================================================================================
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, 2007
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
of incorporation Identification No.)
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
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 23,915,868 Shares June 30, 2007
$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, 2007 and December 31, 2006 3
Unaudited Consolidated Statement of Income -
Three and six months ended June 30, 2007 and 2006 4
Unaudited Consolidated Statement of Cash Flows -
Six months ended June 30, 2007 and 2006 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 2(c). Purchases of Equity Securities by Issuer and Affiliated Purchasers 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits 31
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,
2007 2006
---------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 7,469 $ 29,274
Accounts receivable less allowances of $ 10,186 (2006 - $ 10,180) 99,867 93,086
Inventories 6,752 6,578
Current deferred income taxes 19,828 17,789
Prepaid income taxes 2,604 -
Current assets of discontinued operations - 5,418
Prepaid expenses and other current assets 8,570 9,968
---------------- ---------------
Total current assets 145,090 162,113
Investments of deferred compensation plans held in trust 29,360 25,713
Note receivable 14,701 14,701
Properties and equipment, at cost, less accumulated
depreciation of $ 83,315 (2006 - $ 77,107) 72,428 70,140
Identifiable intangible assets less
accumulated amortization of $ 15,224 (2006 - $ 13,201) 67,195 69,215
Goodwill 435,209 435,050
Noncurrent assets of discontinued operations - 287
Other assets 15,549 16,068
---------------- ---------------
Total Assets $ 779,532 $ 793,287
================ ===============
LIABILITIES
Current liabilities
Accounts payable $ 46,366 $ 49,744
Current portion of long-term debt 10,162 209
Income taxes 837 6,765
Accrued insurance 37,084 38,457
Accrued compensation 33,046 35,990
Current liabilities of discontinued
operations - 12,215
Other current liabilities 20,638 22,684
---------------- ---------------
Total current liabilities 148,133 166,064
Deferred income taxes 3,846 26,301
Long-term debt 268,035 150,331
Deferred compensation liabilities 28,912 25,514
Other liabilities 5,945 3,716
---------------- ---------------
Total Liabilities 454,871 371,926
---------------- ---------------
STOCKHOLDERS' EQUITY
Capital stock - authorized 80,000,000 shares $1 par; issued
29,193,268 shares (2006 - 28,849,918 shares) 29,193 28,850
Paid-in capital 261,951 252,639
Retained earnings 242,905 215,517
Treasury stock - 5,277,400 shares (2006 - 3,023,635 shares), at cost (211,836) (78,064)
Deferred compensation payable in Company stock 2,448 2,419
---------------- ---------------
Total Stockholders' Equity 324,661 421,361
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 779,532 $ 793,287
================ ===============
See accompanying notes to unaudited consolidated 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,
---------------------------- ----------------------------
2007 2006 2007 2006
------------ --------------- -------------- -------------
Continuing operations
Service revenues and sales $ 271,387 $ 249,068 $ 541,826 $ 492,989
------------ --------------- -------------- -------------
Cost of services provided and goods sold
(excluding depreciation) 188,716 179,103 376,963 355,138
Selling, general and administrative expenses 46,090 38,621 94,160 77,075
Depreciation 4,962 4,082 9,677 8,214
Amortization 1,294 1,317 2,609 2,613
Other operating income - - (1,138) -
------------ --------------- -------------- -------------
Total costs and expenses 241,062 223,123 482,271 443,040
------------ --------------- -------------- -------------
Income from operations 30,325 25,945 59,555 49,949
Interest expense (3,400) (4,300) (7,142) (9,645)
Loss on extinguishment of debt (13,715) - (13,715) (430)
Other income--net 2,188 524 3,057 2,019
------------ --------------- -------------- -------------
Income before income taxes 15,398 22,169 41,755 41,893
Income taxes (5,965) (8,619) (16,101) (16,305)
------------ --------------- -------------- -------------
Income from continuing operations 9,433 13,550 25,654 25,588
Discontinued operations, net of income taxes - (708) - (531)
------------ --------------- -------------- -------------
Net income $ 9,433 $ 12,842 $ 25,654 $ 25,057
============ =============== ============== =============
Earnings Per Share
Income from continuing operations $ 0.38 $ 0.52 $ 1.02 $ 0.98
============ =============== ============== =============
Net income $ 0.38 $ 0.49 $ 1.02 $ 0.96
============ =============== ============== =============
Average number of shares outstanding 24,506 26,201 25,108 26,123
============ =============== ============== =============
Diluted Earnings Per Share
Income from continuing operations $ 0.38 $ 0.50 $ 1.00 $ 0.95
============ =============== ============== =============
Net income $ 0.38 $ 0.48 $ 1.00 $ 0.93
============ =============== ============== =============
Average number of shares outstanding 25,080 26,846 25,684 26,815
============ =============== ============== =============
Cash Dividends Per Share $ 0.06 $ 0.06 $ 0.12 $ 0.12
============ =============== ============== =============
See accompanying notes to unaudited consolidated financial statements.
4
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
--------------------
2007 2006
---------- ---------
Cash Flows from Operating Activities
Net income $ 25,654 $ 25,057
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 12,286 10,827
Write off of unamortized debt issuance costs 7,153 430
Noncash long-term incentive compensation 6,154 -
Provision for uncollectible accounts receivable 4,009 3,962
Amortization of debt issuance costs 751 882
Provision for deferred income taxes 376 4,679
Discontinued operations - 531
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations
Increase in accounts receivable (11,308) (5,924)
Decrease/(increase) in inventories (174) 289
Decrease in prepaid expenses and
other current assets 1,377 514
Decrease in accounts payable and other current liabilities (14,838) (18,089)
Increase in income taxes 69 1,932
Increase in other assets (3,932) (2,892)
Increase in other liabilities 4,540 1,973
Excess tax benefit on share-based compensation (2,370) (4,941)
Other sources 477 551
---------- ---------
Net cash provided by continuing operations 30,224 19,781
Net cash provided by discontinued operations - 3,704
---------- ---------
Net cash provided by operating activities 30,224 23,485
---------- ---------
Cash Flows from Investing Activities
Capital expenditures (13,908) (9,222)
Net uses from the disposals of discontinued operations (5,905) (2,990)
Proceeds from sales of property and equipment 3,003 161
Business combinations, net of cash acquired (62) (814)
Other uses (564) (610)
---------- ---------
Net cash used by investing activities (17,436) (13,475)
---------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 300,000 -
Repayment of long-term debt (185,643) (84,499)
Purchases of treasury stock (130,748) (3,992)
Purchase of note hedges (54,939) -
Proceeds from issuance of warrants 27,614 -
Net increase in revolving line of credit 13,300 19,000
Debt issuance costs (6,395) (154)
Dividends paid (2,997) (3,156)
Excess tax benefit on share-based compensation 2,370 4,941
Issuance of capital stock 2,069 3,849
Increase in cash overdrafts payable 166 3,397
Other sources 610 287
---------- ---------
Net cash used by financing activities (34,593) (60,327)
---------- ---------
Decrease in Cash and Cash Equivalents (21,805) (50,317)
Cash and cash equivalents at beginning of year 29,274 57,133
---------- ---------
Cash and cash equivalents at end of period $ 7,469 $ 6,816
========== =========
See accompanying notes to unaudited consolidated 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, 2006. Certain 2006 amounts have
been reclassified to conform with current period presentation in the
balance sheet and statement of income primarily related to the presentation
of the discontinued operations of our Phoenix hospice program.
2. Refinancing Transactions
On May 2, 2007, we entered into a new senior secured credit facility
with JPMorgan Chase Bank (the "2007 Facility") to replace our existing
credit facility. The 2007 Facility includes a $100 million term loan, a
$175 million revolving credit facility and a $100 million expansion
feature. The facility has a 5-year maturity with principal payments on the
term loan due quarterly and on the revolving credit facility due at
maturity. Interest is payable quarterly at a floating rate equal to our
choice of various indices plus a specified margin based on our leverage
ratio. The interest rate at the inception of the agreement is LIBOR plus
0.875%. In connection with replacing our existing credit facility, we
wrote-off approximately $2.3 million in deferred debt costs. The write-off
of deferred debt costs has been recorded as loss on extinguishment of debt
in the accompanying statement of income.
On May 4, 2007, we used the proceeds from the 2007 Facility to fund the
redemption of our $150 million, 8.75% Senior Notes due 2011. The redemption
was made pursuant to the terms of the indenture at a price of 104.375% plus
accrued but unpaid interest. In connection with the redemption, we
wrote-off approximately $4.8 million in deferred debt costs. The premium
payment of $6.6 million and the write-off of deferred debt costs have been
recorded as loss on extinguishment of debt in the accompanying statement of
income.
On May 8, 2007, we entered into a Purchase Agreement with J.P. Morgan
Securities Inc. and Citigroup Global Markets Inc. (the "Initial
Purchasers") for issuance and sale of $180 million in aggregate principal
amount of our 1.875% Senior Convertible Notes due 2014 (the "Notes"). On
May 9, 2007, the Initial Purchasers exercised an over-allotment option to
purchase an additional $20 million in aggregate principal amount of Notes.
On May 14, 2007 a total of $200 million in aggregate principal amount of
the Notes were sold to the Initial Purchasers at a price of $1,000 per
Note, less an underwriting fee of $27.50 per Note. The Notes are to be
resold by the Initial Purchasers pursuant to Rule 144A of the Securities
Act of 1933, as amended (the "Securities Act").
We received approximately $194 million in net proceeds from the sale of
the Notes after paying underwriting fees, legal and other expenses.
