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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2005
Commission File Number 1-8351
CHEMED CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip code)
(513) 762-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes__X__ No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes__X__ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Amount Date
Capital Stock 25,752,440 Shares September 30, 2005
$1 Par Value
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1
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES
Index
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet -
September 30, 2005 and December 31, 2004 3
Unaudited Consolidated Statement of Income -
Three and nine months ended September 30, 2005 and 2004 4
Unaudited Consolidated Statement of Cash Flows -
Nine months ended September 30, 2005 and 2004 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 6. Exhibits 32
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)
September 30, December 31,
2005 2004
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 37,575 $ 71,448
Accounts receivable less allowances of $ 7,692
(2004 - $7,544) 84,472 64,663
Inventories 7,252 7,019
Current deferred income taxes 21,486 31,250
Prepaid income taxes 8,112 -
Current assets of discontinued operations 3,112 13,397
Prepaid expenses and other current assets 7,186 9,842
---------- ----------
Total current assets 169,195 197,619
Investments of deferred compensation plans held in
trust 21,072 18,317
Other investments 1,445 1,445
Note receivable 12,500 12,500
Properties and equipment, at cost, less accumulated
depreciation of $ 63,309 (2004 - $53,497) 62,687 55,796
Identifiable intangible assets less accumulated
amortization of $8,208 (2004 - $5,174) 73,892 76,924
Goodwill 434,559 432,732
Noncurrent assets of discontinued operations 287 5,705
Other assets 22,111 24,528
---------- ----------
Total Assets $ 797,748 $ 825,566
========== ==========
LIABILITIES
Current liabilities
Accounts payable $ 45,401 $ 37,777
Current portion of long-term debt 1,123 12,185
Income taxes 5,830 10,944
Accrued insurance 28,634 26,350
Accrued salaries and wages 19,563 17,030
Current liabilities of discontinued operations 6,301 22,117
Other current liabilities 33,695 42,777
---------- ----------
Total current liabilities 140,547 169,180
Deferred income taxes 18,880 16,814
Long-term debt 234,327 279,510
Deferred compensation liabilities 20,991 18,311
Noncurrent liabilities of discontinued operations 411 811
Other liabilities 7,044 8,848
---------- ----------
Total Liabilities 422,200 493,474
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock - authorized 40,000,000 shares $1 par;
issued 28,020,866 shares (2004 - 13,491,341
pre-2005 stock split shares) 28,021 13,491
Paid-in capital 226,275 212,691
Retained earnings 168,564 141,542
Treasury stock - 2,268,426 shares (2004 - 983,128
pre-2005 stock split shares), at cost (45,757) (33,873)
Unearned compensation (3,363) (3,590)
Deferred compensation payable in Company stock 2,354 2,375
Notes receivable for shares sold (546) (544)
---------- ----------
Total Stockholders' Equity 375,548 332,092
---------- ----------
Total Liabilities and Stockholders' Equity $ 797,748 $ 825,566
========== ==========
See accompanying notes to unaudited financial statements.
3
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Continuing Operations
Service revenues and sales $ 233,328 $ 201,885 $ 678,274 $ 521,360
---------- ---------- ---------- ----------
Cost of services provided and goods sold
(excluding depreciation) 165,229 142,130 479,301 361,049
Selling, general and administrative expenses 38,423 35,371 111,820 98,059
Depreciation 4,086 2,610 11,934 9,768
Amortization 1,248 1,704 3,671 3,262
Other expenses--net (130) (219) 2,360 7,196
---------- ---------- ---------- ----------
Total costs and expenses 208,856 181,596 609,086 479,334
---------- ---------- ---------- ----------
Income from operations 24,472 20,289 69,188 42,026
Interest expense (5,147) (6,083) (16,021) (15,187)
Loss on extinguishment of debt - - (3,971) (3,330)
Other income--net 1,317 336 2,644 1,964
---------- ---------- ---------- ----------
Income before income taxes 20,642 14,542 51,840 25,473
Income taxes (6,010) (3,805) (18,192) (9,560)
Equity in loss of affiliate (Vitas) - - - (4,105)
---------- ---------- ---------- ----------
Income from continuing operations 14,632 10,737 33,648 11,808
Discontinued operations, net of income taxes - (125) (2,015) 12
---------- ---------- ---------- ----------
Net income $ 14,632 $ 10,612 $ 31,633 $ 11,820
========== ========== ========== ==========
Earnings Per Share
Income from continuing operations $ 0.57 $ 0.43 $ 1.32 $ 0.50
========== ========== ========== ==========
Net income $ 0.57 $ 0.43 $ 1.24 $ 0.50
========== ========== ========== ==========
Average number of shares outstanding 25,719 24,940 25,453 23,808
========== ========== ========== ==========
Diluted Earnings Per Share
Income from continuing operations $ 0.55 $ 0.42 $ 1.28 $ 0.49
========== ========== ========== ==========
Net income $ 0.55 $ 0.42 $ 1.21 $ 0.49
========== ========== ========== ==========
Average number of shares outstanding 26,401 25,402 26,202 24,272
========== ========== ========== ==========
Cash Dividends Per Share $ 0.06 $ 0.06 $ 0.18 $ 0.18
========== ========== ========== ==========
See accompanying notes to unaudited financial statements.
4
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
--------------------
2005 2004
--------- ---------
Cash Flows from Operating Activities
Net income $ 31,633 $ 11,820
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15,605 13,030
Provision for uncollectible accounts receivable 5,352 4,543
Write off of unamortized debt issuance costs 2,871 -
Noncash long-term incentive compensation 2,574 4,988
Discontinued operations 2,015 (12)
Provision for deferred income taxes (1,176) (874)
Amortization of debt issuance costs 1,395 1,457
Equity in loss of affiliate - 4,105
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations:
Increase in accounts receivable (25,264) (14,328)
Increase in inventories (233) (702)
Decrease in prepaid expenses and other current
assets 2,656 15,302
Decrease in accounts payable and other current
liabilities (3,584) (14,080)
Increase in income taxes 11,827 9,288
(Increase)/decrease in other assets (2,876) 5,786
Increase in other liabilities 1,464 418
Noncash expense of internally financed ESOPs 858 1,420
Other sources/(uses) 479 (200)
--------- ---------
Net cash provided by continuing operations 45,596 41,961
Net cash (used)/provided by discontinued operations (1,559) 4,604
--------- ---------
Net cash provided by operating activities 44,037 46,565
--------- ---------
Cash Flows from Investing Activities
Capital expenditures (18,874) (13,108)
Net uses from disposals of discontinued operations (7,145) (1,156)
Business combinations, net of cash acquired (5,680) (330,881)
Proceeds from sales of property and equipment 125 375
Return of merger deposit - 10,000
Other uses (232) (192)
--------- ---------
Net cash used by investing activities (31,806) (334,962)
--------- ---------
Cash Flows from Financing Activities
Repayment of long-term debt (141,245) (94,686)
Proceeds from issuance of long-term debt 85,000 295,000
Increase in cash overdraft payable 10,684 6,920
Issuance of capital stock, net of issuance costs 10,009 97,429
Dividends paid (4,611) (4,210)
Purchases of treasury stock (4,390) (2,391)
Debt issuance costs (1,755) (14,436)
Repayment of stock subscriptions note receivable - 8,053
Redemption of convertible trust preferred securities - (2,736)
Other sources 204 27
--------- ---------
Net cash provided/(used) by financing activities (46,104) 288,970
--------- ---------
Increase/(Decrease) in cash and cash equivalents (33,873) 573
Cash and cash equivalents at beginning of year 71,448 50,688
--------- ---------
Cash and cash equivalents at end of period $ 37,575 $ 51,261
========= =========
See accompanying notes to unaudited financial statements.
5
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements
1. Basis of Presentation
As used herein, the terms "We," "Company" and "Chemed" refer to Chemed
Corporation or Chemed Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited consolidated financial
statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.
Consequently, we have omitted certain disclosures required under generally
accepted accounting principles in the United States for complete financial
statements. However, in our opinion, the financial statements presented herein
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position, results of operations and
cash flows of the Company. These financial statements are prepared on the same
basis as and should be read in conjunction with the Consolidated Financial
Statements and related notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 2004. Certain 2004 amounts have been
reclassified to conform with the current period presentation, primarily related
to the presentation of the financial position, results of operations and cash
flows from discontinued operations.
We use Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting
for Stock Issued to Employees, to account for stock-based compensation. Since
the Company's stock options qualify as fixed options under APB 25 and since the
option price equals the market price on the date of a grant, there is no
compensation expense for stock options. Stock awards are expensed during the
period the related services are provided.
