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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2002
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 period 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 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 9,795,144 Shares October 31, 2002
$1 Par Value
Page 1 of 24
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES
Index
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2002 and
December 31, 2001 3
Consolidated Statement of Income -
Three months and nine months ended
September 30, 2002 and 2001 4
Consolidated Statement of Cash Flows
Nine months ended
September 30, 2002 and 2001 5
Notes to Unaudited Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11 - 15
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION 17 - 24
Page 2 of 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands except share and per share data)
September 30, December 31,
2002 2001*
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 15,603 $ 8,725
Accounts receivable less allowances of $3,605
(2001 - $4,091) 14,771 15,128
Inventories 10,111 10,424
Statutory deposits 12,304 13,331
Prepaid expenses 15,092 16,041
Current assets of discontinued operations 36,555 36,404
--------- ---------
Total current assets 104,436 100,053
Other investments 36,768 38,492
Properties and equipment, at cost less accumulated
depreciation of $63,470 (2001 - $61,567) 49,309 54,549
Identifiable intangible assets less accumulated
amortization of $7,014 (2001 - $6,545) 3,042 3,461
Goodwill less accumulated amortization of $30,448
(2001 - $30,450) 131,144 130,402
Noncurrent assets of discontinued operations 43,485 44,905
Other assets 26,827 26,422
--------- ---------
Total Assets $ 395,011 $ 398,284
========= =========
LIABILITIES
Current liabilities
Accounts payable $ 6,464 $ 9,126
Current portion of long-term debt 366 353
Income taxes 5,859 2,312
Deferred contract revenue 20,390 22,194
Current liabilities of discontinued operation 11,071 10,422
Other current liabilities 37,970 40,703
--------- ---------
Total current liabilities 82,120 85,110
Long-term debt 50,728 61,037
Noncurrent liabilities of discontinued operations 2,339 1,773
Other liabilities 24,341 27,842
--------- ---------
Total Liabilities 159,528 175,762
--------- ---------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF THE CHEMED CAPITAL TRUST 14,186 14,239
--------- ---------
STOCKHOLDERS' EQUITY
Capital stock-authorized 15,000,000 shares $1 par;
issued 13,460,755 (2001 - 13,437,781) shares 13,461 13,438
Paid-in capital 168,359 167,542
Retained earnings 152,265 139,163
Treasury stock-3,665,611(2001 - 3,606,085) shares, at cost (112,562) (110,424)
Unearned compensation (5,087) (7,436)
Deferred compensation payable in company stock 2,266 3,288
Accumulated other comprehensive income 3,541 4,214
Notes receivable for shares sold (946) (1,502)
--------- ---------
Total Stockholders' Equity 221,297 208,283
--------- ---------
Total Liabilities and Stockholders' Equity $ 395,011 $ 398,284
========= =========
* Reclassified for operations discontinued in 2002
See accompanying notes to unaudited financial statements.
Page 3 of 24
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 * 2002 2001 *
-------- -------- -------- --------
Continuing Operations
Service revenues and sales $ 75,322 $ 82,604 $235,257 $253,813
-------- -------- -------- --------
Cost of services provided and
cost of goods sold 44,314 49,455 139,446 151,269
Selling and marketing expenses 10,304 11,540 33,085 33,704
General and administrative expenses 11,537 13,486 36,699 42,054
Depreciation 3,424 3,604 10,402 10,772
Other charges - 4,031 - 4,031
-------- -------- -------- --------
Total costs and expenses 69,579 82,116 219,632 241,830
-------- -------- -------- --------
Income from operations 5,743 488 15,625 11,983
Interest expense (709) (1,373) (2,245) (4,324)
Distributions on preferred securities (268) (275) (809) (830)
Other income--net 268 455 3,810 3,766
-------- --------- -------- --------
Income/(loss) before income taxes 5,034 (705) 16,381 10,595
Income taxes (1,856) 193 (5,953) (4,458)
--------- -------- -------- --------
Income/(loss) from continuing
operations 3,178 (512) 10,428 6,137
Discontinued Operations 3,929 604 5,920 (74)
-------- -------- -------- --------
Net Income $ 7,107 $ 92 $ 16,348 $ 6,063
======== ======== ======== ========
Earnings Per Common Share
Income/(loss) from continuing
operations $ .32 $ (.05) 1.06 $ .63
======== ======== ======== ========
Net income $ .72 $ .01 $ 1.66 $ .62
======== ======== ======== ========
Diluted Earnings Per Share
Income/(loss) from continuing
operations $ .32 $ (.05) 1.06 $ .62
======== ======== ======== ========
Net income $ .72 $ .01 $ 1.65 $ .62
======== ======== ======== ========
Adjusted Income From Continuing Operations
Excluding Goodwill Amortization
Adjusted income $ 3,178 $ 461 $ 10,428 $ 9,057
======== ======== ======== ========
Adjusted earnings per share $ .32 $ .05 $ 1.06 $ .93
======== ======== ======== ========
Adjusted diluted earning per
share $ .32 $ .05 $ 1.06 $ .92
======== ======== ======== ========
Average Number of Shares Outstanding
Earnings per share 9,861 9,690 9,854 9,721
======== ======== ======== ========
Diluted earnings per share 9,867 9,690 9,882 9,850
======== ======== ======== ========
Cash Dividends Paid Per Share .11 .11 .33 .33
======== ======== ======== ========
* Reclassified for operations discontinued in 2002
See accompanying notes to unaudited financial statements.