Proceeds from the offering were used to purchase treasury shares of our
stock, as discussed further in Note 3 and to pay down a portion of the 2007
Facility. We will pay interest on the Notes on May 15 and November 15 of
each year, beginning on November 15, 2007. The Notes will mature on May 15,
2014. The Notes are guaranteed on an unsecured senior basis by each of our
subsidiaries that is a borrower or a guarantor under any senior credit
facility, as defined in the Indenture. The Notes are convertible, under
certain circumstances, into our Capital Stock at a conversion rate of
12.3874 shares per $1,000 principal amount of Notes. This conversion rate
is equivalent to an initial conversion price of approximately $80.73 per
share. Prior to March 1, 2014, holders may convert their Notes under
certain circumstances. On and after March 1, 2014, the Notes will be
convertible at any time prior to the close of business three days prior to
the stated maturity date of the Notes. Upon conversion of a Note, if the
conversion value is $1,000 or less, holders will receive cash equal to the
lesser of $1,000 or the conversion value of the number of shares of our
Capital Stock. If the conversion value exceeds $1,000, in addition to this,
holders will receive shares of our Capital Stock for the excess amount. The
Indenture contains customary terms and covenants that upon certain events
of default, including without limitation, failure to pay when due any
principal amount, a fundamental change or certain cross defaults in other
agreements or instruments, occurring and continuing, either the trustee or
the holders of 25% in aggregate principal amount of the Notes may declare
the principal of the Notes and any accrued and unpaid interest through the
date of such declaration immediately due and payable. In the case of
certain events of bankruptcy or insolvency relating to any significant
subsidiary or to us, the principal amount of the Notes and accrued interest
automatically becomes due and payable.
6
Pursuant to the guidance in Emerging Issues Task Force ("EITF") 90-19,
"Convertible Bonds with Issuer Option to Settle for Cash Upon Conversion",
EITF 00-19 "Accounting for Derivative Instruments Indexed to, and
Potentially Settled in a Company's Own Stock" and EITF 01-6 "The Meaning of
Indexed to a Company's Own Stock", the Notes are accounted for as
convertible debt in the accompanying consolidated balance sheet and the
embedded options within the Notes have not been accounted for as separate
derivatives.
We, our subsidiary guarantors and the Initial Purchasers also entered
into a Registration Rights Agreement (the "RRA") dated May 14, 2007.
Pursuant to the RRA, we agreed to, no later than the 120th day after May
14, 2007, file a shelf registration statement covering resale of the Notes
and the Capital Stock issuable upon conversion pursuant to Rule 415 under
the Securities Act. We will also cause the shelf registration statement to
be declared effective under the Securities Act no later than the 180th day
after May 14, 2007. If the shelf registration is not filed or effective by
the appropriate dates, additional interest may accrue on the Notes.
On May 8, 2007 we entered into a purchased call transaction
and a warrant transaction (written call) with JPMorgan Chase, National
Association and Citibank, N.A. (the "Counterparties"). The purchased call
options cover approximately 2,477,000 shares of our Capital Stock, which
under most circumstances represents the maximum number of shares of Capital
Stock that underlie the Notes. Concurrently with entering into the
purchased call options, we entered into warrant transactions with each of
the Counterparties. Pursuant to the warrant transactions, we sold to the
Counterparties warrants to purchase in the aggregate approximately
2,477,000 shares of Capital Stock. In most cases, the sold warrants may not
be exercised prior to the maturity of the Notes.
The purchased call options and sold warrants are separate contracts
with the Counterparties, are not part of the terms of the Notes and do not
affect the rights of holders under the Notes. A holder of the Notes will
not have any rights with respect to the purchased call options or the sold
warrants. The purchased call options are expected to reduce the potential
dilution upon conversion of the Notes if the market value per share of the
Capital Stock at the time of exercise is greater than approximately $80.73,
which corresponds to the initial conversion price of the Notes. The sold
warrants have an exercise price of $105.44 and are expected to result in
some dilution should the price of our Capital Stock exceed this exercise
price. See Note 7 for further detail with respect to the potential impact
of these transactions on our Earnings Per Share.
Our net cost for these transactions was approximately $27.3 million.
Pursuant to EITF 00-19 and EITF 01-6, the purchased call option and the
sold warrants are accounted for as equity transactions. Therefore, our net
cost was recorded as a decrease in shareholders' equity in the accompanying
consolidated balance sheet.
On June 29, 2007, we paid approximately $35.5 million of the $100
million term note under the 2007 Facility using a combination of cash on
hand and a draw from the revolving credit facility. Of the amount paid in
June 2007, $33.0 million represents a prepayment. The following is a
schedule by year of required long-term debt repayments as of June 30, 2007
(in thousands):
June 2008 $ 10,162
June 2009 10,059
June 2010 10,059
June 2011 10,059
June 2012 37,858
Thereafter 200,000
---------------------
Total debt 278,197
Less: Current portion (10,162)
---------------------
Total long-term debt $ 268,035
=====================
We are in compliance with all debt covenants as of June 30, 2007. We
have issued $34.3 million in standby letters of credit as of June 30, 2007
mainly for insurance purposes. Issued letters of credit reduce our
available credit under the revolving credit agreement. As of June 30, 2007,
the Company has approximately $127.4 million of unused lines of credit
available and eligible to be drawn down under its revolving credit
facility, excluding the expansion feature.
7
3. Capital Stock Transactions
On April 26, 2007, our Board of Directors authorized a $150 million
stock repurchase program. Our $50 million stock repurchase program,
authorized in July 2006, had approximately $13.6 million remaining as of
March 31, 2007. For the three and six months June 30, 2007 we repurchased
1.5 million and 2.1 million shares, respectively at a weighted average cost
of $65.26 per share and $59.82 per share, respectively. There were no
shares repurchased during the three or six months ended June 30, 2006.
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 payments are subject to certain caps, as described 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 they 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 Federal government under the
Medicare cap and record the amount as a reduction to patient revenue. The
Medicare cap measurement period is from September 29 through September 28
of the following year for admissions and from November 1 through October 31
of the following year for revenue. As of the date of this filing for the
2007 measurement period, no programs have a required Medicare billing
reduction. Our current estimates for the projected full year 2007
measurement period anticipate no programs with a Medicare cap billing
limitation. Therefore, no revenue reduction for Medicare cap has been
recorded for the three or six-month period ended June 30, 2007.
5. Segments
Service revenues and sales and aftertax earnings by business segment
are as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Service Revenues and Sales
--------------------------
VITAS $185,701 $171,527 $369,750 $337,584
Roto-Rooter 85,686 77,541 172,076 155,405
--------- --------- --------- ---------
Total $271,387 $249,068 $541,826 $492,989
========= ========= ========= =========
Aftertax Earnings
-----------------
VITAS $ 14,154 $ 12,107 $ 29,141 $22,787
Roto-Rooter 10,695 7,003 20,181 14,204
--------- --------- --------- ---------
Total 24,849 19,110 49,322 36,991
Corporate (15,416) (5,560) (23,668) (11,403)
Discontinued operations - (708) - (531)
--------- --------- --------- ---------
Net income $ 9,433 $ 12,842 $ 25,654 $25,057
========= ========= ========= =========
6. Patient Care Notes Receivable
We have notes receivable of $14.7 million from Patient Care, Inc.
related to our sale of this subsidiary in 2002. In February 2007, the
parties amended the terms of the promissory notes receivable. The amended
notes are due October 2009. The interest on the notes receivable is the
higher of Patient Care's current floating rate plus 2% or 11.5% per year.
Interest payments are due quarterly. As of June 30, 2007, Patient Care is
current on all interest payments related to these notes.
8
7. 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 2007 and 2006 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
----------------------------- --------------- ---------- ------------ ---------- --------- ----------
2007
Earnings $ 9,433 24,506 $ 0.38 $ 9,433 24,506 $ 0.38
============ ==========
Dilutive stock options - 481 - 481
Nonvested stock awards - 93 - 93
--------------- ---------- ---------- ---------
Diluted earnings $ 9,433 25,080 $ 0.38 $ 9,433 25,080 $ 0.38
=============== ========== ============ ========== ========= ==========
2006
Earnings $ 13,550 26,201 $ 0.52 $ 12,842 26,201 $ 0.49
============ ==========
Dilutive stock options - 558 - 558
Nonvested stock awards - 87 - 87
--------------- ---------- ---------- ---------
Diluted earnings $ 13,550 26,846 $ 0.50 $ 12,842 26,846 $ 0.48
=============== ========== ============ ========== ========= ==========
Income from Continuing Operations Net Income
---------------------------------------- -------------------------------
Earnings Earnings
For the Six Months Ended per per
June 30, Income Shares Share Income Shares Share
----------------------------- --------------- ---------- ------------ ---------- --------- ----------
2007
Earnings $ 25,654 25,108 $ 1.02 $ 25,654 25,108 $ 1.02
============ ==========
Dilutive stock options - 459 - 459
Nonvested stock awards - 117 - 117
--------------- ---------- ---------- ---------
Diluted earnings $ 25,654 25,684 $ 1.00 $ 25,654 25,684 $ 1.00
=============== ========== ============ ========== ========= ==========
2006
Earnings $ 25,588 26,123 $ 0.98 $ 25,057 26,123 $ 0.96
============ ==========
Dilutive stock options - 604 - 604
Nonvested stock awards - 88 - 88
--------------- ---------- ---------- ---------
Diluted earnings $ 25,588 26,815 $ 0.95 $ 25,057 26,815 $ 0.93
=============== ========== ============ ========== ========= ==========
Diluted earnings per share may be impacted in future periods as the
result of the issuance of our $200 million Notes and related purchased
call options and sold warrants, as described in Note 2 above. Under EITF
04-8 "The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share" and EITF 90-19, we will not include any shares related
to the Notes in our calculation of diluted earnings per share until our
average stock price for a quarter exceeds the conversion price of $80.73.
