================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Under Section 13 or 15 (d) of the Securities
---------- Exchange Act of 1934 For the Quarterly Period Ended March 31,
2006
Transition Report Pursuant to Section 13 or 15(d) of the
----------- Securities Exchange Act of 1934
Commission File Number: 1-8351
CHEMED CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip code)
(513) 762-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
------- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Amount Date
Capital Stock 26,159,533 Shares March 31, 2006
$1 Par Value
================================================================================
1
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES
Index
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet -
March 31, 2006 and December 31, 2005 3
Unaudited Consolidated Statement of Income -
Three months ended March 31, 2006 and 2005 4
Unaudited Consolidated Statement of Cash Flows -
Three months ended March 31, 2006 and 2005 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 6. Exhibits 19
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)
March 31, December 31,
2006 2005
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 45,668 $ 57,133
Accounts receivable less allowances of $9,054 (2005 - $8,413) 71,864 95,063
Inventories 6,724 6,499
Current deferred income taxes 27,753 26,691
Prepaid income taxes 4,867 9,096
Prepaid expenses and other current assets 8,867 9,768
--------- ---------
Total current assets 165,743 204,250
Investments of deferred compensation plans held in trust 23,287 21,105
Other investments 1,445 1,445
Note receivable 12,500 12,500
Properties and equipment, at cost, less accumulated
depreciation of $70,043 (2005 - $66,655) 65,179 65,449
Identifiable intangible assets less accumulated
amortization of $10,717 (2005 - $9,612) 74,254 75,358
Goodwill 433,783 433,756
Other assets 20,406 21,222
--------- ---------
Total Assets $796,597 $835,085
========= =========
LIABILITIES
Current liabilities
Accounts payable $ 42,342 $ 43,626
Current portion of long-term debt 207 1,045
Income taxes 4,948 3,916
Accrued insurance 39,254 38,894
Accrued compensation 25,443 33,156
Other current liabilities 42,454 48,258
--------- ---------
Total current liabilities 154,648 168,895
Deferred income taxes 22,408 22,304
Long-term debt 194,399 234,058
Deferred compensation liabilities 22,647 21,275
Other liabilities 3,989 4,378
--------- ---------
Total liabilities 398,091 450,910
--------- ---------
STOCKHOLDERS' EQUITY
Capital stock - authorized 40,000,000 shares $1 par; issued
28,667,433 shares (2005 - 28,373,872 shares) 28,667 28,374
Paid-in capital 244,101 234,910
Retained earnings 181,831 171,188
Treasury stock - 2,507,900 shares (2005 - 2,394,272 shares), at cost (58,440) (52,127)
Deferred compensation payable in Company stock 2,401 2,379
Notes receivable for shares sold (54) (549)
--------- ---------
Total Stockholders' Equity 398,506 384,175
--------- ---------
Total Liabilities and Stockholders' Equity $796,597 $835,085
========= =========
See accompanying notes to unaudited financial statements.
3
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
Three Months Ended March 31,
---------------------------
2006 2005
--------- ---------
Continuing operations
Service revenues and sales $246,238 $218,637
--------- ---------
Cost of services provided and goods sold
(excluding depreciation) 177,897 152,952
Selling, general and administrative expenses 38,475 37,919
Depreciation 4,148 3,920
Amortization 1,396 1,192
-------- --------
Total costs and expenses 221,916 195,983
--------- ---------
Income from operations 24,322 22,654
Interest expense (5,345) (5,835)
Loss on extinguishment of debt (430) (3,971)
Other income--net 1,495 727
--------- ---------
Income before income taxes 20,042 13,575
Income taxes (7,827) (5,670)
--------- ---------
Income from continuing operations 12,215 7,905
Discontinued operations, net of income taxes - 211
--------- ---------
Net income $ 12,215 $ 8,116
========= =========
Earnings Per Share
Income from continuing operations $ 0.47 $ 0.31
========= =========
Net income $ 0.47 $ 0.32
========= =========
Average number of shares outstanding 26,044 25,152
========= =========
Diluted Earnings Per Share
Income from continuing operations $ 0.46 $ 0.31
========= =========
Net income $ 0.46 $ 0.31
========= =========
Average number of shares outstanding 26,723 25,910
========= =========
Cash Dividends Per Share $ 0.06 $ 0.06
========= =========
See accompanying notes to unaudited financial statements.
4
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
--------------------
2006 2005
--------- ----------
Cash Flows from Operating Activities
Net income $ 12,215 $ 8,116
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 5,544 5,112
Provision for uncollectible accounts receivable 2,033 1,530
Provision for deferred income taxes (1,242) (1,892)
Amortization of debt issuance costs 444 522
Write off unamortized debt issuance costs 430 2,871
Noncash long-term incentive compensation - 948
Discontinued operations - (211)
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations
Decrease/(increase) in accounts receivable 21,140 (18,747)
Decrease/(increase) in inventories (225) 7
Decrease in prepaid expenses and
other current assets 901 1,381
Decrease in accounts payable and other current liabilities (13,207) (9,808)
Increase in income taxes 8,812 7,484
Increase in other assets (1,917) (882)
Increase in other liabilities 1,050 635
Excess tax benefit on share-based compensation (3,289) -
Noncash expense of internally financed ESOPs - 286
Other sources/(uses) 51 (419)
--------- ----------
Net cash provided/(used) by continuing operations 32,740 (3,067)
Net cash used by discontinued operations - (1,081)
--------- ----------
Net cash provided/(used) by operating activities 32,740 (4,148)
--------- ----------
Cash Flows from Investing Activities
Capital expenditures (3,972) (6,201)
Net uses from sale of discontinued operations (1,684) (817)
Business combinations, net of cash acquired (384) (4,401)
Proceeds from sales of property and equipment 65 36
Other uses (185) (136)
--------- ----------
Net cash used by investing activities (6,160) (11,519)
--------- ----------
Cash Flows from Financing Activities
Repayment of long-term debt (84,497) (140,680)
Net increase in revolving line of credit 44,000 -
Excess tax benefit on share-based compensation 3,289 -
Issuance of capital stock, net of costs 2,360 4,208
Purchases of treasury stock (2,318) (833)
Dividends paid (1,572) (1,517)
Increase in cash overdrafts payable 786 8,023
Debt issuance costs (150) (1,555)
Proceeds from long-term debt - 85,000
Other sources 57 130
--------- ----------
Net cash provided/(used) by financing activities (38,045) (47,224)
--------- ----------
Decrease in Cash and Cash Equivalents (11,465) (62,891)
Cash and cash equivalents at beginning of year 57,133 71,448
--------- ----------
Cash and cash equivalents at end of period $ 45,668 $ 8,557
========= ==========
See accompanying notes to unaudited financial statements.
