority of Service
America's assets in exchange for Enterprise's assuming substantially all of
Service America's liabilities. Included in the assets acquired is a receivable
from the Company for approximately $4.7 million. The Company paid $1 million of
this receivable upon closing and will pay the remainder over the following year
in 11 equal installments. At June 30, 2005, 10 of these payments due Enterprise
remain outstanding.
16. OIG Investigation
On April 7, 2005, the Company announced the Office of Inspector General
("OIG") for the Department of Health and Human Services served VITAS with civil
subpoenas relating to VITAS' alleged failure to appropriately bill Medicare and
Medicaid for hospice services. As part of this investigation, the OIG selected
medical records for 320 past and current patients from VITAS' three largest
programs for review. It also sought policies and procedures from 1998 to present
covering admissions, certifications, recertifications, and discharges.
The OIG has not disclosed the origin of the subpoenas or investigation.
We are unable to predict the outcome of the investigation or the impact, if any,
that the investigation may have on the business, results of operations,
liquidity or capital resources. Regardless of outcome, responding to the
subpoenas can adversely affect the Company through defense costs, diversion of
management's time and related publicity.
17. Cash Overdrafts Payable
Included in accounts payable at June 30, 2005 are cash overdrafts
payable of $8,612,000 (December 31, 2004 - $1,265,000).
18. Ohio Tax Law Change
On June 30, 2005, significant changes to the tax system of the state of
Ohio were signed into law. The impact is required to be accounted for in all
annual and interim periods ending on or after June 30, 2005. Changes in the Ohio
tax legislation include the phasing out of the Ohio income tax and the Ohio
personal property tax. Additionally, a new Commercial Activity Tax (CAT), which
is a tax based on gross receipts, is being introduced. Since the corporation
income tax is being replaced by the CAT, which is not an income tax under
generally accepted accounting principles, entities with business in the state of
Ohio must account for the phase-out of the corporation income tax as a change in
enacted tax rate as of June 30, 2005. There was no significant impact for the
Company as of and for the three and six month periods ended June 30, 2005.
19. Recent Accounting
Statements In December 2004, FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004) "Share-Based Payment" ("SFAS No.
123R"), which requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation
issued to employees and disallows the use of the intrinsic value method of
accounting for stock options, but expresses no preference for a type of
valuation model. This statement supersedes APB No. 25, but does not change the
accounting guidance for share-based payment transactions with parties other than
employees provided in SFAS No. 123 as originally issued. Based on recent action
by the Securities and Exchange Commission ("SEC"), SFAS No. 123R will be
effective as of the beginning of the Company's next fiscal year (January 1,
2006). We are evaluating our stock incentive programs and most likely will
significantly reduce the number of stock options granted after December 31,
2005. In March 2005, the Board of Directors approved immediate vesting of all
unvested stock options to avoid recognizing approximately $951,000 of pretax
expense that would have been charged to income under SFAS No. 123R during the
five quarters beginning on January 1, 2006. The $215,000 pretax cost of
accelerating the vesting of these options is included in the determination of
income from continuing operations for the first quarter of 2005. As a result, we
do not expect the implementation of SFAS No. 123R in the first quarter of 2006
to have a significant impact on our financial condition, results of operations
or cash flows.
13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Financial Condition
Liquidity and Capital Resources
Significant changes in the balance sheet accounts from December 31,
2004 to June 30, 2005 include the following:
o The $53.5 million decline in cash and cash equivalents from $71.4
million at December 31, 2004 to $17.9 million at June 30, 2005 is
primarily attributable to the use of cash to reduce the Company's total
long-term debt by $56.0 million from $291.7 million at December 31,
2004 to $235.7 million at June 30, 2005.
o The increase in accounts receivable from $64.7 million at December 31,
2004 to $85.0 million at June 30, 2005 is due to the timing of the
receipt of Medicare payments at the end of 2004 versus such timing at
June 30, 2005, VITAS' higher revenues for the second quarter of 2005 as
compared with the fourth quarter of 2004, and the delay in the receipt
of Medicare payments for recently acquired operations and certain new
start operations. The delay in the receipt of Medicare payments for
recent acquisitions and new starts is due to the timing of receipt of
Medicare program certification. Payment of these amounts is expected
during the next several months.
o The decline in current deferred income taxes from $31.3 million at
December 31, 2004 to $20.7 million at June 30, 2004 and the increase in
prepaid income taxes from nil at December 31, 2004 to $8.4 million at
June 30, 2005 is primarily attributable to reclassifying the income tax
benefit on the disposal of Service America from deferred to current
income taxes.
o The reduction in the current portion of long-term debt from $12.2
million at December 31, 2004 to $1.2 million at June 30, 2005 resulted
from refinancing our term loan with JPMorgan Chase in February 2005.
o The $6.5 million decline in other current liabilities from $42.8
million at December 31, 2004 to $36.3 million at June 30, 2005 is
largely attributable to the payment of 2004 incentive compensation and
supplemental thrift plan contributions during 2005. The payment of
various severance and divestiture liabilities also contributed to this
decline.