At such a time in the future, we would include the number of shares in our
diluted earnings per share that would be issuable using the treasury stock
method. The amount of shares issuable is based upon the amount by which the
average stock price for the quarter exceeds the conversion price. In
addition, the purchased call option does not impact the calculation of
diluted earnings per share as it is always anti-dilutive. The sold warrants
become dilutive when our average stock price for a quarter exceeds the
strike price of the warrant.
9
The following table provides examples of how changes in our stock price
impact the number of shares that would be included in our diluted earnings per
share calculation. It also shows the impact on the number of shares issuable
upon conversion of the Notes and settlement of the purchased call options and
sold warrants:
Shares Total Treasury Shares Due Incremental
Underlying 1.875% Method to the Company Shares Issued by
Share Convertible Warrant Incremental under Notes the Company
Price Notes Shares Shares (a) Hedges upon Conversion (b)
------------------------- -------------------- --------------- ------------------- --------------- ---------------------
$ 80.73 - - - - -
$ 90.73 273,061 - 273,061 (273,061) -
$ 100.73 491,905 - 491,905 (491,905) -
$ 110.73 671,222 118,359 789,581 (671,222) 118,359
$ 120.73 820,833 313,764 1,134,597 (820,833) 313,764
$ 130.73 947,556 479,274 1,426,830 (947,556) 479,274
(a) Represents the number of incremental shares that must be included in
the calculation of fully diluted shares under U.S. GAAP.
(b) Represents the number of incremental shares to be issued by the
Company upon conversion of the 1.875% Convertible Notes, assuming
concurrent settlement of the note hedges and warrants.
8. Other Operating Income
During the first quarter of 2007, we completed the sale of Roto-Rooter's
call center building in Florida. The proceeds from the sale were
approximately $3.0 million, which resulted in a pretax gain of $1.1
million. The gain was recorded in other income from operations in the
accompanying consolidated statement of income.
9. Other Income -- Net
Other income -- net comprises the following (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
2007 2006 2007 2006
------- --------- -------- ---------
Interest income $ 944 $ 578 $1,711 $ 1,551
(Loss)/gain on trading investments of employee benefit trusts 1,237 (8) 1,450 485
Other - net 7 (46) (104) (17)
------- --------- -------- ---------
Total other income $ 2,188 $ 524 $3,057 $ 2,019
======= ========= ======== =========
10. Other Current Liabilities
Other current liabilities as of June 30, 2007 and December 31, 2006
consist of the following (in thousands):
2007 2006
---------------- -----------------
Accrued legal settlements $ 513 $ 1,889
Accrued divestiture expenses 845 2,612
Accrued Medicare Cap estimate 9,503 3,373
Other 9,777 14,810
---------------- -----------------
Total other current liabilities $ 20,638 $ 22,684
================ =================
Accrued Medicare cap as of June 30, 2007 includes $6.6 million related
to our Phoenix program that we sold in November 2006. This amount was
recorded in current liabilities from discontinued operations as of December
31, 2006.
10
11. 2002 Executive Long-Term Incentive Plan
In February 2007, we met the cumulative earnings target specified in the
LTIP and on March 9, 2007 the Compensation/Incentive Committee of the Board
of Directors approved a stock grant of 100,000 shares and the related
allocation to participants. The pre-tax cost of the stock grant was $5.4
million and is included in selling, general and administrative expenses in
the accompanying consolidated statement of income.
In May 2007, the Compensation/Incentive Committee of the Board of
Directors approved a pool of shares to be awarded based on new earnings
before interest, depreciation and amortization (EBITDA) targets. The
participants of the LTIP may be awarded 80,000 shares of our capital stock
if we attain adjusted EBITDA of either $465 million for the three year
period beginning January 1, 2007 or $604 million for the four year period
beginning January 1, 2007.
In June 2007, we met the $62.00 per share stock price hurdle specified
in the 2002 Long-Term Incentive Plan (LTIP) and on June 27, 2007 the
Compensation/Incentive Committee of the Board of Directors approved a stock
grant of 22,200 shares and the related allocation to participants. The
pre-tax cost of the stock grant was $1.6 million and is included in
selling, general and administrative expenses in the accompanying statement
of income.
12. Loans Receivable from Independent Contractors
The Roto-Rooter segment sublicenses with approximately sixty-one
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, 2007, we had notes receivable from our independent
contractors totaling $1.7 million (December 31, 2006-$1.9 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 years at
June 30, 2007. During the three and six months ended June 30, 2007, we
recorded revenues of $5.4 million and $10.8 respectively (2006-$4.6 million
and $9.5 million, respectively) and pretax profits of $2.3 million and $4.7
million, respectively (2006-$1.7 million and $3.8 million, respectively)
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.
13. 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, excess benefit plans and other similar plans were
$4.1 million and $7.7 million for the three and six months ended June 30,
2007, respectively. Expenses for the Company's pension and profit-sharing
plans, excess benefit plans and other similar plans were $2.4 million and
$4.8 million for the three and six months ended June 30, 2006,
respectively.
14. Litigation
Like other large California employers, our VITAS subsidiary faces
allegations of purported class-wide wage and hour violations. It was 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 ("Costa"). This case alleged 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 alleged 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 sought payment of
penalties, interest, and Plaintiffs' attorney fees. VITAS contested these
allegations. During 2006, we reached a tentative settlement and on June 26,
2006, the court granted final approval of the settlement ($19.9 million).
VITAS is party to a class action lawsuit filed in the Superior Court of
California, Los Angeles County, in September 2006 by Bernadette Santos,
Keith Knoche and Joyce White ("Santos"). This case, filed by the Costa case
Plaintiffs' counsel, makes similar allegations of failure to pay overtime
and failure to provide meal and rest periods to a purported class of
California admissions nurses, chaplains and sales representatives. The case
likewise seeks payment of penalties, interest and Plaintiffs' attorney
fees. VITAS contests these allegations. The lawsuit is in its early stage
and we are unable to estimate our potential liability, if any, with respect
to these allegations.
11
Regardless of outcome, defense of litigation adversely affects us
through defense costs, diversion of our time and related publicity. 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.
15. 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. We have incurred pretax
expense related to complying with OIG requests and defending the litigation
of $74,000 and $140,000 for the three and six months ended June 30, 2007,
respectively (2006 - $342,000 and $474,000, respectively). A qui tam
complaint filed in U.S. District Court for the Southern District of Florida
was dismissed by the Court with prejudice in July 2007.
The government may continue 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 our business, results of operations,
liquidity or capital resources. Regardless of outcome, responding to the
subpoenas and defending the litigation can adversely affect us through
defense costs, diversion of our time and related publicity.
16. Related Party Agreement
In October 2004, VITAS entered into a pharmacy services agreement
("Agreement") with Omnicare, Inc. ("OCR") whereby OCR will provide
specified pharmacy services for VITAS and its hospice patients in
geographical areas served by both VITAS and OCR. The Agreement has an
initial term of three years that renews automatically 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 $8.3
million and $16.6 million for the three and six months ended June 30, 2007,
respectively (2006 - $7.3 million and $14.3 million, respectively) and has
accounts payable of $3.4 million at June 30, 2007.
Mr. E. L. Hutton is non-executive Chairman of the Board 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 a 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.
17. Cash Overdrafts Payable
Included in accounts payable at June 30, 2007 are cash overdrafts
payable of $10.8 million (December 31, 2006 - $10.6 million).
18. Uncertain Tax Positions
On January 1, 2007, we adopted FASB Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109", which prescribes a comprehensive model for how to
recognize, measure, present and disclose in financial statements uncertain
tax positions taken or expected to be taken on a tax return. Upon adoption
of FIN 48, the financial statements 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.
The cumulative effect upon adoption of FIN 48 was to reduce our accrual
for uncertain tax positions by approximately $4.7 million, which has been
recorded in retained earnings as of January 1, 2007 in the accompanying
consolidated balance sheet. After adoption, we had approximately $1.3
million in unrecognized tax benefits. The majority of this amount would
affect our effective tax rate, if recognized in a future period. The years
ended December 31, 2003 and forward remain open for review for Federal
income tax purposes at Chemed and Roto-Rooter. For VITAS, fiscal years
beginning after February 24, 2004 (the date of acquisition) remain open for
review for Federal income tax purposes. The earliest open year relating to
any of our material state jurisdictions is the fiscal year ended December
31, 2002. During the next twelve months, we anticipate that the net change
in unrecognized tax benefits will be a decrease of approximately $150,000
to $200,000 due to normal quarterly provisions and releases upon expiration
of certain statutes of limitation.
12
As permitted by FIN 48, we reclassified interest related to our
accrual for uncertain tax positions to separate interest accounts. We
believe this change in accounting method is preferable as it more
accurately classifies the impact of interest in our consolidated balance
sheet and consolidated statement of income. As of June 30, 2007, we have
approximately $179,000 accrued in interest related to uncertain tax
positions. These accruals are included in other current liabilities in the
accompanying consolidated balance sheet. For the three and six months ended
June 30, 2007, we have recorded approximately $13,000 and $27,000,
respectively for interest related to uncertain tax positions in interest
expense in the accompanying consolidated statement of income.
