Manor Care, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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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, 2007
OR
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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
(State or other jurisdiction of
incorporation or organization)
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34-1687107
(IRS Employer
Identification No.) |
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333 N. Summit Street, Toledo, Ohio
(Address of principal executive offices)
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43604-2617
(Zip Code) |
Registrant’s 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 a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer 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 issuer’s classes of common stock, as of
the close of business on April 30, 2007.
Common stock, $0.01 par value – 73,169,995 shares
Manor Care, Inc.
Form 10-Q
Table of Contents
2
Part I. Financial Information
Item 1. Financial Statements.
Manor Care, Inc.
Consolidated Balance Sheets
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March 31, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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(Note 1) |
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(In thousands, except per share data) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
37,022 |
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$ |
17,658 |
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Receivables, less allowances for doubtful
accounts of $78,595 and $74,644, respectively |
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618,257 |
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565,831 |
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Prepaid expenses and other assets |
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33,581 |
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34,924 |
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Deferred income taxes |
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5,091 |
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781 |
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Total current assets |
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693,951 |
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619,194 |
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Property and equipment, net of accumulated depreciation of $882,004 and $844,471, respectively |
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1,492,771 |
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1,493,576 |
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Goodwill |
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134,256 |
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132,997 |
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Intangible assets, net of amortization of $2,050 and $1,862,
respectively |
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5,594 |
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5,782 |
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Other assets |
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101,673 |
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146,928 |
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Total assets |
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$ |
2,428,245 |
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$ |
2,398,477 |
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Liabilities And Shareholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
122,504 |
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$ |
120,621 |
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Employee compensation and benefits |
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163,573 |
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165,001 |
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Accrued insurance liabilities |
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108,640 |
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109,538 |
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Income tax payable |
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29,797 |
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10,118 |
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Other accrued liabilities |
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82,495 |
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79,904 |
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Long-term debt due within one year |
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140,512 |
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38,447 |
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Total current liabilities |
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647,521 |
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523,629 |
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Long-term debt |
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814,817 |
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955,211 |
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Deferred income taxes |
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69,018 |
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78,741 |
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Other liabilities |
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285,800 |
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267,703 |
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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, $.01 par value, 300 million shares authorized,
111.0 million shares issued |
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1,110 |
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1,110 |
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Capital in excess of par value |
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415,883 |
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407,506 |
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Retained earnings |
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1,454,241 |
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1,437,145 |
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Accumulated other comprehensive loss |
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(13,270 |
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(29,217 |
) |
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1,857,964 |
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1,816,544 |
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Less treasury stock, at cost (37.9 and 38.3 million shares,
respectively) |
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(1,246,875 |
) |
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(1,243,351 |
) |
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Total shareholders’ equity |
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611,089 |
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573,193 |
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Total liabilities and shareholders’ equity |
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$ |
2,428,245 |
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$ |
2,398,477 |
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See notes to consolidated financial statements.
3
Manor Care, Inc.
Consolidated Statements of Income
(Unaudited)
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Three Months Ended March 31, |
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2007 |
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2006 |
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(In thousands, except per share data) |
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Revenues |
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$ |
959,066 |
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$ |
869,295 |
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Expenses: |
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Operating |
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790,124 |
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722,910 |
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General and administrative |
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73,503 |
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52,105 |
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Depreciation and amortization |
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36,987 |
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35,942 |
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Asset impairment |
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11,082 |
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900,614 |
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822,039 |
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Income before other income (expenses) and income taxes |
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58,452 |
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47,256 |
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Other income (expenses): |
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Interest expense |
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(8,670 |
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(7,140 |
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Gain (loss) on sale of assets |
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(4,771 |
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58 |
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Equity in earnings of affiliated companies |
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459 |
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1,586 |
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Interest income and other |
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(134 |
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835 |
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Total other expenses, net |
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(13,116 |
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(4,661 |
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Income before income taxes |
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45,336 |
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42,595 |
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Income taxes |
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15,477 |
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15,590 |
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Income before cumulative effect |
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29,859 |
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27,005 |
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Cumulative effect of change in accounting principle, net of tax |
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(2,476 |
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Net income |
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$ |
29,859 |
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$ |
24,529 |
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Earnings per share — basic: |
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Income before cumulative effect |
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$ |
.41 |
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$ |
.34 |
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Cumulative effect |
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(.03 |
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Net income |
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$ |
.41 |
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$ |
.31 |
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Earnings per share — diluted: |
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Income before cumulative effect |
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$ |
.39 |
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$ |
.33 |
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Cumulative effect |
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(.03 |
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Net income |
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$ |
.39 |
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$ |
.30 |
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Weighted-average shares: |
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Basic |
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73,044 |
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78,923 |
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Diluted |
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76,900 |
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80,841 |
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Cash dividends declared per common share |
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$ |
.17 |
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$ |
.16 |
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See notes to consolidated financial statements.
