a50974295.htm
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 September 30, 2014
o 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 incorporation or organization)
|
(IRS Employer Identification No.)
|
255 E. Fifth Street, Suite 2600, Cincinnati, Ohio
|
45202
|
(Address of principal executive offices)
|
(Zip code)
|
(513) 762-6690
(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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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
|
o
|
Non-accelerated
filer
|
o
|
Smaller reporting
company
|
o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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 $1 Par Value
|
17,010,464 Shares
|
September 30, 2014
|
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES
Index
PART I. FINANCIAL INFORMATION
|
|
Item 1. Financial Statements
|
|
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
|
|
|
|
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
September 30, 2014
|
|
December 31, 2013
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
18,562 |
|
|
$ |
84,418 |
|
Accounts receivable less allowances of $13,887 (2013 - $12,590)
|
|
|
132,340 |
|
|
|
91,770 |
|
Inventories
|
|
|
6,385 |
|
|
|
6,703 |
|
Current deferred income taxes
|
|
|
14,543 |
|
|
|
20,257 |
|
Prepaid income taxes
|
|
|
3,488 |
|
|
|
3,690 |
|
Prepaid expenses
|
|
|
13,420 |
|
|
|
17,818 |
|
Total current assets
|
|
|
188,738 |
|
|
|
224,656 |
|
Investments of deferred compensation plans
|
|
|
47,780 |
|
|
|
42,465 |
|
Properties and equipment, at cost, less accumulated depreciation of $187,983 (2013 - $180,550)
|
|
|
101,845 |
|
|
|
92,955 |
|
Identifiable intangible assets less accumulated amortization of $32,644 (2013 - $32,055)
|
|
|
56,158 |
|
|
|
56,556 |
|
Goodwill
|
|
|
466,844 |
|
|
|
466,871 |
|
Other assets
|
|
|
8,143 |
|
|
|
10,198 |
|
Total Assets
|
|
$ |
869,508 |
|
|
$ |
893,701 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
57,067 |
|
|
$ |
41,758 |
|
Current portion of long-term debt
|
|
|
20,425 |
|
|
|
183,564 |
|
Income taxes
|
|
|
4,608 |
|
|
|
111 |
|
Accrued insurance
|
|
|
39,927 |
|
|
|
41,859 |
|
Accrued compensation
|
|
|
50,412 |
|
|
|
48,323 |
|
Accrued legal
|
|
|
685 |
|
|
|
23,210 |
|
Other current liabilities
|
|
|
24,131 |
|
|
|
25,161 |
|
Total current liabilities
|
|
|
197,255 |
|
|
|
363,986 |
|
Deferred income taxes
|
|
|
27,853 |
|
|
|
27,301 |
|
Long-term debt
|
|
|
153,125 |
|
|
|
- |
|
Deferred compensation liabilities
|
|
|
47,736 |
|
|
|
42,348 |
|
Other liabilities
|
|
|
11,108 |
|
|
|
11,176 |
|
Total Liabilities
|
|
|
437,077 |
|
|
|
444,811 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Capital stock - authorized 80,000,000 shares $1 par; issued 33,199,078 shares (2013 - 32,245,226 shares)
|
|
|
33,199 |
|
|
|
32,245 |
|
Paid-in capital
|
|
|
528,973 |
|
|
|
481,011 |
|
Retained earnings
|
|
|
745,077 |
|
|
|
686,114 |
|
Treasury stock - 16,287,526 shares (2013 - 14,660,427)
|
|
|
(877,067 |
) |
|
|
(752,634 |
) |
Deferred compensation payable in Company stock
|
|
|
2,249 |
|
|
|
2,154 |
|
Total Stockholders' Equity
|
|
|
432,431 |
|
|
|
448,890 |
|
Total Liabilities and Stockholders' Equity
|
|
$ |
869,508 |
|
|
$ |
893,701 |
|
See accompanying notes to unaudited consolidated financial statements.
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Service revenues and sales
|
|
$ |
358,389 |
|
|
$ |
340,886 |
|
|
$ |
1,076,871 |
|
|
$ |
1,064,725 |
|
Cost of services provided and goods sold (excluding depreciation)
|
|
|
256,445 |
|
|
|
243,184 |
|
|
|
771,271 |
|
|
|
762,850 |
|
Selling, general and administrative expenses
|
|
|
53,566 |
|
|
|
48,870 |
|
|
|
162,886 |
|
|
|
157,537 |
|
Depreciation
|
|
|
7,450 |
|
|
|
6,971 |
|
|
|
21,871 |
|
|
|
20,665 |
|
Amortization
|
|
|
717 |
|
|
|
1,190 |
|
|
|
2,461 |
|
|
|
3,498 |
|
Other operating expenses
|
|
|
- |
|
|
|
11,461 |
|
|
|
- |
|
|
|
26,221 |
|
Total costs and expenses
|
|
|
318,178 |
|
|
|
311,676 |
|
|
|
958,489 |
|
|
|
970,771 |
|
Income from operations
|
|
|
40,211 |
|
|
|
29,210 |
|
|
|
118,382 |
|
|
|
93,954 |
|
Interest expense
|
|
|
(980 |
) |
|
|
(3,500 |
) |
|
|
(7,224 |
) |
|
|
(11,291 |
) |
Other income - net
|
|
|
705 |
|
|
|
(90 |
) |
|
|
2,277 |
|
|
|
3,312 |
|
Income before income taxes
|
|
|
39,936 |
|
|
|
25,620 |
|
|
|
113,435 |
|
|
|
85,975 |
|
Income taxes
|
|
|
(15,351 |
) |
|
|
(8,188 |
) |
|
|
(43,913 |
) |
|
|
(31,657 |
) |
Net income
|
|
$ |
24,585 |
|
|
$ |
17,432 |
|
|
$ |
69,522 |
|
|
$ |
54,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.44 |
|
|
$ |
0.96 |
|
|
$ |
4.03 |
|
|
$ |
2.95 |
|
Average number of shares outstanding
|
|
|
17,039 |
|
|
|
18,184 |
|
|
|
17,263 |
|
|
|
18,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.39 |
|
|
$ |
0.94 |
|
|
$ |
3.87 |
|
|
$ |
2.89 |
|
Average number of shares outstanding
|
|
|
17,627 |
|
|
|
18,522 |
|
|
|
17,968 |
|
|
|
18,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Per Share
|
|
$ |
0.22 |
|
|
$ |
0.20 |
|
|
$ |
0.62 |
|
|
$ |
0.56 |
|
See accompanying notes to unaudited consolidated financial statements.
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
|
|
|
|
(in thousands)
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2014
|
|
2013
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
Net income
|
|
$ |
69,522 |
|
|
$ |
54,318 |
|
Adjustments to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
24,332 |
|
|
|
24,163 |
|
Deferred income taxes
|
|
|
5,630 |
|
|
|
(11,681 |
) |
Provision for uncollectible accounts receivable
|
|
|
9,573 |
|
|
|
8,211 |
|
Amortization of discount on convertible notes
|
|
|
3,392 |
|
|
|
6,450 |
|
Stock option expense
|
|
|
3,430 |
|
|
|
4,732 |
|
Amortization of debt issuance costs
|
|
|
697 |
|
|
|
1,421 |
|
Noncash long-term incentive compensation
|
|
|
1,988 |
|
|
|
1,161 |
|
Changes in operating assets and liabilities, excluding
|
|
|
|
|
|
|
|
|
amounts acquired in business combinations:
|
|
|
|
|
|
|
|
|
Decrease/(increase) in accounts receivable
|
|
|
(50,027 |
) |
|
|
5,293 |
|
Decrease in inventories
|
|
|
318 |
|
|
|
329 |
|
Decrease/(increase) in prepaid expenses
|
|
|
4,398 |
|
|
|
(6,183 |
) |
Increase/(decrease) in accounts payable and other current liabilities
|
|
|
(29,680 |
) |
|
|
48,967 |
|
Increase in income taxes
|
|
|
8,186 |
|
|
|
1,923 |
|
Increase in other assets
|
|
|
(3,138 |
) |
|
|
(5,002 |
) |
Increase in other liabilities
|
|
|
5,370 |
|
|
|
3,978 |
|
Excess tax benefit on share-based compensation
|
|
|
(3,737 |
) |
|
|
(2,507 |
) |
Other sources
|
|
|
755 |
|
|
|
285 |
|
Net cash provided by operating activities
|
|
|
51,009 |
|
|
|
135,858 |
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(31,745 |
) |
|
|
(18,887 |
) |
Business combinations, net of cash acquired
|
|
|
(250 |
) |
|
|
(2,210 |
) |
Other sources
|
|
|
189 |
|
|
|
139 |
|
Net cash used by investing activities
|
|
|
(31,806 |
) |
|
|
(20,958 |
) |
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from revolving line of credit
|
|
|
308,600 |
|
|
|
- |
|
Payments on revolving line of credit
|
|
|
(233,800 |
) |
|
|
- |
|
Payments on other long-term debt
|
|
|
(188,206 |
) |
|
|
- |
|
Proceeds from other long-term debt
|
|
|
100,000 |
|
|
|
- |
|
Purchases of treasury stock
|
|
|
(99,103 |
) |
|
|
(89,611 |
) |
Dividends paid
|
|
|
(10,558 |
) |
|
|
(10,459 |
) |
Capital stock surrendered to pay taxes on stock-based compensation
|
|
|
(6,121 |
) |
|
|
(4,280 |
) |
Retirement of warrants
|
|
|
(2,645 |
) |
|
|
- |
|
Proceeds from exercise of stock options
|
|
|
22,123 |
|
|
|
13,125 |
|
Excess tax benefit on share-based compensation
|
|
|
3,737 |
|
|
|
2,507 |
|
Increase/(decrease) in cash overdrafts payable
|
|
|
22,233 |
|
|
|
(10,928 |
) |
Debt issuance costs
|
|
|
(939 |
) |
|
|
(1,108 |
) |
Other uses
|
|
|
(380 |
) |
|
|
(473 |
) |
Net cash used by financing activities
|
|
|
(85,059 |
) |
|
|
(101,227 |
) |
Increase/(Decrease) in Cash and Cash Equivalents
|
|
|
(65,856 |
) |
|
|
13,673 |
|
Cash and cash equivalents at beginning of year
|
|
|
84,418 |
|
|
|
69,531 |
|
Cash and cash equivalents at end of period
|
|
$ |
18,562 |
|
|
$ |
83,204 |
|
See accompanying notes to unaudited consolidated financial statements.