19. Recent Accounting Statements
In February 2007, the FASB issued Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" ("SFAS 159"), which
permits an entity to measure certain financial assets and financial
liabilities at fair value. Entities that elect the fair value option will
report unrealized gains and losses in earnings at each reporting date. The
fair value option may be elected on an instrument-by-instrument basis, with
a few exceptions, as long as it is applied to the entire instrument. The
fair value election is irrevocable unless a new election date occurs. SFAS
159 is effective as of the beginning of the first fiscal year that begins
after November 15, 2007. We are currently evaluating the impact SFAS 159
will have on our financial condition and results of operations, if any.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157"), which addresses how companies should measure
fair value when they are required to use a fair value measure for
recognition or disclosure purposes under generally accepted accounting
principles (GAAP). It sets a common definition of fair value to be used
throughout GAAP. The new standard is designed to make the measurement of
fair value more consistent and comparable and improve disclosures about
those measures. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. We are currently
evaluating the impact SFAS 157 will have on our financial condition and
results of operations.
13
20. Guarantor Subsidiaries
Our 1.875% Notes are fully and unconditionally guaranteed on an
unsecured, joint and severally liable basis by certain of our 100% owned
subsidiaries. The following unaudited, condensed, consolidating financial
data presents the composition of the parent company (Chemed), the guarantor
subsidiaries and the non-guarantor subsidiaries as of June 30, 2007 and
December 31, 2006 for the balance sheet, the three and six months ended
June 30, 2007 and 2006 for the income statement and the six months ended
June 30, 2007 and 2006 for the statement of cash flows (dollars in
thousands):
Condensed Consolidating Balance Sheet
-------------------------------------
As of June 30, 2007 Guarantor Non-Guarantor Consolidating
------------------- Parent Subsidiaries Subsidiaries Adjustments Consolidated
------------ ------------ ---------------- ------------- ------------
ASSETS
Cash and cash equivalents $ 2,318 $ (1,132) $ 6,283 $ - $ 7,469
Accounts receivable, less allowances 873 98,428 566 - 99,867
Intercompany receivables 68,060 - - (68,060) -
Inventories - 6,116 636 - 6,752
Prepaid income taxes 3,047 (102) (341) - 2,604
Current deferred income taxes 51 19,518 259 - 19,828
Prepaid expenses and other current assets 1,329 7,135 106 - 8,570
------------ ------------ ---------------- ------------- ------------
Total current assets 75,678 129,963 7,509 (68,060) 145,090
------------ ------------ ---------------- ------------- ------------
Investments of deferred compensation
plans held in trust 13,638 15,722 - - 29,360
Note receivable 14,701 - - - 14,701
Properties and equipment, at cost,
less accumulated depreciation 4,501 66,167 1,760 - 72,428
Identifiable intangible assets
less accumulated amortization - 67,194 1 - 67,195
Goodwill - 430,638 4,571 - 435,209
Other assets 12,237 2,540 772 - 15,549
Investments in subsidiaries 475,770 11,276 - (487,046) -
------------ ------------ ---------------- ------------- ------------
Total assets $ 596,525 $ 723,500 $ 14,613 $ (555,106) $ 779,532
============ ============ ================ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ (247) $ 46,324 $ 289 $ - $ 46,366
Intercompany payables - 67,338 722 (68,060) -
Current portion of long-term debt 10,000 162 - - 10,162
Income taxes (1,575) 1,500 912 - 837
Accrued insurance 1,852 35,232 - - 37,084
Accrued salaries and wages 2,016 30,407 623 - 33,046
Other current liabilities 2,426 17,996 216 - 20,638
Deferred income taxes (27,877) 31,320 403 - 3,846
Long-term debt 267,800 235 - - 268,035
Deferred compensation liabilities 13,826 15,086 - - 28,912
Other liabilities 3,643 2,130 172 - 5,945
Stockholders' equity 324,661 475,770 11,276 (487,046) 324,661
------------ ------------ ---------------- ------------- ------------
Total Liabilities and Stockholders' Equity $ 596,525 $ 723,500 $ 14,613 $ (555,106) $ 779,532
============ ============ ================ ============= ============
14
As of December 31, 2006 Guarantor Non-Guarantor Consolidating
----------------------- Parent Subsidiaries Subsidiaries Adjustments Consolidated
----------------- ------------- ---------------- ------------- ------------
ASSETS
Cash and cash equivalents $ 25,258 $ (1,314) $ 5,330 $ - $ 29,274
Accounts receivable, less allowances 1,547 91,065 474 - 93,086
Intercompany receivables 84,784 - - (84,784) -
Inventories - 6,169 409 - 6,578
Current deferred income taxes (117) 17,591 315 - 17,789
Current assets of discontinued operations - 5,418 - - 5,418
Prepaid expenses and other current assets 809 9,087 72 - 9,968
----------------- ------------- ---------------- ------------- ------------
Total current assets 112,281 128,016 6,600 (84,784) 162,113
----------------- ------------- ---------------- ------------- ------------
Investments of deferred compensation
plans held in trust 12,214 13,499 - - 25,713
Note receivable 14,701 - - - 14,701
Properties and equipment, at cost,
less accumulated depreciation 6,412 62,023 1,705 - 70,140
Identifiable intangible assets
less accumulated amortization - 69,213 2 - 69,215
Goodwill - 430,671 4,379 - 435,050
Noncurrent assets of discontinued operations - 287 - - 287
Other assets 12,845 2,514 709 - 16,068
Investments in subsidiaries 430,399 8,628 - (439,027) -
----------------- ------------- ---------------- ------------- ------------
Total assets $ 588,852 $ 714,851 $ 13,395 $ (523,811) $ 793,287
================= ============= ================ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ (189) $ 49,502 $ 431 $ - $ 49,744
Intercompany payables - 84,036 748 (84,784) -
Current portion of long-term debt - 209 - - 209
Income taxes (5,906) 11,680 991 - 6,765
Accrued insurance 2,938 35,519 - - 38,457
Accrued salaries and wages 2,530 32,731 729 - 35,990
Current liabilities of discontinued
operations - 12,215 - - 12,215
Other current liabilities 9,568 11,715 1,401 - 22,684
Deferred income taxes (6,946) 32,780 467 - 26,301
Long-term debt 150,000 331 - - 150,331
Deferred compensation liabilities 12,247 13,267 - - 25,514
Other liabilities 3,249 467 - - 3,716
Stockholders' equity 421,361 430,399 8,628 (439,027) 421,361
----------------- ------------- ---------------- ------------- ------------
Total Liabilities and
Stockholders' Equity $ 588,852 $ 714,851 $ 13,395 $ (523,811) $ 793,287
================= ============= ================ ============= ============
15
Condensed Consolidating Income Statement
----------------------------------------
For the six months ended June 30, 2007 Guarantor Non-Guarantor Consolidating
-------------------------------------- Parent Subsidiaries Subsidiaries Adjustments Consolidated
-------------- ------------------ ------------------- ------------- ------------
Net sales and service revenues $ - $ 529,530 $ 12,296 $ - $ 541,826
-------------- ------------------ ------------------- ------------- ------------
Cost of services provided and goods
sold - 370,776 6,187 - 376,963
Selling, general and administrative
expenses 10,358 81,642 2,160 - 94,160
Depreciation 243 9,135 299 - 9,677
Amortization 589 2,020 - - 2,609
Other operating income (1,138) - - - (1,138)
-------------- ------------------ ------------------- ------------- ------------
Total costs and expenses 10,052 463,573 8,646 - 482,271
-------------- ------------------ ------------------- ------------- ------------
Income/ (loss) from operations (10,052) 65,957 3,650 - 59,555
Interest expense (6,896) (245) (1) - (7,142)
Loss on extinguishment of debt (13,715) - - - (13,715)
Other income - net 9,598 (6,627) 86 - 3,057
-------------- ------------------ ------------------- ------------- ------------
Income/ (loss) before income taxes (21,065) 59,085 3,735 - 41,755
Income tax (provision)/ benefit 7,869 (22,433) (1,537) - (16,101)
Equity in net income of subsidiaries 38,850 2,198 - (41,048) -
-------------- ------------------ ------------------- ------------- ------------
Net income $ 25,654 $ 38,850 $ 2,198 $ (41,048) $ 25,654
============== ================== =================== ============= ============
For the six months ended June 30, 2006 Guarantor Non-Guarantor Consolidating
-------------------------------------- Parent Subsidiaries Subsidiaries Adjustments Consolidated
-------------- ------------------ ------------------- ------------- ------------
Continuing Operations
Net sales and service revenues $ - $ 482,894 $ 10,095 $ - $ 492,989
-------------- ------------------ ------------------- ------------- ------------
Cost of services provided and goods
sold - 350,128 5,010 - 355,138
Selling, general and administrative
expenses 5,069 70,052 1,954 - 77,075
Depreciation 248 7,682 284 - 8,214
Amortization 605 2,006 2 - 2,613
-------------- ------------------ ------------------- ------------- ------------
Total costs and expenses 5,922 429,868 7,250 - 443,040
-------------- ------------------ ------------------- ------------- ------------
Income/ (loss) from operations (5,922) 53,026 2,845 - 49,949
Interest expense (9,294) (333) (18) - (9,645)
Loss on extinguishment of debt (430) - - - (430)
Other income - net 10,804 (8,813) 28 - 2,019
-------------- ------------------ ------------------- ------------- ------------
Income/ (loss) before income taxes (4,842) 43,880 2,855 - 41,893
Income tax (provision)/ benefit 1,851 (16,943) (1,213) - (16,305)
Equity in net income of subsidiaries 28,048 1,642 - (29,690) -
-------------- ------------------ ------------------- ------------- ------------
Income from continuing operations 25,057 28,579 1,642 (29,690) 25,588
Discontinued 0perations - (531) - - (531)
-------------- ------------------ ------------------- ------------- ------------
Net income $ 25,057 $ 28,048 $ 1,642 $ (29,690) $ 25,057
