================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Under Section 13 or 15 (d) of the Securities
- ---------- Exchange Act of 1934 For the Quarterly Period Ended June 30, 2006
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ---------- Exchange Act of 1934
Commission File Number: 1-8351
CHEMED CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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 a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
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 26,251,757 Shares June 30, 2006
$1 Par Value
================================================================================
1
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES
Index
Page No.
PART I. FINANCIAL INFORMATION: --------
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet -
June 30, 2006 and December 31, 2005 3
Unaudited Consolidated Statement of Income -
Three and six months ended June 30, 2006 and 2005 4
Unaudited Consolidated Statement of Cash Flows -
Six months ended June 30, 2006 and 2005 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders 23
Item 6. Exhibits 24
2
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,
2006 2005
--------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 6,816 $ 57,133
Accounts receivable less allowances of $9,552
(2005 - $8,413) 94,833 95,063
Inventories 6,210 6,499
Current deferred income taxes 21,871 26,691
Prepaid income taxes 12,709 9,096
Prepaid expenses and other current assets 9,255 9,768
--------- ------------
Total current assets 151,694 204,250
Investments of deferred compensation plans held in trust 23,731 21,105
Other investments 1,445 1,445
Note receivable 12,500 12,500
Properties and equipment, at cost, less accumulated
depreciation of $72,928 (2005 - $66,655) 66,474 65,449
Identifiable intangible assets less accumulated
amortization of $11,822 (2005 - $9,612) 73,150 75,358
Goodwill 433,877 433,756
Other assets 20,692 21,222
--------- ------------
Total Assets $783,563 $ 835,085
========= ============
LIABILITIES
Current liabilities
Accounts payable $ 48,591 $ 43,626
Current portion of long-term debt 207 1,045
Income taxes 4,172 3,916
Accrued insurance 40,049 38,894
Accrued compensation 28,071 33,156
Other current liabilities 30,914 48,258
--------- ------------
Total current liabilities 152,004 168,895
Deferred income taxes 22,829 22,304
Long-term debt 169,397 234,058
Deferred compensation liabilities 23,503 21,275
Other liabilities 3,441 4,378
--------- ------------
Total Liabilities 371,174 450,910
--------- ------------
STOCKHOLDERS' EQUITY
Capital stock - authorized 80,000,000 shares $1 par; issued
28,812,033 shares (2005 - 28,373,872 shares) 28,812 28,374
Paid-in capital 249,460 234,910
Retained earnings 193,089 171,188
Treasury stock - 2,560,276 shares (2005 - 2,394,272 shares), at cost (61,340) (52,127)
Deferred compensation payable in Company stock 2,422 2,379
Notes receivable for shares sold (54) (549)
--------- ------------
Total Stockholders' Equity 412,389 384,175
--------- ------------
Total Liabilities and Stockholders' Equity $783,563 $ 835,085
========= ============
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,
--------------------------- --------------------------
2006 2005 2006 2005
------------ ------------- ----------- -------------
Continuing operations
Service revenues and sales $ 249,783 $ 226,309 $ 496,021 $ 444,946
------------ ------------- ----------- -------------
Cost of services provided and
goods sold
(excluding depreciation) 180,925 161,120 358,822 314,072
Selling, general and
administrative expenses 38,644 37,968 77,119 75,887
Depreciation 4,117 3,928 8,265 7,848
Amortization 1,417 1,231 2,813 2,423
------------ ------------- ----------- -------------
Total costs and expenses 225,103 204,247 447,019 400,230
------------ ------------- ----------- -------------
Income from operations 24,680 22,062 49,002 44,716
Interest expense (4,300) (5,039) (9,645) (10,874)
Loss on extinguishment of debt - - (430) (3,971)
Other income--net 524 600 2,019 1,327
------------ ------------- ----------- -------------
Income before income taxes 20,904 17,623 40,946 31,198
Income taxes (8,062) (6,512) (15,889) (12,182)
------------ ------------- ----------- -------------
Income from continuing
operations 12,842 11,111 25,057 19,016
Discontinued operations, net of
income taxes - (2,226) - (2,015)
------------ ------------- ----------- -------------
Net income $ 12,842 $ 8,885 $ 25,057 $ 17,001
============ ============= =========== =============
Earnings Per Share
Income from continuing operations $ 0.49 $ 0.44 $ 0.96 $ 0.75
============ ============= =========== =============
Net income $ 0.49 $ 0.35 $ 0.96 $ 0.67
============ ============= =========== =============
Average number of shares
outstanding 26,201 25,489 26,123 25,319
============ ============= =========== =============
Diluted Earnings Per Share
Income from continuing operations $ 0.48 $ 0.42 $ 0.93 $ 0.73
============ ============= =========== =============
Net income $ 0.48 $ 0.34 $ 0.93 $ 0.65
============ ============= =========== =============
Average number of shares
outstanding 26,846 26,214 26,815 26,059
============ ============= =========== =============
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,
----------------------------
2006 2005
------------- -------------
Cash Flows from Operating Activities
Net income $ 25,057 $ 17,001
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,078 10,271
Provision for uncollectible accounts receivable 4,005 3,343
Provision for deferred income taxes 4,001 (2,206)
Amortization of debt issuance costs 882 962
Write off of unamortized debt issuance costs 430 2,871
Noncash long-term incentive compensation - 2,574
Discontinued operations - 2,015
Changes in operating assets and liabilities,
excluding amounts acquired in business combinations
Increase in accounts receivable (3,828) (23,653)
Decrease/(increase) in inventories 289 (290)
Decrease in prepaid expenses and
other current assets 513 343
Decrease in accounts payable and other
current liabilities (15,949) (2,673)
Increase in income taxes 2,189 7,859
Increase in other assets (2,892) (1,328)
Decrease in other liabilities 1,972 390
Excess tax benefit on share-based compensation (4,941) -
Noncash expense of internally financed ESOPs - 572
Other sources 679 676
------------- -------------
Net cash provided by continuing operations 23,485 18,727
Net cash used by discontinued operations - (1,559)
------------- -------------
Net cash provided by operating activities 23,485 17,168
------------- -------------
Cash Flows from Investing Activities
Capital expenditures (9,474) (11,455)
Net uses from the sale of discontinued operations (2,990) (5,478)
Business combinations, net of cash acquired (814) (5,495)
Proceeds from sales of property and equipment 161 96
Other uses (358) (107)
------------- -------------
Net cash used by investing activities (13,475) (22,439)
------------- -------------
Cash Flows from Financing Activities
Repayment of long-term debt (84,499) (140,978)
Net increase in revolving line of credit 19,000 -
Excess tax benefit on share-based compensation 4,941 -
Issuance of capital stock, net of costs 3,849 8,766
Purchases of treasury stock (3,992) (3,574)
Dividends paid (3,156) (3,060)
Increase in cash overdrafts payable 3,397 7,347
Debt issuance costs (154) (1,755)
Proceeds from long-term debt - 85,000
Other sources/(uses) 287 (53)
------------- -------------
Net cash used by financing activities (60,327) (48,307)
------------- -------------
Decrease in Cash and Cash Equivalents (50,317) (53,578)
Cash and cash equivalents at beginning of year 57,133 71,448
------------- -------------
Cash and cash equivalents at end of period $ 6,816 $ 17,870
============= =============
See accompanying notes 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 our financial position, results of
operations and cash flows. 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 our Annual Report on
Form 10-K for the year ended December 31, 2005. Certain 2005 amounts have
been reclassified to conform with current period presentation in the
balance sheet and statements of income and cash flows primarily related to
the adoption of SFAS 123(R).