5
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements
1. Basis of Presentation
As used herein, the terms "We," "Company" and "Chemed" refer to Chemed
Corporation or Chemed Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited consolidated financial
statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.
Consequently, we have omitted certain disclosures required under generally
accepted accounting principles in the United States for complete financial
statements. However, in our opinion, the financial statements presented herein
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly our financial position, results of operations and
cash flows. These financial statements are prepared on the same basis as and
should be read in conjunction with the Consolidated Financial Statements and
related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2005. Certain 2005 amounts have been reclassified to conform with
current period presentation in the balance sheet and statement of income
primarily related to the presentation of stock-based compensation expense and
unearned compensation.
2. Stock-Based Compensation
Effective January 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards No. 123, revised ("SFAS 123(R)") which
establishes accounting for stock-based compensation for employees. Under SFAS
123(R), stock-based compensation cost is measured at the grant date, based on
the fair value of the award and recognized as expense over the employee's
requisite service period. We previously applied Accounting Principles Board
Opinion No. 25 and provided the pro-forma disclosures required by Statement of
Financial Accounting Standards No. 123. We elected to adopt the modified
prospective transition method as provided by SFAS 123(R). Accordingly, we have
not restated previously reported financial statement amounts. Other than the
reclassifications noted above, there was no material impact on our financial
position, results of operations or cash flows as a result of the adoption of
SFAS 123(R).
We provide employees the opportunity to acquire our stock through a number
of plans, as follows:
o We have eight stock incentive plans under which 7,700,000
shares can be issued to key employees through a grant of
stock awards and/or options to purchase shares. The
Compensation/Incentive Committee ("CIC") of the Board of
Directors administers these plans. All options granted under
these plans provide for a purchase price equal to the market
value of the stock at the date of grant. The latest plan,
covering a total of 1,400,000 shares, was adopted in May
2004. The plans are not qualified, restricted or incentive
plans under the U.S. Internal Revenue Code. The terms of
each plan differ slightly, however, stock options issued
under the plans generally have a maximum term of 10 years.
Under one plan, adopted in 1999, up to 500,000 shares may be
issued to employees who are not our officers or directors.
o In May 2002, our shareholders approved the adoption of the
Executive Long-Term Incentive Plan ("LTIP") covering our
officers and key employees. The LTIP is administered by the
CIC. During June 2004, the CIC approved guidelines covering
the establishment of a pool of 250,000 shares ("2004 LTIP
Pool") to be distributed to eligible members of management
upon attainment of the following hurdles during the period
January 1, 2004 through December 31, 2007:
o 88,000 shares if our cumulative pro forma adjusted
EBITDA (including the results of VITAS beginning
January 1, 2004) reaches $365 million within the
four-year period.
o 88,000 shares if our stock price reaches the following
hurdles during any 30 trading days out of any
60-trading-day period during the four-year period:
|X| 22,000 shares for a stock price of $35.00
|X| an additional 33,000 shares for a stock price of
$38.75
|X| an additional 33,000 shares for a stock price of
$42.50.
o 44,000 shares represent a retention element, subject to
a four-year, time-based vesting.
o 30,000 shares may be awarded at the discretion of the
CIC.
See Note 9 below for disclosure related to awards granted
under the LTIP.
o We maintain an Employee Stock Purchase Plan ("ESPP"). The
ESPP allows eligible participants to purchase our shares
through payroll deductions at current market value. We pay
administrative and broker fees associated with the ESPP.
Shares purchased for the ESPP are purchased on the open
market and credited directly to participants' accounts. In
accordance with the provisions of SFAS 123(R), the ESPP is
non-compensatory.
6
For the three months ended March 31, 2006, we recorded $292,000 in
amortization expense in the accompanying statement of income for stock-based
compensation expense related to the amortization of restricted stock awards
previously granted. There were no capitalized stock-based compensation costs as
of March 31, 2006. The pro-forma disclosure as required by SFAS No. 123 for the
three months ended March 31, 2005 is as follows:
Net income, as reported $ 8,116
Add: stock-based compensation expense included in
net income as reported, net of income taxes 1,139
Deduct: total stock-based compensation determined
under a fair value method, net of income taxes (2,298)
----------
Pro-forma net income $ 6,957
==========
Earnings per share:
As reported $ 0.32
==========
Pro-forma $ 0.28
==========
Diluted earnings per share:
As reported $ 0.31
==========
Pro-forma $ 0.27
==========
As of March 31, 2006, approximately $3.7 million of total unrecognized
compensation costs related to non-vested stock awards are expected to be
recognized over a weighted average period of 3.3 years. Reflected in
paid-in-capital on the accompanying consolidated balance sheet is $3.7 million
and $3.0 million of unearned compensation related to stock awards granted but
not vested as of March 31, 2006 and December 31, 2005, respectively.
The following table summarizes stock option and award activity during the
first quarter of 2006:
Stock Options Stock Awards
---------------------------- ------------------------------
Weighted Weighted
Number Average Number Average
Of Exercise of Grant-Date
Shares Price Shares Price
------------- -------------- ------------- -------------
Stock-based compensation shares:
Outstanding at January 1, 2006 1,741,833 $ 23.57 142,445 $ 27.10
Granted - - 19,000 52.01
Exercised/Vested (274,561) 21.38 (5,200) 34.42
Forfeited - - - -
Expired - - - -
------------- -------------- ------------- -------------
Outstanding at March 31, 2006 1,467,272 $ 23.98 156,245 $ 29.88
============= ============== ============= =============
Vested at March 31, 2006 1,467,272 $ 23.98
============= ==============
The weighted average contractual life of outstanding and exercisable
options was 6.9 years at March 31, 2006.