4
Manor Care, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended March 31, |
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2007 |
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2006 |
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(In thousands) |
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Operating Activities |
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Net income |
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$ |
29,859 |
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$ |
24,529 |
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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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36,987 |
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35,942 |
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Asset impairment and other non-cash charges |
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24,936 |
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15,050 |
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Stock option and restricted stock compensation |
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4,161 |
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6,664 |
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Provision for bad debts |
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13,215 |
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11,786 |
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Deferred income taxes |
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(14,033 |
) |
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(12,263 |
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Net (gain) loss on sale of assets |
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4,771 |
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(58 |
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Equity in earnings of affiliated companies |
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(459 |
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(1,586 |
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Changes in assets and liabilities, excluding sold facilities and acquisitions: |
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Receivables |
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(27,069 |
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(24,897 |
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Prepaid expenses and other assets |
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(2,374 |
) |
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1,758 |
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Liabilities |
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23,898 |
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16,025 |
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Total adjustments |
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64,033 |
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48,421 |
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Net cash provided by operating activities |
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93,892 |
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72,950 |
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Investing Activities |
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Investment in property and equipment |
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(31,504 |
) |
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(30,023 |
) |
Investment in systems development |
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(510 |
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(1,001 |
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Investment in partnership |
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(1,228 |
) |
Acquisitions |
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(2,535 |
) |
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(298 |
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Proceeds from sale of assets |
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487 |
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Net cash used in investing activities |
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(34,062 |
) |
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(32,550 |
) |
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Financing Activities |
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Net repayments under revolving credit facility |
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(36,000 |
) |
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(22,800 |
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Principal payments of long-term debt |
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(2,329 |
) |
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(456 |
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Purchase of common stock for treasury |
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(5,042 |
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Dividends paid |
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(12,414 |
) |
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(12,622 |
) |
Proceeds from exercise of stock options |
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3,978 |
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6,569 |
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Excess tax benefits from share-based payment arrangements |
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6,299 |
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4,170 |
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Net cash used in financing activities |
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(40,466 |
) |
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(30,181 |
) |
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Net increase in cash and cash equivalents |
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19,364 |
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|
10,219 |
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Cash and cash equivalents at beginning of period |
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17,658 |
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12,293 |
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Cash and cash equivalents at end of period |
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$ |
37,022 |
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$ |
22,512 |
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See notes to consolidated financial statements.
5
Manor Care, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
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, 2007 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2007.
The balance sheet at December 31, 2006 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, 2006.
At March 31, 2007, the Company operated 279 skilled nursing facilities, 65 assisted living
facilities, 122 hospice and home health offices, and 90 outpatient therapy clinics.
Comprehensive Income
Comprehensive income represents the sum of net income plus other comprehensive income (loss).
Comprehensive income was $45.8 million for the first quarter of 2007, which included net income of $29.9 million and other comprehensive income of $15.9 million. The other comprehensive income primarily
represented the remaining amortization of unrecognized pension costs related to the Company’s
terminated pension plan. Comprehensive income was $24.5 million for the first quarter of 2006, which represented net income.