2. Stock-Based Compensation
Effective January 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards No. 123, revised ("SFAS 123(R)") which
establishes accounting for stock-based compensation for employees. Under
SFAS 123(R), stock-based compensation cost is measured at the grant date,
based on the fair value of the award and recognized as expense over the
employee's requisite service period. We previously applied Accounting
Principles Board Opinion No. 25 and provided the pro-forma disclosures
required by Statement of Financial Accounting Standards No. 123. We elected
to adopt the modified prospective transition method as provided by SFAS
123(R). Accordingly, we have not restated previously reported financial
statement amounts. Other than the reclassifications noted above, there was
no material impact on our financial position, results of operations or cash
flows as a result of the adoption of SFAS 123(R).
We provide employees the opportunity to acquire our stock through a
number of plans, as follows:
o We have nine stock incentive plans under which 10,700,000 shares can
be issued to key employees through a grant of stock awards and/or
options to purchase shares. The Compensation/Incentive Committee
("CIC") of the Board of Directors administers these plans. All options
granted under these plans provide for a purchase price equal to the
market value of the stock at the date of grant. The latest plan,
covering a total of 3,000,000 shares, was adopted in May 2006. The
plans are not qualified, restricted or incentive plans under the U.S.
Internal Revenue Code. The terms of each plan differ slightly,
however, stock options issued under the plans generally have a maximum
term of 10 years. Under one plan, adopted in 1999, up to 500,000
shares may be issued to employees who are not our officers or
directors.
o In May 2002, our shareholders approved the adoption of the Executive
Long-Term Incentive Plan ("LTIP") covering our officers and key
employees. The LTIP is administered by the CIC. During June 2004, the
CIC approved guidelines covering the establishment of a pool of
250,000 shares ("2004 LTIP Pool") to be distributed to eligible
members of management upon attainment of the following hurdles during
the period January 1, 2004 through December 31, 2007:
o 88,000 shares if our cumulative pro forma adjusted EBITDA
(including the results of VITAS beginning January 1, 2004)
reaches $365 million within the four-year period.
o 88,000 shares if our stock price reaches the following hurdles
during any 30 trading days out of any 60-trading-day period
during the four-year period:
Stock Price Shares to be
Hurdle Issued
------------------ -------------------
$ 35.00 22,000
$ 38.75 33,000
$ 42.50 33,000
-------------------
88,000
===================
o 44,000 shares represent a retention element, subject to a
four-year, time-based vesting.
6
o 30,000 shares may be awarded at the discretion of the CIC.
Through June 30, 2006, 18,000 shares have been issued from the
discretionary pool.
The 88,000 shares, which were tied to stock price hurdles, were issued
during the year ended December 31, 2005. On May 15, 2006, the CIC
approved additional price hurdles and associated shares to be issued
under the LTIP pursuant to the 2006 stock incentive plan, as follows:
Stock Price Shares to be
Hurdle Issued
------------------ -------------------
$ 62.00 20,000
$ 68.00 30,000
$ 75.00 30,000
-------------------
80,000
===================
The stock price hurdles must be achieved during 30 trading days out of
any 60 trading day period during the three years ending May 15, 2009.
See Note 9 below for disclosure related to awards granted under the
LTIP.
o We maintain an Employee Stock Purchase Plan ("ESPP"). The ESPP allows
eligible participants to purchase our shares through payroll
deductions at current market value. We pay administrative and broker
fees associated with the ESPP. Shares purchased for the ESPP are
purchased on the open market and credited directly to participants'
accounts. In accordance with the provisions of SFAS 123(R), the ESPP
is non-compensatory.
For the three and six months ended June 30, 2006, we recorded $313,000
and $605,000, respectively, in amortization expense in the accompanying
statement of income for stock-based compensation expense related to the
amortization of restricted stock awards previously granted. For the three
and six months ended June 30, 2006, we recorded $18,000 in selling, general
and administrative expenses for stock-based compensation expense related to
stock options granted during the quarter. There were no capitalized
stock-based compensation costs as of June 30, 2006. The pro-forma
disclosure as required by SFAS No. 123 for the three and six months ended
June 30, 2005 is as follows:
Three Six
Months Months
-------------- -------------
Net income, as reported $ 8,885 $ 17,001
Add: stock-based compensation expense included in
net income as reported, net of income taxes 1,349 2,488
Deduct: total stock-based compensation determined
under a fair value method, net of income taxes (4,016) (6,314)
-------------- -------------
Pro-forma net income $ 6,218 $ 13,175
============== =============
Earnings per share:
As reported $ 0.35 $ 0.67
============== =============
Pro-forma $ 0.24 $ 0.52
============== =============
Diluted earnings per share:
As reported $ 0.34 $ 0.65
============== =============
Pro-forma $ 0.24 $ 0.51
============== =============
As of June 30, 2006, approximately $3.4 million of total unrecognized
compensation costs related to non-vested stock awards are expected to be
recognized over a weighted average period of 3.0 years. As of June 30,
2006, approximately $6.6 million of total unrecognized compensation costs
related to non-vested stock options are expected to be recognized over a
weighted average period of 3.0 years.
7
The following table summarizes stock option and award activity during
the first six months of 2006:
Stock Options Stock Awards
---------------------------- ------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Grant-Date
Shares Price Shares Price
---------------------------- ------------------------------
Stock-based compensation shares:
Outstanding at January 1, 2006 1,741,833 $ 23.57 142,445 $ 27.10
Granted 370,450 51.76 29,600 53.17
Exercised/Vested (408,561) 20.99 (25,695) 39.69
--------------- ----------------
Outstanding at June 30, 2006 1,703,722 $ 30.32 146,350 $ 30.16
=============== ============ ================ =============
Vested at June 30, 2006 1,333,272 $ 24.36
=============== ============
The weighted average contractual life of outstanding and exercisable
options was 7.0 years at June 30, 2006. The options outstanding at June
30, 2006, were in the following exercise price ranges:
Exercise Price Range Weighted
Average Aggregate
Number of Exercise Intrinsic
Options Price Value
---------------------------------------------------- ------------- ------------- ---------------
$16.10 to $30.32 1,023,872 $ 20.21 $ 35,696,478
$30.33 to $51.76 679,850 $ 45.54 $ 6,479,174
The total intrinsic value of stock options exercised during the six
month periods ended June 30, 2006 and 2005 was $14.1 million and $18.3
million, respectively. The total intrinsic value of stock awards vested
during the six month period ended June 30, 2006 was $1.4 million. The total
cash received from employees as a result of employee stock option exercises
for the six month periods ended June 30, 2006 and 2005 was $3.8 million and
$8.8 million, respectively. In connection with these exercises, the tax
benefits realized for the six months ended June 30, 2006 and 2005 were $4.9
million and $5.9 million, respectively. We settle employee stock options
with newly issued shares.
In connection with the adoption of SFAS 123(R) on January 1, 2006, we
reassessed our valuation technique and related assumptions. We estimate the
fair value of stock options using the Black-Scholes valuation model,
consistent with the provisions of SFAS 123(R), the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 107 and our prior period pro
forma disclosure of net income including stock-based compensation expense.