7
The options outstanding at March 31, 2006, were in the following exercise
price ranges:
Weighted
Average Aggregate
Number of Exercise Intrinsic
Exercise Price Range Options Price Value
---------------------------------------------------- ------------- ------------- ---------------
$16.10 to $21.78 1,089,472 $ 19.76 $ 43,124,000
$25.39 to $41.55 377,800 $ 36.17 $ 8,755,000
The total intrinsic value of stock options exercised during the three month
periods ended March 31, 2006 and 2005 was $9.4 million and $5.0 million,
respectively. The total intrinsic value of stock awards vested during the three
month periods ended March 31, 2006 was $288,000. The total cash received from
employees as a result of employee stock option exercises for the three month
periods ended March 31, 2006 and 2005 was $2.4 million and $4.2 million,
respectively. In connection with these exercises, the tax benefits realized for
the three months ended March 31, 2006 and 2005 were $3.3 million and $1.8
million, respectively. We settle employee stock options with newly issued
shares.
In connection with the adoption of SFAS 123(R), we reassessed our valuation
technique and related assumptions. We estimate the fair value of stock options
using the Black-Scholes valuation model, consistent with the provisions of SFAS
123(R), the Securities and Exchange Commission (SEC) Staff Accounting Bulletin
No. 107 and our prior period pro forma disclosure of net income including
stock-based compensation expense. Key input assumptions used to estimate the
fair value of stock options under the Black-Scholes model include the grant
price of the option, the expected term, volatility of our stock, the risk-free
interest rate and our expected dividend yield. We believe using the
Black-Scholes model and the related assumptions are appropriate in estimating
the fair value of our stock options granted. Estimates of fair value are not
intended to predict actual future events or the value ultimately realized by the
employees who receive the options. The ultimate value received by an employee
for options granted is not necessarily indicative of the reasonableness of the
estimate made by us in accordance with SFAS 123(R).
3. Capital Stock Split
On March 11, 2005, our Board of Directors approved a 2-for-1 stock split in
the form of a 100% stock dividend to shareholders of record at the close of
business on April 22, 2005. This stock split was paid May 11, 2005. Under
Delaware law, the par value of the capital stock remains $1 per share. Prior
period per share data have been restated to retroactively reflect the impact of
the stock split on the average number of shares outstanding.
4. Revenue Recognition
Both the VITAS segment and Roto-Rooter segment recognize service revenues
and sales when the earnings process has been completed. Generally, this occurs
when services are provided or products are delivered. VITAS recognizes revenue
at the estimated realizable amount due from third-party payers. Medicare
payments are subject to certain caps, as described 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.
As of March 31, 2006 and December 31, 2005, we had a $2.4 million accrual
recorded in current liabilities in the accompanying balance sheet for the
Medicare Cap related to the Phoenix facility for the 2005 measurement period.
None of VITAS' hospice programs are currently projected to exceed the Medicare
Cap for the 2006 measurement period.
8
5. Segments
Service revenues and sales and aftertax earnings by business segment are as
follows (in thousands):
Three months ended March 31,
-----------------------------------
2006 2005
----------------- ----------------
Service Revenues and Sales
--------------------------
VITAS $ 168,374 $ 145,990
Roto-Rooter 77,864 72,647
----------------- ----------------
Total $ 246,238 $ 218,637
================= ================
Aftertax Earnings
VITAS $ 10,857 $ 9,610
Roto-Rooter 7,201 7,310
---------------- ----------------
Total 18,058 16,920
Corporate (5,843) (9,015)
Discontinued operations - 211
---------------- ----------------
Net income $ 12,215 $ 8,116
================ ================
Historically, we have allocated stock-based compensation expense to the
segment that employs the individual receiving the stock-based compensation. In
connection with our adoption of SFAS 123(R), we re-assessed the classification
within our business segments of stock-based compensation expense and determined
that our chief decision maker analyzes stock-based compensation as a corporate
expense. Accordingly, all stock-based compensation expense for 2006 and 2005 has
been included as a corporate expense in the chart above.
6. Earnings per Share
Earnings per share are computed using the weighted average number of shares
of capital stock outstanding. Earnings and diluted earnings per share for 2006
and 2005 are computed as follows (in thousands, except per share data):
Income from Continuing Operations Net Income
------------------------------------------ -------------------------------------------
For the Three Months Ended Income Shares Income Income Shares Income per
March 31, (Numerator) (Denominator) per Share (Numerator) (Denominator) Share
--------------------------- ------------ -------------- ---------- ------------ -------------- ------------
2006
Earnings $ 12,215 26,044 $ 0.47 $ 12,215 26,044 $ 0.47
========== ============
Dilutive stock options - 590 - 590
Nonvested stock awards - 89 - 89
------------ -------------- ----------- -------------
Diluted earnings $ 12,215 26,723 $ 0.46 $ 12,215 26,723 $ 0.46
============ ============== =========== =========== ============= ============
2005
Earnings $ 7,905 25,152 $ 0.31 $ 8,116 25,152 $ 0.32
=========== ============
Dilutive stock options - 706 - 706
Nonvested stock awards - 52 - 52
------------ -------------- ---------- -------------
Diluted earnings $ 7,905 25,910 $ 0.31 $ 8,116 25,910 $ 0.31
============ ============== ============= ========== ============= ============
9
7. Other Income -- Net
Other income -- net comprises the following (in thousands):
Three Months Ended March 31,
-------------------------------
2006 2005
-------------- ---------------
Interest income $ 973 $ 650
Market gains on trading investments of
employee benefit trust 493 87
Loss on disposal of property and equipment (57) (29)
Other - net 86 19
-------------- ---------------
Total other income $ 1,495 $ 727
============== ===============
8. Other Current Liabilities
Other current liabilities as of March 31, 2006 and December 31, 2005
consist of the following (in thousands):
2006 2005
--------------- --------------
Accrued legal settlements 22,858 23,108
Accrued divestiture expenses 2,573 3,895
Other 17,023 21,255
---------------- --------------
Total other current liabilities $ 42,454 $ 48,258
================ ==============
9. 2002 Executive Long-Term Incentive Plan
During the first quarter of 2005, the price of our 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 $1.1 million
($695,000 aftertax).