============== ================== =================== ============= ============
16
For the three months ended June 30, 2007 Guarantor Non-Guarantor Consolidating
---------------------------------------- Parent Subsidiaries Subsidiaries Adjustments Consolidated
-------------- ------------------ ------------------- ------------- ------------
Net sales and service revenues $ - $ 265,235 $ 6,152 $ - $ 271,387
-------------- ------------------ ------------------- ------------- ------------
Cost of services provided and goods
sold - 185,671 3,045 - 188,716
Selling, general and administrative
expenses 4,713 40,438 939 - 46,090
Depreciation 121 4,687 154 - 4,962
Amortization 284 1,010 - - 1,294
-------------- ------------------ ------------------- ------------- ------------
Total costs and expenses 5,118 231,806 4,138 - 241,062
-------------- ------------------ ------------------- ------------- ------------
Income/ (loss) from operations (5,118) 33,429 2,014 - 30,325
Interest expense (3,273) (126) (1) - (3,400)
Loss on extinguishment of debt (13,715) - - - (13,715)
Other income/(expense) - net 4,492 (2,343) 39 - 2,188
-------------- ------------------ ------------------- ------------- ------------
Income/ (loss) before income taxes (17,614) 30,960 2,052 - 15,398
Income tax (provision)/ benefit 6,518 (11,644) (839) - (5,965)
Equity in net income of subsidiaries 20,529 1,213 - (21,742) -
-------------- ------------------ ------------------- ------------- ------------
Net income $ 9,433 $ 20,529 $ 1,213 $ (21,742) $ 9,433
============== ================== =================== ============= ============
For the three months ended June 30, 2006 Guarantor Non-Guarantor Consolidating
---------------------------------------- Parent Subsidiaries Subsidiaries Adjustments Consolidated
-------------- ------------------ ------------------- ------------- ------------
Continuing Operations
Net sales and service revenues $ - $ 243,752 $ 5,316 $ - $ 249,068
-------------- ------------------ ------------------- ------------- ------------
Cost of services provided and goods
sold - 176,547 2,556 - 179,103
Selling, general and administrative
expenses 2,520 35,232 869 - 38,621
Depreciation 112 3,827 143 - 4,082
Amortization 313 1,003 1 - 1,317
-------------- ------------------ ------------------- ------------- ------------
Total costs and expenses 2,945 216,609 3,569 - 223,123
-------------- ------------------ ------------------- ------------- ------------
Income/ (loss) from operations (2,945) 27,143 1,747 - 25,945
Interest expense (4,153) (149) 2 - (4,300)
Other income - net 5,102 (4,591) 13 - 524
-------------- ------------------ ------------------- ------------- ------------
Income/ (loss) before income taxes (1,996) 22,403 1,762 - 22,169
Income tax (provision)/ benefit 800 (8,683) (736) - (8,619)
Equity in net income of subsidiaries 14,038 1,026 - (15,064) -
-------------- ------------------ ------------------- ------------- ------------
Income from continuing operations 12,842 14,746 1,026 (15,064) 13,550
Discontinued Operations - (708) - - (708)
-------------- ------------------ ------------------- ------------- ------------
Net income $ 12,842 $ 14,038 $ 1,026 $ (15,064) $ 12,842
============== ================== =================== ============= ============
17
Condensed Consolidating Statement of Cash Flows
-----------------------------------------------
Non-
For the six months ended June 30, 2007 Guarantor Guarantor
-------------------------------------- Parent Subsidiaries Subsidiaries Consolidated
---------- ------------ ------------ ------------
Cash Flow from Operating Activities:
Net cash provided/(used) by operating activities $ (5,430) $ 34,957 $ 697 $ 30,224
---------- ------------ ------------ ------------
Cash Flow from Investing Activities:
------------------------------------
Capital expenditures (156) (13,437) (315) (13,908)
Business combinations, net of cash acquired - (62) - (62)
Net payments from sale of discontinued operations (2,166) (3,739) - (5,905)
Proceeds from sale of property and equipment 2,962 35 6 3,003
Other uses - net (450) (114) - (564)
---------- ------------ ------------ ------------
Net cash provided/ (used) by investing activities 190 (17,317) (309) (17,436)
---------- ------------ ------------ ------------
Cash Flow from Financing Activities:
------------------------------------
Increase/(decrease) in cash overdrafts payable 784 (618) - 166
Change in intercompany accounts 16,723 (16,696) (27) -
Dividends paid to shareholders (2,997) - - (2,997)
Purchases of treasury stock (130,748) - - (130,748)
Proceeds from exercise of stock options 2,069 - - 2,069
Excess tax benefit on share-based compensation 2,370 - - 2,370
Purchase of note hedges (54,939) - - (54,939)
Proceeds from issuance of warrants 27,614 - - 27,614
Net increase in revolving credit facility 13,300 - - 13,300
Proceeds from issuance of long-term debt 300,000 - - 300,000
Debt issuance costs (6,395) - - (6,395)
Repayment of long-term debt (185,500) (143) - (185,643)
Other sources and uses - net 19 (1) 592 610
---------- ------------ ------------ ------------
Net cash provided/ (used) by financing activities (17,700) (17,458) 565 (34,593)
---------- ------------ ------------ ------------
Net increase/(decrease) in cash and cash equivalents (22,940) 182 953 (21,805)
Cash and cash equivalents at beginning of year 25,258 (1,314) 5,330 29,274
---------- ------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,318 $ (1,132) $ 6,283 $ 7,469
========== ============ ============ ============
18
Non-
For the six months ended June 30, 2006 Guarantor Guarantor
-------------------------------------- Parent Subsidiaries Subsidiaries Consolidated
--------- ------------ ------------ ------------
Cash Flow from Operating Activities:
Net cash provided/(used) by operating activities $(11,211) $ 32,900 $ 1,796 $ 23,485
--------- ------------ ------------ ------------
Cash Flow from Investing Activities:
Capital expenditures (62) (8,810) (350) (9,222)
Business combinations, net of cash acquired - (814) - (814)
Net proceeds from sale of discontinued operations (2,990) - - (2,990)
Proceeds from sale of property and equipment 30 131 - 161
Other uses - net (327) (283) - (610)
--------- ------------ ------------ ------------
Net cash used by investing activities (3,349) (9,776) (350) (13,475)
--------- ------------ ------------ ------------
Cash Flow from Financing Activities:
------------------------------------
Increase in cash overdrafts payable 585 2,812 - 3,397
Change in intercompany accounts 26,449 (26,012) (437) -
Dividends paid to shareholders (3,156) - - (3,156)
Purchases of treasury stock (3,992) - - (3,992)
Proceeds from exercise of stock options 3,849 - - 3,849
Excess tax benefit on share-based compensation 4,941 - - 4,941
Net increase in revolving credit facility 19,000 - - 19,000
Debt issuance costs (154) - - (154)
Repayment of long-term debt (84,363) (136) - (84,499)
Other sources - net 30 257 - 287
--------- ------------ ------------ ------------
Net cash used by financing activities (36,811) (23,079) (437) (60,327)
--------- ------------ ------------ ------------
Net increase/(decrease) in cash and cash equivalents (51,371) 45 1,009 (50,317)
Cash and cash equivalents at beginning of year 54,871 (1,419) 3,681 57,133
--------- ------------ ------------ ------------
Cash and cash equivalents at end of period $ 3,500 $ (1,374) $ 4,690 $ 6,816
========= ============ ============ ============
19
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, 2007 and 2006 (in thousands except per share
amounts):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ------------------------
2007 2006 2007 2006
------------- ------------- ----------- ------------
Consolidated service revenues and sales $ 271,387 $ 249,068 $ 541,826 $ 492,989
Consolidated income from continuing operations $ 9,433 $ 13,550 $ 25,654 $ 25,588
Diluted EPS from continuing operations $ 0.38 $ 0.50 $ 1.00 $ 0.95
For the three months ended June 30, 2007 compared to 2006, the increase
in consolidated service revenues and sales was driven by an 8% increase at VITAS
and an 11% increase at Roto-Rooter. The increase at VITAS was primarily the
result of a 7% increase in average daily census (ADC) from the second quarter of
2006 and the October 1, 2006 Medicare reimbursement rate increase. The increase
at Roto-Rooter was driven primarily by a 2% increase in job count combined with
an approximate 9% increase due to price and job mix changes. Consolidated income
from continuing operations and diluted EPS from continuing operations decreased
as a result of the $13.7 million loss on extinguishment of debt, as described
further below.
For the six months ended June 30, 2007 compared to 2006, the increase
in consolidated service revenues and sales was driven by a 10% increase at VITAS
and an 11% increase at Roto-Rooter. The increase at VITAS was primarily the
result of an 8% increase in average daily census (ADC) from the first six months
of 2006 and the October 1, 2006 Medicare reimbursement rate increase. The
increase at Roto-Rooter was driven primarily by a 2% increase in job count
combined with an approximate 9% increase due to price and job mix changes.
Consolidated income from continuing operations and diluted EPS from continuing
operations increased due to the higher sales and related gross margin which was
offset by the $13.7 million loss on extinguishment of debt, as described further
below.
In the second quarter of 2007, we completed the following financing and
capital transactions:
o Entered into a new senior secured credit facility due in 2012 which
includes a $100 million term loan, a $175 million revolving credit
facility and a $100 million expansion feature;
o Using the proceeds from the senior secured credit facility, we retired
our $150 million, 8.75% Senior Notes at a price of 104.375% plus
accrued but unpaid interest;
o Issued $200 million of 1.875% Senior Convertible Notes due in 2014
o Using the proceeds from the Senior Convertible Notes, we repaid a
portion of our revolving line of credit and we repurchased
approximately 1.5 million shares of our outstanding capital stock.