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
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 (“GAAP”) for complete financial statements. The December 31, 2013 balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, in our opinion, the financial statements presented herein contain all adjustments, consisting only of normal recurring adjustments, necessary to state 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 audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.
2. Revenue Recognition
Both the VITAS segment and the 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 limitations, as described below.
We actively monitor each of our hospice programs, by provider number, as to their specific admission, discharge rate and median length of stay data in an attempt to determine whether they are likely to exceed the annual per-beneficiary Medicare cap (“Medicare cap”). Should we determine that revenues for a program are likely to exceed the Medicare cap based on projected trends, we attempt to institute corrective action to influence the patient mix or to increase patient admissions. However, should we project our corrective action will not prevent that program from exceeding its Medicare cap, we estimate the amount of revenue recognized during the period that will require repayment to the Federal government under the Medicare cap and record the amount as a reduction to patient revenue.
During the third quarter of 2014, we recorded $2.5 million Medicare cap liability for two programs’ projected 2014 measurement period liability.
During the nine months ended September 30, 2014 we recorded a net Medicare cap liability of $1.8 million for two programs’ projected 2014 measurement period liability offset by the reversal of Medicare cap liability for amounts recorded in the fourth quarter of 2013 for projected 2014 measurement period liability. Also during the nine months ended September 30, 2014, we received notice from a third party intermediary for amounts accrued related to the 2013 measurement period. As a result we repaid $3.4 million.
Shown below is the Medicare cap liability activity for the fiscal periods ended (in thousands):
|
|
September 30,
|
|
|
2014
|
|
2013
|
Beginning balance January 1,
|
|
$ |
8,260 |
|
|
$ |
1,261 |
|
2014 measurement period
|
|
|
1,796 |
|
|
|
- |
|
2013 measurement period
|
|
|
- |
|
|
|
3,161 |
|
Payments
|
|
|
(3,439 |
) |
|
|
- |
|
Ending balance September 30,
|
|
$ |
6,617 |
|
|
$ |
4,422 |
|
Vitas provides charity care, in certain circumstances, to patients without charge when management of the hospice program determines, at the time services are performed, that the patient does not have the financial wherewithal to make payment. There is no revenue or associated accounts receivable in the accompanying consolidated financial statements related to charity care. The cost of charity care is calculated by taking the ratio of charity care days to total days of care and multiplying by total cost of care. The cost of charity care is as follows (in thousands):
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
2014
|
|
|
2013 |
|
|
2014
|
|
|
2013
|
|
$ |
1,827 |
|
|
$ |
1,909 |
|
|
$ |
5,518 |
|
|
$ |
5,793 |
|
3. Segments
Service revenues and sales and after-tax earnings by business segment are as follows (in thousands):
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Service Revenues and Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
VITAS
|
|
$ |
265,384 |
|
|
$ |
254,001 |
|
|
$ |
789,822 |
|
|
$ |
788,896 |
|
Roto-Rooter
|
|
|
93,005 |
|
|
|
86,885 |
|
|
|
287,049 |
|
|
|
275,829 |
|
Total
|
|
$ |
358,389 |
|
|
$ |
340,886 |
|
|
$ |
1,076,871 |
|
|
$ |
1,064,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VITAS
|
|
$ |
21,593 |
|
|
$ |
14,608 |
|
|
$ |
60,645 |
|
|
$ |
55,237 |
|
Roto-Rooter
|
|
|
9,848 |
|
|
|
8,181 |
|
|
|
30,599 |
|
|
|
19,218 |
|
Total
|
|
|
31,441 |
|
|
|
22,789 |
|
|
|
91,244 |
|
|
|
74,455 |
|
Corporate
|
|
|
(6,856 |
) |
|
|
(5,357 |
) |
|
|
(21,722 |
) |
|
|
(20,137 |
) |
Net income
|
|
$ |
24,585 |
|
|
$ |
17,432 |
|
|
$ |
69,522 |
|
|
$ |
54,318 |
|
We report corporate administrative expenses and unallocated investing and financing income and expense not directly related to either segment as “Corporate”.
4. Earnings per Share
Earnings per share (“EPS”) are computed using the weighted average number of shares of capital stock outstanding. Earnings and diluted earnings per share are computed as follows (in thousands, except per share data):
|
|
Net Income |
For the Three Months Ended September 30,
|
|
Income
|
|
Shares
|
|
Earnings
per Share
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
$ |
24,585 |
|
|
|
17,039 |
|
|
$ |
1.44 |
|
|
Dilutive stock options
|
|
|
- |
|
|
|
416 |
|
|
|
|
|
|
Nonvested stock awards
|
|
|
- |
|
|
|
151 |
|
|
|
|
|
|
Impact of warrants outstanding
|
|
|
- |
|
|
|
21 |
|
|
|
|
|
|
Diluted earnings
|
|
$ |
24,585 |
|
|
|
17,627 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
$ |
17,432 |
|
|
|
18,184 |
|
|
$ |
0.96 |
|
|
Dilutive stock options
|
|
|
- |
|
|
|
235 |
|
|
|
|
|
|
Nonvested stock awards
|
|
|
- |
|
|
|
103 |
|
|
|
|
|
|
Diluted earnings
|
|
$ |
17,432 |
|
|
|
18,522 |
|
|
$ |
0.94 |
|
|
|
|
Net Income |
For the Nine Months Ended September 30,
|
|
Income
|
|
Shares
|
|
Earnings
per Share
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
$ |
69,522 |
|
|
|
17,263 |
|
|
$ |
4.03 |
|
|
Dilutive stock options
|
|
|
- |
|
|
|
402 |
|
|
|
|
|
|
Nonvested stock awards
|
|
|
- |
|
|
|
147 |
|
|
|
|
|
|
Conversion of Notes and impact of warrants outstanding
|
|
|
- |
|
|
|
156 |
|
|
|
|
|
|
Diluted earnings
|
|
$ |
69,522 |
|
|
|
17,968 |
|
|
$ |
3.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
$ |
54,318 |
|
|
|
18,436 |
|
|
$ |
2.95 |
|
|
Dilutive stock options
|
|
|
- |
|
|
|
287 |
|
|
|
|
|
|
Nonvested stock awards
|
|
|
- |
|
|
|
101 |
|
|
|
|
|
|
Diluted earnings
|
|
$ |
54,318 |
|
|
|
18,824 |
|
|
$ |
2.89 |
|
For the three and nine-month periods ended September 30, 2014, no stock options were excluded from the computation of diluted earnings per share because they would have been anti-dilutive. For the three and nine-month periods ended September 30, 2013, 434,000 and 31,000 stock options, respectively, were excluded from the computation of diluted earnings per share.
Diluted earnings per share was impacted by the issuance of 249,000 shares of capital stock under the conversion feature of our 1.875% Senior Convertible Notes (the “Notes”) on May 15, 2014. The dilutive impact of this conversion feature for the first nine months of 2014 was 135,000 shares.
At the time we issued the Notes, as discussed in Note 5 below, we also sold warrants for the right to purchase approximately 2,477,000 Chemed shares in the future. During the quarter ended June 30, 2014, we settled these warrants with one counterparty representing half of the total warrants issued for $2.6 million. The amount paid was recorded as an adjustment to paid-in capital. The remaining half of the sold warrants remain outstanding and mature ratably from August 15 through December 8, 2014. The dilutive impact of the warrants was 21,000 shares for the three and nine months periods ended September 30, 2014.
5. Long-Term Debt
On May 15, 2014, we retired our Senior Convertible Notes (the “Notes”) outstanding. We paid the $187.0 million of principal outstanding using a combination of cash on-hand and our existing revolving credit facility. In addition, we issued 249,000 Chemed shares in conjunction with the conversion feature of the Notes. At the time we issued the Notes, we also entered into a purchased call transaction to offset any potential economic dilution resulting from the conversion feature in the Notes. As a result, we received 266,000 Chemed shares from the exercise of the purchased call transaction. The issuance of shares under the conversion feature of the Notes, as well as the receipt of shares from the purchased call transaction were recorded as adjustments to paid-in capital during the quarter ended June 30, 2014.
On June 30, 2014, we replaced our existing credit agreement with the Third Amended and Restated Credit Agreement (“2014 Credit Agreement”). Terms of the 2014 Credit Agreement consist of a five-year, $350 million revolving credit facility and a $100 million term loan. The 2014 Credit Agreement has a floating interest rate that is currently LIBOR plus 113 basis points.
The debt outstanding consists of the following:
Revolver
|
|
$ |
74,800,000 |
|
Term loan
|
|
|
98,750,000 |
|
Total
|
|
|
173,550,000 |
|
Current portion of term and revolving loan
|
|
|
(20,425,000 |
) |
Long-term debt
|
|
$ |
153,125,000 |
|
Scheduled principal payments of the term loan are as follows:
2014
|
|
$ |
1,250,000 |
|
2015
|
|
|
6,250,000 |
|
2016
|
|
|
7,500,000 |
|
2017
|
|
|
8,750,000 |
|
2018
|
|
|
10,000,000 |
|
2019
|
|
|
65,000,000 |
|
|
|
$ |
98,750,000 |
|
Debt issuance costs associated with the existing credit agreement were not written-off as the lenders and their relative percentage participation in the facility did not change. With respect to the 2014 Credit Agreement, deferred financing costs were $0.9 million. The 2014 Credit Agreement contains the following quarterly financial covenants:
Description
|
|
Requirement
|
|
|
|
Leverage Ratio (Consolidated Indebtedness/Consolidated Adj. EBITDA)
|
|
< 3.50 to 1.00
|
|
|
|
Fixed Charge Coverage Ratio (Consolidated Free Cash Flow/Consolidated Fixed Charges)
|
|
> 1.50 to 1.00
|
|
|
|
Annual Operating Lease Commitment
|
|
< $50.0 million
|
We are in compliance with all debt covenants as of September 30, 2014. We have issued $36.9 million in standby letters of credit as of September 30, 2014 for insurance purposes. Issued letters of credit reduce our available credit under the 2014 Credit Agreement. As of September 30, 2014, we have approximately $238.3 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility.