No performance targets under the LTIP were reached in the first quarter of
2006. As such, no payouts were approved or made during the quarter ended March
31, 2006. As of March 31, 2006, no accrual was recorded for awards under the
earnings component or the remaining market price component of the LTIP since no
awards have been granted.
10. Long-term Debt and Extinguishment of Debt
On March 31, 2006, we repaid in full our $84.4 million term loan with
JPMorgan Chase Bank. The term loan was paid with $40.4 million of cash on hand
and the remainder with a draw on our revolving credit facility. At that time, we
also amended the $175 million revolving credit facility with JPMorgan Chase Bank
to reduce the commitment and annual fees and to reduce the floating interest
rate by approximately 50 basis points. The interest rate of the amended
revolving credit agreement is LIBOR plus 1.25%. The amended revolving credit
facility also includes an "accordion" feature that allows us the opportunity to
expand the facility by $50 million. In connection with the repayment of the term
loan, we recorded a write-off of unamortized debt issuance costs of $430,000.
The following is a schedule by year of required long-term debt payments as
of March 31, 2006 (in thousands):
March 2007 $ 207
March 2008 208
March 2009 159
March 2010 44,032
March 2011 150,000
----------
Total long-term debt $ 194,606
==========
10
We are in compliance with all debt covenants as of March 31, 2006. We have
issued $28.3 million in standby letters of credit as of March 31, 2006 mainly
for insurance purposes. Issued letters of credit reduce our available credit
under the revolving credit agreement. As of March 31, 2006, the Company has
approximately $103 million of unused lines of credit available and eligible to
be drawn down under its revolving credit facility, excluding the accordion
feature.
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 March 31, 2006, we
had notes receivable from its independent contractors totaling $2.4 million
(December 31, 2005-$2.6 million). In most cases these loans are fully or
partially secured by equipment owned by the contractor. The interest rates on
the loans range from 5% to 8% per annum and the remaining terms of the loans
range from two months to 5.4 years at March 31, 2006. During the quarter ended
March 31, 2006, we recorded revenues of $5.0 million (2005-$4.6 million) and
pretax profits of $2.0 million (2005-$1.7 million) from our independent
contractors.
We have adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 46R "Consolidation of Variable Interest Entities--an
interpretation of Accounting Research Bulletin No. 51 (revised)" ("FIN 46R")
relative to our contractual relationships with the independent contractors. FIN
46R requires the primary beneficiary of a Variable Interest Entity ("VIE") to
consolidate the accounts of the VIE. We have evaluated our relationships with
our independent contractors based upon guidance provided in FIN 46R and have
concluded that some of the contractors who have loans payable to us may be
VIE's. We believe consolidation, if required, of the accounts of any VIE's for
which we might be the primary beneficiary would not materially impact our
financial position, results of operations or cash flows.
12. Pension and Retirement Plans
All of the Company's plans that provide retirement and similar benefits are
defined contribution plans. Expenses for the Company's pension and
profit-sharing plans, ESOP's, excess benefit plans and other similar plans are
$2.4 million and $2.7 million for the three months ended March 31, 2006 and
2005, respectively.
13. Litigation
We are party to a class action lawsuit filed in the Third Judicial Circuit
Court of Madison County, Illinois in June of 2000 by Robert Harris, alleging
certain Roto-Rooter plumbing was performed by unlicensed employees. We contest
these allegations and believe them without merit. Plaintiff moved for
certification of a class of customers in 32 states who allegedly paid for
plumbing work performed by unlicensed employees. Plaintiff also moved for
partial summary judgment on grounds the licensed apprentice plumber who
installed his faucet did not work under the direct personal supervision of a
licensed master plumber. On June 19, 2002, the trial judge certified an
Illinois-only plaintiffs class and granted summary judgment for the named party
Plaintiff on the issue of liability, finding violation of the Illinois Plumbing
License Act and the Illinois Consumer Fraud Act through Roto-Rooter's
representation of the licensed apprentice as a plumber. The court has not ruled
on certification of a class in the remaining 31 states. In December 2004, we
reached a resolution of this matter with the Plaintiff. This proposed settlement
has been preliminarily approved by the court. We expect the parties to request
final approval during 2006. We accrued $3.1 million in 2004 as the anticipated
cost of settling this litigation.
Like other large California employers, our VITAS subsidiary faces
allegations of purported class-wide wage and hour violations. It is party to a
class action lawsuit filed in the Superior Court of California, Los Angeles
County, in April of 2004 by Ann Marie Costa, Ana Jimenez, Mariea Ruteaya and
Gracetta Wilson. This case alleges failure to pay overtime wages for hours
worked "off the clock" on administrative tasks, including voicemail retrieval,
time entry, travel to and from work, and pager response. This case also alleges
VITAS failed to provide meal and break periods to a purported class of
California nurses, home health aides and licensed clinical social workers. The
case also seeks payment of penalties, interest, and Plaintiffs' attorney fees.
VITAS contested these allegations.
Plaintiff moved for class certification, and VITAS opposed this motion. We
have reached an agreement with the Plaintiff class in order to avoid the
uncertainty of litigation and the diversion of resources and personnel resulting
from the litigation. In connection with our acquisition of VITAS in February
2004, we recorded a liability of $2.3 million on VITAS' opening balance sheet
for this case. At that time, this represented our best estimate of our exposure
in the matter. As a result of the tentative resolution, we recorded a pretax
charge of $17.4 million ($10.8 million aftertax) in the fourth quarter of 2005,
representing the portion of this settlement not accounted for on Vitas' opening
balance sheet. These amounts are inclusive of Plaintiffs' class attorneys' fees
and the costs of settlement administration. On April 24, 2006, the court granted
preliminary approval of the settlement. The settlement remains subject to final
court approval.