6
Goodwill
During the first quarter of 2007, the Company reorganized its reporting structure by combining its
rehabilitation operating segment with its long-term care operating segment. The Company refers to
this new segment as long-term care and rehabilitation. Prior to the reorganization, rehabilitation
was included in the Other category. See Note 9 for further discussion of segments.
The changes in the carrying amount of goodwill by segment after the reorganization are as follows:
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Long-Term |
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Care and |
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Hospice and |
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Rehabilitation |
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Home Health |
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Other |
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Total |
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(In thousands) |
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Balance at January 1, 2006 |
|
$ |
66,522 |
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$ |
36,384 |
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$ |
451 |
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$ |
103,357 |
|
Goodwill from acquisitions |
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|
10,290 |
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|
19,350 |
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|
29,640 |
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|
Balance at December 31, 2006 |
|
|
76,812 |
|
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|
55,734 |
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|
451 |
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|
132,997 |
|
Goodwill from acquisitions |
|
|
1,259 |
|
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|
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|
|
1,259 |
|
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|
Balance at March 31, 2007 |
|
$ |
78,071 |
|
|
$ |
55,734 |
|
|
$ |
451 |
|
|
$ |
134,256 |
|
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Insurance Liabilities
At March 31, 2007 and December 31, 2006, the workers’ compensation liability consisted of
short-term reserves of $20.8 million and $21.0 million, respectively, which were included in
accrued insurance liabilities, and long-term reserves of $37.0 million at each date, which were
included in other long-term liabilities. The expense for workers’ compensation was $5.8 million
and $6.3 million for the first quarters of 2007 and 2006, respectively. Although management
believes that the Company’s liability reserves are adequate, there can be no assurance that these
reserves will not require material adjustment in future periods. See Note 5 for discussion of the
Company’s general and professional liability.
New Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, “Fair
Value Measurements” (Statement 157), which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. Statement 157 applies under other accounting pronouncements that require
or permit fair value measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement
does not require any new fair value measurements. Statement 157 is effective for fiscal years
beginning after November 15, 2007. Management is in the process of evaluating the impact of
adopting Statement 157.
7
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities” (Statement 159), which permits entities to voluntarily choose to measure
many financial instruments and certain other items at fair value at specified election dates. Such
election, which may be applied on an instrument-by-instrument basis, is typically irrevocable. If
the fair value option is elected for an instrument, Statement 159 specifies that all subsequent
changes in fair value for that instrument shall be reported in earnings. Statement 159 is
effective for fiscal years beginning after November 15, 2007. Management is in the process of
evaluating the impact of adopting Statement 159.
Note 2 – Divestitures
The Company had a 20 percent ownership and voting interest in two hospitals, with affiliates of
Health Management Associates, Inc. holding the remaining interest. In the first quarter of 2007,
the Company entered into an agreement to sell these investments resulting in a net loss of $4.7
million. The transaction closed in April 2007, and the Company received $34.3 million that was
recorded as a receivable at March 31, 2007.
Note 3 – Debt
The holders of the $6.6 million of Old Notes due 2023, $93.4 million of New Notes due 2023, and
$400 million of Convertible Senior Notes due 2035 could convert their notes at March 31, 2007,
because the Company’s average stock price for 20 trading days exceeded the conversion price of
$37.34, $37.34 and $53.70, respectively, for each of the notes. The $6.6 million par value of Old
Notes is only convertible into the Company’s common stock and would not utilize current assets for
payment. The remaining notes totaling $493.4 million are required to be classified as a current
liability, except when the Company has the ability and intent to finance the notes with long-term
debt, such as its $400 million revolving credit facility, which matures June 22, 2011. As of March
31, 2007, there were no loans outstanding under the revolving credit facility, and after
consideration of usage for letters of credit, $354.2 million was available for future borrowing.
The Company classified $354.2 million of these notes as long-term and the remaining $139.2 million
as current.