We granted 370,450 stock options on June 28, 2006 pursuant to the 2006
Stock Incentive Plan. For purposes of determining the key assumptions and
the related fair value of the options granted, we analyzed the participants
of the LTIP separately from the other stock option recipients. Key input
assumptions used to estimate the fair value of stock options granted on
June 28, 2006 are as follows:
LTIP
Participants All Others
--------------- --------------
Stock price on date of issuance $ 51.76 $ 51.76
Grant date fair value per share $ 18.95 $ 16.47
Number of options granted 262,750 107,700
Expected term (years) 6.0 4.5
Risk free rate of return 5.21% 5.19%
Volatility 28.0% 28.9%
Dividend yield 0.5% 0.5%
Forfeiture rate -% 10.0%
8
Volatility was determined using our historical stock price tracked over
a period equal to the expected term of the option. We believe using the
Black-Scholes model and the related assumptions are appropriate in
estimating the fair value of our stock options granted. Estimates of fair
value are not intended to predict actual future events or the value
ultimately realized by the option recipient. The ultimate value received by
an employee for options granted is not necessarily indicative of the
reasonableness of the estimate made by us in accordance with SFAS 123(R).
3. Capital Stock
On May 15, 2006, our shareholders approved an amendment to our
Certificate of Incorporation increasing the number of authorized shares of
capital stock from 40 million shares to 80 million shares.
On March 11, 2005, our Board of Directors 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.
4. Revenue Recognition
Both the VITAS segment and Roto-Rooter segment recognize service
revenues and sales when the earnings process has been completed. Generally,
this occurs when services are provided or products are delivered. VITAS
recognizes revenue at the estimated realizable amount due from third-party
payers. Medicare billings are subject to certain caps, as described further
below.
We actively monitor each of our hospice programs, by provider number,
as to their specific admission, discharge rate and median length of stay
data in an attempt to determine whether revenues are likely to exceed the
annual per-beneficiary Medicare cap ("Medicare Cap"). Should we determine
that revenues for a program are 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 prevent that program from exceeding
its Medicare Cap, we estimate the amount of revenue recognized during the
period that will require repayment to the US Federal government under the
Medicare Cap and record the amount as a reduction to patient revenue.
During the second quarter of 2006, we recorded a pretax charge of $2.3
million for Medicare Cap for the 2006 measurement period. The charge is the
result of two programs reaching the Medicare Cap revenue limitation during
the second quarter of 2006. We believe the range of exposure for the fiscal
year ended December 31, 2006 is between $4.0 million and $6.1 million. The
range includes amounts for Medicare Cap limitations at three of our
programs. As of June 30, 2006 and December 31, 2005, respectively, we had
$4.7 million and $2.4 million accrued in current liabilities in the
accompanying balance sheet for the Medicare Cap.
5. Segments
Service revenues and sales and aftertax earnings by business segment
are as follows (in thousands):
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------- -------------- ------------ ---------------
Service Revenues and Sales
- ----------------------------
VITAS $172,242 $153,748 $340,616 $299,738
Roto-Rooter 77,541 72,561 155,405 145,208
------------- -------------- ------------ ---------------
Total $249,783 $226,309 $496,021 $444,946
============= ============== ============ ===============
Aftertax Earnings
- ----------------------------
VITAS $11,399 $10,603 $22,256 $20,213
Roto-Rooter 7,003 5,875 14,204 13,185
------------- -------------- ------------ ---------------
Total 18,402 16,478 36,460 33,398
Corporate (5,560) (5,367) (11,403) (14,382)
Discontinued operations - (2,226) - (2,015)
------------- -------------- ------------ ---------------
Net income $12,842 $8,885 $25,057 $17,001
============= ============== ============ ===============
9
Historically, we have allocated stock-based compensation expense to the
segment that employs the recipient of the stock-based compensation. In
connection with our adoption of SFAS 123(R), we re-assessed the
classification within our business segments of stock-based compensation
expense and determined that our chief decision maker analyzes stock-based
compensation as a corporate expense. Accordingly, all stock-based
compensation expense for 2006 and 2005 has been included as a corporate
expense in the chart above.
6. 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 2006 and 2005 are computed as follows (in thousands, except per
share data):
Income from Continuing
Operations Net Income
-------------------------------- ---------------------------------
Earnings Earnings
For the Three Months Ended per per
June 30, Income Shares Share Income Shares Share
- ---------------------------- ---------- ------------ -------- ---------- ------------ ---------
2006
Earnings $12,842 26,201 $0.49 $12,842 26,201 $0.49
======== =========
Dilutive stock options - 558 - 558
Nonvested stock awards - 87 - 87
---------- ------------ ---------- ------------
Diluted earnings $12,842 26,846 $0.48 $12,842 26,846 $0.48
========== ============ ======== ========== ============ =========
2005
Earnings $11,111 25,489 $0.44 $8,885 25,489 $0.35
======== =========
Dilutive stock options - 627 - 627
Impact of LTIP shares
issued - 35 - 35
Nonvested stock awards - 63 - 63
---------- ------------ ---------- ------------
Diluted earnings $11,111 26,214 $0.42 $8,885 26,214 $0.34
========== ============ ======== ========== ============ =========
Income from Continuing
Operations Net Income
-------------------------------- ---------------------------------
Earnings Earnings
For the Six Months Ended per per
June 30, Income Shares Share Income Shares Share
- ---------------------------- ---------- ------------ -------- ---------- ------------ ---------
2006
Earnings $25,057 26,123 $0.96 $25,057 26,123 $0.96
======== =========
Dilutive stock options - 604 - 604
Nonvested stock awards - 88 - 88
---------- ------------ ---------- ------------
Diluted earnings $25,057 26,815 $0.93 $25,057 26,815 $0.93
========== ============ ======== ========== ============ =========
2005
Earnings $19,016 25,319 $0.75 $17,001 25,319 $0.67
======== =========
Dilutive stock options - 665 - 665
Impact of LTIP shares
issued - 17 - 17
Nonvested stock awards - 58 - 58
---------- ------------ ---------- ------------
Diluted earnings $19,016 26,059 $0.73 $17,001 26,059 $0.65
========== ============ ======== ========== ============ =========
10
7. Other Income -- Net
Other income -- net comprises the following (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
-------------- ------------ ------------ ------------
Interest income $578 $263 $1,551 $913
(Loss)/gain on trading investments of
employee benefit trust (8) 327 485 414
(Loss)/gain on disposal of property and
equipment 2 10 (55) (19)
Other - net (48) - 38 19
-------------- ------------ ------------ ------------
Total other income $524 $600 $2,019 $1,327
============== ============ ============ ============
8. Other Current Liabilities
Other current liabilities as of June 30, 2006 and December 31, 2005
consist of the following (in thousands):
2006 2005
------------ ------------
Accrued legal settlements $7,884 $23,108
Accrued divestiture expenses 1,945 3,895
Accrued Medicare Cap estimate 4,750 2,410
Other 16,335 18,845
------------ ------------
Total other current
liabilities
$30,914 $48,258
============ ============
9. 2002 Executive Long-Term Incentive Plan
No performance targets under the LTIP were reached in the three or six
months ended June 30, 2006. As of June 30, 2006, no accrual was recorded
for awards under the earnings component or the remaining market price
component of the LTIP since no awards have been granted.