11
In the normal course of business, we are a party to various claims and
legal proceedings. We record a reserve for these matters when an adverse outcome
is probable and the amount of the potential liability is reasonably estimable.
14. OIG Investigation
On April 7, 2005, we announced the Office of Inspector General ("OIG") for
the Department of Health and Human Services served VITAS with civil subpoenas
relating to VITAS' alleged failure to appropriately bill Medicare and Medicaid
for hospice services. As part of this investigation, the OIG selected medical
records for 320 past and current patients from VITAS' three largest programs for
review. It also sought policies and procedures dating back to 1998 covering
admissions, certifications, recertifications and discharges. During the third
quarter of 2005, the OIG requested additional information from us. The U.S.
Attorney General has since provided us with a copy of a qui tam complaint filed
under seal in U.S. District Court for the Southern District of Florida. The
complaint and all filings in the qui tam action remain under seal. We are
conferring with the U.S. Attorney regarding our defenses to the complaint
allegations. The U.S. Attorney has not decided whether to intervene in the qui
tam action. We have incurred pretax expense related to complying with OIG
requests of $132,000 for the quarter ended March 31, 2006.
The government continues to investigate the complaint's allegations. We are
unable to predict the outcome of this matter or the impact, if any, that the
investigation may have on the business, results of operations, liquidity or
capital resources. Regardless of outcome, responding to the subpoenas can
adversely affect us through defense costs, diversion of our time and related
publicity.
15. Related Party 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 $6.7
million for the first three months of 2006 and has accounts payable to OCR of
$2.0 million at March 31, 2006. Mr. E. L. Hutton is non-executive Chairman and a
director of the Company and OCR. Mr. Joel F. Gemunder, President and Chief
Executive Officer of OCR, Mr. Charles H. Erhart, Jr. and Ms. Sandra Laney are
directors of both OCR and the Company. Mr. Kevin J. McNamara, President, Chief
Executive Officer and director of the Company, is a director emeritus of OCR. We
believe that the terms of the Agreement are no less favorable to VITAS than we
could negotiate with an unrelated party.
16. Cash Overdrafts Payable
Included in accounts payable at March 31, 2006 are cash overdrafts payable
of $8.8 million (December 31, 2005 - $8.0 million).
17. Recent Accounting Statements
In February 2006, the FASB issued FASB Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments", which nullifies and amends various
accounting guidance relating to accounting for derivative instruments and
securitization transactions. In general, these changes will reduce the
operational complexity associated with bifurcating embedded derivatives, and
increase the number of beneficial interests in securitization transactions. This
statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15, 2006.
Because we do not have any material derivative instruments or securitization
transactions, we believe there will be no material impact on our financial
condition, results of operations or cash flows upon adoption.
12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Executive Summary
- -----------------
We operate through our two wholly owned subsidiaries, VITAS Healthcare
Corporation and Roto-Rooter Group, Inc. VITAS focuses on hospice care that helps
make terminally ill patients' final days as comfortable as possible. Through its
team of doctors, nurses, home health aides, social workers, clergy and
volunteers, VITAS provides direct medical services to patients, as well as
spiritual and emotional counseling to both patients and their families.
Roto-Rooter's services are focused on providing plumbing and drain cleaning
services to both residential and commercial customers. Through its network of
company-owned branches, independent contractors and franchisees, Roto-Rooter
offers plumbing and drain cleaning service to over 90% of the U.S. population.
The following is a summary of the key operating results for the three
months ended March 31, 2006 and 2005 (in thousands except per share amounts):
2006 2005
------------ ------------
Consolidated service revenues and sales $ 246,238 $ 218,637
Consolidated income from continuing operations $ 12,215 $ 7,905
Diluted EPS from continuing operations $ 0.46 $ 0.31
The increase in consolidated service revenues and sales was driven by a 15%
increase at VITAS and a 7% increase at Roto-Rooter. The increase at VITAS was
primarily the result of a 10% increase in average daily census (ADC) from the
first quarter of 2005 and the October 1, 2005 Medicare reimbursement rate
increase of approximately 3%. The increase at Roto-Rooter was driven primarily
by a 2% increase in job count combined with an approximate 5% price increase.
Consolidated income from continuing operations and diluted EPS from continuing
operations increased as a result of the higher service revenues and sales, which
allowed us to further leverage our current cost structure. Consolidated income
from continuing operations as a percent of service revenues and sales was 5.0%
for the three months ended March 31, 2006 versus 3.6% for the same period of
2005.
Effective January 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards No. 123, revised ("SFAS 123(R)") which
establishes accounting for stock-based compensation for employees. Under SFAS
123(R), stock-based compensation cost is measured at the grant date, based on
the fair value of the award and recognized as expense over the employee's
requisite service period. We previously applied Accounting Principles Board
Opinion No. 25 and provided the pro-forma disclosures required by Statement of
Financial Accounting Standards No. 123. We elected to adopt the modified
prospective transition method as provided by SFAS 123(R). Accordingly,
previously reported financial statement amounts have not been restated. We have
determined that the Black-Scholes option pricing model to calculate the fair
value of our stock options is appropriate in the circumstances. We also used the
Black-Scholes model for purposes of the pro-forma disclosures under SFAS 123.
There was no material impact on our financial position, results of operations or
cash flows as a result of the adoption of SFAS 123(R).
Financial Condition
- -------------------
Liquidity and Capital Resources
- -------------------------------
Significant changes in the balance sheet accounts from December 31, 2005 to
March 31, 2006 include the following:
o The $11.4 million decline in cash and cash equivalents from $57.1
million at December 31, 2005 to $45.7 million at March 31, 2006 is
primarily attributable to the use of $40 million in cash to repay our
$84.4 million term note. The cash used to reduce total long-term debt
was partially offset by cash provided by operations.
o The decrease in accounts receivable from $95.1 million at December 31,
2005 to $71.9 million at March 31, 2006 is due mainly to the timing of
payments received from Medicare and reducing the backlog of
reimbursements due from Medicare at acquired and new start programs.