The following table illustrates the effect on net income and earnings per
share as if the Company had applied the fair-value-recognition provisions of
Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for
Stock-Based Compensation (as amended) (in thousands, except per share data):
Three Months Ended
September 30,
---------------------
2005 2004
--------- ---------
Net income as reported $ 14,632 $ 10,612
Add: stock-based compensation expense included in net
income as reported, net of income tax effects 182 92
Deduct: total stock-based employee compensation determined
under a fair-value- based method for all stock
options and awards, net of income tax effects (234) (1,968)
--------- ---------
Pro forma net income $ 14,580 $ 8,736
========= =========
Earnings per share
As reported $ 0.57 $ 0.43
========= =========
Pro forma $ 0.57 $ 0.35
========= =========
Diluted earnings per share
As reported $ 0.55 $ 0.42
========= =========
Pro forma $ 0.55 $ 0.34
========= =========
6
Nine Months Ended
September 30,
---------------------
2005 2004
--------- ---------
Net income as reported $ 31,633 $ 11,820
Add: stock-based compensation expense included in net
income as reported, net of income tax effects 2,670 3,915
Deduct: total stock-based employee compensation determined
under a fair-value- based method for all stock
options and awards, net of income tax effects (6,548) (6,988)
--------- ---------
Pro forma net income $ 27,755 $ 8,747
========= =========
Earnings per share
As reported $ 1.24 $ 0.50
========= =========
Pro forma $ 1.09 $ 0.37
========= =========
Diluted earnings per share
As reported $ 1.21 $ 0.49
========= =========
Pro forma $ 1.06 $ 0.36
========= =========
We calculated the above data using the Black-Scholes option-valuation
method to value the Company's options granted in 2005 and prior years.
2. Capital Stock Split
On March 11, 2005, the Board of Directors of the Company approved a 2-for-1
stock split in the form of a 100% stock dividend to shareholders of record at
the close of business on April 22, 2005. This stock split was paid May 11, 2005.
Under Delaware law, the par value of the capital stock remains $1 per share.
Prior period per share data have been restated to retroactively reflect the
impact of the stock split on the average number of shares outstanding. The
shares outstanding and in treasury prior to May 11, 2005 have not been restated.
3. Revenue Recognition
The Company recognizes service revenues and sales when the earnings process
has been completed. Generally, this occurs when services are provided or the
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 further below.
We actively monitor each of our hospice programs, by provider number, as to
their specific admission, discharge rate and average length of stay data in an
attempt to determine whether they are likely to exceed the annual
per-beneficiary Medicare cap ("Medicare Cap"). Should we determine that a
provider number is likely to exceed the Medicare Cap based on projected trends,
we attempt to institute corrective action to influence the patient mix or to
increase patient admissions. However, should we project our corrective action
will not prevent that program from exceeding its Medicare Cap, we estimate the
amount we would be required to repay at the end of the Medicare Cap year and
accrue that amount, which is proportional to the number of months elapsed in the
Medicare Cap year, as a reduction to patient revenue.
7
As discussed in Note 8, during the second quarter of 2005, VITAS recorded a
$1.0 million Medicare Cap liability for its Phoenix program, which was acquired
in December 2004. No adjustment to the liability was necessary in the third
quarter of 2005. The final liability will be determined in the fourth quarter of
2005 commensurate with the end of the 2005 measurement period. Management
currently estimates the range of the final liability for the 2005 measurement
period to be between $1.0 million and $1.5 million. Given that the Medicare Cap
liability is related to patients being cared for at the time of acquisition,
this liability is considered to be a pre-acquisition contingency of this
program.
None of VITAS' other hospice programs are currently projected to exceed the
Medicare Cap for the 2005 measurement period.
4. Segments
Service revenues and sales and aftertax earnings by business segment are as
follows (in thousands):
Three Months Ended September 30,
--------------------------------
2005 2004
---------- ----------
Service Revenues and Sales
----------------------------
VITAS $ 160,408 $ 135,101
Roto-Rooter 72,920 66,784
---------- ----------
Total $ 233,328 $ 201,885
========== ==========
Aftertax Earnings
----------------------------
VITAS $ 11,564 (a) $ 8,975
Roto-Rooter 7,069 (b) 6,067 (b)
---------- ----------
Total $ 18,633 $ 15,042
Corporate (4,001)(c) (4,305)(c)
Discontinued operations -- (125)(d)
---------- ----------
Net income $ 14,632 $ 10,612
========== ==========
Nine Months Ended September 30,
-------------------------------
2005 2004
---------- ----------
Service Revenues and Sales
----------------------------
VITAS $ 460,146 $ 316,453 (e)
Roto-Rooter 218,128 204,907
---------- ----------
Total $ 678,274 $ 521,360
========== ==========
Aftertax Earnings
----------------------------
VITAS $ 31,082 (f) $ 19,479 (e)
Roto-Rooter 19,890 (g) 15,454 (g)
---------- ----------
Total $ 50,972 $ 34,933
Corporate (17,324)(h) (19,020)(h)
Equity in loss of affiliates (VITAS) -- (4,105)(i)
Discontinued operations (2,015)(j) 12 (j)
---------- ----------
Net income $ 31,633 $ 11,820
========== ==========
8
- --------------------
(a) Amount for the three months ended September 30, 2005 includes $192,000 for
legal costs and expenses incurred in connection with the Office of
Inspector General ("OIG") investigation.
(b) Amounts for the three months ended September 30, 2005 and 2004 include
adjustments of income tax expense related to the finalization of prior-year
tax returns upon expiration of certain statutes which increased earnings by
$952,000 and $630,000, respectively. Additionally, the amount for the three
months ended September 30, 2004 includes a cumulative adjustment to the
effective state and local income tax rate which increased earnings by
$217,000.
(c) Amounts for the three months ended September 30, 2005 and 2004 include
adjustments of income tax expense related to the finalization of prior-year
tax returns upon expiration of certain statutes which increased earnings by
$835,000 and $390,000, respectively. Amounts for the three months ended
September 30, 2005 and 2004 also include favorable adjustments to
transaction related costs of the VITAS acquisition of $130,000 and
$131,000, respectively. The amount for the three months ended September 30,
2004 includes a cumulative adjustment to the effective state and local
income tax rate which increased earnings by $881,000.
(d) Amount for the three months ended September 30, 2004 represents the loss
from the operations of Service America, discontinued in the fourth quarter
of 2004.
(e) Amounts include consolidated operations of VITAS beginning on February 24,
2004 which is the date the Company acquired controlling interest in VITAS.
Total service revenues for the nine months ended September 30, 2004 were
$389,323,000.
(f) Amount for the nine months ended September 30, 2005 includes $352,000 for
legal costs and expenses incurred in connection with the OIG investigation.
Amount also includes costs of $547,000 related to awards made under the
Company's long-term incentive plan ("LTIP").
(g) Amount for the nine months ended September 30, 2005 includes a favorable
adjustment to casualty insurance expense of $1,014,000 due to favorable
claims experience. Amounts for the nine months ended September 30, 2005 and
2004 include adjustments of income tax expense related to the finalization
of prior-year tax returns upon expiration of certain statutes which
increased earnings by $952,000 and $630,000, respectively. Amounts for both
periods also include costs of $340,000 and $982,000, respectively, related
to awards made under the LTIP.
(h) Amount for the nine months ended September 30, 2005 includes a noncash
charge of $137,000 related to the acceleration of stock option vesting.
Amounts for the nine months ended September 30, 2005 and 2004 include the
following:
o Adjustments of income tax expense related to the finalization of
prior-year tax returns upon expiration of certain statutes which
increased earnings by $835,000 and $390,000, respectively,
o Favorable adjustments to transaction related costs of the VITAS
acquisition of $801,000 and $952,000, respectively,
o Loss on extinguishment of debt of $2,523,000 and $2,030,000,
respectively and,
o Costs of $960,000 and $4,455,000, respectively, related to awards made
under the Company's LTIP.
(i) Amount for 2004 represents the Company's 37% equity in the loss of VITAS
through February 23, 2004. During the period January 1, 2004 through
February 23, 2004, VITAS incurred the following aftertax expenses related
to the sale of its business to the Company (in thousands):
Accrual for potential severance costs under key employee
employment agreements $ 10,975
Legal and valuation costs 6,665
Loss on write off of VITAS' deferred debt costs 2,698
Other 592
---------
Total $ 20,930
=========
9
(j) Amount for 2005 includes an aftertax loss of $2,350,000 resulting from
finalizing the disposal of Service America in May 2005. Amount for 2004
represents the income from the operations of Service America, discontinued
in the fourth quarter of 2004.