Net cash provided by continuing operations declined $10.1 million from
$28.8 million for the first six months of 2004 to $18.7 million for the first
six months of 2005, due primarily to a lower level of cash generated by VITAS
operations in 2005. This decline is due to the previously mentioned delay in the
receipt of Medicare payment for recent acquisitions and new starts related to
the receipt of Medicare program certification.
At June 30, 2005, we had approximately $147.3 million available lines
of credit eligible to be drawn down under our amended credit agreement with
JPMorgan Chase. Management believes its liquidity and sources of capital are
satisfactory for the Company's needs in the foreseeable future.
14
Commitments and Contingencies
Collectively, the terms of the credit agreements provide that the
Company is required to meet various financial covenants, to be tested quarterly,
beginning with the quarter ending June 30, 2005. In connection therewith, we are
in compliance with all financial and other debt covenants as of June 30, 2005
and anticipate remaining in compliance throughout 2005.
In connection with the sale of Patient Care in 2002, $5.0 million of
the cash purchase price was placed in escrow pending collection of third-party
payer receivables on Patient Care's balance sheet at the sale date. To date,
$4.2 million has been returned and the remainder is being withheld pending the
settlement of certain third-party payer claims. Based on Patient Care's
collection history, we believe that the significant majority of the disputed
amounts will be resolved in Patient Care's favor and most of the withheld escrow
will be returned to the Company. We also have accounts receivable from Patient
Care for the post-closing balance sheet valuation ($1.3 million) and for
expenses paid by us after closing on Patient Care's behalf ($1.6 million). The
Company is in litigation with Patient Care over various issues, including the
collection of these amounts. We believe these balances represent valid claims,
are fairly stated and are fully collectible; nonetheless, an unfavorable
determination by the courts could result in the write-off of all or a portion of
these balances.
On April 7, 2005, the Company announced the Office of Inspector General
("OIG") for the Department of Health and Human Services served VITAS with civil
subpoenas relating to VITAS' alleged failure to appropriately bill Medicare and
Medicaid for hospice services. As part of this investigation, the OIG selected
medical records for 320 past and current patients from VITAS' three largest
programs for review. It also sought policies and procedures from 1998 to present
covering admissions, certifications, recertifications, and discharges.
The OIG has not disclosed the origin of the subpoenas or investigation.
We are unable to predict the outcome of the investigation or the impact, if any,
that the investigation may have on the business, results of operations,
liquidity or capital resources. Regardless of outcome, responding to the
subpoenas can adversely affect the Company through defense costs, diversion of
management's time and related publicity.
The Company is party to a class action lawsuit filed in the Third
Judicial Circuit Court of Madison County, Illinois in June of 2000 by Robert
Harris, alleging certain Roto-Rooter plumbing was performed by unlicensed
employees. The Company contests these allegations and believes them without
merit. Plaintiff moved for certification of a class of customers in 32 states
who allegedly paid for plumbing work performed by unlicensed employees.
Plaintiff also moved for partial summary judgment on grounds the licensed
apprentice plumber who installed his faucet did not work under the direct
personal supervision of a licensed master plumber. On June 19, 2002, the trial
judge certified an Illinois-only plaintiffs class and granted summary judgment
for the named party Plaintiff on the issue of liability, finding violation of
the Illinois Plumbing License Act and the Illinois Consumer Fraud Act through
Roto-Rooter's representation of the licensed apprentice as a plumber. The court
has not yet ruled on certification of a class in the remaining 31 states. In
December 2004, the Company reached a tentative resolution of this matter with
the plaintiff. This proposed settlement has not yet been finalized by the
parties nor approved by the court. Nonetheless, the Company, in anticipation of
such approval, accrued $3.1 million in the fourth quarter of 2004 as the
anticipated cost of settling this litigation.
