Manor Care, Inc. 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to Form 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2005
OR
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
Commission file number: 1-10858
Manor Care, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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34-1687107 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification No.) |
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333 N. Summit Street, Toledo, Ohio
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43604-2617 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (419) 252-5500
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
þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ
No o
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of
the Exchange Act). Yes o
No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the close of business on August 31, 2005.
Common stock, $0.01 par value 78,754,187 shares
Manor Care, Inc.
Form 10-Q/A
Explanatory Note
This Amendment No. 1 on Form 10-Q/A is being filed to amend and restate the Companys Form 10-Q for
the quarterly period ended March 31, 2005, which was originally filed on May 10, 2005.
During the first quarter of 2005, and in anticipation of adopting the Financial Accounting
Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment (FAS 123R), the
Company reviewed its accounting practices for all stock-based compensation, including restricted
stock. Historically, the Company amortized its restricted stock compensation to the expected
retirement date. As a result of the first quarter review, the Company determined that its
restricted stock compensation should have been amortized to the retirement eligible date. The
Company recorded a non-cash pretax charge of $10.3 million ($6.6 million after tax, or $.08 per
share) to reflect the accelerated expense for the years 2000 through 2004. The effect on the
Companys prior years earnings per share was not deemed material at that time. In addition,
restricted stock awards were made to retirement eligible employees in March 2005 that resulted in a
pretax charge of $8.2 million ($5.2 million after tax or $.06 per share).
Subsequent to the release of the Companys first quarter earnings, the Companys independent
registered public accounting firm advised the Company that due to the widespread practice of
recognizing compensation expense over the explicit service period (up to the date of actual
retirement), the SEC staff would accept continuation of that practice under Accounting Principles
Board Opinion No. 25 (APB 25) and FASB Statement No. 123 (FAS 123). In addition, for companies that
had followed that practice, the Company was advised that the SEC staff would require a continuation of that practice for awards
granted prior to the adoption of FAS 123R. For companies that had already made the accounting
change in the first quarter, such as Manor Care, the Company was further advised that there would be no objection from the SEC staff
because of the immateriality of the change.
In the third quarter of 2005, the Company determined that deferred tax assets, related to
restricted stock, previously recorded in the amount of $8.6 million, ($6.9 million of which was
recorded in the first quarter of 2005), would not be realized due to the limitations on the tax
deductibility of executive compensation and should not have been previously recorded. The Company
further determined that the previously discussed first quarter restricted stock adjustments,
including any reversal of deferred tax assets, while not material for all years prior to 2005,
would be material for 2005 net income.
Consistent with the SEC staff views described above and in consultation with the Companys
independent registered public accounting firm, the Company reverted to its original accounting
practice of recognizing compensation cost over the explicit service period and the restatement is
included in this Form 10-Q/A. The impact of the restatement for the first quarter reduced general
and administrative expenses and increased income before income taxes by $17.7 million, increased
income taxes by $8.6 million, increased net income by $9.1 million and increased diluted earnings
per share by $.10.
This Form 10-Q/A contains the complete text of Items 1, 2 and 4 of Part I and Item 6 of Part II, as
amended, as well as currently dated certifications. Unaffected items have not been repeated in
this Amendment No. 1. This Amendment No. 1 does not reflect events occurring after the filing date
of the original Form 10-Q on May 10, 2005 or modify or update the disclosures presented in the
original Form 10-Q, except to reflect the restatement as described above. Accordingly, Amendment
No. 1 should be read in conjunction with our filings made subsequent to the filing of the original
Form 10-Q on May 10, 2005, including any amendments to those filings. Additional disclosure
regarding the restatement is included in Note 8 to the restated unaudited consolidated financial
statements included in Item 1 of Part I of this Amendment No. 1 on Form 10-Q/A.
2
Manor Care, Inc.
Form 10-Q/A
Table of Contents
3
Part I. Financial Information
Item 1. Financial Statements.
Manor Care, Inc.