10. Long-term Debt and Extinguishment of Debt
On March 31, 2006, we repaid in full our $84.4 million term loan with
JPMorgan Chase Bank. The term loan was paid with a combination of cash on
hand and a draw on our revolving credit facility. At that time, we also
amended the $175 million revolving credit facility with JPMorgan Chase Bank
to reduce the commitment and annual fees and to reduce the floating
interest rate by approximately 50 basis points. The interest rate of the
amended revolving credit agreement is LIBOR plus 1.25%. The amended
revolving credit facility also includes an "accordion" feature that allows
us the opportunity to expand the facility by $50 million. In connection
with the repayment of the term loan, we recorded a write-off of unamortized
debt issuance costs of $430,000.
The following is a schedule by year of required long-term debt payments
as of June 30, 2006 (in thousands):
June 2007 $207
June 2008 208
June 2009 157
June 2010 19,032
June 2011 150,000
---------------
Total debt 169,604
Less: Current portion (207)
---------------
Total long-term debt $169,397
===============
We are in compliance with all debt covenants as of June 30, 2006. We
have issued $31.3 million in standby letters of credit as of June 30, 2006
mainly for insurance purposes. Issued letters of credit reduce our
available credit under the revolving credit agreement. As of June 30, 2006,
we have approximately $124.7 million of unused lines of credit available
and eligible to be drawn down under our revolving credit facility,
excluding the accordion feature.
11
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, 2006, we had notes receivable from independent contractors
totaling $2.4 million (December 31, 2005-$2.6 million). In most cases these
loans are fully or partially secured by equipment owned by the contractor.
The interest rates on the loans range from 5% to 8% per annum and the
remaining terms of the loans range from two months to 5.4 years at June 30,
2006. During the three months ended June 30, 2006, we recorded revenues of
$4.6 million (2005-$4.4 million) and pretax profits of $1.7 million
(2005-$1.3 million) from our independent contractors. During the six months
ended June 30, 2006, we recorded revenues of $9.5 million (2005-$9.0
million) and pretax profits of $3.8 million (2005-$3.0 million) from our
independent contractors.
We have 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 our contractual relationships with the
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 some of the
contractors who have loans payable to us may be VIE's. We believe
consolidation, if required, of the accounts of any VIE's for which we might
be the primary beneficiary would not materially impact our financial
position, results of operations or cash flows.
12. Pension and Retirement Plans
All of our plans that provide retirement and similar benefits are
defined contribution plans. Expenses for our pension and profit-sharing
plans, ESOP's, excess benefit plans and other similar plans are $2.4
million and $2.7 million for the three months ended June 30, 2006 and 2005,
respectively. Expenses for our pension and profit-sharing plans, ESOP's,
excess benefit plans and other similar plans are $4.8 million and $5.4
million for the six months ended June 30, 2006 and 2005, respectively.
13. Litigation
We are 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. We contested these allegations and believe 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 did not rule on certification of a class in the
remaining 31 states. In December 2004, we reached a resolution of this
matter with the Plaintiff. The court approved this settlement in July 2006.
We accrued $3.1 million in 2004 as the anticipated cost of settling this
litigation.
Like other large California employers, our VITAS subsidiary faces
allegations of purported class-wide wage and hour violations. It is party
to a class action lawsuit filed in the Superior Court of California, Los
Angeles County, in April of 2004 by Ann Marie Costa, Ana Jimenez, Mariea
Ruteaya and Gracetta Wilson (the "Costa case"). This case alleges failure
to pay overtime wages for hours worked "off the clock" on administrative
tasks, including voicemail retrieval, time entry, travel to and from work,
and pager response. This case also alleges VITAS failed to provide meal and
break periods to a purported class of California nurses, home health aides
and licensed clinical social workers. The case also seeks payment of
penalties, interest, and Plaintiffs' attorney fees. VITAS contested these
allegations.
Plaintiff moved for class certification, and VITAS opposed this motion.
We have reached an agreement with the Plaintiff class in order to avoid the
uncertainty of litigation and the diversion of resources and personnel
resulting from the litigation. In connection with our acquisition of VITAS
in February 2004, we recorded a liability of $2.3 million on VITAS' opening
balance sheet for this case. At that time, this represented our best
estimate of our exposure in the matter. As a result of the tentative
resolution, we recorded a pretax charge of $17.4 million ($10.8 million
aftertax) in the fourth quarter of 2005, representing the portion of this
settlement not accounted for on Vitas' opening balance sheet. These amounts
are inclusive of Plaintiffs' class attorneys' fees and the costs of
settlement administration. On April 24, 2006, the court granted preliminary
approval of the settlement and we funded $15 million of the settlement in
May 2006. On June 26, 2006, the court granted final approval of the
settlement.
12
In the normal course of business, we are a party to various claims and
legal proceedings. We record a reserve for these matters when an adverse
outcome is probable and the amount of the potential liability is reasonably
estimable.
14. OIG Investigation
On April 7, 2005, we 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
dating back to 1998 covering admissions, certifications, recertifications
and discharges. During the third quarter of 2005 and again in May 2006, the
OIG requested additional information from us. A qui tam complaint has been
filed in U.S. District Court for the Southern District of Florida. We are
conferring with the U.S. Attorney regarding our defenses to the complaint
allegations. The U.S. Attorney has not decided whether to intervene in the
qui tam action. We have incurred pretax expense related to complying with
OIG requests of $342,000 for the quarter ended June 30, 2006 and $474,000
for the six months ended June 30, 2006.
The government continues to investigate the complaint's allegations. We
are unable to predict the outcome of this matter 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 us through defense costs, diversion of our
time and related publicity.
15. Related Party Agreements
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. In June 2004, VITAS entered into a pharmacy services agreement with
excelleRx. The agreement has a one-year term and automatically renews
unless either party provides a 90-day written termination notice.
Subsequent to June 2004, OCR acquired excelleRx. Under both agreements,
VITAS made purchases of $7.3 million and $14.3 million for the three and
six month periods ended June 30, 2006 and has accounts payable of $3.0
million at June 30, 2006. Mr. E. L. Hutton is non-executive Chairman and a
director of the Company and OCR. 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 director of the Company, is a
director emeritus of OCR. We believe that the terms of these agreements are
no less favorable to VITAS than we could negotiate with an unrelated party.
16. Cash Overdrafts Payable
Included in accounts payable at June 30, 2006 are cash overdrafts
payable of $11.4 million (December 31, 2005 - $8.0 million).
17. Subsequent Event
Effective July 1, 2006, our Board of Directors approved a long-term
care insurance benefit for senior executives who participate in the LTIP.
The long-term care benefit covers these executives and their spouses during
their period of employment as well as postretirement. We will accrue the
cost of the benefit in accordance with FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The
anticipated yearly cost of this benefit is not material.
On July 27, 2006, we announced that we are in the process of finalizing
a $50 million ongoing share repurchase program. In addition, we intend to
fully utilize the remaining $8 million from our February 2000 share
repurchase program. The share repurchases will be funded through a
combination of cash generated from operations as well as utilization of our
revolving credit facility. The timing and amount of any share repurchases
will be determined by us based upon our evaluation of the market and other
factors.