6. Other Income – Net
Other income -- net comprises the following (in thousands):
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Market value gains/(losses) on assets held in |
|
|
|
|
|
|
|
|
|
|
|
|
deferred compensation trust
|
|
$ |
896 |
|
|
$ |
(189 |
) |
|
$ |
2,708 |
|
|
$ |
2,346 |
|
Loss on disposal of property and equipment
|
|
|
(167 |
) |
|
|
(101 |
) |
|
|
(493 |
) |
|
|
(180 |
) |
Interest income - net
|
|
|
(13 |
) |
|
|
192 |
|
|
|
(5 |
) |
|
|
1,165 |
|
Other - net
|
|
|
(11 |
) |
|
|
8 |
|
|
|
67 |
|
|
|
(19 |
) |
Total other income - net
|
|
$ |
705 |
|
|
$ |
(90 |
) |
|
$ |
2,277 |
|
|
$ |
3,312 |
|
7. Stock-Based Compensation Plans
On February 21, 2014, the Compensation/Incentive Committee of the Board of Directors (“CIC”) granted 10,340 Performance Stock Units (“PSUs”) contingent upon the achievement of certain total shareholders return (“TSR”) targets as compared to the TSR of a group of peer companies for the three-year period ending December 31, 2016, the date at which such awards may vest. The cumulative compensation cost of the TSR-based PSU award to be recorded over the three year service period is $1.2 million.
On February 21, 2014, the CIC also granted 14,061 PSUs contingent upon the achievement of certain earnings per share (“EPS”) targets for the three-year period ending December 31, 2016. At the end of each reporting period, the Company estimates the number of shares that it believes will ultimately be earned and records that expense over the service period of the award. We currently estimate the cumulative compensation cost of the EPS-based PSUs to be recorded over the three year service period is $1.2 million.
8. Independent Contractor Operations
The Roto-Rooter segment sublicenses with 68 independent contractors to operate certain plumbing repair and drain cleaning businesses in lesser-populated areas of the United States and Canada. We had notes receivable from our independent contractors as of September 30, 2014 totaling $1.4 million (December 31, 2013 - $1.5 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 0% to 8% per annum and the remaining terms of the loans range from 2 months to 5 years at September 30, 2014. We recorded the following from our independent contractors (in thousands):
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Revenues
|
|
$ |
8,751 |
|
|
$ |
8,054 |
|
|
$ |
26,964 |
|
|
$ |
24,418 |
|
Pretax profits
|
|
|
4,946 |
|
|
|
4,243 |
|
|
|
15,341 |
|
|
|
13,015 |
|
9. Retirement Plans
All of the Company’s plans that provide retirement and similar benefits are defined contribution plans. These expenses include the impact of market gains and losses on assets held in deferred compensation plans. Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans are as follows (in thousands):
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
2014
|
|
2013
|
|
2014
|
|
2013
|
$ |
3,635 |
|
|
$ |
2,098 |
|
|
$ |
10,856 |
|
|
$ |
9,796 |
|
10. Legal and Regulatory Matters
The VITAS segment of the Company’s business operates in a heavily-regulated industry. As a result, the Company is subjected to inquiries and investigations by various government agencies, as well as to lawsuits, including qui tam actions. The following sections describe the various ongoing material lawsuits and investigations of which the Company is currently aware. It is not possible at this time for us to estimate either the timing or outcome of any of those matters, or whether any potential loss, or range of potential losses, is probable or estimable.
Regulatory Matters and Litigation
On January 12, 2012, a putative class action lawsuit was filed in the U.S. District Court for the Southern District of Ohio against the Company, David Williams, and Timothy O’Toole, In re Chemed Corp. Securities Litigation, Civil Action No. 1:12-cv-28 (S.D. Ohio). As the Company has previously disclosed, on February 6, 2014, the Plaintiffs, on behalf of a putative class of purchasers of Chemed Capital Stock between February 15, 2010 and May 2, 2013, inclusive, executed a stipulation of settlement with Defendants. That settlement received final court approval on July 15, 2014, resulting in the dismissal of the case. No appeal of that judgment has since been filed. Defendants agreed to enter into this settlement in order to eliminate the burden, expense and distraction of further litigation.
In June 2011, the U.S. Attorney provided the Company with a partially unsealed qui tam complaint filed under seal in the U.S. District Court for the Western District of Texas, United States, et al. ex rel. Urick v. VITAS HME Solutions, Inc. et al., 5:08-cv-0663 (“Urick”). The U.S. Attorney filed a notice in May 2012 stating that it had decided not to intervene in the case at that time but indicating that it continues to investigate the allegations. In June 2012, the complaint was unsealed. The complaint asserts violations of the federal False Claims Act and the Texas Medicaid Fraud Prevention Act based on allegations of a conspiracy to submit to Medicare and Medicaid false claims involving hospice services for ineligible patients, unnecessary medical supplies, failing to satisfy certain prerequisites for payment, and altering patient records, including backdating patient revocations. The suit was brought by Barbara Urick, a registered nurse in VITAS’s San Antonio program, against VITAS, certain of its affiliates, and several former VITAS employees, including physicians Justo Cisneros and Antonio Cavasos and nurses Sally Schwenk, Diane Anest, and Edith Reed. In September 2012 and July 2013, the plaintiff dismissed all claims against the individual defendants. The complaint was served on the VITAS entities on April 12, 2013.
Also in June 2011, the U.S. Attorney provided the Company with a partially unsealed qui tam complaint filed under seal in the U.S. District Court for the Northern District of Illinois, United States, et al. ex rel. Spottiswood v. Chemed Corp., 1:07-cv-4566 (“Spottiswood”). In April 2012, the complaint was unsealed. The U.S. Attorney and Attorney General for the State of Illinois filed notices in April and May 2012, respectively, stating that they had decided not to intervene in the case at that time but indicating that they continue to investigate the allegations. Plaintiff filed an amended complaint in November 2012. The complaint asserts violations of the federal False Claims Act and the Illinois Whistleblower Reward and Protection Act based on allegations that VITAS fraudulently billed Medicare and Medicaid for providing unwarranted continuous care services. The suit was brought by Laura Spottiswood, a former part-time pool registered nurse at VITAS, against Chemed, VITAS, and a VITAS affiliate. The complaint was served on the defendants on April 12, 2013. On May 29 and June 4, 2013, respectively, the Court granted the government’s motion to partially intervene in Spottiswood and in Urick on the allegations that VITAS submitted or caused to be submitted false or fraudulent claims for continuous care and routine home care on behalf of certain ineligible Medicare beneficiaries. The Court also transferred them to the U.S. District Court for the Western District of Missouri under docket Nos. 4:13-cv-505 and 4:13-cv-563, respectively.
On May 2, 2013, the government filed a False Claims Act complaint against the Company and certain of its hospice-related subsidiaries in the U.S. District Court for the Western District of Missouri, United States v. VITAS Hospice Services, LLC, et al., No. 4:13-cv-00449-BCW (the “2013 Action”). Prior to that date, the Company received various subpoenas from the U.S. Department of Justice and OIG that have been previously disclosed. The 2013 Action alleges that, since at least 2002, VITAS, and since 2004, the Company, submitted or caused the submission of false claims to the Medicare program by (a) billing Medicare for continuous home care services when the patients were not eligible, the services were not provided, or the medical care was inappropriate, and (b) billing Medicare for patients who were not eligible for the Medicare hospice benefit because they did not have a life expectancy of six months or less if their illnesses ran their normal course. This complaint seeks treble damages, statutory penalties, and the costs of the action, plus interest. On August 1, 2013, the government filed its First Amended Complaint in the 2013 Action. The First Amended Complaint changed and supplemented some of the allegations, but did not otherwise expand the causes of action or the nature of the relief sought against VITAS. The defendants filed a motion to dismiss on September 24, 2013. The Court denied the motion, except to the extent that claims were filed before July 24, 2002, on September 30, 2014.
On May 6, 2013, the U.S. District Court for the Western District of Missouri, at the request of the government, unsealed a qui tam complaint against VITAS and VITAS Healthcare Corporation of California, United States ex rel. Charles Gonzales v. VITAS Healthcare Corporation, et al., CV 12-0761-R (“Gonzales”). The case was transferred from the Central District of California to the Western District of Missouri under docket No. 4:13-cv-344. The government partially intervened in Gonzales. The Gonzales complaint alleges that VITAS’ Los Angeles program falsely certified and recertified patients as eligible for the Medicare Hospice Benefit. It alleges violations of the False Claims Act and seeks treble damages, civil penalties, recovery of costs, attorneys’ fees and expenses, and pre- and post-judgment interest.
On September 25, 2013, the Court granted a joint motion by the government, the relators, and VITAS to consolidate the Spottiswood, Urick, and Gonzales complaints with the 2013 Action. As a result, the First Amended Complaint will govern the consolidated federal claims brought by the United States and the relators for all purposes. The relators and VITAS have stipulated that certain non-intervened claims will not be pursued by the relators. The Spottiswood relator filed an action under the Illinois False Claims Act, The State of Illinois ex rel. Laura Spottiswood v. Chemed Corporation, et al., No. 14 L 2786 in the Circuit Court of Cook County, Illinois on March 6, 2014. The Court granted the parties’ joint motion to place this case on its stay calendar, pending resolution of the 2013 Action.