Page 4 of 24
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
--------------------
2002 2001*
--------- --------
Cash Flows From Operating Activities
Net income $ 16,348 $ 6,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,954 16,070
Discontinued operations (5,920) 74
Gains on sale of investments (1,141) (993)
Provision for uncollectible accounts receivable 1,335 1,651
Provision for deferred income taxes 397 (809)
Changes in operating assets and liabilities,
excluding amounts acquired in business combinations
Decrease in accounts receivable (918) (658)
(Increase)/decrease in inventories 313 (728)
(Increase)/decrease in prepaid expenses 1,141 (754)
Decrease in statutory deposits 1,027 753
Increase/(decrease) in accounts payable, deferred
contract revenue and other current liabilities (6,494) 2,606
Increase in income taxes 4,538 290
Other - net 2,354 1,181
-------- --------
Net cash provided by continuing operations 23,934 24,746
Net cash used by discontinued operations 5,287 4,896
-------- --------
Net cash provided by operating activities 29,221 29,642
-------- --------
Cash Flows From Investing Activities
Capital expenditures (8,951) (10,713)
Proceeds from sale of investments 1,917 1,377
Business combinations--net of cash acquired (1,230) (1,358)
Net (proceeds)/outflows from discontinued operations 569 (3,190)
Other-net 1,328 2,365
-------- --------
Net cash used by investing activities (6,367) (11,519)
-------- --------
Cash Flows From Financing Activities
Repayment of long-term debt (15,296) (3,306)
Proceeds from long-term debt 5,000 -
Dividends paid (3,252) (3,292)
Purchase of treasury stock (3,196) (1,201)
Other - net 768 688
-------- --------
Net cash used by financing activities (15,976) (7,111)
-------- --------
Increase In Cash And Cash Equivalents 6,878 11,012
Cash and cash equivalents at beginning of period 8,725 9,978
-------- --------
Cash and cash equivalents at end of period $ 15,603 $ 20,990
======== ========
*Reclassified for operations discontinued in 2002.
See accompanying notes to unaudited financial statements.
Page 5 of 24
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements
1. The accompanying unaudited consolidated financial statements
have been prepared in accordance with Rule 10-01 of SEC
Regulation S-X. Consequently, they do not include all the
disclosures required under generally accepted accounting
principles for complete financial statements. However, in
the opinion of the management of Chemed Corporation (the
"Company"), the financial statements presented herein contain
all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial
position, results of operations and cash flows of the Company
and its consolidated subsidiaries ("Chemed"). For further
information regarding Chemed's accounting policies, refer to
the consolidated financial statements and notes included in
Chemed's Annual Report on Form 10-K for the year ended
December 31, 2001.
2. Service revenues and sales and aftertax earnings by business
segment follow below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Service Revenues and Sales
--------------------------
Roto-Rooter $ 60,234 $ 65,406 $188,608 $200,960
Service America 15,088 17,198 46,649 52,853
-------- -------- -------- --------
Total $ 75,322 $ 82,604 $235,257 $253,813
======== ======== ======== ========
Aftertax Earnings/(Loss)
------------------------
Roto-Rooter $ 3,744 1,268 (a) $ 11,636 8,930(a)
Service America 166 (310)(b) 552 635(b)
-------- --------- -------- --------
Total segment earnings 3,910 958 12,188 9,565
Corporate
Overhead (844) (1,387) (3,022) (4,018)
Gains on sales of
investments - - 775 703
Net investing and
financing income
/(expense) 112 (83) 487 (113)
Discontinued operations 3,929 604 5,920 (74)
-------- -------- -------- --------
Net income $ 7,107 $ 92 $ 16,348 $ 6,063
======== ======== ======== ========
Adjusted Aftertax
Segment Earnings
------------------
Roto-Rooter $ 3,744 $ 3,838(c,d) $ 11,636 $ 13,041(c,d)
Service America 166 513(c,e) 552 1,864(c,e)
-------- -------- -------- --------
Adjusted segment earnings $ 3,910 $ 4,351 $ 12,188 $ 14,905
======== ======== ======== ========
(a) Amounts include Roto-Rooter's aftertax cost of its overtime wage settlement
with the Department of Labor ($1,800,000).