Consolidated Balance Sheets
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March 31, |
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2005 |
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December 31, |
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Restated |
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2004 |
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(Unaudited) |
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(Note 1) |
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(In thousands, except per share data) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
43,521 |
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$ |
32,915 |
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Receivables, less allowances for doubtful
accounts of $56,057 and $54,532, respectively |
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522,509 |
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425,278 |
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Prepaid expenses and other assets |
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24,777 |
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24,762 |
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Deferred income taxes |
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59,804 |
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57,412 |
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Total current assets |
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650,611 |
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540,367 |
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Property and equipment, net of accumulated
depreciation of $792,542 and $768,915, respectively |
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1,492,593 |
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1,495,152 |
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Goodwill |
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93,007 |
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92,672 |
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Intangible assets, net of amortization of $4,665 and $4,499, respectively |
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11,111 |
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9,099 |
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Other assets |
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198,094 |
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203,408 |
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Total assets |
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$ |
2,445,416 |
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$ |
2,340,698 |
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Liabilities And Shareholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
106,735 |
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$ |
102,178 |
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Employee compensation and benefits |
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136,413 |
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139,900 |
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Accrued insurance liabilities |
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100,534 |
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102,973 |
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Income tax payable |
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15,342 |
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4,710 |
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Other accrued liabilities |
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110,892 |
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49,992 |
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Long-term debt due within one year |
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2,467 |
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2,501 |
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Total current liabilities |
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472,383 |
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402,254 |
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Long-term debt |
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552,193 |
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555,275 |
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Deferred income taxes |
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136,474 |
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134,518 |
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Other liabilities |
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267,382 |
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264,492 |
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Shareholders equity: |
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Preferred stock, $.01 par value, 5 million shares authorized
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Common stock, $.01 par value, 300 million shares authorized,
111.0 million shares issued |
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1,110 |
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1,110 |
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Capital in excess of par value |
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365,887 |
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366,649 |
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Retained earnings |
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1,235,929 |
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1,208,493 |
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Accumulated other comprehensive loss |
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(1,218 |
) |
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(1,227 |
) |
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1,601,708 |
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1,575,025 |
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Less treasury stock, at cost (24.6 and 25.0 million shares, respectively) |
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(584,724 |
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(590,866 |
) |
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Total shareholders equity |
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1,016,984 |
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984,159 |
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Total liabilities and shareholders equity |
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$ |
2,445,416 |
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$ |
2,340,698 |
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See notes to consolidated financial statements.
4
Manor Care, Inc.
Consolidated Statements of Income
(Unaudited)
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Three Months Ended March 31, |
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2005 |
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Restated |
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2004 |
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(In thousands, except per share amounts) |
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Revenues |
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$ |
879,202 |
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$ |
797,338 |
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Expenses: |
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Operating |
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734,150 |
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659,358 |
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General and administrative |
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36,266 |
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34,791 |
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Depreciation and amortization |
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33,447 |
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31,747 |
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803,863 |
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725,896 |
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Income before other income (expenses)
and income taxes |
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75,339 |
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71,442 |
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Other income (expenses): |
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Interest expense |
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(10,116 |
) |
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(10,719 |
) |
Gain (loss) on sale of assets |
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(454 |
) |
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2,405 |
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Equity in earnings of affiliated companies |
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1,368 |
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2,053 |
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Interest income and other |
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359 |
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563 |
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Total other expenses, net |
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(8,843 |
) |
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(5,698 |
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Income before income taxes |
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66,496 |
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65,744 |
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Income taxes |
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26,133 |
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24,654 |
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Net income |
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$ |
40,363 |
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$ |
41,090 |
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Earnings per share: |
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Basic |
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$ |
.47 |
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$ |
.47 |
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Diluted |
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$ |
.46 |
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$ |
.45 |
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Weighted-average shares: |
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Basic |
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86,169 |
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88,195 |
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Diluted |
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87,720 |
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90,533 |
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Cash dividends declared per common share |
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$ |
.15 |
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$ |
.14 |
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See notes to consolidated financial statements.
5
Manor Care, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended March 31, |
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2005 |
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Restated |
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2004 |
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(In thousands) |
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Operating Activities |
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Net income |
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$ |
40,363 |
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$ |
41,090 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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33,447 |
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31,747 |
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Restricted stock compensation |
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745 |
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391 |
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Provision for bad debts |
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8,515 |
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6,634 |
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Deferred income taxes |
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(436 |
) |
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(1,302 |
) |
Net (gain) loss on sale of assets |
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454 |
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(2,405 |
) |
Equity in earnings of affiliated companies |
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(1,368 |
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(2,053 |
) |
Changes in assets and liabilities, excluding sold facilities and acquisitions: |
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Receivables |
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(105,813 |
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(14,890 |
) |
Prepaid expenses and other assets |
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3,283 |
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6,628 |
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Liabilities |
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71,424 |
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43,617 |
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Total adjustments |
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10,251 |
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68,367 |
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Net cash provided by operating activities |
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50,614 |
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109,457 |
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Investing Activities |
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Investment in property and equipment |
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(29,320 |
) |
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(61,454 |
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Investment in systems development |
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(748 |
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(980 |
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Proceeds from sale of assets |
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17,107 |
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Net cash used in investing activities |
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(30,068 |
) |
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(45,327 |
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Financing Activities |
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Principal payments of long-term debt |
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(487 |
) |
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(77 |
) |
Purchase of common stock for treasury |
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(1,755 |
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(24,121 |
) |
Dividends paid |
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(12,927 |
) |
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(12,517 |
) |
Proceeds from exercise of stock options |
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5,229 |
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12,853 |
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Net cash used in financing activities |
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(9,940 |
) |
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(23,862 |
) |
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Net increase in cash and cash equivalents |
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10,606 |
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40,268 |
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Cash and cash equivalents at beginning of period |
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32,915 |
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86,251 |
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Cash and cash equivalents at end of period |
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$ |
43,521 |
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$ |
126,519 |
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See notes to consolidated financial statements.