5. Earnings per Share
Earnings per share are computed using the weighted average number of shares
of capital stock outstanding. Earnings and diluted earnings per share for 2005
and 2004 are computed as follows (in thousands, except per share data):
Income Shares Income
(Numerator) (Denominator) Per Share
----------- ------------- ---------
Income from Continuing Operations -
For the Three Months Ended September 30,
- ----------------------------------------
2005
Reported income $ 14,632 25,719 $ 0.57
=========
Dilutive stock options -- 617
Nonvested stock awards -- 65
----------- -------------
Diluted income $ 14,632 26,401 $ 0.55
=========== ============= =========
2004
Reported income $ 10,737 24,940 $ 0.43
=========
Dilutive stock options -- 448
Nonvested stock awards -- 14
----------- -------------
Diluted income $ 10,737 25,402 $ 0.42
=========== ============= =========
Net Income -
For the Three Months Ended September 30,
- ----------------------------------------
2005
Reported income $ 14,632 25,719 $ 0.57
=========
Dilutive stock options -- 617
Nonvested stock awards -- 65
----------- -------------
Diluted income $ 14,632 26,401 $ 0.55
=========== ============= =========
2004
Reported income $ 10,612 24,940 $ 0.43
=========
Dilutive stock options -- 448
Nonvested stock awards -- 14
----------- -------------
Diluted income $ 10,612 25,402 $ 0.42
=========== ============= =========
Income from Continuing Operations -
For the Nine Months Ended September 30,
- ---------------------------------------
2005
Reported income $ 33,648 25,453 $ 1.32
=========
Dilutive stock options -- 676
Impact of LTIP shares issued July
2005 (a) -- 12
Nonvested stock awards -- 61
----------- -------------
Diluted income $ 33,648 26,202 $ 1.28
=========== ============= =========
10
2004 (b)
Reported income $ 11,808 23,808 $ 0.50
=========
Dilutive stock options -- 458
Nonvested stock awards -- 6
----------- -------------
Diluted income $ 11,808 24,272 $ 0.49
=========== ============= =========
Net Income -
For the Nine Months Ended September 30,
- ---------------------------------------
2005
Reported income $ 31,633 25,453 $ 1.24
=========
Dilutive stock options -- 676
Impact of LTIP shares issued July
2005 (a) -- 12
Nonvested stock awards -- 61
----------- -------------
Diluted income $ 31,633 26,202 $ 1.21
=========== ============= =========
2004 (b)
Reported income $ 11,820 23,808 $ 0.50
=========
Dilutive stock options -- 458
Nonvested stock awards -- 6
----------- -------------
Diluted income $ 11,820 24,272 $ 0.49
=========== ============= =========
- ---------------
(a) These amounts reflect the dilutive impact of issuing the LTIP shares at the
beginning of the second quarter rather than in June 2005, when the award
was earned, as assumed for the computation of average shares outstanding.
(b) The impact of the convertible junior subordinated debentures is
anti-dilutive and has been excluded from the computation of average shares
outstanding for these periods.
6. Other Expenses -- Net
Other expenses -- net from continuing operations for 2005 and 2004 include
the following (in thousands):
Three Months Ended September 30,
--------------------------------
2005 2004
--------- ---------
Adjustments to transaction-related costs of the
VITAS acquisition* $ (130) $ (219)
========= =========
Nine Months Ended September 30,
--------------------------------
2005 2004
--------- ---------
Long-term incentive compensation (see Note 9) $ 2,946 $ 8,783
Adjustments to transaction-related costs of the
VITAS acquisition* (801) (1,587)
Cost of accelerating the vesting of stock
options 215 --
--------- ---------
Total other expenses - net $ 2,360 $ 7,196
========= =========
* These adjustments are adjustments to the Company's share of certain
expenses of the acquisition of VITAS incurred by VITAS when it was a 37%
equity investee of the Company.
11
7. Other Income -- Net
Other income -- net comprises the following (in thousands):
Three Months Ended September 30,
--------------------------------
2005 2004
-------- --------
Interest income $ 530 $ 501
Market valuation gains/(losses) on trading
investments of employee benefit trusts 796 (82)
Loss on disposal of property and equipment (67) (87)
Other--net 58 4
-------- --------
Total other income--net $ 1,317 $ 336
======== ========
Nine Months Ended September 30,
--------------------------------
2005 2004
-------- --------
Interest income $ 1,443 $ 1,468
Market valuation gains on trading investments
of employee benefit trusts 1,114 679
Loss on disposal of property and equipment (86) (236)
Other--net 173 53
-------- --------
Total other income--net $ 2,644 $ 1,964
======== ========
8. Business Combinations
During the first nine months of 2005, we completed one business combination
in the VITAS segment and one business combination in the Roto-Rooter segment.
The VITAS business acquired provides hospice services in the Pittsburgh, PA area
and the Roto-Rooter business acquired provides drain cleaning and plumbing
services using the Roto-Rooter name in Greensboro, NC. The results of operations
of the Roto-Rooter business acquired were not material to the Company's results
of operations.
The unaudited pro forma results of operations, assuming all VITAS segment
business combinations completed in 2004 and 2005 were completed on January 1,
2004, are presented below (in thousands, except per share data):
Three Months Ended September 30,
--------------------------------
2005 2004
---------- ----------
Service revenues and sales $ 233,328 $ 205,659
Net income 14,632 10,643
Earnings per share 0.57 0.43
Diluted earnings per share 0.55 0.42
Nine Months Ended September 30,
--------------------------------
2005 2004
---------- ----------
Service revenues and sales $ 678,957 $ 603,649
Net income 31,646 17,320
Earnings per share 1.24 0.73
Diluted earnings per share 1.21 0.71
12
The excess of the purchase price over the fair value of the net assets
acquired in purchase business combinations is classified as goodwill. On a
preliminary basis, the purchase price of all businesses acquired in the first
nine months of 2005 has been allocated as follows (in thousands):
Working capital $ 3,803
Property and equipment 147
Goodwill 1,730
----------
Total $ 5,680
==========
Included in the above allocation is an adjustment of $1,027,000 increasing
both goodwill and other current liabilities for the estimated pre-acquisition
liability related to the Medicare Cap adjustment for VITAS' Phoenix acquisition
(acquired in December 2004). More information will be known about this liability
in the fourth quarter of 2005 when the 2005 measurement period ends. Adjustments
to this preliminary estimate may be recorded at that time.
Included in the above allocation is an adjustment of $3,225,000 related to
the settlement of certain contingent tax matters recorded in the acquisition of
VITAS in February 2004.
All of the goodwill acquired in 2005 is expected to be deductible for tax
purposes. Of the total goodwill recorded in 2005, $1,330,000 relates to the
VITAS segment and $400,000 to the Roto-Rooter segment.
9. 2002 Executive Long-Term Incentive Plan
During the second quarter of 2005, the price of the Company's stock
exceeded $38.75 per share for 30 trading days, fulfilling one of the performance
targets set forth in the 2002 Executive Long-Term Incentive Plan ("LTIP"). On
July 11, 2005, the Compensation/Incentive Committee of the Board of Directors
("CIC") approved a payout of 37,500 shares of capital stock under the LTIP. The
pretax expense of this award for continuing operations, including payroll taxes
and benefit costs, was $1,837,000 ($1,152,000 aftertax).
During the first quarter of 2005, the price of the Company's stock exceeded
$35 per share for 30 trading days, fulfilling one of the performance targets set
forth in the LTIP. On March 11, 2005, the CIC approved a payout of 25,000 shares
of capital stock under the LTIP. The pretax expense of this award for continuing
operations, including payroll taxes and benefit costs, was $1,109,000 ($695,000
aftertax).
During January 2004, the price of the Company's stock exceeded $25 per
share ($50 per share pre-2005 stock split - see Note 2) for more than 10
consecutive trading days, fulfilling one of the performance targets of the LTIP.
In February 2004, the CIC approved a payout under the LTIP in the aggregate
amount of $7.8 million ($2.8 million in cash and 84,633 shares of capital
stock). The pretax expense of this award for continuing operations, including
payroll taxes and benefit costs, was $8,783,000 ($5,723,000 aftertax).
No performance targets under the LTIP were reached in the third quarter of
2005. As such, no payouts were approved or made during the quarter ended
September 30, 2005. As of September 30, 2005, no accrual for awards under the
earnings component or the remaining market price component of the LTIP was made
since it is not probable that either of these awards will be earned and paid.
13
10. Long-term Debt and Extinguishment of Debt
In February 2005, we prepaid $110 million of the Floating Rate Notes due
2010. In addition, we amended our term loan and revolving credit facility with
JPMorgan Chase Bank to provide for a term loan of $85 million due August 2010
and a $175 million revolving credit facility expiring February 2010. In
connection with these transactions, we recorded a loss on the extinguishment of
debt of $3,971,000 in the first quarter of 2005 that comprised a prepayment
penalty of $1,100,000 on the Floating Rate Notes and the write-off of $2,871,000
of unamortized debt issuance costs for the Floating Rate Notes and the previous
term loan.
The Company is in compliance with all debt covenants as of September 30,
2005 and projects that it will remain in compliance during the remainder of
2005. As of September 30, 2005, the Company has approximately $147.1 million of
unused lines of credit available and eligible to be drawn down under its
revolving credit facility.
11. Loans Receivable from Independent Contractors
The Roto-Rooter segment sublicenses with approximately sixty independent
contractors to operate certain plumbing repair and drain cleaning businesses in
lesser-populated areas of the United States and Canada. As of September 30,
2005, the Company had notes receivable from its independent contractors totaling
$2,755,000 (December 31, 2004-$2,781,000). In most cases these loans are fully
or partially secured by equipment owned by the contractor. The interest rates on
the loans range from 5% to 8% per annum and the remaining terms of the loans
range from two months to 5.4 years at September 30, 2005. During the quarter
ended September 30, 2005, we recorded revenues of $4,292,000 (2004-$3,819,000)
and pretax profits of $1,577,000 (2004-$1,495,000) from our independent
contractors. During the nine months ended September 30, 2005, we recorded
revenues of $13,333,000 (2004-$11,842,000) and pretax profits of $4,604,000
(2004-$4,032,000) from our independent contractors.