VITAS is party to a class action lawsuit filed in the Superior Court of
California, Los Angeles County, in April of 2004 by Ann Marie Costa, Ana
Jimenez, Maria Ruteaya and Gracetta Wilson alleging failure to pay overtime
wages and to provide meal and break periods to California nurses, home health
aides and licensed clinical social workers. The Company contests these
allegations and believes them without merit. Due to the complex legal and other
issues involved, it is not presently possible to estimate the amount of
liability, if any, related to this case. Management cannot provide assurance the
Company will ultimately prevail in it. Regardless of outcome, such litigation
can adversely affect the Company through defense costs, diversion of
management's time, and related publicity.
Results of Operations
Second Quarter 2005 versus Second Quarter 2004-Consolidated Results
The Company's service revenues and sales for the second quarter of 2005
increased 14% versus revenues for the second quarter of 2004. Of this increase,
$23,508,000 was attributable to VITAS and $3,666,000 was attributable to
Roto-Rooter (dollar amounts in thousands):
Increase/(Decrease)
------------------------
Amount Percent
--------- ---------
VITAS
Routine Care $17,641 19.8%
Continuous Care 3,369 14.9
Other 2,498 13.4
Roto-Rooter
Plumbing 2,161 8.0
Drain Cleaning 459 1.7
Other 1,046 7.3
------- -----
Total $27,174 13.6%
======= =====
The increase in VITAS' revenues for the second quarter of 2005 versus
the second quarter of 2004 is attributable to increases in average daily census
("ADC") of 16.2%, 9.0% and 10.0%, respectively, for routine care, continuous
care and other services. The remainder of the revenue increases is due primarily
to the increase in reimbursement rates. Approximately 96% of VITAS' revenues for
the period was from Medicare and Medicaid.
Excluding divested locations, the increase in the plumbing revenues for
the second quarter of 2005 versus 2004 comprises a 9.3% increase in the number
of jobs performed and a .5% decline in the average price per job. On the same
basis, the increase in drain cleaning revenues for the second quarter of 2005
versus 2004 comprised a 3.3% decline in the number of jobs and a 5.8% increase
in the average price per job. The increase in other revenues for the second
quarter of 2005 versus 2004 is attributable primarily to increases in
independent contractor operations and other services.
15
The consolidated gross margin was 28.8% in the second quarter of 2005
as compared with 29.7% in the second quarter of 2004, due to VITAS' making up a
larger portion of the Company's revenues and gross profit in 2005 than in 2004.
In the second quarter of 2005 VITAS accounted for 68% of total revenues and 50%
of total gross profit. For the 2004 quarter these percentages were 65% and 48%,
respectively. Thus, VITAS' lower gross profit margin (versus Roto-Rooter's) had
a more significant impact on overall margins in 2005. On a segment basis, VITAS'
gross margin was 21.4% in the second quarter of 2005 and 21.8% in the second
quarter of 2004. The Roto-Rooter segment's gross margin was 44.5% in the 2005
second quarter and 44.4% in the second quarter of 2004.
Selling, general and administrative expenses ("SG&A") for the second
quarter of 2005 were $36,802,000, an increase of $2,326,000 (6.7%) versus the
second quarter of 2004. The increase is largely due to higher revenues by both
segments during the second quarter of 2005 verus 2004.
Other expenses for the second quarter of 2005 totaled $1,166,000 versus
a credit of $1,368,000 in 2004. The 2005 charges include $1,837,000 of expenses
for expenses of the long-term incentive program ("LTIP") and a credit of
$671,000 for an adjustment to Company's shares expenses of the 2004 acquisition
of VITAS. The credit for 2004 represents an adjustment to the Company's share of
expenses of the 2004 acquisition of VITAS incurred by VITAS when it was a 37%
equity investee of the Company.
Income from operations increased $1,299,000 from $20,763,000 in the
second quarter of 2004 to $22,062,000 in the second quarter of 2005. The
increase is attributable primarily to higher income from operations of VITAS
($2,704,000) and Roto-Rooter ($396,000) partially offset by a higher operating
loss for Corporate ($1,801,000). The higher operating loss at Corporate is
attributable to higher other expenses in the second quarter of 2005 verus 2004
(an increase of $1,643,000). This increase is due to higher LTIP expenses
($946,000) and a lower credit for the adjustment to transaction-related expenses
of the VITAS acquisition ($697,000).
Interest expense, substantially all of which is incurred at Corporate,
declined from $6,204,000 in the second quarter of 2004 to $5,039,000 in the 2005
quarter. This decline is due primarily to the reduction in debt outstanding that
occurred in February 2005 when we refinanced a significant portion of our debt.
Other income-net increased from $149,000 in the second quarter of 2004 to
$600,000 in the second quarter of 2005. The increase is attributable primarily
to $208,000 lower losses from market valuation adjustments on trading
investments of employee benefit trusts in 2005 versus 2004 and to higher gains
on other investments held in employee benefit trusts in 2005 ($354,000). These
gains and market valuation adjustments are entirely offset by expenses in the
SG&A category of the statement of income.