6
Manor Care, Inc.
Notes To Consolidated Financial Statements
(Unaudited and Restated)
Note 1 Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of Manor Care, Inc. (the Company), all
adjustments considered necessary for a fair presentation are included. Operating results for the
three months ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005.
The balance sheet at December 31, 2004 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. For further information, refer
to the consolidated financial statements and footnotes thereto included in Manor Care, Inc.s
annual report on Form 10-K for the year ended December 31, 2004.
At March 31, 2005, the Company operated 279 skilled nursing facilities, 65 assisted living
facilities, 97 hospice and home health offices and 88 outpatient therapy clinics.
Comprehensive Income
Comprehensive income represents the sum of net income plus other comprehensive income (loss).
Comprehensive income totaled $40.4 million and $40.6 million for the first quarters of 2005 and
2004, respectively. The other comprehensive loss in the first quarter of 2004 represents the
reversal of the unrealized gain on investments sold in 2004.
Insurance Liabilities
At March 31, 2005 and December 31, 2004, the workers compensation liability consisted of
short-term reserves of $24.4 million and $23.7 million, respectively, which were included in
accrued insurance liabilities, and long-term reserves of $43.5 million and $41.5 million,
respectively, which were included in other long-term liabilities. The expense for workers
compensation was $10.0 million and $9.3 million for the first quarters of 2005 and 2004,
respectively. Although management believes that the Companys liability reserves are adequate,
there can be no assurance that these reserves will not require material adjustment in future
periods. See Note 3 for discussion of the Companys general and professional liability.
7
Restricted Stock Accounting
The compensation expense related to time-vested restricted stock awards is amortized up to the
employees expected retirement date. If an employee retires before the expected retirement date,
it would require an acceleration of any remaining unrecognized compensation expense. The Company
will be required to change this policy for all awards granted or modified after adoption of the
Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based
Payment, on January 1, 2006, as discussed below. Any new or modified awards after December 31,
2005 will be required to be amortized up to the employees retirement eligible date. The Company
recorded compensation expense for time-vested restricted stock awards of $0.6 million and $0.4
million in the first quarters of 2005 and 2004, respectively. If the Company had recorded the
expense up to the employees retirement eligible date, the Company would have expensed $8.0 million
and $2.6 million in the first quarters of 2005 and 2004, respectively.
Stock-Based Compensation
Stock options are granted for a fixed number of shares to employees with an exercise price equal to
the fair market value of the shares at the date of grant. The Company accounts for the stock
option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Accordingly, the Company recognizes no
compensation expense for the stock options.
The following table illustrates the effect on net income and earnings per share as if the Company
had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation for options granted since 1995.
Effective March 15, 2005, stock options were awarded to executive officers that vest immediately.
In addition, the vesting of the stock options awarded in February 2003 and 2004 with an original
three year vesting were accelerated to vest immediately. The Company accelerated the vesting of
the prior year awards in order to avoid compensation expense when the new accounting standard for
share-based compensation is required to be adopted, as discussed in more detail under New
Accounting Standard. Management believes that the executive officers will continue to be employed
until the original vesting period; therefore, the Company has not recorded any expense under APB
25. The accelerated vesting of prior year awards resulted in additional pro forma expense, net of
related tax effects, of $3.0 million, as included in the table below. All outstanding options are
vested at March 31, 2005.