The effect of these transactions was to reduce our overall borrowing
rate and to reduce the number of shares of capital stock outstanding. In
connection with these transactions, we incurred a loss on extinguishment of debt
of approximately $13.7 million related to the premium paid to retire our 8.75%
Senior Notes and the write-off of deferred debt costs from the Senior Notes and
replaced credit facility.
20
Financial Condition
-------------------
Liquidity and Capital Resources
-------------------------------
Significant changes in the balance sheet accounts from December 31,
2006 to June 30, 2007 include the following:
o The increase in accounts receivable from $93.1 million at December 31,
2006 to $99.9 million at June 30, 2007 is due mainly to the timing of
payments received from Medicare.
o The increase in current portion of long-term debt and long-term debt
is the result of our refinancing transactions described in detail
below.
o The decrease in long-term deferred income taxes of $22.5 million
relates mainly to the treatment of the premium payment made in
conjunction with our purchased call options described below.
o The increase in treasury stock of $133.8 million relates mainly to our
share repurchase program.
Net cash provided by continuing operations increased $10.4 million
from a source of cash by continuing operations of $19.8 million for the first
six months of 2006, to a source of cash of $30.2 million for the first six
months of 2007, due primarily to the increase in the write-off of unamortized
debt issuance costs and long-term incentive compensation both of which are
non-cash expenses.
On May 2, 2007, we entered into a new senior secured credit facility
with JPMorgan Chase Bank (the "2007 Facility") to replace our existing credit
facility. The 2007 Facility includes a $100 million term loan, a $175 million
revolving credit facility and a $100 million expansion feature. The facility has
a 5-year maturity with principal payments on the term loan due quarterly and on
the revolving credit facility due at maturity. Interest is payable quarterly at
a floating rate equal to our choice of various indices plus a specified margin
based on our leverage ratio. The interest rate at the inception of the agreement
is LIBOR plus 0.875%. In connection with replacing our existing credit facility,
we wrote-off approximately $2.3 million in deferred debt costs. The write-off of
deferred debt costs has been recorded as loss on extinguishment of debt in the
accompanying statement of income.
On May 4, 2007, we used the proceeds from the 2007 Facility to fund the
redemption of our $150 million, 8.75% Senior Notes due 2011. The redemption was
made pursuant to the terms of the indenture at a price of 104.375% plus accrued
but unpaid interest. In connection with the redemption, we wrote-off
approximately $4.8 million in deferred debt costs. The premium payment of $6.6
million and the write-off of deferred debt costs have been recorded as loss on
extinguishment of debt in the accompanying statement of income.
On May 8, 2007, we entered into a Purchase Agreement with J.P. Morgan
Securities Inc. and Citigroup Global Markets Inc. (the "Initial Purchasers") for
issuance and sale of $180 million in aggregate principal amount of our 1.875%
Senior Convertible Notes due 2014 (the "Notes"). On May 9, 2007, the Initial
Purchasers exercised an over-allotment option to purchase an additional $20
million in aggregate principal amount of Notes. On May 14, 2007 a total of $200
million in aggregate principal amount of the Notes were sold to the Initial
Purchasers at a price of $1,000 per Note, less an underwriting fee of $27.50 per
Note. The Notes are to be resold by the Initial Purchasers pursuant to Rule 144A
of the Securities Act of 1933, as amended (the "Securities Act").
We received approximately $194 million in net proceeds from the sale of
the Notes after paying underwriting fees, legal and other expenses. Proceeds
from the offering were used to purchase treasury shares of our stock and to pay
down a portion of the 2007 Facility. We will pay interest on the Notes on May 15
and November 15 of each year, beginning on November 15, 2007. The Notes will
mature on May 15, 2014. The Notes are guaranteed on an unsecured senior basis by
each of our subsidiaries that is a borrower or a guarantor under any senior
credit facility, as defined in the Indenture. The Notes are convertible, under
certain circumstances, into our Capital Stock at a conversion rate of 12.3874
shares per $1,000 principal amount of Notes. This conversion rate is equivalent
to an initial conversion price of approximately $80.73 per share. Prior to March
1, 2014, holders may convert their Notes under certain circumstances. On and
after March 1, 2014, the Notes will be convertible at any time prior to the
close of business three days prior to the stated maturity date of the Notes.
Upon conversion of a Note, if the conversion value is $1,000 or less, holders
will receive cash equal to the lesser of $1,000 or the conversion value of the
number of shares of our Capital Stock. If the conversion value exceeds $1,000,
in addition to this, holders will receive shares of our Capital Stock for the
excess amount. The Indenture contains customary terms and covenants that upon
certain events of default, including without limitation, failure to pay when due
any principal amount, a fundamental change or certain cross defaults in other
agreements or instruments, occurring and continuing, either the trustee or the
holders of 25% in aggregate principal amount of the Notes may declare the
principal of the Notes and any accrued and unpaid interest through the date of
such declaration immediately due and payable. In the case of certain events of
bankruptcy or insolvency relating to any significant subsidiary or to us, the
principal amount of the Notes and accrued interest automatically becomes due and
payable.
21
Pursuant to the guidance in Emerging Issues Task Force ("EITF") 90-19,
"Convertible Bonds with Issuer Option to Settle for Cash Upon Conversion", EITF
00-19 "Accounting for Derivative Instruments Indexed to, and Potentially Settled
in a Company's Own Stock" and EITF 01-6 "The Meaning of Indexed to a Company's
Own Stock", the Notes are accounted for as convertible debt in the accompanying
consolidated balance sheet and the embedded options within the Notes have not
been accounted for as separate derivatives.
We, our subsidiary guarantors and the Initial Purchasers also entered
into a Registration Rights Agreement (the "RRA") dated May 14, 2007. Pursuant to
the RRA, we agreed to, no later than the 120th day after May 14, 2007, file a
shelf registration statement covering resale of the Notes and the Capital Stock
issuable upon conversion pursuant to Rule 415 under the Securities Act. We will
also cause the shelf registration statement to be declared effective under the
Securities Act no later than the 180th day after May 14, 2007. If the shelf
registration is not filed or effective by the appropriate dates, additional
interest may accrue on the Notes.
On May 8, 2007 we entered into a purchased call transaction and a
warrant transaction (written call) with JPMorgan Chase, National Association and
Citibank, N.A. (the "Counterparties"). The purchased call options cover
approximately 2,477,000 shares of our Capital Stock, which under most
circumstances represents the maximum number of shares of Capital Stock that
underlie the Notes. Concurrently with entering into the purchased call options,
we entered into warrant transactions with each of the Counterparties. Pursuant
to the warrant transactions, we sold to the Counterparties warrants to purchase
in the aggregate approximately 2,477,000 shares of Capital Stock. In most cases,
the sold warrants may not be exercised prior to the maturity of the Notes.
The purchased call options and sold warrants are separate contracts with
the Counterparties, are not part of the terms of the Notes and do not affect the
rights of holders under the Notes. A holder of the Notes will not have any
rights with respect to the purchased call options or the sold warrants. The
purchased call options are expected to reduce the potential dilution upon
conversion of the Notes if the market value per share of the Capital Stock at
the time of exercise is greater than approximately $80.73, which corresponds to
the initial conversion price of the Notes. The sold warrants have an exercise
price of $105.44 and are expected to result in some dilution should the price of
our Capital Stock exceed this exercise price.
Our net cost for these transactions was approximately $27.3 million.
Pursuant to EITF 00-19 and EITF 01-6, the purchased call option and the sold
warrants are accounted for as equity transactions. Therefore, our net cost was
recorded as a decrease in shareholders' equity in the accompanying consolidated
balance sheet.
On June 29, 2007, we paid approximately $35.5 million of the $100
million term note under the 2007 Facility using a combination of cash on hand
and a draw from the revolving credit facility. Of the amount paid in June 2007,
$33.0 million represents a prepayment. The following is a schedule by year of
required long-term debt repayments as of June 30, 2007 (in thousands):
June 2008 $ 10,162
June 2009 10,059
June 2010 10,059
June 2011 10,059
June 2012 37,858
Thereafter 200,000
---------------------
Total debt 278,197
Less: Current portion (10,162)
---------------------
Total long-term debt $ 268,035
=====================
We are in compliance with all debt covenants as of June 30, 2007. We
have issued $34.3 million in standby letters of credit as of June 30, 2007
mainly for insurance purposes. Issued letters of credit reduce our available
credit under the revolving credit agreement. As of June 30, 2007, the Company
has approximately $127.4 million of unused lines of credit available and
eligible to be drawn down under its revolving credit facility, excluding the
expansion feature. We believe our liquidity and sources of capital are
satisfactory for the Company's needs in the foreseeable future.
22
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, 2007 and anticipate remaining in compliance throughout
2007.
Like other large California employers, our VITAS subsidiary faces
allegations of purported class-wide wage and hour violations. It was 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 ("Costa"). This case alleged 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 alleged 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 sought payment of penalties, interest, and Plaintiffs' attorney
fees. VITAS contested these allegations. During 2006 we reached a tentative
settlement and on June 26, 2006, the court granted final approval of the
settlement ($19.9 million).
VITAS is party to a class action lawsuit filed in the Superior Court of
California, Los Angeles County, in September 2006 by Bernadette Santos, Keith
Knoche and Joyce White ("Santos"). This case, filed by the Costa case
Plaintiffs' counsel, makes similar allegations of failure to pay overtime and
failure to provide meal and rest periods to a purported class of California
admissions nurses, chaplains and sales representatives. The case likewise seeks
payment of penalties, interest and Plaintiffs' attorney fees. VITAS contests
these allegations. The lawsuit is in its early stage and we are unable to
estimate our potential liability, if any, with respect to these allegations.