Our effective income tax rate declined from 43.4% in the second quarter
of 2004 to 37.0% in the second quarter of 2005. This reduction is due primarily
to a lower effective state and local income tax rate due primarily to revised
tax planning strategies implemented in the third quarter of 2004.
16
Income from continuing operations increased from $8,327,000 ($.34 per
share and $.33 per diluted share) for the second quarter of 2004 to $11,111,000
($.44 per share and $.42 per diluted share) for the second quarter of 2005. Net
income increased from $8,318,000 ($.34 per share and $.33 per diluted share) for
the second quarter of 2004 to income of $8,885,000 ($.35 per share and $.34 per
diluted share). Income from continuing operations and net income for both
periods included the following aftertax special items/adjustments that
increased/(reduced) aftertax earnings (in thousands):
For the Three Months Ended
June 30,
----------------------------
2005 2004
------------ ----------
Compensation expense of the LTIP $(1,152) $ --
Adjustments to transaction-related costs
of the VITAS acquisition 671 821
OIG investigation-related expenses
(VITAS) (160) --
------------ ----------
Total aftertax impact on earnings $ (641) $ 821
============ =========
In addition, net income for the second quarter of 2005 includes a loss
of $2,226,000 (2004-$9,000) from discontinued operations.
Second quarter 2005 versus Second quarter 2004-Segment Results
The change in aftertax earnings for the second quarter of 2005 versus
the second quarter of 2004 is due to (in thousands):
Increase/
(Decrease)
---------
Higher aftertax earnings of VITAS in 2005 $ 2,242
Higher aftertax earnings of Roto-Rooter in 2005 526
Higher loss on discontinued operations in 2005 (2,217)
All other 16
-------
Increase in net income in 2005 $ 567
=======
The higher aftertax earnings of VITAS and Roto-Rooter in the second
quarter of 2005 are due to revenue increases of 18.0% and 5.3%, respectively.
The higher loss for discontinued operations in the second quarter of 2005 is
primarily attributable to the sale of Service America in May 2005 and
finalizing adjustments to income taxes, assets and other liabilities.
First Six Months of 2005 versus First Six Months of 2004-
Consolidated Results
The Company's service revenues and sales for the first six months of
2005 increased 39% versus revenues for the first six months of 2004. This $125.5
million increase largely was attributable to the acquisition of VITAS on
February 24, 2004 and to the following (dollar amounts in thousands):
Increase/(Decrease)
-------------------
Amount Percent
-------- --------
VITAS
Increase in first quarter 2005
revenues due to only recogniz-
ing a partial quarter's revenues
in 2004 (VITAS was acquired on
February 24, 2004) $94,878 185.6%
Increase in second quarter 2005
revenues due primarily to higher
ADC in 2005 versus 2004 23,508 18.0
Roto-Rooter
Plumbing 4,280 8.1
Drain Cleaning 930 1.6
Other 1,875 6.6
-------- -------
Total $125,471 39.3%
======== =======
VITAS' revenues for the first six months of 2005 included revenues from the
following sources (in thousands):
Routine home care $207,482
Continuous home care 50,277
General inpatient care
and other 41,979
--------
Total $299,738
========
17
Approximately 96% of VITAS' revenues for the period was from Medicare and
Medicaid.
Excluding divested locations, the increase in plumbing revenues for the
first six months of 2005 versus 2004 comprises a 4.9% increase in the number of
jobs performed and a 4.0% increase in the average price per job. The increase in
drain cleaning revenues for the first six months of 2005 versus 2004 comprised a
2.5% decline in the number of jobs and a 5.0% increase in the average price per
job. The increase in other revenues for the first six months of 2005 versus 2004
is attributable primarily to increases in independent contractor operations and
other services.
The consolidated gross margin was 29.4% in the first six months of 2005
as compared with 31.5% in the first six months of 2004, largely due to the
acquisition of VITAS on February 24, 2004. In 2004 VITAS accounted for 57% of
total revenues and 39% of total gross profit. For the first six months of 2005
these percentages were 67% and 49%, respectively. Thus, VITAS' lower gross
profit margin (versus Roto-Rooter's) had a more significant impact on overall
margins in 2005. On a segment basis, VITAS' gross margin was 21.2% in the first
six months of 2005 and 21.6% in the first six months of 2004. The Roto-Rooter
segment's gross margin increased 1.8% points to 46.3%, largely due to a
favorable adjustment to the casualty insurance accruals related to prior
periods' experience and to lower training wages as a percentage of revenues, in
the first six months of 2005 versus 2004.