(b) Amounts include Service America's aftertax impairment loss related to the
closing of its Tucson branch ($620,000).
(c) Amounts exclude the amortization of goodwill in 2001.
(d) Amounts exclude Roto-Rooter's aftertax cost of its overtime wage settlement
with the Department of Labor ($1,800,000).
(e) Amounts exclude Service America's aftertax impairment loss related to the
closing of its Tucson branch ($620,000).
Page 6 of 24
3. Earnings per common share are computed using the weighted
average number of shares of capital stock outstanding. The
impact of the Trust Securities on earnings per share from
continuing operations is anti-dilutive for all periods
presented. Therefore, the Trust Securities are excluded
from diluted earnings per share computations.
Diluted earnings per share are computed below (in thousands
except per share data):
Income from Continuing Operations Net Income
----------------------------------------- ---------------------------------------
Income Shares Income Income Shares Income
(Numerator) (Denominator) Per Share (Numerator) (Denominator) Per Share
----------- ------------- --------- ----------- ------------- ---------
For the Three Months
Ended September 30,
- ----------------------
2002
Earnings $ 3,178 9,861 $ .32 $ 7,107 9,861 $ .72
======== =======
Dilutive stock
options - 6 - 6
------- --------- --------- ---------
Diluted Earnings $ 3,178 9,867 $ .32 $ 7,107 9,867 $ .72
======= ========= ======== ========= ========= =======
2001
Earnings/(loss)(a) $ (512) 9,690 $ (.05) $ 92 9,690 $ .01
======= ========= ======== ========= ========= =======
For the Nine Months
Ended September 30,
- ---------------------
2002
Earnings $10,428 9,854 $ 1.06 $ 16,348 9,854 $ 1.66
======== =======
Dilutive stock
options - 28 - 28
------- --------- --------- ---------
Diluted Earnings $10,428 9,882 $ 1.06 $ 16,348 9,882 $ 1.65
======= ========= ======== ========= ========= =======
2001
Earnings $ 6,137 9,721 $ .63 $ 6,063 9,721 $ .62
======== =======
Nonvested stock
awards - 112 - 112
Dilutive stock
options - 17 - 17
------- --------- --------- ---------
Diluted Earnings $ 6,137 9,850 $ .62 $ 6,063 9,850 $ .62
======= ========= ======== ========= ========= =======
For the Periods Ended Adjusted Earnings from Continuing Operations Excluding Goodwill Amortization
----------------------------------------------------------------------------------
September 30, 2001 For the Three Months Ended For the Nine Months Ended
- --------------------- -------------------------------------- -------------------------------------
Earnings $ 461 9,690 $ .05 $ 9,057 9,721 $ .93
======== =======
Nonvested stock
awards - -(a) - 112
Dilutive stock
options - -(a) - 17
------- --------- --------- ---------
Diluted Earnings $ 461 9,690 $ .05 $ 9,057 9,850 $ .92
======= ========= ======== ========= ========= =======
(a) Since income from continuing operations is a loss for the three months ending September 30, 2001, the
impact of stock awards and stock options is anti-dilutive. Therefore, nonvested stock awards and stock
options are excluded from diluted earnings per share computations.
4. The Company's total comprehensive income comprises the following
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Income $ 7,107 $ 92 $ 16,348 $ 6,063
Other Comprehensive
income/(loss) (664) 75 (673) (1,165)
-------- -------- -------- --------
Total comprehensive income $ 6,443 $ 167 $ 15,675 $ 4,898
======== ======== ======== ========
The other comprehensive income relates to the cumulative unrealized
appreciation/depreciation on the Company's available-for-sale
securities.