VITAS has also received document subpoenas in related state matters. In February 2010, VITAS received a civil investigative demand (“CID”) from the Texas Attorney General seeking documents from January 1, 2002 through the date of the CID, and interrogatory responses in connection with an investigation of possible fraudulent submission of Medicaid claims for non-qualifying patients and fraudulent shifting of costs from VITAS to the State of Texas and the United States. The CID requested similar information sought by prior Department of Justice subpoenas, including policy and procedure manuals and information concerning Medicare and Medicaid billing, patient statistics and sales and marketing practices, together with information concerning record-keeping and retention practices, and medical records concerning 117 patients. In September 2010, VITAS received a third CID from the Texas Attorney General seeking additional documents concerning business plans and results, revocation forms for certain patients, and electronic documents of 10 current and former employees. In July 2012, VITAS received an investigative subpoena from the Florida Attorney General seeking documents previously produced in the course of prior government investigations as well as, for the period January 1, 2007 through the date of production, billing records and procedures; information concerning business results, plans, and strategies; documents concerning patient eligibility for hospice care; and certain information concerning employees and their compensation.
The net costs incurred related to U.S. v. Vitas and related regulatory matters were $450,000 and a $591,000 credit for the three months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, the net costs were $1.6 million and $1.4 million respectively.
In November 2013, two shareholder derivative lawsuits were filed against the Company’s current and former directors, as well as certain of its officers, both of which are covered by the Company’s commercial insurance. On November 6, 2013, KBC Asset Management NV filed suit in the United States District Court for the District of Delaware, KBC Asset Management NV, derivatively on behalf of Chemed Corp. v. McNamara, et al., No. 13 Civ. 1854 (LPS) (D. Del.). It sued Kevin McNamara, Joel Gemunder, Patrick Grace, Thomas Hutton, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, Arthur Tucker, Jr., George Walsh III, Frank Wood, Timothy O’Toole, David Williams and Ernest Mrozek, together with the Company as nominal defendant. Plaintiff alleges that since at least 2004, Chemed, through VITAS, has submitted or caused the submission of false claims to Medicare. The suit alleges a claim for breach of fiduciary duty against the individual defendants, and seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.
On November 14, 2013, Mildred A. North filed suit in the United States District Court for the Southern District of Ohio, North, derivatively on behalf of Chemed Corp. v. Kevin McNamara, el al., No. 13 Civ. 833 (MDB) (S.D. Ohio). She sued Kevin McNamara, David Williams, Timothy O’Toole, Joel Gemunder, Patrick Grace, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, George Walsh III, Frank Wood and Thomas Hutton, together with the Company as nominal defendant. Plaintiff alleges that, between February 2010 and the present, the individual defendants breached their fiduciary duties as officers and directors of Chemed by, among other things, (a) allegedly causing VITAS to submit improper and ineligible claims to Medicare and Medicaid; and (b) allegedly misrepresenting the state of Chemed’s internal controls. The suit alleges claims for breach of fiduciary duty, abuse of control and gross mismanagement against the individual defendants. The complaint also alleges unjust enrichment and insider trading against Messrs. McNamara, Williams and O’Toole. Plaintiff seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.
On January 29, 2014 defendants in North filed a motion to transfer that case to Delaware under 28 U.S.C § 1404(a). On February 12, 2014, defendants in KBC filed a motion to dismiss that case pursuant to Federal Rules of Civil Procedure 23.1 and 12(b)(6). On September 19, 2014, the Ohio court granted defendants’ motion to transfer North to Delaware. Following that decision and in light of that transfer, on September 29, 2014, the Delaware court denied without prejudice defendants’ motion to dismiss KBC, and referred both cases to Magistrate Judge Burke. Defendants intend to renew their motion to dismiss the claims and allegations in KBC once it has been determined how these two cases are to proceed. On October 15, 2014, the plaintiff in KBC filed a motion seeking to consolidate KBC and North, to have plaintiff KBC appointed the sole lead plaintiff and its counsel, Motley Rice, sole lead counsel, and to designate KBC the sole operative complaint. Plaintiff North has indicated that she does not oppose consolidation of the two cases, but otherwise opposes KBC’s motion with regard to the appointment of lead plaintiff and lead counsel and designation of the operative complaint. On October 20, 2014, the Court stayed Defendants’ obligation to answer, move, or otherwise respond to the complaints in KBC and North pending further order of the Court.
The Company intends to defend vigorously against the allegations in each of the above lawsuits. Regardless of the outcome of any of the preceding matters, responding to the subpoenas and dealing with the various regulatory agencies and opposing parties can adversely affect us through defense costs, potential payments, diversion of management time, and related publicity. Although the Company intends to defend them vigorously, there can be no assurance that those suits will not have a material adverse effect on the Company.
11. Concentration of Risk
VITAS has pharmacy services agreements ("Agreements") with Omnicare, Inc. and its subsidiaries (“OCR”) whereby OCR provides specified pharmacy services for VITAS and its hospice patients in geographical areas served by both VITAS and OCR. The Agreements renew automatically for three-year terms. Either party may cancel the Agreements at the end of any term by giving 30 days prior written notice. VITAS made purchases from OCR of $8.8 million and $9.7 million for the three months ended September 30, 2014 and 2013, respectively. VITAS made purchases from OCR of $26.5 million and $29.3 million for the nine months ended September 30, 2014 and 2013, respectively. For the three and nine month periods ending September 30, 2014 and 2013, respectively, purchases from this vendor represent approximately 90% of all pharmacy services used by VITAS.
12. Cash Overdrafts and Cash Equivalents
Included in accounts payable at September 30, 2014 is cash overdrafts payable of $23.0 million (December 31, 2013 - $806,000).
From time to time throughout the year, we invest excess cash in money market funds with major commercial banks. We closely monitor the creditworthiness of the institutions with which we invest our overnight funds. We had $68,000 in cash equivalents as of September 30, 2014. There was $23.1 million in cash equivalents as of December 31, 2013. The weighted average rate of return for our cash equivalents was 0.09% at September 30, 2014 and 0.08% at December 31, 2013.
13. Financial Instruments
FASB’s authoritative guidance on fair value measurements defines a hierarchy which prioritizes the inputs in fair value measurements. Level 1 measurements are measurements using quoted prices in active markets for identical assets or liabilities. Level 2 measurements use significant other observable inputs. Level 3 measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions. In recording the fair value of assets and liabilities, companies must use the most reliable measurement available.
The following shows the carrying value, fair value and the hierarchy for our financial instruments as of September 30, 2014 (in thousands):
|
|
|
Fair Value Measure
|
|
|
|
|
|
|
|
Carrying Value
|
|
Quoted Prices in
Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund investments of deferred compensation plans held in trust |
|
$ |
47,780 |
|
|
$ |
47,780 |
|
|
$ |
- |
|
|
$ |
- |
|
Long-term debt
|
|
|
173,550 |
|
|
|
- |
|
|
|
173,550 |
|
|
|
- |
|
All outstanding long-term debt is at a floating interest rate tied to LIBOR. Therefore, the carrying amount is a reasonable estimation of fair value.
The following shows the carrying value, fair value and the hierarchy for our financial instruments as of December 31, 2013 (in thousands):
|
|
|
Fair Value Measure
|
|
|
|
|
|
|
|
Carrying Value
|
|
Quoted Prices in
Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund investments of deferred compensation plans held in trust
|
|
$ |
42,465 |
|
|
$ |
42,465 |
|
|
$ |
- |
|
|
$ |
- |
|
Long-term debt
|
|
|
183,564 |
|
|
|
193,032 |
|
|
|
- |
|
|
|
- |
|
For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount is a reasonable estimate of fair value because of the liquidity and short-term nature of these instruments.
14. Capital Stock Repurchase Plan Transactions
We repurchased the following capital stock for the three and nine-months ended September 30, 2014 and 2013:
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
400,000 |
|
|
|
1,032,754 |
|
|
|
1,082,934 |
|
|
|
1,313,455 |
|
Weighted average price per share
|
|
$ |
101.53 |
|
|
$ |
68.91 |
|
|
$ |
91.51 |
|
|
$ |
68.23 |
|
In February 2014, the Board of Directors authorized an additional $100 million for stock repurchase under Chemed’s existing share repurchase program. We currently have $22.7 million of authorization remaining under this share repurchase plan.
15. Recent Accounting Statements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update “ASU No. 2014-09 – Revenue from Contracts with Customers” which provides additional guidance to clarify the principles for recognizing revenue. The standard will also be used to develop a common revenue standard for removing inconsistencies and weaknesses, improve comparability, provide more useful information to users through improved disclosure requirements, and simplify the preparation of financial statements. The guidance is effective for fiscal years beginning after December 15, 2016. We are currently evaluating the impact of this ASU on our existing revenue recognition policies and disclosures.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “ASU No. 2014-15 - Presentation of Financial Statements-Going Concern”. ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for us for the annual period ending December 31, 2016 and interim periods thereafter. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.
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 teams 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 (in thousands except per share amounts):
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Service revenues and sales
|
|
$ |
358,389 |
|
|
$ |
340,886 |
|
|
$ |
1,076,871 |
|
|
$ |
1,064,725 |
|
Net income
|
|
$ |
24,585 |
|
|
$ |
17,432 |
|
|
$ |
69,522 |
|
|
$ |
54,318 |
|
Diluted EPS
|
|
$ |
1.39 |
|
|
$ |
0.94 |
|
|
$ |
3.87 |
|
|
$ |
2.89 |
|
Adjusted net income
|
|
$ |
26,058 |
|
|
$ |
25,098 |
|
|
$ |
76,351 |
|
|
$ |
78,470 |
|
Adjusted diluted EPS
|
|
$ |
1.48 |
|
|
$ |
1.36 |
|
|
$ |
4.28 |
|
|
$ |
4.17 |
|
Adjusted EBITDA
|
|
$ |
50,946 |
|
|
$ |
49,739 |
|
|
$ |
150,831 |
|
|
$ |
153,978 |
|
Adjusted EBITDA as a % of revenue
|
|
|
14.2 |
% |
|
|
14.6 |
% |
|
|
14.0 |
% |
|
|
14.5 |
% |
Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”) and Adjusted EBITDA are not measures derived in accordance with GAAP. We provide non-GAAP measures to help readers evaluate our operating results, compare our operating performance with that of similar companies that have different capital structures and help evaluate our ability to meet future debt service, capital expenditure and working capital requirements. Our non-GAAP measures should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP. A reconciliation of our non-GAAP measures are presented on pages 28-30.