Selling, general and administrative expenses ("SG&A") for the first six
months of 2005 were $73,397,000, an increase of $10,709,000 (17.1%) versus the
first six months of 2004. Almost all of the increase was attributable to the
increased SG&A of the VITAS segment, acquired February 24, 2004. Similarly, the
$690,000 increase in depreciation expense and $865,000 increase in amortization
expense for the first six months of 2005 versus the first six months of 2004 are
primarily due to the VITAS segment.
Other expenses for the first six months declined $4,925,000 from
$7,415,000 in 2004 to $2,490,000 in 2005 due primarily to lower expenses of the
long-term incentive program ("LTIP") in 2005 versus 2004.
Income from operations increased $22,979,000 from $21,737,000 in the
first six months of 2004 to $44,716,000 in the first six months of 2005. The
increase comprises (in thousands):
Increase/
(Decrease)
---------
Higher income from operations of VITAS
(acquired February 24, 2004) $ 12,788
Higher income from operations of Roto-Rooter 5,770
Lower operating loss for Corporate 4,421
--------
Total $ 22,979
========
18
The lower operating loss for Corporate is attributable primarily to
lower other expenses (largely LTIP costs) in 2005 versus 2004.
Interest expense, substantially all of which is incurred at Corporate,
increased from $9,104,000 in the first six months of 2004 to $10,874,000 in the
2005 period. This increase is due primarily to having the acquisition-related
debt outstanding for the entire first quarter of 2005 versus only 37 days during
the first quarter of 2004. This increase is partially offset by the February
2005 refinancing which reduced debt outstanding.
Other income-net declined from $1,628,000 in the first six months of
2004 to $1,327,000 in the first six months of 2005. The decline is attributable
primarily to $701,000 lower market valuation adjustments on trading investments
of employee benefit trusts in 2005 versus 2004. This reduction is partially
offset by $354,000 gains recorded from other investments of the employee benefit
trusts. These market valuation adjustments and investments gains are entirely
offset by expenses of deferred compensation liabilities in the SG&A category of
the statement of income.
Our effective income tax rate declined from 52.6% in the first six
months of 2004 to 39.0% in the first six months of 2005. The effective income
tax rate was significantly higher in the first six months of 2004 due to higher
corporate expenses for which no state tax benefit was recorded.
Equity in the loss of VITAS for 2004 represents the Company's 37% share
of VITAS' loss for the period from January 1, 2004 through February 23, 2004,
prior to our acquiring a controlling interest in VITAS. During the first one
month and 23 days of 2004, VITAS recorded a net loss due to significant
transaction-related expenses on the sale of its business to Chemed.
Income from continuing operations increased from $1,071,000 ($.05 per
share) for the first six months of 2004 to $19,016,000 ($.75 per share and $.73
per diluted share) for the first six months of 2005. Net income increased from
$1,208,000 ($.05 per share) for the first six months of 2004 to $17,001,000
($.67 per share and $.65 per diluted share). Income from continuing operations
and net income for both periods included the following aftertax special
items/adjustments that increased/(reduced) aftertax earnings (in thousands):
For the Six Months Ended
June 30,
-----------------------------
2005 2004
----------- ----------
Loss on extinguishment of debt $ (2,523) $ (2,164)
Compensation expense of the LTIP (1,847) (5,723)
Favorable adjustment to casualty
insurance accruals related to prior
years' experience 1,014 --
Adjustments to transaction-related costs
of the VITAS acquisition 671 821
OIG investigation-related expenses
(VITAS) (160) --
Cost of accelerating vesting of
stock options (137) --
Equity in loss of VITAS in 2004 -- (4,105)
--------- ---------
Total aftertax impact on earnings $ (2,982) $(11,171)
========= =========
In addition, net income for the first six months of 2005 includes a
loss from discontinued operations of $2,015,000 (2004-income of $137,000)
related to Service America, discontinued in 2004.