Note 4 – Income Taxes
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (FIN 48), which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
As a result of adopting FIN 48, the Company reduced retained earnings by $0.3 million. As of the
date of adoption, the total amount of unrecognized tax benefits was $11.1 million. The total
amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$4.6 million.
8
Upon adoption of FIN 48, the Company elected to make a change in accounting principle concerning
the financial statement presentation of interest and penalties related to income taxes. Such
interest and penalties are now classified in the income statement as income taxes. Prior to the
change, interest expense was classified as interest expense, interest income was classified as
interest income and other, and penalties were classified as operating expenses. As of the date of
adoption, the Company has recorded accrued interest and penalties of $0.6 million. Prior to
adoption, accrued interest and penalties were $0.2 million
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction
and in most states. With few exceptions, the Company is no longer subject to U.S. federal, state
or local income tax examinations for years before 2003. The Internal Revenue Service has recently
completed an examination of the Company’s 2002 through 2004 U.S. income tax returns, and all issues
raised for those years have been resolved.
Except for the effect of the first-quarter settlement discussed below, the Company has not
identified any positions for which it is reasonably possible that the total amount of unrecognized
tax benefit will materially increase or decrease in the next 12 months. During the first quarter
of 2007, the Company reduced its unrecognized tax benefit balance by approximately $2.0 million
related to the resolution of a dispute involving availability of tax credits in a local tax
jurisdiction. This amount reduced the effective tax rate by $1.3 million.
Note 5 – Contingencies
One or more subsidiaries or affiliates of the Company 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 the Company. 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
subsidiaries or affiliates of the Company are alleged to be a potentially responsible party has not
yet been quantified. At March 31, 2007 and December 31, 2006, the Company had $4.8 million
accrued in other long-term liabilities, based
9
on its current assessment of the likely outcome of
the Actions. The amount of the Company’s reserve is based on management’s continual monitoring of
the litigation activity, estimated clean-up costs and the portion of the liability for which the
Company is responsible. At March 31, 2007 and December 31, 2006, 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, 2007 and December 31, 2006, the
general and professional liability consisted of short-term reserves of $61.6 million and $61.7
million, respectively, which were included in accrued insurance liabilities, and long-term reserves
of $111.0 million and $109.0 million, respectively, which were included in other long-term
liabilities. The expense for general and professional liability claims, premiums and
administrative fees was $15.3 million and $18.0 million for the first quarters of 2007 and 2006,
respectively, which was included in operating expenses. Although management believes that the
Company’s liability reserves are adequate, there can be no assurance that such provision and
liability will not require material adjustment in future periods.
Note 6 – Stock-Based Compensation
During the first quarter of 2006, the Company recorded the cumulative effect of the change in
accounting for stock appreciation rights, or SARs, of $4.0 million ($2.5 million after tax, or $.03
per share) as a result of the adoption of FASB Statement No. 123R, “Share-Based Payment” (Statement
123R). The Company was required to change the measurement method for its SARs liability from
intrinsic value to fair value on January 1, 2006.
Stock-based compensation expense, related to stock options, time- and performance-vested restricted
stock, restricted stock units and stock appreciation rights, was $10.2 million and $12.0 million
for the first quarters of 2007 and 2006, respectively, excluding the cumulative effect discussed
previously. During the first quarter of 2007, the following awards were granted: 345,000 stock
options with an exercise price of $53.21 and a weighted-average grant-date fair value of $13.68,
which cliff vest in three years, and 191,800 restricted stock units with a grant-date fair value of
$53.21, which cliff vest in three years. For performance-vested restricted stock related to 2007,
there are target awards of 106,167 shares, with a weighted-average grant-date fair value of $43.06.
Depending on the Company’s actual performance, the actual shares awarded could range from zero to
225 percent of the target shares. The Company accrues the expense based on the number of awards
that are probable of vesting.
Shares delivered by employees to the Company to cover the payment of the option price and tax
withholdings related to option exercises or vesting of stock had a value of $28.8 million and $14.1
million for the first quarters of 2007 and 2006, respectively.