For the three months ended September 30, 2014, the increase in consolidated service revenues and sales was driven by a 7.0% increase at Roto-Rooter and a 4.5% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in a combination of price and service mix shift offset by a decrease in job count. The remaining difference relates to increases in contractor revenue and increases in our water restoration business line. Water restoration is the remediation of water and humidity damage after a flood. The increase in service revenues at VITAS was a result of Medicare reimbursement rates increasing 1.4%, a 2.8% increase in average daily census and mix shift. Consolidated net income increased 41.0% mainly as a result of lawsuit settlements in 2013 at Vitas and Roto-Rooter that did not repeat in 2014. Diluted EPS increased 47.9% as a result of the increase in net income as well as a lower number of shares outstanding. Adjusted EBITDA as a percent of revenue decreased 0.4%. See page 31 for additional VITAS operating metrics.
For the nine months ended September 30, 2014, the increase in consolidated service revenues and sales was driven by a 4.1% increase at Roto-Rooter and a 0.1% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in a combination of price, and service mix shift offset by a decrease in job count. The remaining difference relates to increases in contractor revenue and increases in our water restoration business line. Consolidated net income increased 28.0% mainly as a result of lawsuit settlements in 2013 at VITAS and Roto-Rooter that did not repeat in 2014. Diluted EPS increased 33.9% as a result of the increase in net income as well as a lower number of shares outstanding. Adjusted EBITDA as a percent of revenue decreased 0.5%. See page 31 for additional VITAS operating metrics.
On April 1, 2013, Medicare reduced hospice reimbursement rates 2.0%. Effective October 1, 2013, Medicare increased the average hospice rate approximately 1.4% This effectively reduced Medicare hospice reimbursement 0.6% through the first quarter of 2014. VITAS expects its full-year 2014 revenue growth, prior to Medicare cap, to be in the range of 1.0% to 2.0%. Admissions in 2014 are estimated to increase 2.0%. Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 14.5% to 15.0%. Medicare cap is estimated to be $3.6 million in 2014. Roto-Rooter expects full-year 2014 revenue growth of 4.0% to 5.0%. The revenue estimate is a result of increased job pricing of approximately 2.0%. Adjusted EBITDA margin for 2014 is estimated in the range of 19.0% to 19.5%. We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.
Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2013 to September 30, 2014 include the following:
● |
A $65.9 million decrease in cash due to purchases of treasury stock and capital expenditures, partially offset by cash generated by operations. |
● |
A $40.6 million increase in accounts receivable related to the timing of payments. |
● |
A $15.3 million increase in accounts payable due to timing of payments. |
● |
A $10.0 million decrease in total long-term debt as a result of net payments of outstanding debt using cash on-hand. |
● |
A $22.5 million decrease in accrued legal due to the payment of litigation settlements. |
Net cash provided by operating activities decreased $84.8 million primarily as a result of the increase in accounts receivable and a decline in accrued legal expenses. Management continually evaluates cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of available capital resources.
We have issued $36.9 million in standby letters of credit as of September 30, 2014, for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of September 30, 2014, we have approximately $238.3 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility. 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 require us to meet various financial covenants, to be tested quarterly. We are in compliance with all financial and other debt covenants as of September 30, 2014 and anticipate remaining in compliance throughout 2014.
The VITAS segment of the Company’s business operates in a heavily-regulated industry. As a result, the Company is subjected to inquiries and investigations by various government agencies, as well as to lawsuits, including qui tam actions. The following sections describe the various ongoing material lawsuits and investigations of which the Company is currently aware. It is not possible at this time for us to estimate either the timing or outcome of any of those matters, or whether any potential loss, or range of potential losses, is probable or estimable.
On January 12, 2012, a putative class action lawsuit was filed in the U.S. District Court for the Southern District of Ohio against the Company, David Williams, and Timothy O’Toole, In re Chemed Corp. Securities Litigation, Civil Action No. 1:12-cv-28 (S.D. Ohio). As the Company has previously disclosed, on February 6, 2014, the Plaintiffs, on behalf of a putative class of purchasers of Chemed Capital Stock between February 15, 2010 and May 2, 2013, inclusive, executed a stipulation of settlement with Defendants. That settlement received final court approval on July 15, 2014, resulting in the dismissal of the case. No appeal of that judgment has since been filed. Defendants agreed to enter into this settlement in order to eliminate the burden, expense and distraction of further litigation.
In June 2011, the U.S. Attorney provided the Company with a partially unsealed qui tam complaint filed under seal in the U.S. District Court for the Western District of Texas, United States, et al. ex rel. Urick v. VITAS HME Solutions, Inc. et al., 5:08-cv-0663 (“Urick”). The U.S. Attorney filed a notice in May 2012 stating that it had decided not to intervene in the case at that time but indicating that it continues to investigate the allegations. In June 2012, the complaint was unsealed. The complaint asserts violations of the federal False Claims Act and the Texas Medicaid Fraud Prevention Act based on allegations of a conspiracy to submit to Medicare and Medicaid false claims involving hospice services for ineligible patients, unnecessary medical supplies, failing to satisfy certain prerequisites for payment, and altering patient records, including backdating patient revocations. The suit was brought by Barbara Urick, a registered nurse in VITAS’s San Antonio program, against VITAS, certain of its affiliates, and several former VITAS employees, including physicians Justo Cisneros and Antonio Cavasos and nurses Sally Schwenk, Diane Anest, and Edith Reed. In September 2012 and July 2013, the plaintiff dismissed all claims against the individual defendants. The complaint was served on the VITAS entities on April 12, 2013.
Also in June 2011, the U.S. Attorney provided the Company with a partially unsealed qui tam complaint filed under seal in the U.S. District Court for the Northern District of Illinois, United States, et al. ex rel. Spottiswood v. Chemed Corp., 1:07-cv-4566 (“Spottiswood”). In April 2012, the complaint was unsealed. The U.S. Attorney and Attorney General for the State of Illinois filed notices in April and May 2012, respectively, stating that they had decided not to intervene in the case at that time but indicating that they continue to investigate the allegations. Plaintiff filed an amended complaint in November 2012. The complaint asserts violations of the federal False Claims Act and the Illinois Whistleblower Reward and Protection Act based on allegations that VITAS fraudulently billed Medicare and Medicaid for providing unwarranted continuous care services. The suit was brought by Laura Spottiswood, a former part-time pool registered nurse at VITAS, against Chemed, VITAS, and a VITAS affiliate. The complaint was served on the defendants on April 12, 2013. On May 29 and June 4, 2013, respectively, the Court granted the government’s motion to partially intervene in Spottiswood and in Urick on the allegations that VITAS submitted or caused to be submitted false or fraudulent claims for continuous care and routine home care on behalf of certain ineligible Medicare beneficiaries. The Court also transferred them to the U.S. District Court for the Western District of Missouri under docket Nos. 4:13-cv-505 and 4:13-cv-563, respectively.
On May 2, 2013, the government filed a False Claims Act complaint against the Company and certain of its hospice-related subsidiaries in the U.S. District Court for the Western District of Missouri, United States v. VITAS Hospice Services, LLC, et al., No. 4:13-cv-00449-BCW (the “2013 Action”). Prior to that date, the Company received various subpoenas from the U.S. Department of Justice and OIG that have been previously disclosed. The 2013 Action alleges that, since at least 2002, VITAS, and since 2004, the Company, submitted or caused the submission of false claims to the Medicare program by (a) billing Medicare for continuous home care services when the patients were not eligible, the services were not provided, or the medical care was inappropriate, and (b) billing Medicare for patients who were not eligible for the Medicare hospice benefit because they did not have a life expectancy of six months or less if their illnesses ran their normal course. This complaint seeks treble damages, statutory penalties, and the costs of the action, plus interest. On August 1, 2013, the government filed its First Amended Complaint in the 2013 Action. The First Amended Complaint changed and supplemented some of the allegations, but did not otherwise expand the causes of action or the nature of the relief sought against VITAS. The defendants filed a motion to dismiss on September 24, 2013. The Court denied the motion, except to the extent that claims were filed before July 24, 2002, on September 30, 2014.
On May 6, 2013, the U.S. District Court for the Western District of Missouri, at the request of the government, unsealed a qui tam complaint against VITAS and VITAS Healthcare Corporation of California, United States ex rel. Charles Gonzales v. VITAS Healthcare Corporation, et al., CV 12-0761-R (“Gonzales”). The case was transferred from the Central District of California to the Western District of Missouri under docket No. 4:13-cv-344. The government partially intervened in Gonzales. The Gonzales complaint alleges that VITAS’ Los Angeles program falsely certified and recertified patients as eligible for the Medicare Hospice Benefit. It alleges violations of the False Claims Act and seeks treble damages, civil penalties, recovery of costs, attorneys’ fees and expenses, and pre- and post-judgment interest.
On September 25, 2013, the Court granted a joint motion by the government, the relators, and VITAS to consolidate the Spottiswood, Urick, and Gonzales complaints with the 2013 Action. As a result, the First Amended Complaint will govern the consolidated federal claims brought by the United States and the relators for all purposes. The relators and VITAS have stipulated that certain non-intervened claims will not be pursued by the relators. The Spottiswood relator filed an action under the Illinois False Claims Act, The State of Illinois ex rel. Laura Spottiswood v. Chemed Corporation, et al., No. 14 L 2786 in the Circuit Court of Cook County, Illinois on March 6, 2014. The Court granted the parties’ joint motion to place this case on its stay calendar, pending resolution of the 2013 Action.