Page 7 of 24
5. On October 11, 2002, the Company completed the sale of Patient
Care, Inc. ("Patient Care"), a wholly owned subsidiary, to an
investor group that includes Schroeder Ventures Life Sciences
Group, Oak Investment Partners, Prospect Partners and Salix
Ventures. Patient Care provides home-healthcare services primarily
in the New York-New Jersey-Connecticut area.
The cash proceeds to the Company from the sale of Patient Care
total $57.5 million, of which $5 million was placed in escrow
pending settlement of specified contingencies. In addition, the
Company received a senior subordinated note receivable ("Note") for
$12.5 million and a common stock purchase warrant for the purchase
of 2% of the outstanding stock of the purchasing company. The Note
is due October 11, 2007 and bears interest at the annual rate of
7.5% through September 30, 2004, 8.5% from October 1, 2004 through
September 30, 2005 and 9.5% thereafter. The warrant has an
estimated fair value of $1.4 million.
The Company will record a small gain on the sale of Patient Care in
the fourth quarter of 2002. Data relating to discontinued
operations include the following (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2002 2001 2002 2001
-------- ------- --------- ---------
Service Revenues and Sales
From Discontinued Operations $ 37,515 $ 36,451 $ 111,184 $ 110,762
------------------------------- ======== ======== ========= =========
Income from Discontinued Operations
-----------------------------------
Refund of income taxes related to
the sale of The Omnia Group in
1997 $ 2,861 $ - $ 2,861 $ -
-------- -------- --------- ---------
Operating results of Patient Care(a)
Income before income tax 2,249 790 5,178 2,444
Income taxes (1,181) (186) (2,119) (545)
-------- -------- --------- ---------
Net Income 1,068 604 3,059 1,899
-------- -------- --------- ---------
Operating results of Cadre Computer
Loss before income tax - (165) - (734)
Income tax benefit/(expense) - 58 - 255
Minority interest - 6 - 46
-------- -------- --------- ---------
Net Loss - (101) - (433)
-------- --------- --------- ---------
Adjustment to loss/(loss on disposal)
of Cadre Computer
Income/(loss) before income
tax - 155 - (2,369)
Income tax benefit/(expense) - (54) - 829
-------- -------- --------- ---------
Net income/(loss) - 101 - (1,540)
-------- -------- --------- ---------
Total discontinued operations $ 3,929 $ 604 $ 5,920 $ (74)
======== ======== ========= =========
(a) During the third quarter of 2002, Patient Care recorded a favorable pretax adjustment of
$1,041,000 to prior years' cost reports. In addition, Patient Care recorded an unfavorable
pretax adjustment of $440,000 for expenses related to a 1997 business combination. The net
aftertax impact of these adjustments increased net income by $361,000.
September 30, December 31,
2002 2001
------------- ------------
Asset and Liabilities of Discontinued Operations
------------------------------------------------
Assets
Accounts receivable, less allowances $ 34,826 $ 34,110
Other current assets 1,729 2,294
Properties and equipment less accumulated
depreciation 11,963 13,039
Goodwill less accumulated amortization 30,458 30,673
Other noncurrent assets 1,064 1,193
------------- ------------
Total Assets $ 80,040 $ 81,309
============= ============
Liabilities
Accounts payable $ 1,148 $ 2,525
Other current liabilities 9,923 7,897
Deferred income taxes 2,339 1,773
------------- ------------
Total Liabilities $ 13,410 $ 12,195
============= ============
Page 8 of 24
6. During 2002, one purchase business combination was completed within
the Roto-Rooter segment for a purchase price of $1,230,000 in cash.
The business acquired provides drain cleaning and plumbing services
under the Roto-Rooter name. The results of operations of this
business are not material.
The purchase price was allocated as follows (in thousands):
Identifiable intangible assets $ 50
Goodwill 1,104
Other assets 76
-------
Total $ 1,230
=======
7. The Company is party to lawsuits in the normal course of business,
none of which is expected to have a material impact on its
operating results. This includes a class action lawsuit filed in
the Third Judicial Circuit Court of Madison County, Illinois in
June of 2000 by Robert Harris, alleging certain Roto-Rooter
plumbing was performed by unlicensed employees. The Company
contests these allegations and believes them baseless. Due to the
complex legal and other issues involved, it is not presently
possible to estimate the amount of liability, if any, related to
this matter.
8. Effective July 1, 2001, Chemed adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, for all business combinations initiated after June
30, 2001. Effective January 1, 2002, Chemed adopted the provisions
of SFAS No. 141 for all business combinations initiated after
December 31, 2001. The adoption of the provisions of SFAS No. 141
did not materially impact the Company's financial statements.