18. Recent Accounting Statements
In July 2006, the FASB issued Interpretation No. 48 "FIN 48",
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109", which proscribes a comprehensive model for how a company
should recognize, measure, present and disclose in its financial statements
uncertain tax positions that the company has taken or expects to take on a
tax return. Upon adoption of FIN 48, the financial statements will reflect
expected future tax consequences of such uncertain positions assuming the
taxing authorities' full knowledge of the position and all relevant facts.
FIN 48 also revises disclosure requirements and introduces an annual,
tabular roll-forward of the unrecognized tax benefits. This interpretation
is effective as of the beginning of fiscal years starting after December
15, 2006. We are currently evaluating the impact that FIN 48 will have on
our financial condition and results of operations.
13
In February 2006, the FASB issued Statement No. 155, "Accounting
for Certain Hybrid Financial Instruments", which nullifies and amends
various accounting guidance relating to accounting for derivative
instruments and securitization transactions. In general, these changes will
reduce the operational complexity associated with bifurcating embedded
derivatives, and increase the number of beneficial interests in
securitization transactions. This statement is effective for all financial
instruments acquired or issued after the beginning of our first fiscal year
that begins after September 15, 2006. Because we do not have any material
derivative instruments or securitization transactions, we believe there
will be no material impact on our financial condition, results of
operations or cash flows upon adoption.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Executive Summary
We operate through our two wholly owned subsidiaries, VITAS Healthcare
Corporation and Roto-Rooter Group, Inc. VITAS focuses on hospice care that helps
make terminally ill patients' final days as comfortable as possible. Through its
team of doctors, nurses, home health aides, social workers, clergy and
volunteers, VITAS provides direct medical services to patients, as well as
spiritual and emotional counseling to both patients and their families.
Roto-Rooter's services are focused on providing plumbing and drain cleaning
services to both residential and commercial customers. Through its network of
company-owned branches, independent contractors and franchisees, Roto-Rooter
offers plumbing and drain cleaning service to over 90% of the U.S. population.
The following is a summary of the key operating results for the three
and six months ended June 30, 2006 and 2005 (in thousands except per share
amounts):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
Consolidated service revenues and
sales $249,783 $226,309 $496,021 $444,946
Consolidated income from continuing
operations $12,842 $11,111 $25,057 $19,016
Diluted EPS from continuing
operations $0.48 $0.42 $0.93 $0.73
The increase in consolidated service revenues and sales for the three
months ended June 30, 2006 was driven by a 12% increase at VITAS and a 7%
increase at Roto-Rooter. The increase at VITAS was primarily the result of a 10%
increase in average daily census (ADC) from the second quarter of 2005 and the
October 1, 2005 Medicare reimbursement rate increase of approximately 3%. The
increase at VITAS was partially offset by a $2.3 million reduction in revenue
for Medicare Cap billing limitations. The increase at Roto-Rooter was driven
primarily by a 0.6% increase in job count combined with an approximate 6% price
increase. Consolidated income from continuing operations and diluted EPS from
continuing operations increased as a result of the higher service revenues and
sales, which allowed us to further leverage our current cost structure.
Consolidated income from continuing operations as a percent of service revenues
and sales was 5.1% for the three months ended June 30, 2006 versus 4.9% for the
same period of 2005. As further shown in the results of operations section,
consolidated income from continuing operations and diluted EPS from continuing
operations include special items and adjustments that decreased aftertax
earnings by $224,000 and $641,000 for the three months ended June 30, 2006 and
2005, respectively.
The increase in consolidated service revenues and sales for the six
months ended June 30, 2006 was driven by a 14% increase at VITAS and a 7%
increase at Roto-Rooter. The increase at VITAS was primarily the result of a 10%
increase in average daily census (ADC) from the first six months of 2005 and the
October 1, 2005 Medicare reimbursement rate increase of approximately 3%. The
increase at VITAS was partially offset by a $2.3 million reduction in revenue
for Medicare Cap billing limitations. The increase at Roto-Rooter was driven
primarily by a 1% increase in job count combined with an approximate 6% price
increase. Consolidated income from continuing operations and diluted EPS from
continuing operations increased as a result of the higher service revenues and
sales, which allowed us to further leverage our current cost structure.
Consolidated income from continuing operations as a percent of service revenues
and sales was 5.1% for the six months ended June 30, 2006 versus 4.3% for the
same period of 2005. As further shown in the results of operations section,
consolidated income from continuing operations and diluted EPS from continuing
operations include special items and adjustments that decreased aftertax
earnings by $579,000 and $3.0 million for the six months ended June 30, 2006 and
2005, respectively.
Effective January 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards No. 123, revised ("SFAS 123(R)") which
establishes accounting for stock-based compensation for employees. Under SFAS
123(R), stock-based compensation cost is measured at the grant date, based on
the fair value of the award and recognized as expense over the employee's
requisite service period. We previously applied Accounting Principles Board
Opinion No. 25 and provided the pro-forma disclosures required by Statement of
Financial Accounting Standards No. 123. We elected to adopt the modified
prospective transition method as provided by SFAS 123(R). Accordingly,
previously reported financial statement amounts have not been restated. We have
determined that the Black-Scholes option pricing model to calculate the fair
value of our stock options is appropriate in the circumstances. We also used the
Black-Scholes model for purposes of the pro-forma disclosures under SFAS 123.
There was no material impact on our financial position, results of operations or
cash flows as a result of the adoption of SFAS 123(R).
15
Financial Condition
Liquidity and Capital Resources
Significant changes in the balance sheet accounts from December 31,
2005 to June 30, 2006 include the following:
o The $50.3 million decline in cash and cash equivalents from $57.1
million at December 31, 2005 to $6.8 million at June 30, 2006 is
primarily attributable to the use of $65.5 million in cash to repay
our $84.4 million term note and the use of approximately $15 million
in cash to fund the Costa case settlement. The cash uses were
partially offset by cash provided by operations.
o The decrease in other current liabilities of $17.3 million is
primarily attributable to our funding of the Costa settlement during
the second quarter of 2006. The legal accrual for the Costa case of
$19.7 million at December 31, 2005 was classified in other current
liabilities.
o The reduction in long-term debt from $234.1 million at December 31,
2005 to $169.4 million at June 30, 2006 resulted from repayment of our
$84.4 million term loan with JPMorgan Chase in March 2006, partially
offset by borrowings on our revolving line of credit to fund a portion
of the repayment.
Net cash provided by continuing operations increased $4.8 million from
a source of cash from continuing operations of $18.7 million for the first six
months of 2005 to a source of cash of $23.5 million for the first six months of
2006, due primarily to the increase in net income, partially offset by the
funding of the Costa case settlement.
We have issued $31.3 million in standby letters of credit as of June
30, 2006 mainly for insurance purposes. Issued letters of credit reduce our
available credit under the revolving credit agreement. At June 30, 2006, we had
approximately $124.7 million available lines of credit eligible to be drawn down
under our amended credit agreement with JPMorgan Chase, excluding the $50.0
million accordion feature. We believe our liquidity and sources of capital are
satisfactory for our needs in the foreseeable future.
Commitments and Contingencies
Collectively, the terms of our credit agreements provide that we are
required to meet various financial covenants, to be tested quarterly. In
connection therewith, we are in compliance with all financial and other debt
covenants as of June 30, 2006 and anticipate remaining in compliance throughout
2006.