VITAS has also received document subpoenas in related state matters. In February 2010, VITAS received a civil investigative demand (“CID”) from the Texas Attorney General seeking documents from January 1, 2002 through the date of the CID, and interrogatory responses in connection with an investigation of possible fraudulent submission of Medicaid claims for non-qualifying patients and fraudulent shifting of costs from VITAS to the State of Texas and the United States. The CID requested similar information sought by prior Department of Justice subpoenas, including policy and procedure manuals and information concerning Medicare and Medicaid billing, patient statistics and sales and marketing practices, together with information concerning record-keeping and retention practices, and medical records concerning 117 patients. In September 2010, VITAS received a third CID from the Texas Attorney General seeking additional documents concerning business plans and results, revocation forms for certain patients, and electronic documents of 10 current and former employees. In July 2012, VITAS received an investigative subpoena from the Florida Attorney General seeking documents previously produced in the course of prior government investigations as well as, for the period January 1, 2007 through the date of production, billing records and procedures; information concerning business results, plans, and strategies; documents concerning patient eligibility for hospice care; and certain information concerning employees and their compensation.
The net costs incurred related to U.S. v. Vitas and related regulatory matters were $450,000 and a $591,000 credit for the three months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, the net costs were $1.6 million and $1.4 million respectively.
In November 2013, two shareholder derivative lawsuits were filed against the Company’s current and former directors, as well as certain of its officers, both of which are covered by the Company’s commercial insurance. On November 6, 2013, KBC Asset Management NV filed suit in the United States District Court for the District of Delaware, KBC Asset Management NV, derivatively on behalf of Chemed Corp. v. McNamara, et al., No. 13 Civ. 1854 (LPS) (D. Del.). It sued Kevin McNamara, Joel Gemunder, Patrick Grace, Thomas Hutton, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, Arthur Tucker, Jr., George Walsh III, Frank Wood, Timothy O’Toole, David Williams and Ernest Mrozek, together with the Company as nominal defendant. Plaintiff alleges that since at least 2004, Chemed, through VITAS, has submitted or caused the submission of false claims to Medicare. The suit alleges a claim for breach of fiduciary duty against the individual defendants, and seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.
On November 14, 2013, Mildred A. North filed suit in the United States District Court for the Southern District of Ohio, North, derivatively on behalf of Chemed Corp. v. Kevin McNamara, el al., No. 13 Civ. 833 (MDB) (S.D. Ohio). She sued Kevin McNamara, David Williams, Timothy O’Toole, Joel Gemunder, Patrick Grace, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, George Walsh III, Frank Wood and Thomas Hutton, together with the Company as nominal defendant. Plaintiff alleges that, between February 2010 and the present, the individual defendants breached their fiduciary duties as officers and directors of Chemed by, among other things, (a) allegedly causing VITAS to submit improper and ineligible claims to Medicare and Medicaid; and (b) allegedly misrepresenting the state of Chemed’s internal controls. The suit alleges claims for breach of fiduciary duty, abuse of control and gross mismanagement against the individual defendants. The complaint also alleges unjust enrichment and insider trading against Messrs. McNamara, Williams and O’Toole. Plaintiff seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.
On January 29, 2014 defendants in North filed a motion to transfer that case to Delaware under 28 U.S.C § 1404(a). On February 12, 2014, defendants in KBC filed a motion to dismiss that case pursuant to Federal Rules of Civil Procedure 23.1 and 12(b)(6). On September 19, 2014, the Ohio court granted defendants’ motion to transfer North to Delaware. Following that decision and in light of that transfer, on September 29, 2014, the Delaware court denied without prejudice defendants’ motion to dismiss KBC, and referred both cases to Magistrate Judge Burke. Defendants intend to renew their motion to dismiss the claims and allegations in KBC once it has been determined how these two cases are to proceed. On October 15, 2014, the plaintiff in KBC filed a motion seeking to consolidate KBC and North, to have plaintiff KBC appointed the sole lead plaintiff and its counsel, Motley Rice, sole lead counsel, and to designate KBC the sole operative complaint. Plaintiff North has indicated that she does not oppose consolidation of the two cases, but otherwise opposes KBC’s motion with regard to the appointment of lead plaintiff and lead counsel and designation of the operative complaint. On October 20, 2014, the Court stayed Defendants’ obligation to answer, move, or otherwise respond to the complaints in KBC and North pending further order of the Court.
The Company intends to defend vigorously against the allegations in each of the above lawsuits. Regardless of the outcome of any of the preceding matters, responding to the subpoenas and dealing with the various regulatory agencies and opposing parties can adversely affect us through defense costs, potential payments, diversion of management time, and related publicity. Although the Company intends to defend them vigorously, there can be no assurance that those suits will not have a material adverse effect on the Company.
Results of Operations
Three months ended September 30, 2014 versus 2013 - Consolidated Results
Our service revenues and sales for the third quarter of 2014 increased 5.1% versus services and sales revenues for the third quarter of 2013. Of this increase, $11.4 million was attributable to VITAS and a $6.1 million increase at Roto-Rooter. The following chart shows the components of those changes (in thousands):
|
|
Increase/(Decrease)
|
|
|
Amount
|
|
|
Percent
|
VITAS
|
|
|
|
|
|
|
Routine homecare
|
|
$
|
8,489
|
|
|
4.3
|
Continuous care
|
|
|
2,027
|
|
|
5.6
|
General inpatient
|
|
|
188
|
|
|
0.8
|
Medicare cap
|
|
|
679
|
|
|
21.4
|
Roto-Rooter
|
|
|
|
|
|
|
Plumbing
|
|
|
996
|
|
|
2.5
|
Drain cleaning
|
|
|
92
|
|
|
0.3
|
Contractor operations
|
|
|
697
|
|
|
8.7
|
Other
|
|
|
4,335
|
|
|
70.0
|
Total
|
|
$
|
17,503
|
|
|
5.1
|
The increase in VITAS’ revenues for the third quarter of 2014 versus the third quarter of 2013 was a combination of Medicare reimbursement rates increasing approximately 1.4% and a 2.8% increase in ADC. In the third quarter of 2014, VITAS recorded a net revenue reduction of $2.5 million related to the recording of Medicare Cap liability for two programs’ 2014 Medicare cap billing limitation which compares to a revenue reduction of $3.2 million in the same quarter of 2013. The ADC increase was driven by a 2.8% increase in routine homecare and a 3.8% increase in continuous care. Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.
The increase in plumbing revenues for the third quarter of 2014 versus 2013 is attributable to a 3.6% decrease in job count, offset by a 6.3% increase in a combination of price and service mix shift. Drain cleaning revenues for the third quarter of 2014 versus 2013 reflect a 3.9% decrease in the number of jobs performed, offset by a 4.2% increase in a combination of price and service mix shift. Other Roto-Rooter revenue increased 70.0% mainly as a result of an increase in our water restoration line of business. Water restoration is the remediation of water and humidity damage after a flood.
The consolidated gross margin was 28.4% in the third quarter of 2014 as compared with 28.7% in the third quarter of 2013. On a segment basis, VITAS’ gross margin was 22.0% in the third quarter of 2014 and 22.3% in the third quarter of 2013. The Roto-Rooter segment’s gross margin was 46.9% for the third quarter of 2014 as compared with 47.3% for the third quarter of 2013.
Selling, general and administrative expenses (“SG&A”) comprise (in thousands):
|
|
Three months ended September 30,
|
|
|
2014
|
|
2013
|
SG&A expenses before the impact of market gains/(losses) of deferred compensation
|
|
|
|
|
|
|
plans, long-term incentive compensation, and OIG investigation expenses
|
|
$ |
51,218 |
|
|
$ |
49,595 |
|
Long-term incentive compensation
|
|
|
1,002 |
|
|
|
55 |
|
Net expenses/(cost recovery) related to OIG investigation
|
|
|
450 |
|
|
|
(591 |
) |
Market value gains/(losses) related to assets held in deferred compensation
|
|
|
|
|
|
|
|
|
trusts
|
|
|
896 |
|
|
|
(189 |
) |
Total SG&A expenses
|
|
$ |
53,566 |
|
|
$ |
48,870 |
|
SG&A expenses before long-term incentive compensation, expenses related to OIG investigation and the impact of market gains of deferred compensation plans for the third quarter of 2014 were up 3.3% when compared to the third quarter of 2013 as a result of normal salary increases and favorable insurance accrual adjustments in 2013.
Other operating expenses decreased $11.5 million in the third quarter of 2014 when compared to the third quarter of 2013 as a result of lawsuit settlements at Vitas and Roto-Rooter in 2013 that did not repeat in 2014.
Other income - net comprise (in thousands):
|
|
Three months ended September 30,
|
|
|
2014
|
|
2013
|
Market value gains/(losses) on assets held in
|
|
|
|
|
|
|
deferred compensation trusts
|
|
$ |
896 |
|
|
$ |
(189 |
) |
Loss on disposal of property and equipment
|
|
|
(167 |
) |
|
|
(101 |
) |
Interest income - net
|
|
|
(13 |
) |
|
|
192 |
|
Other
|
|
|
(11 |
) |
|
|
8 |
|
Total other income - net
|
|
$ |
705 |
|
|
$ |
(90 |
) |
Our effective income tax rate was 38.4% in the third quarter of 2014 compared to 32.0% for the third quarter of 2013. This is a result of a $1.8 million credit recorded in the third quarter of 2013 related to the expiration of tax statutes for uncertain tax positions recorded in prior years that did not recur in 2014.