Effective January 1, 2002, Chemed adopted the provisions of SFAS
No. 142, Goodwill and Other Intangible Assets. The adoption of
SFAS No. 142 eliminates the amortization of goodwill as of the
effective date of adoption. For continuing operations,
amortization of goodwill for the third quarter of 2001 is
$1,026,000 ($973,000 net of income tax benefit), and is included in
cost of services and cost of goods sold in the consolidated
statement of income. For the first nine months of 2001,
amortization of goodwill for continuing operations is $3,081,000
($2,920,000 net of income tax benefit).
In addition, SFAS No. 142 requires goodwill be evaluated annually
for impairment beginning in 2002 for each component of an operating
segment. The first, or transition, evaluation was performed as of
January 1, 2002 and completed during the second quarter. As of
January 1, 2002, the Company determined its reporting components to
be Service America, Patient Care, Roto-Rooter Services (plumbing
and drain cleaning services), Roto-Rooter Franchising and Products
(manufacturing, sale and franchising of Roto-Rooter products and
services) and Roto-Rooter HVAC/non-Roto-Rooter brands (heating,
ventilating and air conditioning repair services and non-Roto-
Rooter-branded drain cleaning and plumbing services). The
Page 9 of 24
Company's impairment test indicates that none of the goodwill for
any of its reporting components is impaired.
9. On January 1, 2002, Chemed adopted the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
The adoption of SFAS No. 144 did not materially impact the
Company's financial statements.
10. In August 2001, the Financial Accounting Standards Board approved
the issuance of SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement became effective for fiscal years
beginning after June 15, 2002, and requires recognizing legal
obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development
or normal operation of a long-lived asset. Since the Company has
no material asset retirement obligations, the adoption of SFAS No.
143 in 2003 will not have a material impact on Chemed's financial
statements.
In April 2002, the FASB approved the issuance of SFAS No. 145,
Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. This statement is
generally effective for transactions occurring after May 15, 2002.
The adoption of SFAS No. 145 is not expected to have a material
impact on Chemed's financial statements.
In July 2002, the FASB approved the issuance of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities.
Generally, SFAS No. 146 stipulates that defined exit costs
(including restructuring and employee termination costs) are to be
recorded on an incurred basis rather than on a commitment basis as
is presently required. This statement is effective for exit or
disposal activities initiated after December 31, 2002. The Company
currently anticipates that adoption of this statement in 2003 will
not have a material impact on its financial statements.
Page 10 of 24
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Financial Condition
- -------------------
There are no unusual changes in the balance sheet accounts during
the first nine months of 2002.
At September 30, 2002, Chemed had approximately $29.2 million of
lines of credit with various banks. In addition to the $15.6 million
balance in cash and cash equivalents at September 30, 2002, $52.5 cash
was received in October 2002 from the sale of Patient Care. Management
believes its liquidity and sources of capital are satisfactory for the
Company's needs in the foreseeable future. Proceeds from the sale of
Patient Care will be used for acquisitions and other corporate purposes.
Results of Operations
- ---------------------
Data relating to (a) the decrease in service revenues and sales
and (b) aftertax earnings/(loss) as a percent of service revenues and
sales for each segment are set forth below:
Service Revenues Aftertax Earnings as a % of Revenues
and Sales - % (Aftertax Margin)
----------------------------------------
Decrease 2001 2001
------------------
2002 vs. 2001 2002 Reported Adjusted(a)
------------------ -------- -------- -----------
Three Months Ended
September 30,
- ------------------
Roto-Rooter (8)% 6.2% 1.9% 5.9%
Service America (12) 1.1 (1.8) 3.0
Total (9) 5.2 1.2 5.3
Nine Months Ended
September 30,
- ------------------
Roto-Rooter (6)% 6.2% 4.4% 6.5%
Service America (12) 1.2 1.2 3.5
Total (7) 5.2 3.8 5.9
(a) Adjusted to exclude amortization of goodwill, Roto-Rooter's wage settlement with
the Department of Labor, and Service America's impairment loss.
Third Quarter 2002 versus Third Quarter 2001
- --------------------------------------------
Service revenues and sales of the Roto-Rooter segment for the
third quarter of 2002 totaled $60,234,000, a decline of 8% versus the
$65,406,000 recorded in the third quarter of 2001. Revenues of the
drain cleaning business and the plumbing services business declined 6%
and 5%, respectively, for the third quarter of 2002, as compared with
revenues for 2001. Each of these businesses' revenues accounts for 44%
and 41%, respectively, of Roto-Rooter's total revenues and sales. The
aftertax margin of this segment during the third quarter of 2002 was
6.2% as compared with 5.9% on an adjusted basis (excluding the cost of
the wage settlement and excluding amortization of goodwill) during the
Page 11 of 24
third quarter of 2001. Most of this increase is attributable to a
higher gross profit margin in the 2002 quarter.