Regardless of outcome, defense of litigation adversely affects us
through defense costs, diversion of our time and related publicity. 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.
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. We have incurred pretax expense related to complying with
OIG requests and defending the litigation of $74,000 and $140,000 for the three
and six months ended June 30, 2007, respectively (2006 - $342,000 and $474,000,
respectively). A qui tam complaint filed in U.S. District Court for the Southern
District of Florida was dismissed by the Court with prejudice in July 2007.
The government may continue 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 our business, results of operations, liquidity or
capital resources. Regardless of outcome, responding to the subpoenas and
defending the litigation can adversely affect us through defense costs,
diversion of our time and related publicity.
23
Results of Operations
Three-months ended June 30, 2007 versus 2006-Consolidated Results
-----------------------------------------------------------------
Our service revenues and sales for the second quarter of 2007 increased
9.0% versus revenues for the second quarter of 2006. Of this increase, $14.2
million was attributable to VITAS and $8.1 million was attributable to
Roto-Rooter, as follows (dollars in thousands):
Increase/(Decrease)
-------------------------------------------------
Amount Percent
----------------------- -------------------------
VITAS
Routine homecare $ 14,026 11.6%
Continuous care (1,476) -5.0%
General inpatient 1,025 4.7%
Medicare cap 599 -
Roto-Rooter
Plumbing 4,491 14.4%
Drain cleaning 2,128 6.1%
Other 1,526 13.7%
-----------------------
Total $ 22,319 9.0%
=======================
The increase in VITAS' revenues for the second quarter of 2007 versus
the second quarter of 2006 is attributable to an increase in ADC of 7.4% for
routine homecare and a 2.2% increase in general inpatient offset by a 6.0%
decline in continuous care. 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 2006. In excess of 90% of VITAS'
revenues for the period were from Medicare and Medicaid. Additionally, we did
not incur a Medicare cap liability during the second quarter of 2007.
The increase in the plumbing revenues for the second quarter of 2007
versus 2006 comprises an 8.8% increase in the number of jobs performed and a
5.6% increase caused by increased prices and job mix. The increase in drain
cleaning revenues for the second quarter of 2007 versus 2006 comprised a 1.2%
decline in the number of jobs offset by a 7.3% increase caused by increased
prices and job mix. The increase in other revenues is attributable primarily to
increased revenue from the independent contractor operations.
The consolidated gross margin was 30.5% in the second quarter of 2007
as compared with 28.1% in the second quarter of 2006. On a segment basis, VITAS'
gross margin was 22.1% in the second quarter of 2007 and 20.3% in the second
quarter of 2006. The increase in VITAS' gross margin in 2007 is primarily
attributable to not having a Medicare cap liability in 2007, a reclassification
of approximately $1.6 million of costs from cost of revenue to central support
in 2007, as well as excess patient care capacity in the prior year period. We
corrected our excess capacity during the later part of the second quarter in
2006. The Roto-Rooter segment's gross margin was 48.6% in the second quarter of
2007 and 45.3% in the second quarter of 2006. The increase in Roto-Rooter's
gross margin in 2007 is primarily attributable to better retention of service
technicians, which enhances overall productivity of our workforce as well as
reduces our workers' compensation costs.
Selling, general and administrative expenses ("SG&A") for the second
quarter of 2007 were $46.1 million, an increase of $7.5 million (19.3%) versus
the second quarter of 2006. The increase is due to higher revenue, which
increase our variable selling expenses as well as stock-based compensation
expense of $2.5 million comprised of $1.6 million related to the LTIP pay out in
May 2007 and $900,000 related to stock option grants made in May 2007 and June
2006. There was no material stock-based compensation expense in the second
quarter of 2006.
Income from operations increased $4.4 million from $25.9 million in the
second quarter of 2006 to $30.3 million in the second quarter of 2007. The
increase is primarily the result of the increase in sales and gross margin.
Interest expense, substantially all of which is incurred at Corporate,
declined from $4.3 million in the second quarter of 2006 to $3.4 million in the
second quarter of 2007. This decline is due primarily to the refinancing
transactions in May 2007, as discussed above. Additionally, the loss on
extinguishment of debt is the result of the May 2007 refinancing transactions.
24
Other income-net increased from $524,000 in the second quarter of 2006
to $2.2 million in the second quarter of 2007. The increase is attributable
mainly to market gains from investments held in our deferred compensation
benefit plans. The expense related to these plans is included in SG&A expense.
Our effective income tax rate was 38.9% in the second quarter of 2006
compared to 38.7% in the second quarter of 2007.
Income from continuing operations decreased $4.1 million or 30.4% in
the second quarter of 2007 as compared to the second quarter of 2006 due to the
loss on extinguishment of debt. The loss on extinguishment of debt was partially
offset by the increases in sales and gross margin discussed above. The $708,000
loss from discontinued operations in the second quarter of 2006 relates to
VITAS' Phoenix, AZ program that was sold in November 2006. 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,
------------------------------------
2007 2006
----------------- -----------------
Loss on extinguishment of debt $ 8,726 $ -
Long-term incentive compensation award 1,013 -
Stock-option expense 570 12
Legal expenses of OIG investigation 46 212
----------------- -----------------
$ 10,355 $ 224
================= =================
Three-months ended June 30, 2007 versus 2006-Segment Results
------------------------------------------------------------
The change in aftertax earnings for the second quarter of 2007 versus
the second quarter of 2006 is due to (in thousands):
Net Income
Increase/(Decrease)
-------------------------------------------------
Amount Percent
-------------------------- ----------------------
VITAS $ 2,047 16.9%
Roto-Rooter 3,692 52.7%
Corporate (9,856) -177.3%
Discontinued operations 708 100.0%
--------------------------
$ (3,409) -26.5%
==========================
25
Six-months ended June 30, 2007 versus 2006-Consolidated Results
---------------------------------------------------------------
Our service revenues and sales for the first six months of 2007
increased 9.9% versus revenues for the first six months of 2006. Of this
increase, $32.2 million was attributable to VITAS and $16.6 million was
attributable to Roto-Rooter, as follows: (dollars in thousands):
Increase/(Decrease)
---------------------------------------------
Amount Percent
--------------------- ---------------------
VITAS
Routine homecare $ 32,341 13.8%
Continuous care (2,718) -4.6%
General inpatient 1,472 3.3%
Medicare cap 1,071 -179%
Roto-Rooter
Plumbing 10,033 16.5%
Drain cleaning 4,462 6.2%
Other 2,176 9.4%
---------------------
Total $ 48,837 9.9%
=====================
The increase in VITAS' revenues for the first six months of 2007 versus
the first six months of 2006 is attributable to an increase in ADC of 9.4% for
routine homecare and 0.5% for general inpatient care offset by a 7.1% decline in
continuous care. 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 increases is due primarily to the annual increase in Medicare
reimbursement rates in the fourth quarter of 2006. In excess of 90% of VITAS'
revenues for the period were from Medicare and Medicaid. Additionally, we did
not incur a Medicare cap liability during the first six months of 2007.
The increase in the plumbing revenues for the first six months of 2007
versus 2006 comprises a 9.3% increase in the number of jobs performed and a 7.2%
increase due to increased price and job mix. The increase in drain cleaning
revenues for the first six months of 2007 versus 2006 comprised a 1.0% decline
in the number of jobs offset by a 7.2% increase due to increased price and job
mix. The increase in other revenues is attributable primarily to increased
revenue from the independent contractor operations.
The consolidated gross margin was 30.4% in the first six months of 2007
as compared with 28.0% in the first six months of 2006. On a segment basis,
VITAS' gross margin was 22.5% in the first six months of 2007 and 19.9% in the
first six months of 2006. The increase in VITAS' gross margin in 2007 is
primarily attributable to not having a Medicare cap liability in 2007 as well as
excess patient care capacity in the prior year period. We corrected our excess
capacity during the later part of the second quarter in 2006. The Roto-Rooter
segment's gross margin was 47.6% in the first six months of 2007 as compared to
45.4% in the first six months of 2006. The increase in Roto-Rooter's gross
margin in 2007 is primarily attributable to better retention of service
technicians, which enhances overall productivity of our workforce as well as
reduces our workers' compensation costs
SG&A for the first six months of 2007 were $94.2 million, an increase
of $17.1 million (22%) versus the first six months of 2006. The increase is
largely due to increased revenue which increases our variable selling expenses
as well as 2007 stock-based compensation expense of $8.5 million comprised of
$7.0 million related to the LTIP and $1.5 million related to stock option grants
made in May 2007 and June 2006. There was no material stock-based compensation
expense recorded in the first six months of 2006.
Income from operations increased $9.7 million from $49.9 million in the
first six months of 2006 to $59.6 million in the first six months of 2007. The
increase is primarily the result of the increase in sales and gross margin.
Interest expense, substantially all of which is incurred at Corporate,
declined from $9.6 million in the first six months of 2006 to $7.1 million in
the first six months of 2007. This decline is due to the reduction in debt
outstanding that occurred in February 2006 when we refinanced and repaid a
significant portion of our debt as well as the refinancing transactions in May
2007, as discussed above. Additionally, the loss on extinguishment of debt is
the result of the May 2007 refinancing transactions.
26
Other income-net increased from $2.0 million in the first six months of
2006 to $3.1 million in the first six months of 2007. The increase is
attributable mainly to market gains from investments held in our deferred
compensation benefit plans. The expense related to these plans is included in
SG&A expense.
Our effective income tax rate was 38.6% for the first six months of
2007 as compared to 38.9% for the same period of 2006.