Net income for both periods included the following after-tax items/adjustments that reduced or increased after-tax earnings (in thousands):
|
|
Three months ended September 30,
|
|
|
2014
|
|
2013
|
VITAS
|
|
|
|
|
|
|
Litigation settlements
|
|
$ |
- |
|
|
$ |
(6,510 |
) |
Net cost recovery/(expenses) related to OIG investigation
|
|
|
(279 |
) |
|
|
367 |
|
Acquisition expenses
|
|
|
- |
|
|
|
(11 |
) |
Roto-Rooter
|
|
|
|
|
|
|
|
|
Net recoveries related to litigation settlements
|
|
|
143 |
|
|
|
- |
|
Litigation settlements
|
|
|
- |
|
|
|
(584 |
) |
Expenses related to litigation settlements
|
|
|
- |
|
|
|
(269 |
) |
Acquisition expenses
|
|
|
- |
|
|
|
(1 |
) |
Corporate
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
(615 |
) |
|
|
(1,030 |
) |
Noncash impact of change in accounting for convertible debt
|
|
|
- |
|
|
|
(1,375 |
) |
Uncertain tax position adjustments
|
|
|
- |
|
|
|
1,782 |
|
Long-term incentive compensation
|
|
|
(634 |
) |
|
|
(34 |
) |
Expenses related to securities litigation
|
|
|
(88 |
) |
|
|
(1 |
) |
Total
|
|
$ |
(1,473 |
) |
|
$ |
(7,666 |
) |
Three months ended September 30, 2014 versus 2013 - Segment Results
The change in after-tax earnings for the third quarter of 2014 versus the third quarter of 2013 is due to (in thousands):
|
|
Increase/(Decrease)
|
|
|
Amount
|
|
Percent
|
VITAS
|
|
$ |
6,985 |
|
|
|
47.8 |
|
Roto-Rooter
|
|
|
1,667 |
|
|
|
20.4 |
|
Corporate
|
|
|
(1,499 |
) |
|
|
(28.0 |
) |
|
|
$ |
7,153 |
|
|
|
41.0 |
|
Results of Operations
Nine months ended September 30, 2014 versus 2013 - Consolidated Results
Our service revenues and sales for the first nine months of 2014 increased 1.1% versus services and sales revenues for the first nine months of 2013. Of this increase, $926,000 was attributable to VITAS and an $11.2 million increase at Roto-Rooter. The following chart shows the components of those changes (in thousands):
|
|
Increase/(Decrease)
|
|
|
Amount
|
|
Percent
|
VITAS
|
|
|
|
|
|
|
Routine homecare
|
|
$
|
7,370
|
|
|
1.2
|
Continuous care
|
|
|
(5,665)
|
|
|
(4.7)
|
General inpatient
|
|
|
(2,144)
|
|
|
(2.7)
|
Medicare cap
|
|
|
1,365
|
|
|
43.2
|
Roto-Rooter
|
|
|
|
|
|
|
Plumbing
|
|
|
3,687
|
|
|
2.9
|
Drain cleaning
|
|
|
(2,336)
|
|
|
(2.2)
|
Contractor operations
|
|
|
2,546
|
|
|
10.4
|
Other
|
|
|
7,323
|
|
|
39.3
|
Total
|
|
$
|
12,146
|
|
|
1.1
|
The increase in VITAS’ revenues for the first nine months of 2014 versus the first nine months of 2013 was a combination of Medicare reimbursement rates increasing approximately 1.4%, offset by a 2.0% decline due to sequestration (which was effective May 1, 2013), an ADC increase of 0.3%, and geographical and level of care mix shift. In the first nine months of 2014, VITAS recorded a revenue adjustment of $1.8 million related to eliminating the Medicare cap billing limitation recorded in the fourth quarter of 2013 for one program and by the recording of Medicare cap billing limitations for two programs’ liability for the 2014 Medicare cap year. This compares with a $3.2 million Medicare cap liability recorded in the first nine months of 2013. The ADC increase was driven by a 0.7% increase in routine homecare, a decrease of 5.3% in continuous care and a decrease of 2.5% in general inpatient. Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.
The increase in plumbing revenues for the first nine months of 2014 versus 2013 is attributable to a 1.1% increase in job count, and a 1.8% increase in price and service mix shift. Drain cleaning revenues for the first nine months of 2014 versus 2013 reflect a 6.5% decrease in the number of jobs performed, offset by a 4.3% increase in a combination of price and service mix shift. Other Roto-Rooter revenue increased 39.3% as a result of a increase in our water restoration line of business. Water restoration is the remediation of water and humidity damage after a flood.
The consolidated gross margin was 28.4% in the first nine months of 2014 which is essentially flat when compared with the first nine months of 2013. On a segment basis, VITAS’ gross margin was 21.7% in the first nine months of 2014 and 21.9% in the first nine months of 2013. The Roto-Rooter segment’s gross margin was 46.7% for the first nine months of 2014 as compared with 46.9% for the first nine months of 2013.
Selling, general and administrative expenses (“SG&A”) comprise (in thousands):
|
|
Nine months ended September 30,
|
|
|
2014
|
|
2013
|
SG&A expenses before the impact of market gains of deferred compensation
|
|
|
|
|
|
|
plans, long-term incentive compensation, and OIG investigation expenses
|
|
$ |
156,582 |
|
|
$ |
152,586 |
|
Long-term incentive compensation
|
|
|
1,988 |
|
|
|
1,161 |
|
Expenses related to OIG investigation
|
|
|
1,608 |
|
|
|
1,444 |
|
Market value gains related to assets held in
|
|
|
|
|
|
|
|
|
deferred compensation trusts
|
|
|
2,708 |
|
|
|
2,346 |
|
Total SG&A expenses
|
|
$ |
162,886 |
|
|
$ |
157,537 |
|
SG&A expenses before long-term incentive compensation, expenses related to OIG investigation and the impact of market gains of deferred compensation plans for the first nine months of 2014 were up 2.6% when compared to the first nine months of 2013 as a result of normal salary increases and favorable insurance accrual adjustments in 2013.
Other operating expenses decreased $26.2 million in the first nine months of 2014 when compared to the first nine months of 2013 as a result of lawsuit settlements at Vitas and Roto-Rooter in 2013 that did not repeat in 2014.
Other income - net comprise (in thousands):
|
|
Nine months ended September 30,
|
|
|
2014
|
|
2013
|
Market value gains on assets held in deferred
|
|
|
|
|
|
|
compensation trusts
|
|
$ |
2,708 |
|
|
$ |
2,346 |
|
Loss on disposal of property and equipment
|
|
|
(493 |
) |
|
|
(180 |
) |
Interest income - net
|
|
|
(5 |
) |
|
|
1,165 |
|
Other
|
|
|
67 |
|
|
|
(19 |
) |
Total other income - net
|
|
$ |
2,277 |
|
|
$ |
3,312 |
|
Our effective income tax rate was 38.7% in the first nine months of 2014 when compared to 36.8% in the first nine months of 2013. This increase is a result of a $1.8 million credit recorded in 2013 related to the expiration of tax statutes for uncertain tax positions recorded in prior years.
Net income for both periods included the following after-tax items/adjustments that reduced or increased after-tax earnings (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
2014
|
|
2013
|
VITAS
|
|
|
|
|
|
|
Litigation settlements
|
|
$ |
- |
|
|
$ |
(6,510 |
) |
Expenses related to litigation settlements
|
|
|
(70 |
) |
|
|
- |
|
Legal expenses of OIG investigation
|
|
|
(997 |
) |
|
|
(895 |
) |
Acquisition expenses
|
|
|
(1 |
) |
|
|
(23 |
) |
Roto-Rooter
|
|
|
|
|
|
|
|
|
Net recoveries related to litigation settlements
|
|
|
6 |
|
|
|
- |
|
Litigation settlements
|
|
|
- |
|
|
|
(9,551 |
) |
Expenses related to litigation settlements
|
|
|
- |
|
|
|
(699 |
) |
Expenses of severance arrangements
|
|
|
- |
|
|
|
(184 |
) |
Acquisition expenses
|
|
|
- |
|
|
|
(2 |
) |
Corporate
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
(2,159 |
) |
|
|
(2,993 |
) |
Noncash impact of change in accounting for convertible debt
|
|
|
(2,143 |
) |
|
|
(4,046 |
) |
Uncertain tax position adjustments
|
|
|
- |
|
|
|
1,782 |
|
Long-term incentive compensation
|
|
|
(1,258 |
) |
|
|
(734 |
) |
Expenses of securities litigation
|
|
|
(207 |
) |
|
|
(3 |
) |
Loss on extinguishment of debt
|
|
|
- |
|
|
|
(294 |
) |
Total
|
|
$ |
(6,829 |
) |
|
$ |
(24,152 |
) |
Nine months ended September 30, 2014 versus 2013 - Segment Results
The change in after-tax earnings for the first nine months of 2014 versus the first nine months of 2013 is due to (in thousands):
|
|
Increase/(Decrease)
|
|
|
Amount
|
|
Percent
|
VITAS
|
|
$ |
5,408 |
|
|
|
9.8 |
|
Roto-Rooter
|
|
|
11,381 |
|
|
|
59.2 |
|
Corporate
|
|
|
(1,585 |
) |
|
|
(7.9 |
) |
|
|
$ |
15,204 |
|
|
|
28.0 |
|
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
|
CONSOLIDATING STATEMENT OF INCOME
|
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014
|
(in thousands)(unaudited)
|
|
|
|
|
VITAS
|
|
Roto-Rooter
|
|
Corporate
|
|
Chemed
Consolidated