Service revenues and sales of the Service America segment
declined 12% from $17,198,000 in the third quarter of 2001 to
$15,088,000 in the third quarter of 2002. This decline is attributable
to a decline in contract renewals in 2002, lower retail sales in 2002
and the divestment of the Tucson branch in the fourth quarter of 2001.
The aftertax margin of this segment was 1.1% in the third quarter of
2002 as compared with 3.0% on an adjusted basis (excluding goodwill
amortization and excluding the Tucson branch closing costs) in the third
quarter of 2001. This decline is attributable to a lower gross profit
margin in the 2002 quarter, primarily as the result of higher labor
costs (as a percent of revenues) in 2002.
Income from operations increased from $488,000 in the third
quarter of 2001 to $5,743,000 in the third quarter of 2002. On an
adjusted basis, excluding goodwill amortization ($1,026,000), the cost
of Roto-Rooter's wage settlement ($3,000,000) and the cost of Service
America's branch closing ($1,031,000), income from operations for 2001
was $5,545,000. Earnings before interest, taxes, depreciation and
amortization before capital gains ("EBITDA") declined from $9,801,000 in
the third quarter of 2001 to $9,591,000 in the third quarter of 2002.
Interest expense declined from $1,373,000 in the third quarter of
2001 to $709,000, as a result of refinancing long-term debt at lower
interest rates in December 2001. Lower debt levels during 2002 also
contributed to this decline.
Other income-net declined from $455,000 in the third quarter of
2001 to $268,000 in the third quarter of 2002 primarily as the result of
lower interest rates on invested cash in the third quarter of 2002, as
compared with interest rates in 2001.
The effective income tax rate during the third quarter of 2002
was 36.9% as compared with 27.4% during the third quarter of 2001.
Excluding the amortization of goodwill in 2001, the effective tax rate
for the third quarter of 2001 was 43.6%, which is primarily attributable
to favorable tax adjustments, the domestic dividend exclusion and a
relatively low level of adjusted pretax earnings in the 2001 quarter.
Income/(loss) from continuing operations increased from a loss of
$512,000 ($.05 per share) in the third quarter of 2001 to income of
$3,178,000 ($.32 per share) in the third quarter of 2002. Excluding
amortization of goodwill ($973,000 aftertax), adjusted income from
continuing operations for the third quarter of 2001 was $461,000 ($.05
per share). If the cost of Roto-Rooter's wage settlement and the cost
of Service America's branch closing (a combined aftertax total of
$2,420,000, or $.25 per share) are also excluded from earnings for the
third quarter of 2001, adjusted earnings for 2001's third quarter were
$.30 per share.
Page 12 of 24
Net income increased from $92,000 ($.01 per share) in the third
quarter of 2001 to $7,107,000 ($.72 per share) in the third quarter of
2002. The results for 2002 include discontinued operations of
$3,929,000 ($.40 per share), comprising a tax refund of $2,861,000
related to the sale of The Omnia Group (sold in 1997) and earnings of
$1,068,000 from Patient Care operations (sold in October 2002). The
results for 2001 include discontinued operations of $604,000 ($.06 per
share)from the earnings of Patient Care.
Nine Months Ended September 30, 2002 Versus September 30, 2001
- --------------------------------------------------------------
Service revenues and sales of the Roto-Rooter segment for the
first nine months of 2002 totaled $188,608,000, a decline of 6% versus
the $200,960,000 recorded in the first nine months of 2001. Revenues
of the drain cleaning business and the plumbing services business
declined 3% and 6%, respectively, for the first nine months of 2002, as
compared with revenues for 2001. The aftertax margin of this segment
during the first nine months of 2002 was 6.2% as compared with 6.5% on
an adjusted basis (excluding amortization of goodwill) during the first
nine months of 2001. Most of this decline is attributable to a lower
gross profit margin as the result of increased labor costs (as a
percent of revenues) in the 2002 period.