Effective January 1, 2004, we adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 46R "Consolidation of
Variable Interest Entities--an interpretation of Accounting Research Bulletin
No. 51 (revised)" ("FIN 46R") relative to the Company's contractual
relationships with its independent contractors. FIN 46R requires the primary
beneficiary of a Variable Interest Entity ("VIE") to consolidate the accounts of
the VIE. We have evaluated our relationships with our independent contractors
based upon guidance provided in FIN 46R and have concluded that 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 the Company might be the
primary beneficiary would not materially impact the Company's financial
position, results of operations or cash flows.
12. Pension and Retirement Plans
All of the Company's plans that provide retirement and similar benefits are
defined contribution plans.
14
Expenses for the Company's pension and profit-sharing plans, ESOP's, excess
benefit plans and other similar plans comprise the following (in thousands):
For the three months ended September 30, 2005 $ 3,373
For the three months ended September 30, 2004 $ 1,686
For the nine months ended September 30, 2005 $ 8,724
For the nine months ended September 30, 2004 $ 6,420
13. Litigation
The Company is party to a class action lawsuit filed in the Third Judicial
Circuit Court of Madison County, Illinois in June of 2000 by Robert Harris,
alleging certain Roto-Rooter plumbing was performed by unlicensed employees. The
Company contests these allegations and believes them without merit. Plaintiff
moved for certification of a class of customers in 32 states who allegedly paid
for plumbing work performed by unlicensed employees. Plaintiff also moved for
partial summary judgment on grounds the licensed apprentice plumber who
installed his faucet did not work under the direct personal supervision of a
licensed master plumber. On June 19, 2002, the trial judge certified an
Illinois-only plaintiffs class and granted summary judgment for the named party
Plaintiff on the issue of liability, finding violation of the Illinois Plumbing
License Act and the Illinois Consumer Fraud Act through Roto-Rooter's
representation of the licensed apprentice as a plumber. The court has not yet
ruled on certification of a class in the remaining 31 states. In December 2004,
the Company reached a tentative resolution of this matter with the plaintiff.
This proposed settlement has not yet been approved by the court. Nonetheless,
the Company, in anticipation of such approval, accrued $3.1 million in the
fourth quarter of 2004 as the anticipated cost of settling this litigation.
VITAS is party to a class action lawsuit filed in the Superior Court of
California, Los Angeles County, in April of 2004 by Ann Marie Costa, Ana
Jimenez, Maria Ruteaya and Gracetta Wilson alleging failure to pay overtime
wages and to provide meal and break periods to California nurses, home health
aides and licensed clinical social workers. The Company contests these
allegations and believes them without merit. Due to the complex legal and other
issues involved, it is not presently possible to estimate the amount of
liability, if any, related to this case. Management cannot provide assurance the
Company will ultimately prevail in it. Regardless of outcome, such litigation
can adversely affect the Company through defense costs, diversion of
management's time, and related publicity.
In the normal course of business, the Company is a party to various claims
and legal proceedings. The Company records a reserve for these matters when an
adverse outcome is probable and the amount of the potential liability is
reasonably estimable.
14. Related Party Agreement
In October 2004, VITAS entered into a pharmacy services agreement
("Agreement") with Omnicare, Inc. ("OCR") whereby OCR will provide specified
pharmacy services for VITAS and its hospice patients in geographical areas
served by both VITAS and OCR. The Agreement has an initial term of three years
that renews automatically thereafter for one-year terms. Either party may cancel
the Agreement at the end of any term by giving written notice at least 90 days
prior to the end of said term. Under the agreement, VITAS made purchases of $9.4
million from OCR during the first nine months of 2005. Mr. E. L. Hutton is
non-executive Chairman and a director of the Company and OCR. Mr. Joel F.
Gemunder, President and Chief Executive Officer of OCR, Mr. Charles H. Erhart,
Jr. and Ms. Sandra Laney are directors of both OCR and the Company. Mr. Kevin J.
McNamara, President, Chief Executive Officer and director of the Company, is a
director emeritus of OCR. We believe that the terms of the Agreement are no less
favorable to VITAS than we could negotiate with an unrelated party.
15
15. Discontinued Operations
Discontinued operations comprises the operating results and loss on
disposal of Service America, discontinued in December 2004 and disposed in May
2005 (in thousands except per share data):
Three Months Ended September 30,
--------------------------------
2005 2004
--------- ---------
Operating Results
Loss before income taxes $ -- $ (195)
Income taxes -- 70
--------- ---------
Loss from discontinued operations $ -- $ (125)
========= =========
Loss per share $ -- $ --
========= =========
Diluted loss per share $ -- $ --
========= =========
Service revenues and sales $ -- $ 9,248
========= =========
Nine Months Ended September 30,
--------------------------------
2005 2004
--------- ---------
Operating Results
Income/(loss) before income taxes $ 576 $ 70
Income taxes (241) (58)
--------- ---------
Income/(loss) from operations, net of
income taxes 335 12
--------- ---------
Loss on disposal
Loss on disposal before income taxes (2,398) --
Income taxes 48 --
--------- ---------
Loss on disposal, net of income taxes (2,350) --
--------- ---------
Total discontinued operations $ (2,015) $ 12
========= =========
Loss per share $ (0.08) $ --
========= =========
Diluted loss per share $ (0.07) $ --
========= =========
Service revenues and sales $ 10,716 $ 29,816
========= =========
The loss on disposal of Service America in the second quarter of 2005
arises from the finalization of the asset and liability values and related tax
benefits resulting from completing the disposal in May 2005.
16
The corporation that acquired Service America, Service America Enterprise,
Inc. ("Enterprise"), purchased the substantial majority of Service America's
assets in exchange for Enterprise's assuming substantially all of Service
America's liabilities. Included in the assets acquired is a receivable from the
Company for approximately $4.7 million. The Company paid $1 million of this
receivable upon closing and will pay the remainder over the following year in 11
equal installments. At September 30, 2005, seven of these payments due
Enterprise remain outstanding.
16. OIG Investigation
On April 7, 2005, the Company announced the Office of Inspector General
("OIG") for the Department of Health and Human Services served VITAS with civil
subpoenas relating to VITAS' alleged failure to appropriately bill Medicare and
Medicaid for hospice services. As part of this investigation, the OIG selected
medical records for 320 past and current patients from VITAS' three largest
programs for review. It also sought policies and procedures from 1998 to present
covering admissions, certifications, recertifications, and discharges. During
the third quarter of 2005, the OIG requested additional information of the
Company. The Company has recorded pretax expense related to complying with OIG
requests of $310,000 and $564,000 for the three and nine month periods ended
September 30, 2005, respectively.
The OIG has not disclosed the origin of the subpoenas or investigation. As
of September 30, 2005, the investigation is on-going and the OIG has not given
indication regarding the results of their investigation. We are unable to
predict the outcome of the investigation or the impact, if any, that the
investigation may have on the business, results of operations, liquidity or
capital resources. Regardless of outcome, responding to the subpoenas can
adversely affect the Company through defense costs, diversion of management's
time and related publicity.
17. Cash Overdrafts Payable
Included in accounts payable at September 30, 2005 are cash overdrafts
payable of $11,949,000 (December 31, 2004 - $1,265,000).
18. Ohio Tax Law Change
On June 30, 2005, significant changes to the tax system of the State of
Ohio were signed into law. The impact is required to be accounted for in all
annual and interim periods ending on or after June 30, 2005. Changes in the Ohio
tax legislation include the phasing out of the Ohio income tax and the Ohio
personal property tax. Additionally, a new Commercial Activity Tax ("CAT"),
which is a tax based on gross receipts, is being introduced. Since the corporate
income tax is being replaced by the CAT, which is not an income tax under
generally accepted accounting principles, entities with business in the State of
Ohio must account for the phase-out of the corporate income tax as a change in
enacted tax rate as of June 30, 2005. There was no significant impact for the
Company as of and for the three and nine month periods ended September 30, 2005.
19. Recent Accounting Statements
In December 2004, FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004) "Share-Based Payment" ("SFAS No. 123R"), which requires
companies to recognize in the income statement the grant-date fair value of
stock options and other equity-based compensation issued to employees and
disallows the use of the intrinsic value method of accounting for stock options,
but expresses no preference for a type of valuation model. This statement
supersedes APB No. 25, but does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
SFAS No. 123 as originally issued.
17
Based on recent action by the Securities and Exchange Commission ("SEC"), SFAS
No. 123R will be effective as of the beginning of the Company's next fiscal year
(January 1, 2006). We are evaluating our stock incentive programs and most
likely will significantly reduce the number of stock options granted after
December 31, 2005. In March 2005, the Board of Directors approved immediate
vesting of all unvested stock options to avoid recognizing approximately
$951,000 of pretax expense that would have been charged to income under SFAS No.