New start and acquired programs must receive Medicare program
certification prior to billing for Medicare eligible services. During
2005, the backlog increased due to multiple new start programs and
acquisitions.
o The reduction in long-term debt from $234.1 million at December 31,
2005 to $194.4 million at March 31, 2006 resulted from repayment of
our $84.4 million term loan with JPMorgan Chase in March 2006
partially offset by borrowings on our revolving line of credit to fund
a portion of the repayment.
13
Net cash provided by continuing operations increased $36.8 million from a
use of cash by continuing operations of $4.1 million for the first three months
of 2005 to a source of cash of $32.7 million for the first three months of 2006,
due primarily to the decrease in accounts receivable described above and the
increase in net income.
We have issued $28.3 million in standby letters of credit as of March 31,
2006 mainly for insurance purposes. Issued letters of credit reduce our
available credit under the revolving credit agreement. At March 31, 2006, we had
approximately $103 million available lines of credit eligible to be drawn down
under our amended credit agreement with JPMorgan Chase, excluding the $50
million accordion feature. 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 we are
required to meet various financial covenants, to be tested quarterly. In
connection therewith, we are in compliance with all financial and other debt
covenants as of March 31, 2006 and anticipate remaining in compliance throughout
2006.
In connection with the sale of Patient Care in 2002, $5.0 million of the
cash purchase price was placed in escrow pending collection of third-party payer
receivables on Patient Care's balance sheet at the sale date. To date, $4.2
million has been returned and the remainder is being withheld pending the
settlement of certain third-party payer claims. Based on Patient Care's
collection history, we believe the significant majority of the disputed amounts
will be resolved in Patient Care's favor and most of the withheld escrow will be
returned to us. We have a long-term receivable due from Patient Care of $12.5
million. As of March 31, 2006, Patient Care is current on all payments due
related to the long-term receivable. We also have current accounts receivable
from Patient Care for the post-closing balance sheet valuation and for expenses
paid by us after closing on Patient Care's behalf of $4.0 million. We are in
litigation with Patient Care over various issues, including the collection of
these current amounts. We believe these balances represent valid claims, are
fairly stated and are fully collectible; nonetheless, an unfavorable
determination by the court could result in the write-off of all or a portion of
these balances.
We are party to a class action lawsuit filed in the Third Judicial Circuit
Court of Madison County, Illinois in June of 2000 by Robert Harris, alleging
certain Roto-Rooter plumbing was performed by unlicensed employees. We contest
these allegations and believe them without merit. Plaintiff moved for
certification of a class of customers in 32 states who allegedly paid for
plumbing work performed by unlicensed employees. Plaintiff also moved for
partial summary judgment on grounds the licensed apprentice plumber who
installed his faucet did not work under the direct personal supervision of a
licensed master plumber. On June 19, 2002, the trial judge certified an
Illinois-only plaintiffs class and granted summary judgment for the named party
Plaintiff on the issue of liability, finding violation of the Illinois Plumbing
License Act and the Illinois Consumer Fraud Act through Roto-Rooter's
representation of the licensed apprentice as a plumber. The court has not ruled
on certification of a class in the remaining 31 states. In December 2004, we
reached a resolution of this matter with the Plaintiff. This proposed settlement
has been preliminarily approved by the court. We expect the parties to request
final approval during 2006. We accrued $3.1 million in 2004 as the anticipated
cost of settling this litigation.
Like other large California employers, our VITAS subsidiary faces
allegations of purported class-wide wage and hour violations. It is party to a
class action lawsuit filed in the Superior Court of California, Los Angeles
County, in April of 2004 by Ann Marie Costa, Ana Jimenez, Mariea Ruteaya and
Gracetta Wilson. This case alleges failure to pay overtime wages for hours
worked "off the clock" on administrative tasks, including voicemail retrieval,
time entry, travel to and from work, and pager response. This case also alleges
VITAS failed to provide meal and break periods to a purported class of
California nurses, home health aides and licensed clinical social workers. The
case also seeks payment of penalties, interest, and Plaintiffs' attorney fees.
VITAS contested these allegations.
Plaintiff moved for class certification, and VITAS opposed this motion. We
have reached an agreement with the Plaintiff class in order to avoid the
uncertainty of litigation and the diversion of resources and personnel resulting
from the litigation. In connection with our acquisition of VITAS in February
2004, we recorded a liability of $2.3 million on VITAS' opening balance sheet
for this case. At that time, this represented our best estimate of our exposure
in the matter. As a result of the tentative resolution, we recorded a pretax
charge of $17.4 million ($10.8 million aftertax), representing the portion of
this settlement not accounted for on Vitas' opening balance sheet in 2005. These
amounts are inclusive of Plaintiffs' class attorneys' fees and the costs of
settlement administration. On April 24, 2006, the court granted preliminary
approval of the settlement. The settlement remains subject to final court
approval.
On April 7, 2005, we announced the Office of Inspector General ("OIG") for
the Department of Health and Human Services served VITAS with civil subpoenas
relating to VITAS' alleged failure to appropriately bill Medicare and Medicaid
for hospice services. As part of this investigation, the OIG selected medical
records for 320 past and current patients from VITAS' three largest programs for
review. It also sought policies and procedures dating back to 1998 covering
admissions, certifications, recertifications and discharges. During the third
quarter of 2005, the OIG requested additional information from us. The U.S.
Attorney General has since provided us with a copy of a qui tam complaint filed
under seal in U.S. District Court for the Southern District of Florida. The
complaint and all filings in the qui tam action remain under seal. We are
conferring with the U.S. Attorney regarding our defenses to the complaint
allegations. The U.S. Attorney has not decided whether to intervene in the qui
tam action. We have incurred pretax expense related to complying with OIG
requests of $132,000 for the three months ended March 31, 2006.