8
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Three months ended March 31, |
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2005 |
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2004 |
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(In thousands, except earnings per share) |
|
Net income as reported |
|
$ |
40,363 |
|
|
$ |
41,090 |
|
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects |
|
|
(8,001 |
) |
|
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(1,623 |
) |
|
|
|
|
|
|
|
Net income pro forma |
|
$ |
32,362 |
|
|
$ |
39,467 |
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Earnings per share as reported: |
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Basic |
|
$ |
.47 |
|
|
$ |
.47 |
|
Diluted |
|
$ |
.46 |
|
|
$ |
.45 |
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Earnings per share pro forma: |
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Basic |
|
$ |
.38 |
|
|
$ |
.45 |
|
Diluted |
|
$ |
.37 |
|
|
$ |
.43 |
|
New Accounting Standard
In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment, which is
a revision of Statement No. 123. Statement 123R replaces APB Opinion No. 25 and amends Statement
No. 95, Statement of Cash Flows. Statement 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on
their fair value. The pro forma footnote disclosure is no longer an alternative to financial
statement recognition. In April 2005, the Securities and Exchange Commission postponed the
effective date. Statement 123R is effective for the Company beginning January 1, 2006, but early
adoption is permitted in periods in which financial statements have not been issued. There are two
transition alternatives, modified-prospective and modified-retrospective. Under the
modified-prospective method, the Company will be required to recognize compensation cost in the
financial statements on the date of adoption. Under the modified-retrospective method, the Company
will be required to restate prior periods by recognizing in the financial statements the same
amount of compensation cost as previously reported in the pro forma footnote disclosures under
Statement 123. The Company will be permitted to apply the modified-retrospective method either to
all periods presented or to the start of the fiscal year in which Statement 123R is adopted.
In addition, Statement 123R requires awards classified as liabilities (such as cash-settled stock
appreciation rights) to be measured at fair value at each reporting date versus measured at
intrinsic value under Statement 123. The time value of the liability will be recognized as
compensation cost but then be reversed as the settlement date approaches. At expiration, total
9
compensation cost will not differ from that which would result under the intrinsic-value method.
Management expects to adopt this Statement on January 1, 2006 under the
modified-prospective-transition method. As discussed previously, all of the Companys options are
vested so it will not have expense related to prior year awards. Management has not determined the
impact of adoption of cash-settled stock appreciation rights.
Note 2 Revenues
Revenues for certain health care services are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Skilled nursing and assisted living services |
|
$ |
749,468 |
|
|
$ |
676,562 |
|
Hospice and home health services |
|
|
95,331 |
|
|
|
92,093 |
|
Rehabilitation
services
(excludes intercompany revenues) |
|
|
24,796 |
|
|
|
21,824 |
|
Other services |
|
|
9,607 |
|
|
|
6,859 |
|
|
|
|
|
|
|
|
|
|
$ |
879,202 |
|
|
$ |
797,338 |
|
|
|
|
|
|
|
|
Note 3 Contingencies
One or more subsidiaries or affiliates of Manor Care of America, Inc. (MCA) have been identified as
potentially responsible parties (PRPs) in a variety of actions (the Actions) relating to waste
disposal sites which allegedly are subject to remedial action under the Comprehensive Environmental
Response Compensation Liability Act, as amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and
similar state laws. CERCLA imposes retroactive, strict joint and several liability on PRPs for the
costs of hazardous waste clean-up. The Actions arise out of the alleged activities of Cenco,
Incorporated and its subsidiary and affiliated companies (Cenco). Cenco was acquired in 1981 by a
wholly owned subsidiary of MCA. The Actions allege that Cenco transported and/or generated
hazardous substances that came to be located at the sites in question. Environmental proceedings
such as the Actions may involve owners and/or operators of the hazardous waste site, multiple waste
generators and multiple waste transportation disposal companies. Such proceedings involve efforts
by governmental entities and/or private parties to allocate or recover site investigation and
clean-up costs, which costs may be substantial. The potential liability exposure for currently
pending environmental claims and litigation, without regard to insurance coverage, cannot be
quantified with precision because of the inherent uncertainties of litigation in the Actions and
the fact that the ultimate cost of the remedial actions for some of the waste disposal sites where
MCA is alleged to be a potentially responsible party has not yet been quantified. At March 31,
2005, the Company had $4.5 million accrued in other long-term liabilities based on its current
assessment of the likely outcome of the Actions which
10
was reviewed with its outside advisors. At
March 31, 2005, there were no receivables related to insurance recoveries.
The Company is party to various other legal matters arising in the ordinary course of business
including patient care-related claims and litigation. At March 31, 2005 and December 31, 2004, the
general and professional liability consisted of short-term reserves of $60.1 million and $65.9
million, respectively, which were included in accrued insurance liabilities, and long-term reserves
of $119.5 million and $122.5 million, respectively, which were included in other long-term
liabilities.