First six months 2005 versus First six months 2004-Segment Results
The change in aftertax earnings for the first six months of 2005 versus
the first six months of 2004 is due to (in thousands):
Increase/
(Decrease)
----------
Higher earnings of VITAS, acquired
February 24, 2004 $ 9,014
Inclusion of the equity in the loss of
VITAS in the results for 2004 4,105
Higher earnings of the Roto-Rooter
segment in 2005 3,433
Loss on discontinued operations in 2005 verus
income in 2004 (2,152)
All other 1,393
---------
Increase in net income in 2005 $ 15,793
=========
The higher aftertax earnings of VITAS is due to the inclusion of 100%
of VITAS' earnings for the entire first six months of 2005 versus only 127 days'
earnings in the first six months of 2004. The higher aftertax earnings of
Roto-Rooter in the first six months of 2005 versus 2004 were primarily driven by
a 5.1% increase in total revenues. The loss for discontinued operations in the
first six months of 2005 is primarily attributable to the sale of Service
America in May 2005 and finalizing adjustments to income taxes, assets and other
liabilities.
19
The following charts update historical financial and operating data of
VITAS, acquired in February 2004 (dollars in thousands, except dollars per
patient day):
2004 2005
--------------------------- ----------------------------
Second Year-to-Date Second Year-to-Date
Quarter June Quarter June
---------- ------------ ----------- ------------
OPERATING STATISTICS
Net revenue
Homecare $ 88,967 $ 171,949 $ 106,610 $ 207,482
Inpatient 18,634 37,412 21,131 41,979
Continuous care 22,639 44,861 26,007 50,277
----------- ----------- ------------ -----------
Total $ 130,240 $ 254,222 $ 153,748 $ 299,738
=========== =========== ============ ===========
Net revenue as a percent of total
Homecare 68.3% 67.7% 69.4% 69.2%
Inpatient 14.3 14.7 13.7 14.0
Continuous care 17.4 17.6 16.9 16.8
---------- ----------- ------------ -----------
Total 100.0% 100.0% 100.0% 100.0%
========== =========== ============ ===========
Average daily census ("ADC") (days)
Homecare 4,709 4,525 5,750 5,589
Nursing home 3,048 2,991 3,260 3,230
---------- ----------- ------------ -----------
Routine homecare 7,757 7,516 9,010 8,819
Inpatient 369 371 406 405
Continuous care 456 452 497 495
--------- ----------- ------------ -----------
Total 8,582 8,339 9,913 9,719
========= =========== ============ ===========
Total Admissions 11,473 23,709 12,646 25,594
Average length of stay (days) 59.9 57.8 66.8(a) 66.4
Median length of stay (days) 12.0 11.5 12.0 11.5
ADC by major diagnosis
Neurological 31.0% 30.9% 32.0% 31.4%
Cancer 23.3 23.5 21.4 22.3
Cardio 14.3 14.2 15.2 14.8
Respiratory 7.4 7.4 7.2 7.2
Other 24.0 24.0 24.2 24.3
--------- ----------- ------------- -----------
Total 100.0% 100.0% 100.0% 100.0%
========= =========== ============= ===========
Admissions by major diagnosis
Neurological 18.4% 19.1% 18.7% 19.2%
Cancer 37.2 36.3 36.6 35.5
Cardio 13.2 13.3 13.8 14.0
Respiratory 7.3 7.7 6.9 7.6
Other 23.9 23.6 24.0 23.7
--------- ----------- ------------- -----------
Total 100.0% 100.0% 100.0% 100.0%
========= =========== ============= ===========
Direct patient care margins (b)
Routine homecare 49.9% 49.3% 49.4% 49.6%
Inpatient 25.9 26.5 23.0 22.9
Continuous care 19.0 19.1 19.5 18.5
Homecare margin drivers
(dollars per patient day)
Labor costs $ 41.53 $ 42.74 $ 46.01 $ 45.86
Drug costs 9.24 8.95 7.94 7.72
Home medical equipment 5.80 5.76 5.53 5.50
Medical supplies 1.91 1.92 2.14 2.15
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 202.08 $ 200.15 $ 240.76 $ 239.55
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 421.84 $ 421.79 $ 443.83 $ 438.56
Bad debt expense as a percent of revenues 1.1% 1.2% 0.9% 0.9%
Accounts receivable --
days of revenue outstanding 35.1 N/A 43.8 N/A
(a) VITAS has six large (greater than 450 ADC), 14 medium (greater than 200
but less than 450 ADC) and 19 small (less than 200 ADC) hospice
programs. Only one program had an average length of stay in excess of
100 days. The average length of stay for all discharged patients by
program, ranged from a low of 11.7 days to a high of 163.3 days for the
second quarter of 2005.
(b) Amounts exclude indirect patient care and administrative costs.