123R during the five quarters beginning on January 1, 2006. The $215,000 pretax
cost of accelerating the vesting of these options is included in the
determination of income from continuing operations for the first quarter of
2005. As a result, we do not expect the implementation of SFAS No. 123R in the
first quarter of 2006 to have a significant impact on our financial condition,
results of operations or cash flows.
18
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Executive Summary
- -----------------
The Company operates through its two wholly owned subsidiaries, VITAS
Healthcare Corporation and Roto-Rooter. VITAS focuses on non-curative 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 core 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
approximately 91% of the U.S. population.
The following is a summary of the key operating results for the three
months ended September 30, 2005 and 2004 (in thousands except per share
amounts):
2005 2004
---------- ----------
Consolidated service revenues and sales $ 233,328 $ 201,885
Consolidated income from continuing operations $ 14,632 $ 10,737
Diluted EPS from continuing operations $ 0.55 $ 0.42
The increase in consolidated service revenues and sales was driven by a 19%
increase at VITAS and a 9% increase at Roto-Rooter. The increase at VITAS was
primarily the result of a 15% increase in average daily census (ADC) from the
third quarter of 2004. The increase at Roto-Rooter was driven primarily by the
continued shift in jobs from residential to commercial. Commercial jobs
typically average approximately 34% more revenue per job than a residential job.
Consolidated income from continuing operations and diluted EPS from continuing
operations increased as a result of the higher service revenues and sales, which
allowed the Company to further leverage its current cost structure. Consolidated
income from continuing operations as a percent of service revenues and sales was
6.3% for the three months ended September 30, 2005 versus 5.3% for the same
period of 2004. As further shown in the Results of Operations section,
consolidated income from continuing operations and diluted EPS from continuing
operations include special items/adjustments that increased aftertax earnings by
$1,725,000 and $2,564,000 for the three months ended September 30, 2005 and
2004, respectively.
The following is a summary of the key operating results for the nine months
ended September 30, 2005 and 2004 (in thousands except per share amounts):
2005 2004
---------- ----------
Consolidated service revenues and sales $ 678,274 $ 521,360
Consolidated income from continuing operations $ 33,648 $ 11,808
Diluted EPS from continuing operations $ 1.28 $ 0.49
19
The increase in consolidated service revenues and sales was driven by a 45%
increase in sales at VITAS and 6% increase at Roto-Rooter. The increase at VITAS
was the result of a 16% increase in ADC for the period and the Company owning
VITAS for all of 2005 versus a partial year in 2004. The increase at Roto-Rooter
was driven primarily by the continued shift in jobs from residential to
commercial. Commercial jobs typically average approximately 34% more revenue per
job than a residential job. Consolidated income from continuing operations and
diluted EPS from continuing operations increased as a result of higher service
revenues and sales, which allowed the Company to further leverage its current
cost structure. Consolidated income from continuing operations as a percent of
service revenues and sales was 5.0% for the nine months ended September 30, 2005
versus 2.3% for the same period of 2004. As further shown in the Results of
Operations section, consolidated income from continuing operations and diluted
EPS from continuing operations include special items/adjustments that reduced
aftertax earnings by $1,257,000 and $9,600,000 for the nine months ended
September 30, 2005 and 2004, respectively.
Financial Condition
- -------------------
Liquidity and Capital Resources
- -------------------------------
Significant changes in the balance sheet accounts from December 31, 2004 to
September 30, 2005 include the following:
o The $33.8 million decline in cash and cash equivalents from $71.4
million at December 31, 2004 to $37.6 million at September 30, 2005 is
primarily attributable to the use of cash to reduce the Company's
total long-term debt by $56.3 million from $291.7 million at December
31, 2004 to $235.4 million at September 30, 2005. The cash used to
reduce total long-term debt was partially offset by cash provided by
operations.
o The increase in accounts receivable from $64.7 million at December 31,
2004 to $84.5 million at September 30, 2005 is due to the timing of
the receipt of Medicare payments at the end of 2004 versus such timing
at September 30, 2005, VITAS' higher revenues for the third quarter of
2005 as compared with the fourth quarter of 2004, and the delay in the
receipt of Medicare payments for recently acquired operations and
certain new start operations. The delay in the receipt of Medicare
payments for recent acquisitions and new starts is due to the timing
of receipt of Medicare program certification. Payment of certain of
these amounts was received during the third quarter of 2005 with
additional receipts expected during the next several months.
o The decline in current deferred income taxes from $31.3 million at
December 31, 2004 to $21.5 million at September 30, 2005 and the
increase in prepaid income taxes from nil at December 31, 2004 to $8.1
million at September 30, 2005 is primarily attributable to
reclassifying the income tax benefit on the disposal of Service
America from deferred to current income taxes.
o The decline in current and noncurrent assets of discontinued
operations from $19.1 million at December 31, 2004 to $3.4 million at
September 30, 2005 is the result of the sale of Service America in May
2005.
o The reduction in the current portion of long-term debt from $12.2
million at December 31, 2004 to $1.1 million at September 30, 2005
resulted from refinancing our term loan with JPMorgan Chase in
February 2005.
o The $9.1 million decline in other current liabilities from $42.8
million at December 31, 2004 to $33.7 million at September 30, 2005 is
largely attributable to the payment of 2004 incentive compensation and
supplemental thrift plan contributions during 2005. The payment of
various severance and divestiture liabilities also contributed to this
decline.
20
o The decline in current and noncurrent liabilities of discontinued
operations from $22.9 million at December 31, 2004 to $6.7 million at
September 30, 2005 is the result of the sale of Service America in May
2005.
Net cash provided by continuing operations increased $3.6 million from
$42.0 million for the first nine months of 2004 to $45.6 million for the first
nine months of 2005, due primarily to the increase in net income. The increase
was partially offset by a lower level of cash generated by VITAS operations in
2005. This decline is due to the previously mentioned delay in the receipt of
Medicare payment for recent acquisitions and new starts related to the receipt
of Medicare program certification.
At September 30, 2005, we had approximately $147.1 million available
lines of credit eligible to be drawn down under our amended credit agreement
with JPMorgan Chase. Management believes its liquidity and sources of capital
are satisfactory for the Company's needs in the foreseeable future.
Commitments and Contingencies
- -----------------------------
Collectively, the terms of our credit agreements provide that the Company
is required to meet various financial covenants, to be tested quarterly,
beginning with the quarter ending June 30, 2005. In connection therewith, we are
in compliance with all financial and other debt covenants as of September 30,
2005 and anticipate remaining in compliance throughout 2005.
In connection with the sale of Patient Care in 2002, $5.0 million of the
cash purchase price was placed in escrow pending collection of third-party payer
receivables on Patient Care's balance sheet at the sale date. To date, $4.2
million has been returned and the remainder is being withheld pending the
settlement of certain third-party payer claims. Based on Patient Care's
collection history, we believe that the significant majority of the disputed
amounts will be resolved in Patient Care's favor and most of the withheld escrow
will be returned to the Company. We have a long-term receivable due from Patient
Care of $12.5 million. As of September 30, 2005, Patient Care is current on all
payments due related to the long-term receivable. We also have current accounts
receivable from Patient Care for the post-closing balance sheet valuation ($1.3
million) and for expenses paid by us after closing on Patient Care's behalf
($1.8 million). The Company is in litigation with Patient Care over various
issues, including the collection of these current amounts. We believe these
balances represent valid claims, are fairly stated and are fully collectible;
nonetheless, an unfavorable determination by the courts could result in the
write-off of all or a portion of these balances.
On April 7, 2005, the Company announced the Office of Inspector General
("OIG") for the Department of Health and Human Services served VITAS with civil
subpoenas relating to VITAS' alleged failure to appropriately bill Medicare and
Medicaid for hospice services. As part of this investigation, the OIG selected
medical records for 320 past and current patients from VITAS' three largest
programs for review. It also sought policies and procedures from 1998 to present
covering admissions, certifications, recertifications, and discharges. During
the third quarter of 2005, the OIG requested additional information of the
Company. The Company has recorded pretax expense related to complying with OIG
requests of $310,000 and $564,000 for the three and nine month periods ended
September 30, 2005, respectively.
21
The OIG has not disclosed the origin of the subpoenas or investigation. As
of September 30, 2005, the investigation is on-going and the OIG has not given
indication regarding the results of their investigation. We are unable to
predict the outcome of the investigation or the impact, if any, that the
investigation may have on the business, results of operations, liquidity or
capital resources. Regardless of outcome, responding to the subpoenas can
adversely affect the Company through defense costs, diversion of management's
time and related publicity.