14
The government continues to investigate the complaint's allegations. We are
unable to predict the outcome of this matter or the impact, if any, that the
investigation may have on our business, results of operations, liquidity or
capital resources. Regardless of outcome, responding to the subpoenas can
adversely affect us through defense costs, diversion of our time and related
publicity.
Results of Operations
First Quarter 2006 versus First Quarter 2005-Consolidated Results
- -----------------------------------------------------------------
Our service revenues and sales for the first quarter of 2006 increased
12.6% versus revenues for the first quarter of 2005. Of this increase, $22.4
million was attributable to VITAS and $5.2 million was attributable to
Roto-Rooter (dollar amounts in thousands):
Increase/(Decrease)
---------------------------------------
Amount Percent
---------------- --------------------
VITAS
Routine Homecare $ 14,586 14.5%
Continuous Care 5,538 22.8%
General Inpatient 2,260 10.8%
Roto-Rooter
Plumbing 1,157 4.1%
Drain Cleaning 3,253 9.8%
Other 807 7.3%
----------------
Total $ 27,601 12.6%
================
The increase in VITAS' revenues for the first quarter of 2006 versus the
first quarter of 2005 is attributable to increases in ADC of 9.8%, 16.1% and
7.5%, respectively, for routine homecare, continuous care and general inpatient.
ADC is a key measure we use to monitor volume growth in our hospice business.
Changes in total program admissions and average length of stay for our patients
are the main drivers of changes in ADC. The remainder of the revenue increases
is due primarily to the annual increase in Medicare reimbursement rates in the
fourth quarter of 2005. In excess of 90% of VITAS' revenues for the period were
from Medicare and Medicaid.
The increase in the plumbing revenues for the first quarter of 2006 versus
2005 comprises a 1.3% increase in the number of jobs performed and a 2.8%
increase in the average price per job. The increase in drain cleaning revenues
for the first quarter of 2006 versus 2005 comprised a 2.3% increase in the
number of jobs and a 7.5% increase in the average price per job. The increase in
other revenues is attributable primarily to increased revenue from the
independent contractor operations.
The consolidated gross margin was 27.8% in the first quarter of 2006 as
compared with 30.0% in the first quarter of 2005. On a segment basis, VITAS'
gross margin was 19.6% in the first quarter of 2006 and 21.1% in the first
quarter of 2005. The decrease in VITAS' gross margin in 2006 is primarily
attributable to an unusual increase in seasonal discharge rates in January and
February 2006 coupled with excess patient care capacity. In the hospice care
industry, discharge rates in the first quarter are typically higher than at
other times during the year. However, the discharge rate in the first quarter of
2006 was higher and took longer to stabilize than expected. The increase in
discharge rates, offset by record admissions, caused ADC to grow at a slower
pace than anticipated during the quarter. We determined that the increase in the
discharge rate was temporary and therefore, did not modify existing staffing
levels, which were expanded in late 2005 to accommodate our growing ADC. The
combination of these factors led to a decrease in gross margin in January and
February 2006. Discharge rates and gross margin returned to more historic levels
in March 2006. Roto-Rooter segment's gross margin was 45.5% in the first quarter
of 2006 and 48.1% in the first quarter of 2005. The decrease in Roto-Rooter's
gross margin in 2006 is primarily attributable to a benefit realized in the
first quarter of 2005 of $1.6 million (pretax) related to prior period casualty
insurance claims.
15
Selling, general and administrative expenses ("SG&A") for the first quarter
of 2006 were $38.5 million, an increase of $556,000 (1.5%) versus the first
quarter of 2005. The increase is largely due to higher revenues by both
segments. The increase is partially offset by lower stock-based compensation
costs of $1.1 million related to the first quarter 2005 LTIP payout.
Income from operations increased $1.6 million from $22.7 million in the
first quarter of 2005 to $24.3 million in the first quarter of 2006. The
increase is attributable primarily to the rate of SG&A growth being considerably
lower than the rate of service revenues and sales growth. The decrease in the
consolidated gross margin noted above partially offset the increase.
Interest expense, substantially all of which is incurred at Corporate,
declined from $5.8 million in the first quarter of 2005 to $5.3 million in the
first quarter of 2006. 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.
Loss on extinguishment of debt decreased from $4.0 million in the first
quarter of 2005 to $430,000 in the first quarter of 2006. The 2005 loss on
extinguishment relates to the refinancing in February 2005. The loss on
extinguishment in 2006 relates to the early repayment of our $84.4 million term
loan in March 2006.
Other income-net increased from $727,000 in the first quarter of 2005 to
$1.5 million in the first quarter of 2006. The increase is attributable to
higher income from market valuation adjustments and realized gains on trading
investments of employee benefit trusts in 2006 versus 2005 and higher interest
income. The realized gains and market valuation adjustments are offset by
expenses in the SG&A category of the statement of income.
Our effective income tax rate decreased from 41.8% in the first quarter of
2005 to 39.1% in the first quarter of 2006. The decrease in our effective tax
rate relates mainly to certain state income tax planning strategies implemented
in 2005 that reduced the overall effective rate by 1.9%.
Income from continuing operations increased $4.3 million or 54.5% in the
first quarter of 2006 as compared to the first quarter of 2005. Net income
increased $4.1 million or 50.5% in the first quarter of 2006 as compared to the
first quarter of 2005. Income from continuing operations and net income for both
periods included the following aftertax special items/adjustments that
increased/(reduced) aftertax earnings (in thousands):
Three Months Ended March 31,
----------------------------------
2006 2005
---------------- -----------------
Loss on extinguishment of debt $ (273) $ (2,523)
Legal expenses of OIG investigation (82) -
Prior period insurance adjustment - 1,014
LTIP - (695)
Accelerated stock option vesting - (137)
---------------- -----------------
$ (355)$ (2,341)
================ =================
16
First quarter 2006 versus First quarter 2005-Segment Results
- ------------------------------------------------------------
The change in aftertax earnings for the first quarter of 2006 versus the
first quarter of 2005 is due to (in thousands):
Net Income Increase/(Decrease)
--------------------------------------
Amount Percent
-------------------- -----------------
VITAS $ 1,247 13.0%
Roto-Rooter (109) -1.5%
Corporate 3,172 35.2%
Discontinued operations (211) N.D.