10
Note 7 — Earnings Per Share
The calculation of earnings per share (EPS) is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(In thousands, except earnings per share) |
|
Numerator: |
|
|
|
|
|
|
|
|
Numerator for basic EPS – income before
cumulative effect |
|
$ |
29,859 |
|
|
$ |
27,005 |
|
After-tax amount of interest expense on
Convertible Senior Notes (Old Notes) |
|
|
28 |
|
|
|
27 |
|
|
|
|
|
|
|
|
Numerator for diluted EPS |
|
$ |
29,887 |
|
|
$ |
27,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic EPS – weighted-
average shares |
|
|
73,044 |
|
|
|
78,923 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options |
|
|
779 |
|
|
|
951 |
|
Restricted stock or units |
|
|
95 |
|
|
|
19 |
|
Convertible Senior Notes |
|
|
2,982 |
|
|
|
948 |
|
|
|
|
|
|
|
|
Denominator for diluted EPS –
adjusted for weighted-average
shares and assumed conversions |
|
|
76,900 |
|
|
|
80,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS — Income before cumulative effect: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
.41 |
|
|
$ |
.34 |
|
Diluted |
|
$ |
.39 |
|
|
$ |
.33 |
|
Options to purchase 0.3 million shares of the Company’s common stock with an average exercise price
of $53 for the first quarter of 2007 and 0.1 million shares with an average exercise price of $41
for the first quarter of 2006 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.
The Company’s warrants related to its $400 million Convertible Senior Notes due in 2035 were not
included in the computation of diluted EPS, because the warrants’ current conversion price of
$59.57 was greater than the average market price of the common shares.
11
Note 8 – Employee Benefit Plans
The Company has two qualified and two non-qualified defined benefit pension plans included in the
table below. Effective December 31, 2006, the Company elected to terminate its qualified,
overfunded, defined benefit pension plan. This plan, with frozen benefits prior to 1997, covers
certain non-union employees. In the first quarter of 2007, the Company made either lump-sum
distributions to participants or transferred account balances to a licensed insurance company for
all remaining vested participants, based on the option elected by the participants. The Company
was relieved of its obligation with respect to this plan, which resulted in a full settlement of
the plan in the first quarter of 2007. The Company recorded a non-cash pretax charge of $24.9
million ($15.6 million after tax, or $.20 per share) related to the terminated plan.
The components of net pension cost are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(In thousands) |
|
Service cost |
|
$ |
678 |
|
|
$ |
1,108 |
|
Interest cost |
|
|
722 |
|
|
|
1,035 |
|
Expected return on plan assets |
|
|
(394 |
) |
|
|
(1,045 |
) |
Amortization of unrecognized transition asset |
|
|
(12 |
) |
|
|
(12 |
) |
Amortization of prior service cost |
|
|
488 |
|
|
|
490 |
|
Amortization of net loss |
|
|
220 |
|
|
|
249 |
|
Settlement loss |
|
|
24,804 |
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
26,506 |
|
|
$ |
1,825 |
|
|
|
|
|
|
|
|
12
Note 9 – Segment Information
The Company provides a range of health care services. During the first quarter of 2007, the
Company reorganized its reporting structure by combining its rehabilitation operating segment with
its long-term care operating segment. The Company refers to this new segment as long-term care and
rehabilitation. Prior to the reorganization, rehabilitation was included in the Other category.
The Company changed its prior-year segment disclosures to conform with the new reporting structure.