The Company is party to a class action lawsuit filed in the Third Judicial
Circuit Court of Madison County, Illinois in June of 2000 by Robert Harris,
alleging certain Roto-Rooter plumbing was performed by unlicensed employees. The
Company contests these allegations and believes them without merit. Plaintiff
moved for certification of a class of customers in 32 states who allegedly paid
for plumbing work performed by unlicensed employees. Plaintiff also moved for
partial summary judgment on grounds the licensed apprentice plumber who
installed his faucet did not work under the direct personal supervision of a
licensed master plumber. On June 19, 2002, the trial judge certified an
Illinois-only plaintiffs class and granted summary judgment for the named party
Plaintiff on the issue of liability, finding violation of the Illinois Plumbing
License Act and the Illinois Consumer Fraud Act through Roto-Rooter's
representation of the licensed apprentice as a plumber. The court has not yet
ruled on certification of a class in the remaining 31 states. In December 2004,
the Company reached a tentative resolution of this matter with the plaintiff.
This proposed settlement has not yet been approved by the court. Nonetheless,
the Company, in anticipation of such approval, accrued $3.1 million in the
fourth quarter of 2004 as the anticipated cost of settling this litigation.
VITAS is party to a class action lawsuit filed in the Superior Court of
California, Los Angeles County, in April of 2004 by Ann Marie Costa, Ana
Jimenez, Maria Ruteaya and Gracetta Wilson alleging failure to pay overtime
wages and to provide meal and break periods to California nurses, home health
aides and licensed clinical social workers. The Company contests these
allegations and believes them without merit. Due to the complex legal and other
issues involved, it is not presently possible to estimate the amount of
liability, if any, related to this case. Management cannot provide assurance the
Company will ultimately prevail in it. Regardless of outcome, such litigation
can adversely affect the Company through defense costs, diversion of
management's time, and related publicity.
22
Results of Operations
Third Quarter 2005 versus Third Quarter 2004-Consolidated Results
- -----------------------------------------------------------------
The Company's service revenues and sales for the third quarter of 2005
increased 15.6% versus revenues for the third quarter of 2004. Of this increase,
$25.3 million was attributable to VITAS and $6.1 million was attributable to
Roto-Rooter (dollar amounts in thousands):
Increase/(Decrease)
----------------------
Amount Percent
--------- -------
VITAS
Routine Care $ 17,692 18.8 %
Continuous Care 4,656 20.7
Other 2,959 16.3
Roto-Rooter
Plumbing 3,470 13.0
Drain Cleaning 1,231 4.6
Other 1,435 10.5
--------- -------
Total $ 31,443 15.6 %
========= =======
The increase in VITAS' revenues for the third quarter of 2005 versus the
third quarter of 2004 is attributable to increases in ADC of 20.9%, 15.1% and
5.9%, respectively, for routine care, continuous care and other services. The
remainder of the revenue increases is due primarily to the increase in
reimbursement rates. Approximately 96% of VITAS' revenues for the period was
from Medicare and Medicaid.
Excluding divested locations, the increase in the plumbing revenues for the
third quarter of 2005 versus 2004 comprises an 8.2% increase in the number of
jobs performed and a 4.0% increase in the average price per job. On the same
basis, the increase in drain cleaning revenues for the third quarter of 2005
versus 2004 comprised a 0.4% decline in the number of jobs offset by a 5.1%
increase in the average price per job. The increase in other revenues for the
third quarter of 2005 versus 2004 is attributable primarily to increases in
independent contractor operations and other services.
The consolidated gross margin was 29.2% in the third quarter of 2005 as
compared with 29.6% in the third quarter of 2004. On a segment basis, VITAS'
gross margin was 21.7% in the third quarter of 2005 and 21.8% in the third
quarter of 2004. The Roto-Rooter segment's gross margin was 45.7% in the 2005
third quarter and 45.4% in the third quarter of 2004.
Selling, general and administrative expenses ("SG&A") for the third quarter
of 2005 were $38,423,000, an increase of $3,052,000 (8.6%) versus the third
quarter of 2004. The increase is largely due to higher revenues by both segments
during the third quarter of 2005 versus 2004.
Income from operations increased $4,183,000 from $20,289,000 in the third
quarter of 2004 to $24,472,000 in the third quarter of 2005. The increase is
attributable primarily to higher income from operations of VITAS ($3,156,000)
and Roto-Rooter ($1,202,000) partially offset by a higher operating loss for
Corporate ($175,000).
Interest expense, substantially all of which is incurred at Corporate,
declined from $6,083,000 in the third quarter of 2004 to $5,147,000 in the 2005
quarter. This decline is due primarily to the reduction in debt outstanding that
occurred in February 2005 when we refinanced a significant portion of our debt.
23
Other income-net increased from $336,000 in the third quarter of 2004 to
$1,317,000 in the third quarter of 2005. The increase is attributable primarily
to higher income from market valuation adjustments on trading investments of
employee benefit trusts in 2005 versus 2004 and to higher gains on other
investments held in employee benefit trusts in 2005. These gains and market
valuation adjustments are entirely offset by expenses in the SG&A category of
the statement of income.
Our effective income tax rate increased from 26.2% in the third quarter of
2004 to 29.1% in the third quarter of 2005. This change is due primarily to a
one time cumulative adjustment to lower the effective state and local income tax
rate due primarily to revised tax planning strategies implemented in the third
quarter of 2004. The three month periods ended September 30, 2005 and 2004
include favorable adjustments of $1,787,000 and $1,020,000, respectively,
resulting from finalizing prior year tax returns upon expiration of certain
statutes.
Income from continuing operations increased from $10,737,000 ($0.43 per
share and $0.42 per diluted share) for the third quarter of 2004 to $14,632,000
($0.57 per share and $0.55 per diluted share) for the third quarter of 2005. Net
income increased from $10,612,000 ($0.43 per share and $0.42 per diluted share)
for the third quarter of 2004 to income of $14,632,000 ($0.57 per share and
$0.55 per diluted share).
Income from continuing operations and net income for both periods included
the following aftertax special items/adjustments that increased/(reduced)
aftertax earnings (in thousands):
Three Months Ended September 30,
--------------------------------
2005 2004
-------- --------
Adjustments to transaction-related costs of the
VITAS acquisition $ 130 $ 131
OIG investigation-related expenses (VITAS) (192) --
Adjustments to revise VITAS purchase price
adjustment and related depreciation and
amortization -- 315
Cumulative adjustment to the state and local
income tax rate -- 1,098
Tax adjustments resulting from finalization of
prior year tax returns upon expiration of
certain statutes 1,787 1,020
-------- --------
Total aftertax impact on earnings $ 1,725 $ 2,564
======== ========
In addition, net income for the third quarter of 2004 includes a loss of
$125,000 from discontinued operations.
24
Third quarter 2005 versus Third quarter 2004-Segment Results
- ------------------------------------------------------------
The change in aftertax earnings for the third quarter of 2005 versus the
third quarter of 2004 is due to (in thousands):
Amount of
Income Increase
---------------
Aftertax earnings of VITAS in 2005 $ 2,589
Aftertax earnings of Roto-Rooter in 2005 1,002
Discontinued operations in 2005 125
All other 304
---------------
Increase in net income in 2005 $ 4,020
===============
First Nine Months of 2005 versus First Nine Months of 2004-
Consolidated Results
- --------------------
The Company's service revenues and sales for the first nine months of 2005
increased 30.1% versus revenues for the first nine months of 2004. This $156.9
million increase largely was attributable to the acquisition of VITAS on
February 24, 2004 and to the following (dollar amounts in thousands):
Increase
---------------------
Amount Percent
---------- --------
VITAS
Increase in first quarter 2005 revenues due
to only recognizing a partial quarter's
revenues in 2004 (VITAS was acquired on
February 24, 2004) $ 94,878 185.6 %
Increase in second and third quarter 2005
revenues due primarily to higher ADC in
2005 versus 2004 48,815 15.4
Roto-Rooter
Plumbing 7,751 9.7
Drain Cleaning 2,161 2.6
Other 3,309 7.8
---------- --------
Total $ 156,914 30.1 %
========== ========
VITAS' revenues for the first nine months of 2005 included revenues from
the following sources (in thousands):
Routine home care $ 319,441
Continuous home care 77,405
General inpatient care and other 63,300
----------
Total $ 460,146
==========
Approximately 96% of VITAS' revenues for the period were from Medicare and
Medicaid.
Excluding divested locations, the increase in plumbing revenues for the
first nine months of 2005 versus 2004 comprises a 6.0% increase in the number of
jobs performed and a 4.0% increase in the average price per job. The increase in
drain cleaning revenues for the first nine months of 2005 versus 2004 comprised
a 1.9% decline in the number of jobs offset by a 5.1% increase in the average
price per job. The increase in other revenues for the first nine months of 2005
versus 2004 is attributable primarily to increases in independent contractor
operations and other services.
25
The consolidated gross margin was 29.3% in the first nine months of 2005 as
compared with 30.7% in the first nine months of 2004, largely due to the
acquisition of VITAS on February 24, 2004. In 2004 VITAS accounted for 61% of
total revenues and 43% of total gross profit. For the first nine months of 2005
these percentages were 68% and 49%, respectively. Thus, VITAS' lower gross
profit margin (versus Roto-Rooter's) had a more significant impact on overall
margins in 2005. On a segment basis, VITAS' gross margin was 21.4% in the first
nine months of 2005 and 21.6% in the first nine months of 2004. The Roto-Rooter
segment's gross margin increased 1.3% to 46.1%, largely due to a favorable
adjustment to the casualty insurance accruals related to prior periods'
experience and to lower training wages as a percentage of revenues, in the first
nine months of 2005 versus 2004.