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 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 us. We have a long-term receivable due from Patient Care of $12.5
million. As of June 30, 2006, Patient Care is current on all payments due
related to the long-term receivable. We also have current accounts receivable
from Patient Care for the post-closing balance sheet valuation and for expenses
paid by us after closing on Patient Care's behalf of $3.3 million. We are in
litigation with Patient Care over various issues, including the collection of
these current amounts. We believe these balances represent valid claims, are
fairly stated and are fully collectible; nonetheless, an unfavorable
determination by the court could result in the write-off of all or a portion of
these balances.
We are 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. We
contested these allegations and believe 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 did not rule
on certification of a class in the remaining 31 states. In December 2004, we
reached a resolution of this matter with the Plaintiff. The court approved this
settlement in July 2006. We accrued $3.1 million in 2004 as the anticipated cost
of settling this litigation.
16
Like other large California employers, our VITAS subsidiary faces
allegations of purported class-wide wage and hour violations. It is party to a
class action lawsuit filed in the Superior Court of California, Los Angeles
County, in April of 2004 by Ann Marie Costa, Ana Jimenez, Mariea Ruteaya and
Gracetta Wilson (the "Costa case"). This case alleges failure to pay overtime
wages for hours worked "off the clock" on administrative tasks, including
voicemail retrieval, time entry, travel to and from work, and pager response.
This case also alleges VITAS failed to provide meal and break periods to a
purported class of California nurses, home health aides and licensed clinical
social workers. The case also seeks payment of penalties, interest, and
Plaintiffs' attorney fees. VITAS contested these allegations.
Plaintiff moved for class certification, and VITAS opposed this motion.
We have reached an agreement with the Plaintiff class in order to avoid the
uncertainty of litigation and the diversion of resources and personnel resulting
from the litigation. In connection with our acquisition of VITAS in February
2004, we recorded a liability of $2.3 million on VITAS' opening balance sheet
for this case. At that time, this represented our best estimate of our exposure
in the matter. As a result of the tentative resolution, we recorded a pretax
charge of $17.4 million ($10.8 million aftertax) in the fourth quarter of 2005,
representing the portion of this settlement not accounted for on Vitas' opening
balance sheet. These amounts are inclusive of Plaintiffs' class attorneys' fees
and the costs of settlement administration. On April 24, 2006, the court granted
preliminary approval of the settlement and we funded $15 million of the
settlement in May 2006. On June 26, 2006, the court granted final approval of
the settlement.
On April 7, 2005, we 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 dating back to 1998
covering admissions, certifications, recertifications and discharges. During the
third quarter of 2005 and again in May 2006, the OIG requested additional
information from us. A qui tam complaint has been filed in U.S. District Court
for the Southern District of Florida. We are conferring with the U.S. Attorney
regarding our defenses to the complaint allegations. The U.S. Attorney has not
decided whether to intervene in the qui tam action. We have incurred pretax
expense related to complying with OIG requests of $342,000 for the quarter ended
June 30, 2006 and $474,000 for the six months ended June 30, 2006.
The government continues to investigate the complaint's allegations. We
are unable to predict the outcome of this matter 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 us through defense costs, diversion of our time and related
publicity.
Results of Operations
Second Quarter 2006 versus Second Quarter 2005-Consolidated Results
Our service revenues and sales for the second quarter of 2006 increased
10.4% versus the second quarter of 2005. Of this increase, $18.5 million was
attributable to VITAS and $5.0 million was attributable to Roto-Rooter, as
follows (dollars in thousands):
Increase/(Decrease)
-----------------------
Amount Percent
------------ ----------
VITAS
Routine Homecare $16,552 15.5%
Continuous Care 3,631 14.0%
General Inpatient 651 3.1%
Less: Medicare Cap (2,340) --
Roto-Rooter
Plumbing 2,071 7.1%
Drain Cleaning 2,695 8.3%
Other 214 2.0%
------------
Total $23,474 10.4%
============
17
The increase in VITAS' revenues for the second quarter of 2006 versus
the second quarter of 2005 is attributable to increases in ADC of 10.6% and
7.8%, respectively, for routine homecare and continuous care. General inpatient
ADC was unchanged between periods. ADC is a key measure we use to monitor volume
growth in our hospice business. Changes in total program admissions and average
length of stay for our patients are the main drivers of changes in ADC. The
remainder of the revenue increase is due primarily to the annual increase in
Medicare reimbursement rates in the fourth quarter of 2005. In excess of 90% of
VITAS' revenues for both periods were from Medicare and Medicaid. The increase
in VITAS revenue was partially offset by a reduction of $2.3 million for
Medicare Cap. The revenue reduction is the result of two programs reaching the
Medicare Cap revenue limitation during the second quarter of 2006. We believe
the range of exposure for the fiscal year ended December 31, 2006 is between
$4.0 million and $6.1 million. The range includes amounts for Medicare Cap
limitations at three of our programs.
The increase in the plumbing revenues for the second quarter of 2006
versus 2005 comprises a 0.4% increase in the number of jobs performed and a 6.7%
increase in the average price per job. The increase in drain cleaning revenues
for the second quarter of 2006 versus 2005 comprised a 0.6% increase in the
number of jobs and a 7.7% increase in the average price per job. The average
price per job for both plumbing and drain cleaning was positively impacted by
the continued shift to commercial jobs. Overall, the number of commercial jobs
increased 2.4% while the number of residential jobs declined 0.3%. This is a
favorable shift in job mix since a commercial job averages approximately 20%
more revenue per job than a residential job. The increase in other revenues is
attributable primarily to increased revenue from the independent contractor
operations.
The consolidated gross margin was 27.6% in the second quarter of 2006
as compared with 28.8% in the second quarter of 2005. On a segment basis, VITAS'
gross margin was 19.6% in the second quarter of 2006 and 21.4% in the second
quarter of 2005. The decrease in VITAS' gross margin in the second quarter of
2006 is primarily attributable to the $2.3 million reduction in revenue related
to Medicare Cap billing limitations. This represents a decrease in VITAS margin
of 1.4%. Roto-Rooter segment's gross margin was 45.3% in the second quarter of
2006 and 44.5% in the second quarter of 2005.
Selling, general and administrative expenses ("SG&A") for the second
quarter of 2006 were $38.6 million, an increase of $676,000 (1.8%) versus the
second quarter of 2005. The increase is largely due to higher revenues by both
segments which increase certain variable selling costs, such as commissions.
Income from operations increased $2.6 million from $22.1 million in the
second quarter of 2005 to $24.7 million in the second quarter of 2006. The
increase is attributable primarily to the rate of SG&A growth being considerably
lower than the rate of service revenues and sales growth. The decrease in the
consolidated gross margin noted above partially offset the increase.
Interest expense, substantially all of which is incurred at Corporate,
declined from $5.0 million in the second quarter of 2005 to $4.3 million in the
second quarter of 2006. This decline is due primarily to the pay down of
outstanding debt balances during the last half of 2005 and the first half of
2006.
Our effective income tax rate increased from 37.0% in the second
quarter of 2005 to 38.6% in the second quarter of 2006. The increase in our
effective tax rate relates mainly to adjustments to pre-acquisition equity
earnings at VITAS in 2005. There were no such amounts in the second quarter of
2006.