The expense for general and professional liability claims, premiums and administrative fees was
$18.2 million and $20.5 million for the first quarters of 2005 and 2004, respectively, which was
included in operating expenses. Although management believes that the Companys liability reserves
are adequate, there can be no assurance that such provision and liability will not require material
adjustment in future periods.
Note 4 Earnings Per Share
The calculation of earnings per share (EPS) is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except earnings per share) |
|
Numerator: |
|
|
|
|
|
|
|
|
Numerator for basic EPS net income |
|
$ |
40,363 |
|
|
$ |
41,090 |
|
After-tax amount of interest expense on
Convertible Senior Notes (Old Notes) |
|
|
26 |
|
|
|
27 |
|
|
|
|
|
|
|
|
Numerator for diluted EPS |
|
$ |
40,389 |
|
|
$ |
41,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic EPS weighted-average shares |
|
|
86,169 |
|
|
|
88,195 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options |
|
|
1,045 |
|
|
|
1,337 |
|
Non-vested restricted stock |
|
|
|
|
|
|
459 |
|
Convertible Senior Notes |
|
|
506 |
|
|
|
542 |
|
|
|
|
|
|
|
|
Denominator for diluted EPS
adjusted for weighted-average
shares and assumed conversions |
|
|
87,720 |
|
|
|
90,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
.47 |
|
|
$ |
.47 |
|
Diluted |
|
$ |
.46 |
|
|
$ |
.45 |
|
11
Options to purchase shares of the Companys common stock that were not included in the computation
of diluted EPS because the options exercise prices were greater than the average market price of
the common shares were: 0.6 million shares with an average exercise price of $38 for the first
quarter of 2005 and 0.4 million shares with an average exercise price of $39 for the first quarter
of 2004.
Note 5 Employee Benefit Plans
The Company has two qualified and two non-qualified defined benefit pension plans included in the
table below. Two of the plans future benefits are frozen. The components of net pension cost are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
Service cost |
|
$ |
429 |
|
|
$ |
413 |
|
Interest cost |
|
|
990 |
|
|
|
1,039 |
|
Expected return on plan assets |
|
|
(1,183 |
) |
|
|
(1,226 |
) |
Amortization of unrecognized transition asset |
|
|
(12 |
) |
|
|
(12 |
) |
Amortization of prior service cost |
|
|
490 |
|
|
|
490 |
|
Amortization of net loss |
|
|
235 |
|
|
|
211 |
|
Net pension cost |
|
$ |
949 |
|
|
$ |
915 |
|
Note 6 Shareholder Rights Plan
The Companys shareholder rights plan expired on May 2, 2005.
Note 7 Segment Information
The Company provides a range of health care services. The Company has two reportable operating
segments, long-term care, which includes the operation of skilled nursing and assisted living
facilities, and hospice and home health. The Other category includes the non-reportable segments
and corporate items. The revenues in the Other category include services for rehabilitation and
other services. Asset information, including capital expenditures, is not reported by segment by
the Company. Operating performance represents revenues less operating expenses and does not
include general and administrative expenses, depreciation and amortization, other income and
expense items, and income taxes.
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
Hospice and |
|
|
|
|
|
|
|
|
|
Care |
|
|
Home Health |
|
|
Other |
|
|
Total |
|
|
|
(In thousands) |
Three months ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
749,468 |
|
|
$ |
95,331 |
|
|
$ |
34,403 |
|
|
$ |
879,202 |
|
Intercompany revenues |
|
|
|
|
|
|
|
|
|
|
19,649 |
|
|
|
19,649 |
|
Depreciation and amortization |
|
|
31,709 |
|
|
|
773 |
|
|
|
965 |
|
|
|
33,447 |
|
Operating margin |
|
|
129,513 |
|
|
|
12,451 |
|
|
|
3,088 |
|
|
|
145,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
676,562 |
|
|
$ |
92,093 |
|
|
$ |
28,683 |
|
|
$ |
797,338 |
|
Intercompany revenues |
|
|
|
|
|
|
|
|
|
|
16,996 |
|
|
|
16,996 |
|
Depreciation and amortization |
|
|
30,039 |
|
|
|
771 |
|
|
|
937 |
|
|
|
31,747 |
|
Operating margin |
|
|
117,443 |
|
|
|
16,040 |
|
|
|
4,497 |
|
|
|
137,980 |
|
Note 8 Restatement of Previously Issued Financial Statements
To correct the items discussed in our Explanatory Note on page 2, the Company restated its
consolidated balance sheet at March 31, 2005, its consolidated statement of income for the quarter
ended March 31, 2005 and its consolidated statement of cash flows for the quarter ended March 31,
2005. The accompanying notes to the consolidated financial statements have been restated as
necessary to reflect the adjustments.