--------------------
$ 4,099 50.5%
====================
The decrease in Roto-Rooter net income is due to the $1.0 million insurance
adjustment recorded in 2005 for prior period claims experience. No such
adjustment was recorded in the first quarter of 2006.
The following chart updates historical unaudited financial and operating
data of VITAS, acquired in February 2004 (dollars in thousands, except dollars
per patient day):
17
First Quarter
----------------------
2006 2005
--------- ---------
OPERATING STATISTICS
Net revenue
Homecare $115,458 $100,872
Inpatient 23,107 20,847
Continuous care 29,809 24,271
--------- ---------
Total $168,374 (a)$145,990
========= =========
Net revenue as a percent of total
Homecare 68.6 % 69.1 %
Inpatient 13.7 14.3
Continuous care 17.7 16.6
------------ ---------
Total 100.0 % 100.0 %
============ =========
Average daily census ("ADC") (days)
Homecare 6,112 5,428
Nursing home 3,366 3,201
-------- --------
Routine homecare 9,478 8,629
Inpatient 432 402
Continuous care 570 492
-------- --------
Total 10,480 9,523
======== ========
Total Admissions 13,896 12,948
Total Discharges 13,411 12,588
Average length of stay (days) 72.4 66.2
Median length of stay (days) 12.0 11.0
ADC by major diagnosis
Neurological 33.1 % 31.7 %
Cancer 20.5 21.5
Cardio 14.8 15.3
Respiratory 7.1 7.1
Other 24.5 24.4
------------ ---------
Total 100.0 % 100.0 %
============ =========
Admissions by major diagnosis
Neurological 20.5 % 19.7 %
Cancer 33.7 34.3
Cardio 13.8 14.0
Respiratory 7.9 8.4
Other 24.1 23.6
------------ ---------
Total 100.0 % 100.0 %
============ =========
Direct patient care margins (b)
Routine homecare 47.5 % 49.9 %
Inpatient 23.1 22.9
Continuous care 18.3 17.5
Homecare margin drivers
(dollars per patient day)
Labor costs $ 51.25 $ 45.71
Drug costs 7.43 7.48
Home medical equipment 5.56 5.47
Medical supplies 2.14 2.15
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 246.67 $ 238.31
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 454.53 $ 433.18
Bad debt expense as a percent of revenues 0.9 % 0.9 %
Accounts receivable --
days of revenue outstanding 39.4 39.5
- --------------------------------------------------------------------------------
(a) VITAS has five large (greater than 450 ADC), 15 medium (greater than
200 but less than 450 ADC) and 20 small (less than 200 ADC) hospice
programs. There are no programs that have an estimated Medicare Cap
cushion of less than 10% for the 2006 measurement period.
(b) Amounts exclude indirect patient care and administrative costs.
18
Recent Accounting Statements
- ----------------------------
In February 2006, the FASB issued FASB Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments", which nullifies and amends various
accounting guidance relating to accounting for derivative instruments and
securitization transactions. In general, these changes will reduce the
operational complexity associated with bifurcating embedded derivatives, and
increase the number of beneficial interests in securitization transactions. This
statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15, 2006.
Because we do not have any material derivative instruments or securitization
transactions, we believe there will be no material impact on our financial
condition, results of operations or cash flows upon adoption.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Regarding Forward-Looking Information
- -------------------------------------
In addition to historical information, this report contains forward-looking
statements and performance trends that are based upon assumptions subject to
certain known and unknown risks, uncertainties, contingencies and other factors.
Variances in any or all of the risks, uncertainties, contingencies, and other
factors from our assumptions could cause actual results to differ materially
from these forward-looking statements and trends. Our ability to deal with the
unknown outcomes of these events, many of which are beyond our control, may
affect the reliability of projections and other financial matters.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposure relates to interest rate risk exposure
through variable interest rate borrowings. At March 31, 2006, we had a total of
$44 million of variable rate debt outstanding. Should the interest rate on this
debt increase 100 basis points, our annual interest expense would increase
$440,000. The quoted market value of our 8.75% fixed rate senior notes on March
31, 2006 is $159.8 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 March 31, 2006.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision of our President and
Chief Executive Officer and with the participation of the Vice President and
Chief Financial Officer and the Vice President and Controller, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, the President and Chief Executive Officer, Vice President and Chief
Financial Officer and Vice President and Controller have concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report. There has been no change in our internal control over
financial reporting that occurred during the quarter covered by this report that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 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.
19
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: May 9, 2006 By: Kevin J. McNamara
--------------------------- -----------------------------------------
Kevin J. McNamara
(President and Chief Executive Officer)
Dated: May 9, 2006 By: David P. Williams
--------------------------- -----------------------------------------
David P. Williams
(Vice President and Chief Financial
Officer)
Dated: May 9, 2006 By: Arthur V. Tucker, Jr.
--------------------------- -----------------------------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
20
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.
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: May 9, 2006 /s/ Kevin J. McNamara
----------- ------------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
E-1
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.
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: May 9, 2006 /s/ David P. Williams
----------- ------------------------
David P. Williams
(Vice President and Chief Financial Officer)
E-2
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.
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: May 9, 2006 /s/ Arthur V. Tucker, Jr.
----------- -------------------------
Arthur V. Tucker, Jr.
(Vice President and
Controller)
E-3
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 March 31, 2006 ("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: May 9, 2006 /s/ Kevin J. McNamara
----------- ------------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
E-4
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 March 31, 2006 ("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: May 9, 2006 /s/ David P. Williams
----------- ------------------------
David P. Williams
(Vice President and Chief Financial Officer)
E-5
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 March 31, 2006 ("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: May 9, 2006 /s/ Arthur V. Tucker, Jr.
----------- -------------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
E-6