Income from continuing operations increased $1.7 million or 15.6% in
the second quarter of 2006 as compared to the second quarter of 2005. Net income
increased $4.0 million or 44.5% in the second quarter of 2006 as compared to the
second quarter of 2005. Income from continuing operations and net income for
both periods included the following aftertax special items/adjustments that
increased/(reduced) aftertax earnings (in thousands):
Three Months Ended June 30,
-----------------------------
2006 2005
-------------- --------------
Legal expenses of OIG
investigation $(212) $(160)
Stock option expense (12) -
LTIP - (1,152)
Adjustments to transaction costs - 671
-------------- --------------
$(224) $(641)
============== ==============
18
Second quarter 2006 versus Second quarter 2005-Segment Results
The change in aftertax earnings for the second quarter of 2006 versus
the second quarter of 2005 is due to (in thousands):
Net Income
Increase/(Decrease)
----------------------------
Amount Percent
--------------- ------------
VITAS $796 7.5%
Roto-Rooter 1,128 19.2%
Corporate (193) 3.6%
Discontinued operations 2,226 100.0%
---------------
$3,957 44.5%
===============
First Six Months of 2006 versus First Six Months of 2005-Consolidated Results
Our service revenues and sales for the first six months of 2006
increased 11.5% versus the first six months of 2005. Of this increase, $40.9
million was attributable to VITAS and $10.2 million was attributable to
Roto-Rooter, as follows (dollars in thousands):
Increase/(Decrease)
------------------------
Amount Percent
------------ -----------
VITAS
Routine Homecare $31,138 15.0%
Continuous Care 9,170 18.2%
General Inpatient 2,910 6.9%
Less: Medicare Cap (2,340) --
Roto-Rooter
Plumbing 3,228 5.6%
Drain Cleaning 5,948 9.0%
Other 1,021 4.6%
------------
Total $51,075 11.5%
============
The increase in VITAS' revenues for the first six months of 2006 versus
the first six months of 2005 is attributable to increases in ADC of 10.2%, 11.7%
and 3.5%, respectively, for routine homecare, continuous care and general
inpatient. ADC is a key measure we use to monitor volume growth in our hospice
business. Changes in total program admissions and average length of stay for our
patients are the main drivers of changes in ADC. The remainder of the revenue
increase is due primarily to the annual increase in Medicare reimbursement rates
in the fourth quarter of 2005. In excess of 90% of VITAS' revenues for both
periods were from Medicare and Medicaid. The increase in VITAS revenue was
partially offset by a reduction of $2.3 million for Medicare Cap. The revenue
reduction is the result of two programs reaching the Medicare Cap revenue
limitation during the second quarter of 2006. We believe the range of exposure
for the fiscal year ended December 31, 2006 is between $4.0 million and $6.1
million. The range includes amounts for Medicare Cap limitations at three of our
programs.
The increase in the plumbing revenues for the first six months of 2006
versus 2005 comprises a 0.8% increase in the number of jobs performed and a 4.8%
increase in the average price per job. The increase in drain cleaning revenues
for the first six months of 2006 versus 2005 comprised a 1.4% increase in the
number of jobs and a 7.6% increase in the average price per job. The average
price per job for both plumbing and drain cleaning was positively impacted by
the continued shift to commercial jobs. Overall, the number of commercial jobs
increased 3.4% while the number of residential jobs increased 0.3%. This is a
favorable shift in job mix since a commercial job averages approximately 20%
more revenue per job than a residential job. The increase in other revenues is
attributable primarily to increased revenue from the independent contractor
operations.
19
The consolidated gross margin was 27.7% in the first six months of 2006
as compared with 29.4% in the first six months of 2005. On a segment basis,
VITAS' gross margin was 19.6% in the first six months of 2006 and 21.2% in the
first six months of 2005. The decrease in VITAS' gross margin in 2006 is
primarily attributable to the $2.3 million reduction in revenue for the Medicare
Cap billing limitation and excess patient care capacity experienced in the first
quarter of 2006. Roto-Rooter segment's gross margin was 45.4% in the first six
months of 2006 and 46.3% in the first six months of 2005. The decrease in
Roto-Rooter's gross margin in 2006 is primarily attributable to a benefit
realized in the first quarter of 2005 of $1.6 million (pretax) related to prior
period casualty insurance claims.
Selling, general and administrative expenses ("SG&A") for the first six
months of 2006 were $77.1 million, an increase of $1.2 million (1.6%) versus the
first six months of 2005. The increase is largely due to higher revenues by both
segments which increase certain variable selling costs, such as commissions.
Income from operations increased $4.3 million from $44.7 million in the
first six months of 2005 to $49.0 million in the first six months of 2006. The
increase is attributable primarily to the rate of SG&A growth being considerably
lower than the rate of service revenues and sales growth. The decrease in the
consolidated gross margin noted above partially offset the increase.
Interest expense, substantially all of which is incurred at Corporate,
declined from $10.9 million in the first six months of 2005 to $9.6 million in
the first six months of 2006. This decline is due primarily to the reduction in
debt outstanding that occurred as a result of the February 2005 and 2006
refinancings, as well as subsequent debt payments.
Loss on extinguishment of debt decreased from $4.0 million in the first
six months of 2005 to $430,000 in the first six months of 2006. The 2005 loss on
extinguishment relates to the refinancing in February 2005. The loss on
extinguishment in 2006 relates to the early repayment of our $84.4 million term
loan in March 2006.
Our effective income tax rate decreased from 39.0% in the first six
months of 2005 to 38.8% in the first six months of
2006.