The effects of the restatement on the consolidated balance sheet as of March 31, 2005 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005 |
|
|
|
Previously |
|
|
|
|
|
|
Reported |
|
|
Restated |
|
|
|
(In thousands) |
Current liabilities: |
|
|
|
|
|
|
|
|
Income tax payable |
|
$ |
15,405 |
|
|
$ |
15,342 |
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
127,840 |
|
|
|
136,474 |
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
Capital in excess of par value |
|
|
383,600 |
|
|
|
365,887 |
|
Retained earnings |
|
|
1,226,787 |
|
|
|
1,235,929 |
|
Total shareholders equity |
|
|
1,025,555 |
|
|
|
1,016,984 |
|
13
The consolidated statement of income was adjusted by a decrease to general and administrative
expenses by $17.7 million and an increase to income taxes by $8.6 million. The effects of the
restatement on the consolidated statement of income for the first quarter of 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, 2005 |
|
|
|
Previously |
|
|
|
|
|
|
Reported |
|
|
Restated |
|
|
|
(In thousands, except per share amounts) |
|
Expenses: |
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
53,979 |
|
|
$ |
36,266 |
|
|
|
|
|
|
|
|
|
|
Income before other income (expenses) and
income taxes |
|
|
57,626 |
|
|
|
75,339 |
|
Income before income taxes |
|
|
48,783 |
|
|
|
66,496 |
|
Income taxes |
|
|
17,562 |
|
|
|
26,133 |
|
Net income |
|
|
31,221 |
|
|
|
40,363 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
.36 |
|
|
$ |
.47 |
|
Diluted |
|
$ |
.36 |
|
|
$ |
.46 |
|
There was no change to the cash provided by operations as the adjustments were all non-cash
items. The effects of the restatement on the consolidated statement of cash flows for the first
quarter of 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, 2005 |
|
|
|
Previously |
|
|
|
|
|
|
Reported |
|
|
Restated |
|
|
|
(In thousands) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
31,221 |
|
|
$ |
40,363 |
|
Restricted stock compensation |
|
|
18,458 |
|
|
|
745 |
|
Deferred income taxes |
|
|
(9,070 |
) |
|
|
(436 |
) |
Liabilities |
|
|
71,487 |
|
|
|
71,424 |
|
Total adjustments |
|
|
19,393 |
|
|
|
10,251 |
|
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies
General and Professional Liability. Our general and professional reserves include amounts for
patient care-related claims and incurred but not reported claims. The amount of our reserves is
determined based on an estimation process that uses information obtained from both company-specific
and industry data. The estimation process requires us to continuously monitor and evaluate the
life cycle of the claims. Using data obtained from this monitoring and our assumptions about
emerging trends, we along with our independent actuary develop information about the size of
ultimate claims based on our historical experience and other available industry information. The
most significant assumptions used in the estimation process include determining the trend in costs,
the expected cost of claims incurred but not reported and the expected costs to settle unpaid
claims. Our assumptions take into consideration our internal efforts to contain our costs by
reviewing our risk management programs, our operational and clinical initiatives, and other
industry changes affecting the long-term care market. In comparing the first quarter of 2005 with
the first quarter of 2004, the number of new claims is similar and our average settlement cost per
claim is down. Our accrual rate for current claims is $5.1 million per month. Although we believe
our liability reserves are adequate and appropriate, we can give no assurance that these reserves
will not require material adjustment in future periods.
Workers Compensation Liability. Our workers compensation reserves are determined based on
an estimation process that uses company-specific data. We continuously monitor the claims and
develop information about the ultimate cost of the claims based on our historical experience.
During 2003 and continuing into 2004, we expanded and increased attention to our safety, training
and claims management programs. As a result, the number of new claims in the first quarter of 2005
decreased in comparison to the prior year period. Our workers compensation expense increased $0.7
million for the first quarter of 2005 in comparison to the prior year period primarily because of
inflation. Although we believe our liability reserves are adequate and appropriate, we can give no
assurance that these reserves will not require material adjustment in future periods.