Income from continuing operations increased $66,000 or 0.3% in the
first six months of 2007 as compared to the first six months of 2006. Increased
income from continuing operations was due to increases in sales and gross margin
in 2007 which were almost fully offset by the $13.7 million loss on
extinguishment of debt. The $531,000 loss from discontinued operations in the
first six months of 2006 relates to VITAS' Phoenix, AZ program that was sold in
November 2006. 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,
-------------------------------
2007 2006
---------------- --------------
Loss on extinguishment of debt $ 8,726 $ 273
Long-term incentive compensation award 4,427 -
Stock-option expense 941 12
Gain on sale of Florida call center (724) -
Legal expenses of OIG investigation 87 294
Other (296) -
---------------- --------------
$ 13,161 $ 579
================ ==============
Six-months ended June 30, 2007 versus 2006-Segment Results
----------------------------------------------------------
The change in aftertax earnings for the first six months of 2007 versus
the first six months of 2006 is due to (in thousands):
Increase/(Decrease)
----------------------------------------------
Amount Percent
------------------------ ---------------------
VITAS $ 6,354 27.9%
Roto-Rooter 5,977 42.1%
Corporate (12,265) -107.6%
Discontinued operations 531 -100.0%
------------------------
$ 597 2.4%
========================
27
The following chart updates historical unaudited financial and operating
data of VITAS, acquired in February 2004: (dollars in thousands, except dollars
per patient day)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2007 2006 2007 2006
--------------- ----------- ------------ ------------
OPERATING STATISTICS
Net revenue (a)
Homecare $ 134,794 $ 120,768 $ 266,341 $ 234,000
Inpatient 22,745 21,720 46,207 44,736
Continuous care 28,162 29,638 56,730 59,447
--------------- ----------- ------------ ------------
Total before Medicare cap allowance 185,701 172,126 369,278 338,183
Medicare cap allowance - (599) 472 (599)
--------------- ----------- ------------ ------------
Total $ 185,701 $ 171,527 $ 369,750 $ 337,584
=============== =========== ============ ============
Net revenue as a percent of total before
Medicare cap allowance
Homecare 72.6% 70.2 % 72.0% 69.2 %
Inpatient 12.2 12.6 12.5 13.2
Continuous care 15.2 17.2 15.4 17.6
--------------- ----------- ------------ ------------
Total before Medicare cap allowance 100.0 100.0 99.9 100.0
Medicare cap allowance - (0.3) 0.1 (0.2)
--------------- ----------- ------------ ------------
Total 100.0% 99.7 % 100.0% 99.8 %
=============== =========== ============ ============
Average daily census ("ADC") (days)
Homecare 6,915 6,275 6,851 6,104
Nursing home 3,574 3,488 3,574 3,424
--------------- ----------- ------------ ------------
Routine homecare 10,489 9,763 10,425 9,528
Inpatient 413 404 419 417
Continuous care 504 537 514 553
--------------- ----------- ------------ ------------
Total 11,406 10,704 11,358 10,498
=============== =========== ============ ============
Total Admissions 13,658 12,987 27,768 26,760
Total Discharges 13,359 12,528 27,416 25,825
Average length of stay (days) 76.6 68.0 76.8 70.3
Median length of stay (days) 13.0 13.0 13.0 13.0
ADC by major diagnosis
Neurological 33.0% 33.1 % 33.2% 33.1 %
Cancer 19.7 20.0 19.7 20.2
Cardio 14.6 15.0 14.6 14.9
Respiratory 6.9 7.2 6.9 7.2
Other 25.8 24.7 25.6 24.6
--------------- ----------- ------------ ------------
Total 100.0% 100.0 % 100.0% 100.0 %
=============== =========== ============ ============
Admissions by major diagnosis
Neurological 18.0% 19.6 % 18.6% 20.1 %
Cancer 35.9 35.0 35.0 34.4
Cardio 12.9 13.2 13.1 13.6
Respiratory 7.7 7.0 7.8 7.5
Other 25.5 25.2 25.5 24.4
--------------- ----------- ------------ ------------
Total 100.0% 100.0 % 100.0% 100.0 %
=============== =========== ============ ============
Direct patient care margins (b)
Routine homecare 51.1% 49.5 % 50.9% 48.6 %
Inpatient 18.9 20.9 19.5 22.0
Continuous care 17.7 20.3 18.9 19.3
Homecare margin drivers
(dollars per patient day)
Labor costs $ 48.96 $ 48.31 $ 49.04 $ 49.77
Drug costs 7.82 8.39 7.99 7.90
Home medical equipment 5.78 5.51 5.77 5.52
Medical supplies 2.11 2.11 2.14 2.10
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 262.37 $ 258.32 $ 257.35 $ 252.87
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 484.13 $ 463.62 $ 474.21 $ 458.96
Bad debt expense as a percent of revenues 0.9% 0.9 % 0.9% 0.9 %
Accounts receivable --
days of revenue outstanding 37.5 40.1 N.A. N.A.
-----------------------------------------------------------------
(a) VITAS has 6 large (greater than 450 ADC), 15 medium (greater than 200
but less than 450 ADC) and 23 small (less than 200 ADC) hospice
programs. There are two programs with Medicare cap cushion of less
than 10% for the 2007 measurement period.
(b) Amounts exclude indirect patient care and administrative costs, as
well as Medicare cap billing limitation.
28
Recent Accounting Statements
----------------------------
In February 2007, the FASB issued Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" ("SFAS 159"), which
permits an entity to measure certain financial assets and financial liabilities
at fair value. Entities that elect the fair value option will report unrealized
gains and losses in earnings at each reporting date. The fair value option may
be elected on an instrument-by-instrument basis, with a few exceptions, as long
as it is applied to the entire instrument. The fair value election is
irrevocable unless a new election date occurs. SFAS 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007. We are
currently evaluating the impact SFAS 159 will have on our financial condition
and results of operations, if any.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157"), which addresses how companies should measure fair
value when they are required to use a fair value measure for recognition or
disclosure purposes under generally accepted accounting principles (GAAP). It
sets a common definition of fair value to be used throughout GAAP. The new
standard is designed to make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact SFAS 157 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, 2007, we had $77.8
million of variable rate debt outstanding. A 1% change in the interest rate on
our variable interest rate borrowings would have a $778,000 full-year impact on
our interest expense. At June 30, 2007, we believe the fair value of our Senior
Convertible Notes approximates book value.
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.
29
PART II OTHER INFORMATION
Item 2(c). Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
The following table shows the repurchase activity related to our share
repurchase programs for the six months ended June 30, 2007:
Weighted
Total Number Average Cumulative Shares Dollar Amount
of Shares Price Paid Per Repurchased Under Remaining Under
Repurchased Share the Program The Program
---------------- ------------------- ------------------ -----------------
July 2006 Program
-----------------
January 1 through January 31, 2007 67,379 $ 36.41 260,777 $ 40,432,944
February 1 through February 28, 2007 111,900 $ 46.86 372,677 $ 35,189,260
March 1 through March 31, 2007 446,800 $ 48.29 819,477 $ 13,614,888
---------------- ================== =================
First Quarter Total - July 2006 Program 626,079 $ 46.76
================ ===================
April 1 through April 30, 2007 - $ - 819,477 $ 13,614,888
May 1 through May 31, 2007 220,072 $ 61.87 1,039,549 $ -
---------------- ================== =================
Second Quarter Total - July 2006 Program 220,072 $ 61.87
================ ===================
April 2007 Program
------------------
April 1 through April 30, 2007 - $ - - $ 150,000,000
May 1 through May 31, 2007 1,272,928 $ 65.85 1,272,928 $ 66,174,828
June 1 through June 30, 2007 8,500 $ 64.98 1,281,428 $ 65,622,526
---------------- ================== =================
Second Quarter Total - April 2007 Program 1,281,428 $ 65.85
================ ===================
The amount authorized for repurchase under the July 2006 Program is $50
million. On April 26, 2007, our Board of Directors authorized a $150 million
share repurchase plan.
Item 4. Submission of Matters to a Vote of Security Holders
A. Chemed Corporation held its annual meeting of stockholders on May
21, 2007.
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
Charles H. Erhart, Jr. Timothy S. O'Toole
Joel F. Gemunder Donald E. Saunders
Patrick P. Grace George J. Walsh III
Thomas C. Hutton Frank E. Wood
30
C. The stockholders then ratified the selection by the Board of
Directors of PricewaterhouseCoopers LLP as independent accountants for the
Company and its consolidated subsidiaries for the year 2007: 23,116,944.439
votes were cast in favor of the proposal, 259,886.606 votes were cast against
it, 44,282.993 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 22,831,898.521 589,215.517
Kevin J. McNamara 22,968,046.374 453,067.664
Charles H. Erhart, Jr. 22,641,814.115 779,299.923
Joel F. Gemunder 22,222,996.649 1,198,117.389
Patrick P. Grace 23,036,708.604 384,405.434
Thomas C. Hutton 22,850,660.094 570,453.944
Walter L. Krebs 23,198,194.086 222,919.952
Sandra E. Laney 22,449,273.878 971,840.160
Timothy S. O'Toole 22,742,609.374 678,504.664
Donald E. Saunders 23,196,244.654 224,869.384
George J. Walsh III 22,974,863.654 446,250.384
Frank E. Wood 23,201,572.481 219,541.557
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.
31
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 3, 2007 By: Kevin J. McNamara
------------------------------------ -------------------------------------------------------
Kevin J. McNamara
(President and Chief Executive Officer)
Dated: August 3, 2007 By: David P. Williams
------------------------------------ -------------------------------------------------------
David P. Williams
(Vice President and Chief Financial Officer)
Dated: August 3, 2007 By: Arthur V. Tucker, Jr.
------------------------------------ -------------------------------------------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
32