Service revenues and sales of the Service America segment
declined 12% from $52,853,000 in the first nine months of 2001 to
$46,649,000 in the first nine months of 2002. This decline is
attributable to a decline in contract renewals in 2002, lower retail
sales in 2002 and the divestment of the Tucson branch in the fourth
quarter of 2001. The aftertax margin of this segment was 1.2% in the
first nine months of 2002, as compared with 3.5% on an adjusted basis
(excluding goodwill amortization and excluding the cost of the Tucson
branch closing) in the first nine months of 2001. This decline is
attributable to a lower gross profit margin in the 2002 quarter,
primarily as the result of higher labor costs (as a percent of
revenues) in 2002.
Income from operations increased from $11,983,000 in the first
nine months of 2001 to $15,625,000 in the first nine months of 2002.
On an adjusted basis, excluding: goodwill amortization in 2001
($3,081,000); the cost of Roto-Rooter's wage settlement; and the cost
of the Tucson branch closing; income from operations for the 2001
period was $19,095,000. The decline in adjusted operating income from
2001 to 2002 is attributable to lower operating profit recorded by both
Roto-Rooter and Service America, partially offset by lower corporate
overhead. For the same reasons, earnings before interest, taxes,
depreciation and amortization before capital gains ("EBITDA") declined
12% from $33,263,000 in the first nine months of 2001 to $29,165,000 in
the first nine months of 2002.
Interest expense declined from $4,324,000 in the first nine
months of 2001 to $2,245,000, as a result of refinancing long-term debt
Page 13 or 24
at lower interest rates in December 2001. Lower debt levels during the
year 2002 also contributed to this decline.
Other income-net increased slightly from $3,766,000 in the first
nine months of 2001 to $3,810,000 in the first nine months of 2002.
The effective income tax rate during the first nine months of
2002 was 36.3% as compared with 42.1% during the first nine months of
2001. Excluding the amortization of goodwill in 2001, the effective tax
rate for the first nine months of 2001 was 33.8%. The higher rate in
2002 (versus the adjusted rate in 2001) is primarily attributable to
larger favorable tax adjustments in the 2001 period.
Income from continuing operations increased from $6,137,000
($.63 per share and $.62 per diluted share) in the first nine months of
2001 to $10,428,000 ($1.06 per share) in the first nine months of 2002.
Excluding amortization of goodwill ($2,920,000 aftertax), adjusted
income from continuing operations was $9,057,000 ($.93 per share and
$.92 per diluted share) in the first nine months of 2001 as compared
with $10,428,000 ($1.06 per share) in the first nine months of 2002. If
capital gains ($775,000, or $.08 per share in 2001 and $703,000, or
$.08 per share in 2002), the cost of Roto-Rooter's wage settlement and
the cost of Service America's branch closing (combined aftertax total
of $2,420,000, or $.25 per share) are also excluded from earnings for
the first nine months of the respective years, adjusted earnings for
2001's third quarter were $.98 per share.
Net income increased from $6,063,000 ($.62 per share) in the
first nine months of 2001 to $16,348,000 ($1.66 per share and $1.65 per
diluted share) in the first nine months of 2002. The results for 2002
include discontinued operations of $5,920,000 ($.60 per share and $.59
per diluted share), comprising a tax refund of $2,861,000 related to
the sale of The Omnia Group (sold in 1997) and earnings of $3,059,000
from Patient Care operations (sold in October 2002). The results for
2001 include a net loss on discontinued operations of $74,000 ($.01 per
share and nil per diluted share). Discontinued operations in 2001
include $1,899,000 from the operations of Patient Care, a loss on the
sale of Cadre Computer of $1,540,000 and a loss from Cadre Computer
operations of $433,000.
Recent Accounting Statements
- ----------------------------
In August 2001, the Financial Accounting Standards Board
("FASB") approved the issuance of SFAS No. 143, Accounting for Asset
Retirement Obligations. It becomes effective for fiscal years
beginning after June 15, 2002, and requires recognizing legal
obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development or
normal operation of a long-lived asset. Since the Company has no
material asset retirement obligations, the adoption of SFAS No. 143 in
2003 will not have a material impact on Chemed's financial statements.
Page 14 of 24
In April 2002, the FASB approved the issuance of SFAS no. 145,
Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. It is generally effective
for transactions occurring after May 15, 2002. Its adoption is not
expected to have a material impact on Chemed's financial statements.
In July 2002, the FASB approved the issuance of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities.