Results of Operations
Quarter Ended March 31, 2005 Compared with Quarter Ended March 31, 2004
Revenues. Our revenues increased $81.9 million, or 10 percent, from the first quarter of 2004
to 2005, primarily related to the increased revenues of $63.2 million associated with provider
assessments for several states, including Pennsylvania. The first quarter Pennsylvania effect was
$7.4 million. Revenues from our long-term care segment, excluding the revenues associated with
provider assessments, increased $9.7 million, or 1 percent, due to increases in rates/patient mix
of $49.0 million and occupancy of
$8.9 million that were partially offset by a decrease in capacity
of
15
$48.2 million. Our revenues from the hospice and home health segment increased $3.2 million, or
4 percent, primarily from an increase in the number of patients utilizing our hospice services.
Our average rates per day for the long-term care segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
Increase |
|
Medicare |
|
$ |
352.50 |
|
|
$ |
333.37 |
|
|
|
6 |
% |
Medicaid |
|
$ |
146.10 |
|
|
$ |
133.22 |
|
|
|
10 |
% |
Private and other (skilled only) |
|
$ |
211.59 |
|
|
$ |
197.07 |
|
|
|
7 |
% |
Our average Medicare rates increased as a result of an inflation update of 2.8 percent effective
October 1, 2004, as well as higher acuity Medicare patients. Our average Medicaid rate excluded
the prior year Pennsylvania revenues associated with provider assessments but included the first
quarter effect. For comparison purposes, our average Medicaid rate was $141 when excluding the
first quarter Pennsylvania effect.
Our occupancy levels were 88 percent for the first quarter of 2004 and 89 percent for the first
quarter of 2005. Excluding start-up facilities, our occupancy levels were 89 percent for the first
quarters of 2004 and 2005. Excluding start-up facilities, our occupancy levels for skilled nursing
facilities were 89 percent for the first quarter of 2004 and 90 percent for the first quarter of
2005. The quality mix of revenues from Medicare, private pay and insured patients that related to
our long-term care segment and rehabilitation operations increased from 69 percent for the first
quarter of 2004 to 71 percent for the first quarter of 2005.
Our bed capacity declined between the first quarters of 2004 and 2005 primarily because of the
divestiture of 21 facilities in 2004.
Operating Expenses. Our operating expenses in the first quarter of 2005 increased $74.8
million, or 11 percent, compared with the first quarter of 2004, primarily related to the increase
in provider assessments of $57.5 million for several states, including Pennsylvania. The first
quarter Pennsylvania provider assessment effect was $7.3 million.
Excluding the increase in provider assessments, operating expenses from our long-term care segment
increased $3.3 million, or 1 percent, between the first quarters of 2004 and 2005. The largest
portion of the operating expense increase related to ancillary costs, excluding internal labor, of
$13.0 million. Ancillary costs, which include various types of therapies, medical supplies and
prescription drugs, increased as a result of our more medically complex patients. Partially
offsetting this increase were decreases in labor costs of $9.7 million and general and professional
liability expense of $2.2 million. Our labor costs have decreased due to the divestiture of
facilities in 2004. Our wage rates increased 4 percent compared with the first quarter of 2004.
16
During the quarter, our hospice and home health segment was reorganized in preparation for future
growth. We appointed a new general manager and new divisional and regional management. Margins
declined this quarter as our operating expenses increased $6.8 million or 9 percent, primarily due
to a $4.2 million increase in labor costs.
Depreciation and Amortization. Our depreciation expense increased $1.6 million from the first
quarters of 2004 to 2005. Excluding our divested facilities in 2004, depreciation expense
increased $2.4 million because of the completion of new construction projects and renovations to
existing facilities.
Interest Expense. Interest expense decreased $0.6 million from the first quarter of 2004 to
2005 because of lower debt levels partially offset by higher interest rates.
Gain on Sale of Assets. Our gain on sale of assets in 2004 primarily resulted from the sale
of four skilled nursing facilities in January 2004 and certain other assets.
Income Taxes. Our effective tax rate was 39.3 percent in the first quarter of 2005 compared
with 37.5 percent in the first quarter of 2004. We expected our 2005 effective tax rate to be 37.0
percent, as disclosed in our 2004 Form 10-K, but due to additional non-deductible restricted stock
expense we now expect our rate to be approximately 37.5 percent in 2005 before unusual items. In
the first quarter of 2005, we reversed $1.7 million of deferred tax assets related to prior years
restricted stock expense that was partially offset by an adjustment to prior years state tax
liability.
Financial Condition March 31, 2005 and December 31, 2004
Receivables and other accrued liabilities have both increased primarily as a result of the
Pennsylvania revenues and associated provider assessment. The receipts and payments related to
Pennsylvania are scheduled for the second quarter.