2004 2005
-------------------------------------- -------------------------
First Quarter
----------------------------
January 1 February 24
to to Second Second Year-to-date to
February 23 March 31 (a) Quarter Quarter June
----------- ------------- -------- -------- ---------------
STATEMENT OF OPERATIONS
Service revenues and sales $ 72,870 $ 51,112 $130,240 153,748 $ 299,738
----------- --------- -------- -------- ---------
Cost of services provided
(excluding depreciation) 58,848 40,486 101,790 120,854 236,074
Selling, general and administrative expenses 8,182 5,060 12,319 13,590 26,714
Depreciation 836 748 1,861 1,770 3,555
Amortization 4 331 1,010 984 1,979
Other expense 24,956(b) -- -- 588 881
----------- -------- -------- -------- ---------
Total costs and expenses 92,826 46,625 116,980 137,786 269,203
----------- -------- -------- -------- ---------
Income/(loss) from operations (19,956) 4,487 13,260 15,962 30,535
Interest expense (919) (28) (30) (33) (71)
Loss on extinguishment of debt (4,497)(b) -- -- -- --
Other income--net 41 31 176 695 1,312
----------- -------- -------- -------- ---------
Income/(loss) before income taxes (25,331) 4,490 13,406 16,624 31,776
Income taxes 6,996 (1,893) (5,499) (6,475) (12,258)
----------- -------- -------- -------- ---------
Net income/(loss) $ (18,335) $ 2,597 $ 7,907 $ 10,149 $ 19,518
=========== ======== ======== ======== =========
EBITDA (c)
Net income/(loss) $ (18,335) $ 2,597 $ 7,907 $ 10,149 $ 19,518
Add/(deduct)
Interest expense 919 28 30 33 71
Income taxes (6,996) 1,893 5,499 6,475 12,258
Depreciation 836 748 1,861 1,770 3,555
Amortization 4 331 1,010 984 1,979
----------- -------- -------- -------- ---------
EBITDA $ (23,572) $ 5,597 $ 16,307 $ 19,411 $ 37,381
=========== ======== ======== ======== =========
(a) We acquired VITAS on February 24, 2004 and recorded estimated purchase
accounting adjustments to the value of VITAS' assets as of that date.
(b) Costs related to the sale of VITAS totaled $29,453,000 pretax
($20,930,000 aftertax) for January 1 through February 23, 2004.
(c) EBITDA is income before interest expense, income taxes, depreciation
and amortization. We use EBITDA, in addition to net income,
income/(loss) from operations and cash flow from operating activities,
to assess our performance and believe it is important for investors to
be able to evaluate us using the same measures used by management. We
believe EBITDA is an important supplemental measure of operating
performance because it provides investors with an indication of our
performance independent of our debt and equity structure and related
costs. We also believe EBITDA is a supplemental measurement tool used
by analysts and investors to help evaluate a company's overall
operating performance by including only transactions related to core
cash operating business activities. EBITDA as calculated by us is not
necessarily comparable to similarly titled measures reported by other
companies. In addition, EBITDA is not prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"),
and should not be considered an alternative for net income, income from
operations, net cash provided by operating activities or other
financial information determined under GAAP, and should not be
considered as a measure of profitability or liquidity. We believe the
line on the consolidated statement of operations entitled net
income/(loss) is the most directly comparable GAAP measure to EBITDA.
EBITDA, as calculated above, includes interest income, loss on
extinguishment of debt and costs related to the sale of VITAS to the
Company as follows (in thousands):
2004 2005
-------------------------------------- -------------------------
First Quarter
----------------------------
January 1 February 24
to to Second Second Year-to-date to
February 23 March 31 (a) Quarter Quarter June
----------- ------------- -------- -------- ---------------
Interest income $ 41 $ 31 $ 196 $ 714 $ 1,349
Loss on extinguishment of debt 4,497 -- -- -- --
Costs related to sale of business 24,956 -- -- -- --
20
Recent Accounting Statements
In December 2004, the FASB issued SFAS No. 123 (revised
2004)"Share-Based Payment" ("SFAS No. 123R"), which requires companies to
recognize in the income statement the grant-date fair value of stock options and
other equity-based compensation issued to employees and disallows the use of the
intrinsic value method of accounting for stock options, but expresses no
preference for a type of valuation model. This statement supersedes APB No. 25,
but does not change the accounting guidance for share-based payment transactions
with parties other than employees provided in SFAS No. 123 as originally issued.
Based on recent action by the SEC, SFAS No. 123R will be effective as of the
beginning of the Company's next fiscal year (January 1, 2006). We are evaluating
our stock incentive programs and most likely will significantly reduce the
number of stock options granted after December 31, 2005. In March 2005, the
Board of Directors approved immediate vesting of all unvested stock options to
avoid recognizing approximately $951,000 of pretax expense that would have been
charged to income under SFAS No. 123R during the five quarters beginning on
January 1, 2006. The $215,000 pretax cost of accelerating the vesting of these
options is included in the determination of income from continuing operations
for first quarter of 2005. As a result, we do not expect the implementation of
SFAS No. 123R in the first quarter of 2006 to have a significant impact on our
financial condition, results of operations or cash flows.