Income from continuing operations increased $6.0 million or 31.8% in
the first six months of 2006 as compared to the first six months of 2005. Net
income increased $8.1 million or 47.4% in the first six months of 2006 as
compared to the first six months of 2005. Income from continuing operations and
net income for both periods included the following aftertax special
items/adjustments that increased/(reduced) aftertax earnings (in thousands):
Six Months Ended June 30,
-----------------------------
2006 2005
-------------- --------------
Loss on extinguishment of debt $(273) $(2,523)
Legal expenses of OIG
investigation (294) (160)
Favorable adjustment for
insurance - 1,014
Stock option expense (12) (137)
LTIP - (1,847)
Adjustments to transaction costs - 671
-------------- --------------
$(579) $(2,982)
============== ==============
20
First Six Months of 2006 versus First Six Months of 2005-Segment Results
The change in aftertax earnings for the first six months of 2006 versus
the first six months of 2005 is due to (in thousands):
Net Income
Increase/(Decrease)
----------------------------
Amount Percent
---------------- -----------
VITAS $2,043 10.1%
Roto-Rooter 1,019 7.7%
Corporate 2,979 20.7%
Discontinued operations 2,015 100.0%
----------------
$8,056 47.4%
================
The following chart updates historical unaudited financial and
operating data of VITAS, acquired in February 2004 (dollars in thousands, except
dollars per patient day):
21
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
OPERATING STATISTICS FOR VITAS SEGMENT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ----------------------------
2006 2005 2006 2005
----------- ------------- -------------- ------------
OPERATING STATISTICS
Net revenue ($000) (a)
Homecare $ 123,162 $ 106,610 $ 238,620 $ 207,482
Inpatient 21,782 21,131 44,889 41,979
Continuous care 29,638 26,007 59,447 50,277
----------- ------------- -------------- ------------
Total before Medicare cap
allowance 174,582 153,748 342,956 299,738
Medicare cap allowance (2,340) - (2,340) -
----------- ------------- -------------- ------------
Total $ 172,242 $ 153,748 $ 340,616 $ 299,738
=========== ============= ============== ============
Net revenue as a percent of total
before Medicare cap allowance
Homecare 70.5 % 69.4 % 69.6 % 69.2 %
Inpatient 12.5 13.7 13.1 14.0
Continuous care 17.0 16.9 17.3 16.8
----------- ------------- ---------- ------------
Total before Medicare cap
allowance 100.0 100.0 100.0 100.0
Medicare cap allowance (1.3) - (0.7) -
----------- ------------- -------------- ------------
Total 98.7 % 100.0 % 99.3 % 100.0 %
=========== ============= ============== ============
Average daily census ("ADC") (days)
Homecare 6,469 5,750 6,292 5,589
Nursing home 3,493 3,260 3,429 3,230
----------- ------------- -------------- ------------
Routine homecare 9,962 9,010 9,721 8,819
Inpatient 406 406 419 405
Continuous care 536 497 553 495
----------- ------------- -------------- ------------
Total 10,904 9,913 10,693 9,719
=========== ============= ============== ============
Total Admissions 13,069 12,646 26,965 25,594
Total Discharges 12,603 12,153 26,015 24,741
Average length of stay (days) 68.0 66.8 70.3 66.4
Median length of stay (days) 13.0 12.0 13.0 12.0
ADC by major diagnosis
Neurological 33.1 % 32.0 % 33.1 % 31.4 %
Cancer 20.0 21.4 20.2 22.3
Cardio 15.0 15.2 14.9 14.8
Respiratory 7.2 7.2 7.2 7.2
Other 24.7 24.2 24.6 24.3
----------- ------------- -------------- ------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
=========== ============= ============== ============
Admissions by major diagnosis
Neurological 19.6 % 18.7 % 20.1 % 19.2 %
Cancer 35.0 36.6 34.4 35.5
Cardio 13.2 13.8 13.6 14.0
Respiratory 7.0 6.9 7.5 7.6
Other 25.2 24.0 24.4 23.7
----------- ------------- -------------- ------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
=========== ============= ============== ============
Direct patient care margins (b)
Routine homecare 49.6 % 49.4 % 48.6 % 49.6 %
Inpatient 21.0 23.0 22.1 22.9
Continuous care 20.3 19.5 19.3 18.5
Homecare margin drivers
(dollars per patient day)
Labor costs $ 48.15 $ 46.01 $ 49.65 $ 45.86
Drug costs 8.42 7.94 7.94 7.72
Home medical equipment 5.52 5.53 5.54 5.50
Medical supplies 2.11 2.14 2.13 2.15
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 257.69 $ 240.76 $ 252.04 $ 239.55
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 463.62 $ 443.83 $ 458.96 $ 438.56
Bad debt expense as a percent of
revenues 0.9 % 0.9 % 0.9 % 0.9 %
Accounts receivable --
days of revenue outstanding 40.1 43.8 N.A. N.A.
(a) VITAS has five large (greater than 450 ADC), 17 medium (greater than 200
but less than 450 ADC) and 20 small (less than 200 ADC) hospice programs.
There are three programs with estimated Medicare Cap billing limitiations
for the 2006 measurement period. There is one other program with Medicare
Cap cushion of less than 10% for the 2006 measurement period. No other
programs have an estimated Medicare Cap cushion of less than 10% for the
2006 measurement period.
(b) Amounts exclude indirect patient care and administrative costs, as well as
Medicare Cap billing limitation.
22
Recent Accounting Statements
In February 2006, the FASB issued Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments", which nullifies and amends various
accounting guidance relating to accounting for derivative instruments and
securitization transactions. In general, these changes will reduce the
operational complexity associated with bifurcating embedded derivatives, and
increase the number of beneficial interests in securitization transactions. This
statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15, 2006.
Because we do not have any material derivative instruments or securitization
transactions, we believe there will be no material impact on our financial
condition, results of operations or cash flows upon adoption.
In July 2006, the FASB issued Interpretation No. 48 "FIN 48",
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109", which proscribes a comprehensive model for how a company should
recognize, measure, present and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax return.
Upon adoption of FIN 48, the financial statements will reflect expected future
tax consequences of such uncertain positions assuming the taxing authorities'
full knowledge of the position and all relevant facts. FIN 48 also revises
disclosure requirements and introduces an annual, tabular roll-forward of the
unrecognized tax benefits. This interpretation is effective as of the beginning
of fiscal years starting after December 15, 2006. We are currently evaluating
the impact that FIN 48 will have on our financial condition and results of
operations.
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 our assumptions could cause actual results
to differ materially from these forward-looking statements and trends. Our
ability to deal with the unknown outcomes of these events, many of which are
beyond our control, may affect the reliability of projections and other
financial matters.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposure relates to interest rate risk exposure
through variable interest rate borrowings. At June 30, 2006, we had a total of
$19.0 million of variable rate debt outstanding. Should the interest rate on
this debt increase 100 basis points, our annual interest expense would increase
$190,000. The quoted market value of our 8.75% fixed rate senior notes on June
30, 2006 is $157.1 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, 2006.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision of our 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 our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, the President and Chief Executive Officer, Vice President and Chief
Financial Officer and Vice President and Controller have concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report. There has been no change in our internal control over
financial reporting that occurred during the quarter covered by this report that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders:
(a) We held our annual meeting of stockholders on May 15, 2006.
(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. Germunder George J. Walsh III
Patrick P. Grace Frank E. Wood
Thomas C. Hutton
23
(c) The stockholders voted to approve and adopt the Company's 2006 Stock
Incentive Plan: 17,114,115 votes were cast in favor of the proposal,
4,007,270 votes were cast against it, 543,673 votes abstained, and
there were 2,529 broker non-votes.
(d) The stockholders voted to approve an amendment to the Company's
Certificate of Incorporation, as amended, increasing the number of
authorized shares of Capital stock from 40,000,000 to 80,000,000
shares: 21,219,910 votes were cast in favor of the proposal, 2,937,808
votes were cast against it, 36,971 votes abstained, and there were no
broker non-votes.
(e) 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 2006: 23,478,994 votes
were cast in favor of the proposal, 687,307 votes were cast against
it, 28,387 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 22,785,015 1,409,675
Kevin J. McNamara 22,841,200 1,353,489
Donald Breen, Jr. 22,710,836 1,483,853
Charles H. Erhart, Jr. 21,691,072 2,503,617
Joel F. Gemunder 22,216,246 1,978,444
Patrick P. Grace 23,645,851 548,838
Thomas C. Hutton 22,794,788 1,399,901
Walter L. Krebs 23,746,701 447,988
Sandra E. Laney 22,356,173 1,838,516
Timothy S. O'Toole 22,795,110 1,399,579
Donald E. Saunders 23,751,112 443,577
George J. Walsh III 22,832,816 1,361,873
Frank E. Wood 22,666,820 1,527,869
Item 6. Exhibits
Exhibit No. Description
---------------- -----------------------------------------------------------------
10.1 2006 Stock Incentive Plan
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.
24
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, 2006 By: Kevin J. McNamara
--------------------------- -----------------------------------------
Kevin J. McNamara
(President and Chief Executive Officer)
Dated: August 9, 2006 By: David P. Williams
--------------------------- -----------------------------------------
David P. Williams
(Vice President and Chief Financial
Officer)
Dated: August 9, 2006 By: Arthur V. Tucker, Jr.
--------------------------- -----------------------------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
25