Liquidity and Capital Resources
Cash Flows. During the first quarter of 2005, we satisfied our cash requirements with cash
generated from operating activities. We used the cash principally for capital expenditures and the
payment of dividends. Cash flows from operating activities were $50.6 million for the first
quarter of 2005, a decrease of $58.8 million from the first quarter of 2004. Our operating cash
flows in 2005 decreased primarily because of federal income tax payments of $14.1 million and
Medicare settlement payments of $31.9 million related to the former Manor Care home office cost
reports for 1997 through 1999, which are under appeal and recorded as receivables.
Investing Activities. Our expenditures for property and equipment of $29.3 million in the
first quarter of 2005 included $9.3 million to construct new facilities and expand existing
facilities.
17
Debt Agreement. As of March 31, 2005, there were no loans outstanding under our three-year
$200 million revolving credit facility. After consideration of usage for letters of credit, there
was $151.4 million available for future borrowings. The holders of our $100 million Convertible
Senior Notes had the right to require us to purchase the Notes on April 15, 2005 but only $15,000
was requested for redemption. The next put date is April 15, 2008.
Stock Purchase. In July 2004, our Board of Directors authorized us to spend up to $100
million to purchase our common stock through December 31, 2005. With this authorization, we
purchased 50,000 shares in the first quarter of 2005 for $1.8 million. We had $55.5 million
remaining authority to repurchase our shares as of March 31, 2005. We may use the shares for
internal stock option and 401(k) match programs and for other uses, such as possible acquisitions.
Cash Dividends. On April 22, 2005, we announced that the Company will pay a quarterly cash
dividend of 15 cents per share to shareholders of record on May 9, 2005. This dividend will
approximate $13.0 million and is payable May 23, 2005. We intend to declare and pay regular
quarterly cash dividends; however, there can be no assurance that any dividends will be declared,
paid or increased in the future.
We believe that our cash flow from operations will be sufficient to cover operating needs, future
capital expenditure requirements, scheduled debt payments of miscellaneous small borrowing
arrangements and capitalized leases, cash dividends and some share repurchase. Because of our
significant annual cash flow, we believe that we will be able to refinance the major pieces of our
debt as they mature. It is likely that we will pursue growth from acquisitions, partnerships and
other ventures that we would fund from excess cash from operations, credit available under our
revolving credit facility and other financing arrangements that are normally available in the
marketplace.
Cautionary Statement Concerning Forward-Looking Statements
This report may include forward-looking statements. We have based these forward-looking statements
on our current expectations and projections about future events. We identify forward-looking
statements in this report by using words or phrases such as anticipate, believe, estimate,
expect, intend, may be, objective, plan, predict, project, and will be and similar
words or phrases, or the negative thereof.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties.
Factors which may cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by us in those statements
include, among others: changes in the health care industry because of political and economic
influences; changes in Medicare, Medicaid and certain private payors
18
reimbursement levels or coverage requirements; existing government regulations, including applicable health care, tax and
health and safety regulations, and changes in, or the failure to comply with, governmental
regulations or the interpretations thereof; legislative proposals for health care reform;
competition and general economic and business conditions; the ability to attract and retain
qualified personnel; changes in current trends in the cost and volume of patient care-related
claims and workers compensation claims and in insurance costs related to such claims; and other
litigation.
Although we believe the expectations reflected in our forward-looking statements are based upon
reasonable assumptions, we can give no assurance that we will attain these expectations or that any
deviations will not be material. Except as otherwise required by the federal securities laws, we
disclaim any obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this report to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which any such statement is
based.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management,
including the chief executive officer, or CEO, and chief financial officer, or CFO, of the
effectiveness of the design and operation of our disclosure procedures. Based on that evaluation,
our management, including the CEO and CFO, concluded that our disclosure controls and procedures
were effective as of March 31, 2005. There were no significant changes in our internal control
over financial reporting in the first quarter of 2005 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 6. Exhibits.
|
|
|
S-K Item |
|
|
601 No. |
|
|
31.1
|
|
Chief Executive Officer Certification |
|
|
|
31.2
|
|
Chief Financial Officer Certification |
|
|
|
32.1
|
|
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Manor Care, Inc. |
|
|
(Registrant) |
|
|
|
|
|
Date September 27, 2005
|
|
By
|
|
/s/ Geoffrey G. Meyers |
|
|
|
|
|
|
|
|
|
Geoffrey G. Meyers, Executive Vice President
and Chief Financial Officer |
20
Exhibit Index
|
|
|
Exhibit |
|
|
31.1
|
|
Chief Executive Officer Certification |
|
|
|
31.2
|
|
Chief Financial Officer Certification |
|
|
|
32.1
|
|
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
21