|
2014 (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues and sales
|
|
$ |
265,384 |
|
|
$ |
93,005 |
|
|
$ |
- |
|
|
$ |
358,389 |
|
Cost of services provided and goods sold
|
|
|
207,105 |
|
|
|
49,340 |
|
|
|
- |
|
|
|
256,445 |
|
Selling, general and administrative expenses
|
|
|
20,224 |
|
|
|
25,682 |
|
|
|
7,660 |
|
|
|
53,566 |
|
Depreciation
|
|
|
4,530 |
|
|
|
2,772 |
|
|
|
148 |
|
|
|
7,450 |
|
Amortization
|
|
|
205 |
|
|
|
114 |
|
|
|
398 |
|
|
|
717 |
|
Total costs and expenses
|
|
|
232,064 |
|
|
|
77,908 |
|
|
|
8,206 |
|
|
|
318,178 |
|
Income/(loss) from operations
|
|
|
33,320 |
|
|
|
15,097 |
|
|
|
(8,206 |
) |
|
|
40,211 |
|
Interest expense
|
|
|
(55 |
) |
|
|
(87 |
) |
|
|
(838 |
) |
|
|
(980 |
) |
Intercompany interest income/(expense)
|
|
|
1,660 |
|
|
|
760 |
|
|
|
(2,420 |
) |
|
|
- |
|
Other income/(expense)—net
|
|
|
(189 |
) |
|
|
(2 |
) |
|
|
896 |
|
|
|
705 |
|
Income/(expense) before income taxes
|
|
|
34,736 |
|
|
|
15,768 |
|
|
|
(10,568 |
) |
|
|
39,936 |
|
Income taxes
|
|
|
(13,143 |
) |
|
|
(5,920 |
) |
|
|
3,712 |
|
|
|
(15,351 |
) |
Net income/(loss)
|
|
$ |
21,593 |
|
|
$ |
9,848 |
|
|
$ |
(6,856 |
) |
|
$ |
24,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The following amounts are included in net income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemed
|
|
|
VITAS
|
|
|
Roto-Rooter
|
|
|
Corporate
|
|
|
Consolidated
|
Pretax benefit/(cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(977 |
) |
|
$ |
(977 |
) |
Long-term incentive compensation
|
|
|
- |
|
|
|
- |
|
|
|
(1,002 |
) |
|
|
(1,002 |
) |
Net recoveries related to litigation settlements
|
|
|
- |
|
|
|
234 |
|
|
|
- |
|
|
|
234 |
|
Expenses related to securities litigation
|
|
|
- |
|
|
|
- |
|
|
|
(138 |
) |
|
|
(138 |
) |
Expenses related to OIG investigation
|
|
|
(450 |
) |
|
|
- |
|
|
|
- |
|
|
|
(450 |
) |
Total
|
|
$ |
(450 |
) |
|
$ |
234 |
|
|
$ |
(2,117 |
) |
|
$ |
(2,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemed
|
|
|
VITAS
|
|
|
Roto-Rooter
|
|
|
Corporate
|
|
|
Consolidated
|
After-tax benefit/(cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(615 |
) |
|
$ |
(615 |
) |
Long-term incentive compensation
|
|
|
- |
|
|
|
- |
|
|
|
(634 |
) |
|
|
(634 |
) |
Net recoveries related to litigation settlements
|
|
|
- |
|
|
|
143 |
|
|
|
- |
|
|
|
143 |
|
Expenses related to securities litigation
|
|
|
- |
|
|
|
- |
|
|
|
(88 |
) |
|
|
(88 |
) |
Expenses related to OIG investigation
|
|
|
(279 |
) |
|
|
- |
|
|
|
- |
|
|
|
(279 |
) |
Total
|
|
$ |
(279 |
) |
|
$ |
143 |
|
|
$ |
(1,337 |
) |
|
$ |
(1,473 |
) |
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
|
|
CONSOLIDATING STATEMENT OF INCOME
|
|
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013
|
|
(in thousands)(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VITAS
|
|
|
|
Roto-Rooter
|
|
|
|
Corporate
|
|
|
|
Chemed Consolidated
|
|
2013 (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues and sales
|
|
$ |
254,001 |
|
|
$ |
86,885 |
|
|
$ |
- |
|
|
$ |
340,886 |
|
Cost of services provided and goods sold
|
|
|
197,387 |
|
|
|
45,797 |
|
|
|
- |
|
|
|
243,184 |
|
Selling, general and administrative expenses
|
|
|
18,637 |
|
|
|
25,009 |
|
|
|
5,224 |
|
|
|
48,870 |
|
Depreciation
|
|
|
4,545 |
|
|
|
2,292 |
|
|
|
134 |
|
|
|
6,971 |
|
Amortization
|
|
|
538 |
|
|
|
151 |
|
|
|
501 |
|
|
|
1,190 |
|
Other operating expenses
|
|
|
10,500 |
|
|
|
961 |
|
|
|
- |
|
|
|
11,461 |
|
Total costs and expenses
|
|
|
231,607 |
|
|
|
74,210 |
|
|
|
5,859 |
|
|
|
311,676 |
|
Income/(loss) from operations
|
|
|
22,394 |
|
|
|
12,675 |
|
|
|
(5,859 |
) |
|
|
29,210 |
|
Interest expense
|
|
|
(48 |
) |
|
|
(82 |
) |
|
|
(3,370 |
) |
|
|
(3,500 |
) |
Intercompany interest income/(expense)
|
|
|
1,231 |
|
|
|
579 |
|
|
|
(1,810 |
) |
|
|
- |
|
Other income/(expense)—net
|
|
|
73 |
|
|
|
8 |
|
|
|
(171 |
) |
|
|
(90 |
) |
Income/(expense) before income taxes
|
|
|
23,650 |
|
|
|
13,180 |
|
|
|
(11,210 |
) |
|
|
25,620 |
|
Income taxes
|
|
|
(9,042 |
) |
|
|
(4,999 |
) |
|
|
5,853 |
|
|
|
(8,188 |
) |
Net income/(loss)
|
|
$ |
14,608 |
|
|
$ |
8,181 |
|
|
$ |
(5,357 |
) |
|
$ |
17,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The following amounts are included in net income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VITAS
|
|
|
Roto-Rooter
|
|
|
Corporate
|
|
|
|
|
Pretax benefit/(cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(1,629 |
) |
|
$ |
(1,629 |
) |
Noncash impact of accounting for convertible debt
|
|
|
- |
|
|
|
- |
|
|
|
(2,174 |
) |
|
|
(2,174 |
) |
Long-term incentive compensation
|
|
|
- |
|
|
|
- |
|
|
|
(55 |
) |
|
|
(55 |
) |
Litigation settlements
|
|
|
(10,500 |
) |
|
|
(961 |
) |
|
|
- |
|
|
|
(11,461 |
) |
Expenses related to litigation settlements
|
|
|
- |
|
|
|
(443 |
) |
|
|
- |
|
|
|
(443 |
) |
Expenses related to securities litigation
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
|
(1 |
) |
Acquisition expenses
|
|
|
(18 |
) |
|
|
(3 |
) |
|
|
- |
|
|
|
(21 |
) |
Net cost recovery related to OIG investigation
|
|
|
591 |
|
|
|
- |
|
|
|
- |
|
|
|
591 |
|
Total
|
|
$ |
(9,927 |
) |
|
$ |
(1,407 |
) |
|
$ |
(3,859 |
) |
|
$ |
(15,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VITAS
|
|
|
Roto-Rooter
|
|
|
Corporate
|
|
|
|
|
After-tax benefit/(cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(1,030 |
) |
|
$ |
(1,030 |
) |
Noncash impact of accounting for convertible debt
|
|
|
- |
|
|
|
- |
|
|
|
(1,375 |
) |
|
|
(1,375 |
) |
Long-term incentive compensation
|
|
|
- |
|
|
|
- |
|
|
|
(34 |
) |
|
|
(34 |
) |
Litigation settlements
|
|
|
(6,510 |
) |
|
|
(584 |
) |
|
|
- |
|
|
|
(7,094 |
) |
Uncertain tax position adjustments
|
|
|
- |
|
|
|
- |
|
|
|
1,782 |
|
|
|
1,782 |
|
Expenses related to litigation settlements
|
|
|
- |
|
|
|
(269 |
) |
|
|
- |
|
|
|
(269 |
) |
Expenses related to securities litigation
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
|
(1 |
) |
Acquisition expenses
|
|
|
(11 |
) |
|
|
(1 |
) |
|
|
- |
|
|
|
(12 |
) |
Net cost recovery related to OIG investigation
|
|
|
367 |
|
|
|
- |
|
|
|
- |
|
|
|
367 |
|
Total
|
|
$ |
(6,154 |
) |
|
$ |
(854 |
) |
|
$ |
(658 |
) |
|
$ |
(7,666 |
) |
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
|
CONSOLIDATING STATEMENT OF INCOME
|
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
|
(in thousands)(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VITAS |
|
|
|
Roto-Rooter |
|
|
|
Corporate |
|
|
|
Chemed Consolidated
|
|
2014 (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues and sales
|
|
$ |
789,822 |
|
|
$ |
287,049 |
|
|
$ |
- |
|
|
$ |
1,076,871 |
|
Cost of services provided and goods sold
|
|
|
618,315 |
|
|
|
152,956 |
|
|
|
- |
|
|
|
771,271 |
|
Selling, general and administrative expenses
|
|
|
62,939 |
|
|
|
78,569 |
|
|
|
21,378 |
|
|
|
162,886 |
|
Depreciation
|
|
|
13,709 |
|
|
|
7,732 |
|
|
|
430 |
|
|
|
21,871 |
|
Amortization
|
|
|
829 |
|
|
|
397 |
|
|
|
1,235 |
|
|
|
2,461 |
|
Total costs and expenses
|
|
|
695,792 |
|
|
|
239,654 |
|
|
|
23,043 |
|
|
|
958,489 |
|
Income/(loss) from operations
|
|
|
94,030 |
|
|
|
47,395 |
|
|
|
(23,043 |
) |
|
|
118,382 |
|
Interest expense
|
|
|
(167 |
) |
|
|
(295 |
) |
|
|
(6,762 |
) |
|
|
(7,224 |
) |
Intercompany interest income/(expense)
|
|
|
4,520 |
|
|
|
2,090 |
|
|
|
(6,610 |
) |
|
|
- |
|
Other income/(expense)—net
|
|
|
(577 |
) |
|
|
137 |
|
|
|
2,717 |
|
|
|
2,277 |
|
Income/(expense) before income taxes
|
|
|
97,806 |
|
|
|
49,327 |
|
|
|
(33,698 |
) |
|
|
113,435 |
|
Income taxes
|
|
|
(37,161 |
) |
|
|
(18,728 |
) |
|
|
11,976 |
|
|
|
(43,913 |
) |
Net income/(loss)
|
|
$ |
60,645 |
|
|
$ |
30,599 |
|
|
$ |
(21,722 |
) |
|
$ |
69,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The following amounts are included in net income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
VITAS
|
|
|
Roto-Rooter
|
|
|
Corporate
|
|
|
Chemed
Consolidated
|
Pretax benefit/(cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(3,430 |
) |
|
$ |
(3,430 |
) |
Noncash impact of accounting for convertible debt
|
|
|
- |
|
|
|
- |
|
|
|
(3,389 |
) |
|
|
(3,389 |
) |
Long-term incentive compensation
|
|