The Company has two reportable operating segments – long-term care and rehabilitation, which
operates skilled nursing and assisted living facilities and provides rehabilitation services, and
hospice and home health. The Other category includes the non-reportable segments and corporate
items. The revenues in the Other category include other health care services and prior to 2007,
medical transcription revenues. 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, asset
impairment, other income and expense items, income taxes, and cumulative effect.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Long-Term |
|
|
|
|
|
|
| |
|
Care and |
|
Hospice and |
|
|
|
|
| |
|
Rehabilitation |
|
Home Health |
|
Other |
|
Total |
| |
|
(In thousands) |
Three months ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
821,669 |
|
|
$ |
132,617 |
|
|
$ |
4,780 |
|
|
$ |
959,066 |
|
Depreciation and amortization |
|
|
35,715 |
|
|
|
955 |
|
|
|
317 |
|
|
|
36,987 |
|
Operating margin |
|
|
155,730 |
|
|
|
14,146 |
|
|
|
(934 |
) |
|
|
168,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
756,790 |
|
|
$ |
104,800 |
|
|
$ |
7,705 |
|
|
$ |
869,295 |
|
Intersegment revenues |
|
|
|
|
|
|
|
|
|
|
975 |
|
|
|
975 |
|
Depreciation and amortization |
|
|
34,406 |
|
|
|
709 |
|
|
|
827 |
|
|
|
35,942 |
|
Operating margin |
|
|
130,124 |
|
|
|
16,364 |
|
|
|
(103 |
) |
|
|
146,385 |
|
13
Item 2. Management’s 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 estimate the ultimate size of 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 2007 with the same period in 2006, the number of new
claims is similar, and our average settlement cost per claim has decreased. Our accrual for
current claims is $4.3 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 and industry data. We continuously monitor the
claims and develop information about the ultimate cost of the claims based on our historical
experience. The number of new claims in the first quarter of 2007 decreased in comparison to the
prior-year period. Our workers’ compensation expense decreased $0.5 million for the first quarter
of 2007 in comparison to the prior-year period. 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, 2007 Compared with Quarter Ended March 31, 2006
Overview. During the first quarter of 2007, there were unusual items totaling $.28 per share
as follows:
| |
¨ |
|
We recorded a non-cash charge of $24.9 million ($15.6 million after tax, or $.20 per
share) as a result of the termination and full settlement of an overfunded defined benefit
pension plan, as discussed in Note 8 to our consolidated financial statements. |
| |
| |
¨ |
|
Our stock-based compensation expense of $10.2 million and deferred compensation expense
of $3.3 million were higher than normal. The expense for the quarter was higher than
normal by $7.7 million, or $.06 per share, primarily because of our stock price increase |
14
| |
|
|
of over 15
percent for the quarter. Of the stock-based compensation and deferred compensation expense,
we recorded approximately 26 percent in operating expenses and the remaining amount in
general and administrative expenses. |
| |
| |
¨ |
|
We recorded a loss of $4.7 million ($3.0 million after tax, or $.04 per share) related
to the sale of our investment in two hospitals, as discussed in Note 2 to our consolidated
financial statements. |
| |
| |
¨ |
|
The items above were partially offset by a tax benefit of $1.4 million, or $.02 per
share, related primarily to tax credits from prior periods. |
During the first quarter of 2006, there were unusual items totaling $.21 per share as follows:
| |
¨ |
|
Our stock-based compensation expense of $12.0 million and deferred compensation expense
of $3.6 million were higher than normal. The expense for the quarter was higher than
normal by $11.3 million, or $.09 per share, primarily because of our stock price increase
of over 11 percent for the quarter, stock option grants that vested immediately as a result
of an option reload feature, and executive retirements that accelerated the amortization of
restricted stock expense. Of the stock-based compensation and deferred compensation
expense, we recorded approximately 20 percent in operating expenses and the remaining
amount in general and administrative expenses. |
| |
| |
¨ |
|
The cumulative effect of the change in accounting for SARs of $4.0 million ($2.5 million
after tax, or $.03 per share) was a result of the adoption of Statement 123R, as reported
on a separate line item in our income statement. We were required to change the
measurement method for our SARs liability from intrinsic value to fair value on January 1,
2006. |
| |
| |
¨ |
|
We recorded a charge of $11.1 million ($7.0 million after tax, or $.09 per share)
related to the write-down of our transcription business, which we sold in the fourth
quarter of 2006. We reported the charge on a separate line item in our income statement. |
Revenues. Our revenues increased $89.8 million, or 10 percent, from the first quarter of 2006
to 2007. As discussed in Note 9 to our consolidated financial statements, we reorganized our
reporting structure by combining our rehabilitation services with skilled nursing and assisted
living services. Revenues from our long-term care and rehabilitation segment increased $64.9
million, or 9 percent, due to increases in rates/patient mix of $65.7 million and capacity of $4.8
million that were partially offset by a decrease in occupancy of $5.6 million. Our revenues from
the hospice and home health segment increased $27.8 million, or 27 percent, primarily from an
increase in the number of patients utilizing our hospice services.