SG&A for the first nine months of 2005 were $111,820,000, an increase of
$13,761,000 (14%) versus the first nine months of 2004. Almost all of the
increase was attributable to the increased SG&A of the VITAS segment, acquired
February 24, 2004. Similarly, the $2,166,000 increase in depreciation expense
and $409,000 increase in amortization expense for the first nine months of 2005
versus the first nine months of 2004 are primarily due to the VITAS segment.
Other expenses - net for the first nine months declined $4,836,000 from
$7,196,000 in 2004 to $2,360,000 in 2005 due primarily to lower expenses of the
LTIP in 2005 versus 2004.
Income from operations increased $27,162,000 from $42,026,000 in the first
nine months of 2004 to $69,188,000 in the first nine months of 2005. The
increase comprises (in thousands):
Amount of
Income Increase
-----------------
Income from operations of VITAS (acquired
February 24, 2004) $ 15,944
Income from operations of Roto-Rooter 6,972
Corporate 4,246
-----------------
Total $ 27,162
=================
The lower operating loss for Corporate is attributable primarily to lower
other expenses - net (largely LTIP costs) in 2005 versus 2004.
Interest expense, substantially all of which is incurred at Corporate,
increased from $15,187,000 in the first nine months of 2004 to $16,021,000 in
the 2005 period. This increase is due primarily to having the
acquisition-related debt outstanding for the entire first quarter of 2005 versus
only 37 days during the first quarter of 2004. This increase is partially offset
by the February 2005 refinancing which reduced debt outstanding.
Other income-net increased from $1,964,000 in the first nine months of 2004
to $2,644,000 in the first nine months of 2005. The increase is attributable
primarily to higher income from market valuation adjustments on trading
investments of employee benefit trusts in 2005 versus 2004 and to higher gains
on other investments held in employee benefit trusts in 2005. These gains and
market valuation adjustments are entirely offset by expenses in the SG&A
category of the statement of income.
26
Our effective income tax rate declined from 37.5 % in the first nine months
of 2004 to 35.1% in the first nine months of 2005. The decline in the effective
rate is primarily due to larger favorable adjustments to tax accruals for prior
years in 2005 due to the expiration of the statute of limitations for certain
items in the third quarter.
Equity in the loss of VITAS for 2004 represents the Company's 37% share of
VITAS' loss for the period from January 1, 2004 through February 23, 2004, prior
to our acquiring a controlling interest in VITAS. During the first one month and
23 days of 2004, VITAS recorded a net loss due to significant
transaction-related expenses on the sale of its business to Chemed.
Income from continuing operations increased from $11,808,000 ($0.50 per
share and $0.49 per diluted share) for the first nine months of 2004 to
$33,648,000 ($1.32 per share and $1.28 per diluted share) for the first nine
months of 2005. Net income increased from $11,820,000 ($0.50 per share and $0.49
per diluted share) for the first nine months of 2004 to $31,633,000 ($1.24 per
share and $1.21 per diluted share). Income from continuing operations and net
income for both periods included the following aftertax special
items/adjustments that increased/(reduced) aftertax earnings (in thousands):
For the Nine Months Ended
September 30,
-------------------------
2005 2004
--------- ---------
Loss on extinguishment of debt $ (2,523) $ (2,030)
Compensation expense of the LTIP (1,847) (5,437)
Favorable adjustment to casualty insurance accruals
related to prior years' experience 1,014 --
Adjustments to transaction-related costs of the VITAS
acquisition 801 952
OIG investigation-related expenses (VITAS) (352) --
Income tax benefit for finalizing prior year tax
returns upon expiration of certain statutes 1,787 1,020
Cost of accelerating vesting of stock options (137) --
Equity in loss of VITAS in 2004 -- (4,105)
--------- ---------
Total aftertax impact on earnings $ (1,257) $ (9,600)
========= =========
In addition, net income for the first nine months of 2005 includes a loss
from discontinued operations of $2,015,000 (2004-income of $12,000) related to
Service America, discontinued in 2004.
27
First nine months 2005 versus First nine months 2004-Segment Results
- --------------------------------------------------------------------
The change in aftertax earnings for the first nine months of 2005 versus
the first nine months of 2004 is due to (in thousands):
Amount of
Increase/
(Decrease)
----------
Aftertax earnings of VITAS, acquired February 24, 2004 $ 11,603
Aftertax earnings of Roto-Rooter in 2005 4,436
Discontinued operations in 2005 (2,027)
All other 5,801
----------
Increase in net income in 2005 $ 19,813
==========
The higher aftertax earnings of VITAS is due to the inclusion of 100% of
VITAS' earnings for the entire first nine months of 2005 (274 days) versus only
219 days' earnings in the first nine months of 2004. The higher aftertax
earnings of Roto-Rooter in the first nine months of 2005 versus 2004 were
primarily driven by a 6.5% increase in total revenues. The loss for discontinued
operations in the first nine months of 2005 is primarily attributable to the
sale of Service America in May 2005 and finalizing adjustments to income taxes,
assets and other liabilities.
The following charts update historical unaudited financial and operating
data of VITAS, acquired in February 2004 (dollars in thousands, except dollars
per patient day):
28
2004 2005
------------------------ ------------------------
Third Year-to-Date Third Year-to-Date
Quarter September Quarter September
---------- ------------ ---------- ------------
OPERATING STATISTICS
Net revenue
Homecare $ 94,267 $ 266,216 $ 111,959 $ 319,441
Inpatient 18,362 55,774 21,321 63,300
Continuous care 22,472 67,333 27,128 77,405
---------- ------------ ---------- ------------
Total $ 135,101 $ 389,323 $ 160,408 $ 460,146
========== ============ ========== ============
Net revenue as a percent of total
Homecare 69.8 % 68.4 % 69.8 % 69.4 %
Inpatient 13.6 14.3 13.3 13.8
Continuous care 16.6 17.3 16.9 16.8
---------- ------------ ---------- ------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
========== ============ ========== ============
Average daily census ("ADC") (days)
Homecare 4,940 4,665 5,972 5,719
Nursing home 3,198 3,061 3,366 3,276
---------- ------------ ---------- ------------
Routine homecare 8,138 7,726 9,338 8,995
Inpatient 362 367 404 404
Continuous care 449 451 517 502
---------- ------------ ---------- ------------
Total 8,949 8,544 10,259 9,901
========== ============ ========== ============
Total Admissions 11,270 34,979 12,375 37,969
Average length of stay (days) 60.8 58.8 66.5 (a) 66.8
Median length of stay (days) 13.0 12.0 13.0 12.0
ADC by major diagnosis
Neurological 31.6 % 31.0 % 32.1 % 32.0 %
Cancer 22.4 23.2 21.3 21.4
Cardio 14.8 14.5 14.9 15.1
Respiratory 7.1 7.3 7.1 7.1
Other 24.1 24.0 24.6 24.4
---------- ------------ ---------- ------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
========== ============ ========== ============
Admissions by major diagnosis
Neurological 18.5 % 18.9 % 18.0 % 18.8 %
Cancer 38.4 37.0 38.3 36.6
Cardio 13.1 13.2 12.4 13.5
Respiratory 6.7 7.4 6.3 7.2
Other 23.3 23.5 25.0 23.9
---------- ------------ ---------- ------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
========== ============ ========== ============
Direct patient care margins (b)
Routine homecare 50.1 % 49.6 % 50.4 % 49.9 %
Inpatient 20.8 24.6 21.3 22.4
Continuous care 18.5 18.9 18.1 18.4
Homecare margin drivers
(dollars per patient day)
Labor costs $ 42.21 $ 42.55 $ 45.04 $ 45.58
Drug costs 8.42 8.76 7.66 7.71
Home medical equipment 5.75 5.76 5.45 5.48
Medical supplies 2.08 1.98 2.23 2.18
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 217.34 $ 205.96 $ 242.70 $ 240.61
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 424.21 $ 422.60 $ 447.99 $ 441.83
Bad debt expense as a percent of revenues 1.0 % 1.1 % 0.9 % 0.9 %
Accounts receivable --
days of revenue outstanding 37.4 N.A. 42.1 N.A.
- -----------------------------------------
(a) VITAS has six large (greater than 450 ADC), 15 medium (greater than
200 but less than 450 ADC) and 18 small (less than 200 ADC) hospice
programs. Two programs have estimated Medicare cap cushion of less
than 10% for the 2005 measurement period. In addition, one program,
which was acquired in December 2004, has an estimated contractual
adjustment due to the Medicare Cap ranging from $1.0 million to $1.5
million for the 2005 measurement period.
(b) Amounts exclude indirect patient care and administrative costs.