Safe harbor Statement under the Private Securities Litigation
Reform Act of 1995 Regarding Forward-Looking Information
In addition to historical information, this report contains
forward-looking statements and performance trends that are based upon
assumptions subject to certain known and unknown risks, uncertainties,
contingencies and other factors. Variances in any or all of the risks,
uncertainties, contingencies, and other factors from the Company's assumptions
could cause actual results to differ materially from these forward-looking
statements and trends. The Company's ability to deal with the unknown outcomes
of these events, many of which are beyond the control of the Company, may affect
the reliability of its projections and other financial matters.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Chemed's primary market risk exposure relates to interest rate risk
exposure through its variable interest rate borrowings. At June 30, 2005, we had
a total of $84.8 million of variable rate debt outstanding. Should the interest
rate on this debt increase 100 basis points, our annual interest expense would
increase $848,000. The quoted market value of our 8.75% fixed rate senior notes
on July 31, 2005 is $160.5 million(carrying value is $150 million). We estimate
that the fair value of the remainder of our long-term debt approximates its book
value at June 30, 2005 ($85.7 million).
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management to allow timely
decisions regarding required disclosure.
The Company recently carried out an evaluation, under the supervision
of the Company's President and Chief Executive Officer, and with the
participation of the Vice President and Chief Financial Officer and the Vice
President and Controller, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rules
13a-14/15d-14(a). Based upon the foregoing, the Company's President and Chief
Executive Officer, Vice President and Chief Financial Officer and Vice President
and Controller concluded that as of the date of this report the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company and its consolidated subsidiaries
required to be included in the Company's Exchange Act reports. There have been
no significant changes in internal control over financial reporting during the
first six months of 2005.
21
PART II OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders:
a. The Company held its annual meeting of stockholders on May 16, 2005.
b. The names of directors elected at this annual meeting are as follows:
Edward L. Hutton Walter L. Krebs
Kevin J. McNamara Sandra E. Laney
Donald Breen, Jr. Timothy S. O'Toole
Charles H. Erhart, Jr. Donald E. Saunders
Joel F. Gemunder George J. Walsh
Patrick P. Grace Frank E. Wood
Thomas C. Hutton
c. The stockholders ratified the selection by the Board of Directors of
PricewaterhouseCoopers LLP as independent accountants for the Company
and its consolidated subsidiaries for the year 2005: 11,143,681 votes
were cast in favor of the proposal, 442,541 votes were cast against it,
28,258 votes abstained, and there were no broker non-votes.
With respect to the election of directors, the number of votes cast for
each nominee was as follows:
For Withheld
Edward L. Hutton 10,080,801 1,533,679
Kevin J. McNamara 10,262,597 1,351,882
Donald Breen, Jr. 10,708,394 906,086
Charles H. Erhart, Jr. 10,142,106 1,472,374
Joel F. Gemunder 10,052,706 1,561,774
Patrick P. Grace 11,044,626 569,854
Thomas C. Hutton 10,087,026 1,527,453
Walter L. Krebs 10,470,560 1,143,920
Sandra E. Laney 9,877,589 1,736,891
Timothy S. O'Toole 10,092,736 1,521,744
Donald E. Saunders 10,371,878 1,242,602
George J. Walsh, III 10,160,816 1,453,664
Frank E. Wood 11,077,449 537,030
22
Item 6. Exhibits
Exhibit No. Description
31.1 Certification by Kevin J. McNamara pursuant to Rule 13a-14(a)/15d-14(a)
of the Exchange Act of 1934.
31.2 Certification by David P. Williams pursuant to Rule 13a-14(a)/15d-14(a)
of the Exchange Act of 1934.
31.3 Certification by Arthur V. Tucker, Jr. pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act of 1934.
32.1 Certification by Kevin J. McNamara pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by David P. Williams pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification by Arthur V. Tucker, Jr. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chemed Corporation
(Registrant)
Dated: August 9, 2005 By: Kevin J. McNamara
-----------------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
Dated: August 9, 2005 By: David P. Williams
-----------------------------
David P. Williams
(Vice President and Chief
Financial Officer)
Dated: August 9, 2005 By: Arthur V. Tucker, Jr.
-----------------------------
Arthur V. Tucker, Jr.
(Vice President and
Controller)
23