Generally, SFAS No. 146 stipulates that defined exit costs (including
restructuring and employee termination costs) are to be recorded on an
incurred basis rather than on a commitment basis, as is presently
required. This statement is effective for exit or disposal activities
initiated after December 31, 2002. The Company currently anticipates
its adoption in 2003 will not have a material impact on its financial
statements
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995 Regarding Forward-Looking Information
- -------------------------------------------------------------
This report contains statements which are subject to certain
known and unknown risks, uncertainties, contingencies and other factors
that could cause actual results to differ materially from these
statements and trends. The Company's ability to deal with the unknown
outcomes of these events, many of which are beyond its control, may
affect the reliability of its projections and other financial matters.
Page 15 of 24
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in the
Company's Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management to allow timely decisions regarding required
disclosure. Management necessarily applies its judgment in assessing
the costs and benefits of such controls and procedures which, by their
nature, can provide only reasonable assurance regarding management's
control objectives.
Within 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision of the Company's
President and Chief Executive Officer, with the participation of its
Executive Vice President and Treasurer and its Vice President and
Controller, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon this evaluation, the Company's President and
Chief Executive Officer, Executive Vice President and Treasurer and
Vice President and Controller concluded the Company's disclosure
controls and procedures are effective in timely alerting them to
material information relating to the Company and its consolidated
subsidiaries required to be included in the Company's Exchange Act
reports. There have been no significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
Page 16 of 24
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
99.1 Certification by Kevin J. McNamara pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
99.2 Certification by Timothy S. O'Toole pursuant
to Section 906 of The Sarbanes-Oxley Act of
2002.
99.3 Certification by Arthur V. Tucker, Jr. pursuant
to Section 906 of The Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
-------------------
A Current Report on Form 8-K, dated October 11, 2002, was
filed October 18, 2002. The report disclosed the October 11,
2002 sale of Patient Care, Inc. ("Patient Care"), formerly a
wholly owned subsidiary of the Company. Pro forma financial
statements contained therein present the financial position
and results of operations of the Company excluding Patient
Care as of June 30, 2002, for the six months ended June 30,
2002 and 2001, and for the year ended December 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Chemed Corporation
------------------
(Registrant)
Dated: November 12, 2002 By Kevin J. McNamara
----------------- -----------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
Dated: November 12, 2002 By Timothy S. O'Toole
----------------- -----------------------
Timothy S. O'Toole
(Executive Vice President and
Treasurer)
Dated: November 12, 2002 By Arthur V. Tucker, Jr.
----------------- -----------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
Page 17 of 24
CERTIFICATIONS PURSUANT TO RULE 13A -14 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;
2. Based on my knowledge, this quarterly 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 quarterly
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 quarterly 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-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
Page 18 of 24
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weakness.
Date: November 12, 2002 Kevin J. McNamara
----------------- -----------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
I, Timothy S. O'Toole, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chemed
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
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 quarterly 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-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
Page 19 of 24
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weakness.
Date: November 12, 2002 Timothy S. O'Toole
----------------- -----------------------
Timothy S. O'Toole
(Executive Vice President and
Treasurer)
I, Arthur V. Tucker, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chemed
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
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 quarter report;
Page 20 of 24
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-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weakness.
Date: November 12, 2002 Arthur V. Tucker, Jr.
----------------- --------------------------
Arthur V. Tucker, Jr.
(Vice President and
Controller)
Page 21 of 24
EXHIBIT 99.1
CERTIFICATION BY KEVIN J. MCNAMARA
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as President and Chief Executive Officer of Chemed
Corporation ("Company"), does hereby certify that:
1) the Company's Quarterly Report of Form 10-Q for the quarter
ending September 30, 2002 ("Report"), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: November 12, 2002 By: Kevin J. McNamara
----------------- -----------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
Page 22 of 24
EXHIBIT 99.2
CERTIFICATION BY TIMOTHY S. O'TOOLE
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 Executive Vice President and Treasurer of Chemed
Corporation ("Company"), does hereby certify that:
1) the Company's Quarterly Report of Form 10-Q for the quarter
ending September 30, 2002 ("Report"), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: November 12, 2002 By Timothy S. O'Toole
----------------- -----------------------
Timothy S. O'Toole
(Executive Vice President and
Treasurer)
Page 23 of 24
EXHIBIT 99.3
CERTIFICATION BY ARTHUR V. TUCKER, JR.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as Vice President and Controller of Chemed Corporation
("Company"), does hereby certify that:
1) the Company's Quarterly Report of Form 10-Q for the quarter
ending September 30, 2002 ("Report"), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Dated: November 12, 2002 By Arthur V. Tucker, Jr.
----------------- -----------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
Page 24 of 24