29
2004 2005
----------------------------------- -----------------------
First Quarter
----------------------
January 1 February 24
to to Third Third Year-to-date
February 23 June 30(a) Quarter Quarter September
--------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS
Service revenues and sales $ 72,870 $ 181,352 $ 135,101 $ 160,408 $ 460,146
--------- ---------- ---------- ---------- ----------
Cost of services provided
(excluding depreciation) 58,848 142,276 105,695 125,629 361,703
Selling, general and administrative
expenses 8,182 17,379 12,632 13,995 40,709
Depreciation 836 2,609 469 1,922 5,477
Amortization 4 1,341 1,583 984 2,963
Other expense 24,956 (b) - - - 881
--------- ---------- ---------- ---------- ----------
Total costs and expenses 92,826 163,605 120,379 142,530 411,733
--------- ---------- ---------- ---------- ----------
Income/(loss) from operations (19,956) 17,747 14,722 17,878 48,413
Interest expense (919) (58) (32) (33) (104)
Loss on extinguishment of debt (4,497)(b) - - - -
Other income--net 41 207 382 591 1,903
--------- ---------- ---------- ---------- ----------
Income/(loss) before income taxes (25,331) 17,896 15,072 18,436 50,212
Income taxes 6,996 (7,392) (6,097) (6,872) (19,130)
--------- ---------- ---------- ---------- ----------
Net income/(loss) $(18,335) $ 10,504 $ 8,975 $ 11,564 $ 31,082
========= ========== ========== ========== ==========
EBITDA (c)
Net income/(loss) $(18,335) $ 10,504 $ 8,975 $ 11,564 $ 31,082
Add/(deduct)
Interest expense 919 58 32 33 104
Income taxes (6,996) 7,392 6,097 6,872 19,130
Depreciation 836 2,609 469 1,922 5,477
Amortization 4 1,341 1,583 984 2,963
--------- ---------- ---------- ---------- ----------
EBITDA $(23,572) $ 21,904 $ 17,156 $ 21,375 $ 58,756
========= ========== ========== ========== ==========
- ---------------------------------------------------
(a) We acquired VITAS on February 24, 2004 and recorded estimated purchase
accounting adjustments to the value of VITAS' assets as of that date.
(b) Costs related to the sale of VITAS totaled $29,453,000 pretax ($20,930,000
aftertax) for January 1 through February 23, 2004.
(c) EBITDA is income before interest expense, income taxes, depreciation and
amortization. We use EBITDA, in addition to net income, income/(loss) from
operations and cash flow from operating activities, to assess our
performance and believe it is important for investors to be able to
evaluate us using the same measures used by management. We believe EBITDA
is an important supplemental measure of operating performance because it
provides investors with an indication of our performance independent of our
debt and equity structure and related costs. We also believe EBITDA is a
supplemental measurement tool used by analysts and investors to help
evaluate a company's overall operating performance by including only
transactions related to core cash operating business activities. EBITDA as
calculated by us is not necessarily comparable to similarly titled measures
reported by other companies. In addition, EBITDA is not prepared in
accordance with accounting principles generally accepted in the United
States ("GAAP"), and should not be considered an alternative for net
income, income from operations, net cash provided by operating activities
or other financial information determined under GAAP, and should not be
considered as a measure of profitability or liquidity. We believe the line
on the consolidated statement of operations entitled net income/(loss) is
the most directly comparable GAAP measure to EBITDA. EBITDA, as calculated
above, includes interest income, loss on extinguishment of debt and costs
related to the sale of VITAS to the Company as follows (in thousands):
2004 2005
----------------------------------- -----------------------
First Quarter
----------------------
January 1 February 24
to to Third Third Year-to-date
February 23 June 30(a) Quarter Quarter September
--------- ---------- ---------- ---------- ----------
Interest income $ 41 $ 227 $ 383 $ 612 $ 1,961
Loss on extinguishment of debt 4,497 - - - -
Costs related to sale of business 24,956 - - - -
30
Recent Accounting Statements
- ----------------------------
In December 2004, the FASB issued SFAS No. 123 (revised 2004)"Share-Based
Payment" ("SFAS No. 123R"), which requires companies to recognize in the income
statement the grant-date fair value of stock options and other equity-based
compensation issued to employees and disallows the use of the intrinsic value
method of accounting for stock options, but expresses no preference for a type
of valuation model. This statement supersedes APB No. 25, but does not change
the accounting guidance for share-based payment transactions with parties other
than employees provided in SFAS No. 123 as originally issued. Based on recent
action by the SEC, SFAS No. 123R will be effective as of the beginning of the
Company's next fiscal year (January 1, 2006). We are evaluating our stock
incentive programs and most likely will significantly reduce the number of stock
options granted after December 31, 2005. In March 2005, the Board of Directors
approved immediate vesting of all unvested stock options to avoid recognizing
approximately $951,000 of pretax expense that would have been charged to income
under SFAS No. 123R during the five quarters beginning on January 1, 2006. The
$215,000 pretax cost of accelerating the vesting of these options is included in
the determination of income from continuing operations for first quarter of
2005. As a result, we do not expect the implementation of SFAS No. 123R in the
first quarter of 2006 to have a significant impact on our financial condition,
results of operations or cash flows.
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995 Regarding Forward-Looking Information
- --------------------------------------------------------
In addition to historical information, this report contains forward-looking
statements and performance trends that are based upon assumptions subject to
certain known and unknown risks, uncertainties, contingencies and other factors.
Variances in any or all of the risks, uncertainties, contingencies, and other
factors from the Company's assumptions could cause actual results to differ
materially from these forward-looking statements and trends. The Company's
ability to deal with the unknown outcomes of these events, many of which are
beyond the control of the Company, may affect the reliability of its projections
and other financial matters.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Chemed's primary market risk exposure relates to interest rate risk
exposure through its variable interest rate borrowings. At September 30, 2005,
we had a total of $84.6 million of variable rate debt outstanding. Should the
interest rate on this debt increase 100 basis points, our annual interest
expense would increase $846,000. The quoted market value of our 8.75% fixed rate
senior notes on October 31, 2005 is $158.3 million (carrying value is $150
million). We estimate that the fair value of the remainder of our long-term debt
approximates its book value at September 30, 2005 ($85.5 million).
Item 4. Controls and Procedures
The Company recently carried out an evaluation, under the supervision of
the Company's President and Chief Executive Officer and with the participation
of the Vice President and Chief Financial Officer and the Vice President and
Controller, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures 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 the Company's disclosure controls and procedures were
effective as of the end of the period covered by this report. There has been no
change in the Company's 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, the Company's internal control over
financial reporting.
31
PART II OTHER INFORMATION
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.
32
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: November 8, 2005 By: Kevin J. McNamara
------------------ ----------------------
Kevin J. McNamara
(President and Chief Executive
Officer)
Dated: November 8, 2005 By: David P. Williams
------------------ ----------------------
David P. Williams
(Vice President and Chief
Financial Officer)
Dated: November 8, 2005 By: Arthur V. Tucker, Jr.
------------------ ----------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
33
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULES 13a-14(a)/15d-14(a) OF THE EXCHANGE ACT OF 1934
I, Kevin J. McNamara, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chemed Corporation
("registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial report to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
E-1
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 8, 2005 /s/ Kevin J. McNamara
---------------- ---------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
E-2
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULES 13a-14(a)/15d-14(a) OF THE EXCHANGE ACT OF 1934
I, David P. Williams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chemed Corporation
("registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial report to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
E-3
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 8, 2005 /s/ David P. Williams
---------------- ---------------------
David P. Williams
(Vice President and Chief Financial
Officer)
E-4
EXHIBIT 31.3
CERTIFICATION PURSUANT TO RULES 13a-14(a)/15d-14(a) OF THE EXCHANGE ACT OF 1934
I, Arthur V. Tucker, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chemed Corporation
("registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial report to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles,
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
E-5
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 8, 2005 /s/ Arthur V. Tucker, Jr.
---------------- -------------------------
Arthur V. Tucker, Jr.
(Vice President and
Controller)
E-6
EXHIBIT 32.1
CERTIFICATION BY KEVIN J. MCNAMARA
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as
President and Chief Executive Officer of Chemed Corporation ("Company"), does
hereby certify that:
1) the Company's Quarterly Report of Form 10-Q for the quarter ending
September 30, 2005 ("Report"), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: November 8, 2005 /s/ Kevin J. McNamara
---------------- ---------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
E-7
EXHIBIT 32.2
CERTIFICATION BY DAVID P. WILLIAMS
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as
Vice President and Chief Financial Officer of Chemed Corporation ("Company"),
does hereby certify that:
1) the Company's Quarterly Report of Form 10-Q for the quarter ending
September 30, 2005 ("Report"), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: November 8, 2005 /s/ David P. Williams
---------------- ---------------------
David P. Williams
(Vice President and Chief
Financial Officer)
E-8
EXHIBIT 32.3
CERTIFICATION BY ARTHUR V. TUCKER, JR.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as
Vice President and Controller of Chemed Corporation ("Company"), does hereby
certify that:
1) the Company's Quarterly Report of Form 10-Q for the quarter ending
September 30, 2005 ("Report"), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: November 8, 2005 /s/ Arthur V. Tucker, Jr.
---------------- -------------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
E-9