Our average rates per day for our long-term care and rehabilitation segment were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First Quarter |
|
|
| |
|
2007 |
|
2006 |
|
Increase |
Medicare |
|
$ |
406.49 |
|
|
$ |
375.59 |
|
|
|
8 |
% |
Medicaid |
|
$ |
158.71 |
|
|
$ |
150.79 |
|
|
|
5 |
% |
Private and other (skilled only) |
|
$ |
238.44 |
|
|
$ |
223.74 |
|
|
|
7 |
% |
15
Our average Medicare rate increased as a result of our continued shift to higher-acuity and
higher-rate-category patients compared with the first quarter of 2006. Our average Medicaid rate
in the table above excluded prior-period revenues. When taking into account the increase in state
provider assessments, the net Medicaid rate increased approximately 4 percent for the first quarter
of 2007 compared with the prior-year period.
Our occupancy levels were 90 percent for the first quarter of 2006 and 89 percent for the first
quarter of 2007. Our occupancy levels for skilled nursing facilities were 90 percent for the first
quarter of 2006 and 89 percent for the first quarter of 2007. The quality mix of revenues from
Medicare, private pay and insured patients that related to our long-term care and rehabilitation
segment increased from 72 percent for the first quarter of 2006 to 73 percent for the first quarter
of 2007.
We increased our bed capacity between the first quarters of 2006 and 2007 primarily by opening
three skilled nursing facilities in the last six months.
Operating Expenses. Our operating expenses in the first quarter of 2007 increased $67.2
million, or 9 percent, compared with the first quarter of 2006.
Operating expenses from our long-term care and rehabilitation segment increased $39.3 million, or 6
percent, between the first quarters of 2006 and 2007. The largest portion of the operating expense
increase related to labor costs of $18.9 million and ancillary costs, excluding internal labor, of
$10.0 million. Our wage rates increased 4 percent compared with the first quarter of 2006.
Ancillary costs, which include various types of therapies, medical supplies and prescription drugs,
increased as a result of our more medically-complex patients. Our provider assessment costs
increased $6.2 million, and our general and professional liability costs decreased $2.7 million.
Our operating expenses from our hospice and home health segment increased $30.0 million, or 34
percent, between the first quarters of 2006 and 2007. The increase related to labor costs of $17.6
million, other nursing care costs, including medical equipment and supplies, of $4.2 million, and
ancillary costs, including pharmaceuticals, of $3.7 million. Our operating margin declined in the
first quarter of 2007 primarily because of additional costs associated with the start-up of new
offices and inpatient facilities.
General and Administrative Expenses. Our general and administrative expenses increased $21.4
million between the first quarters of 2006 and 2007. Our 2007 expense included $24.9 million
related to the non-cash charge as a result of terminating one of our pension plans, as discussed in
Note 8 to our consolidated financial statements. Excluding the pension charge in 2007, our general
and administrative expenses decreased $3.5 million compared with the first quarter of 2006. The
costs associated with our stock-based compensation, deferred compensation plans and non-qualified
defined
benefit plans decreased $3.1 million. In 2006, our
16
stock-based compensation included stock option
grants that vested immediately as a result of an option reload feature, and executive retirements
that accelerated the amortization of restricted stock expense.
Interest Expense. Interest expense increased $1.5 million from the first quarter of 2006 to
2007 because of higher debt levels partially offset by lower interest rates. In May 2006, we
issued $250 million principal amount of 2.0% Convertible Senior Notes.
Income Taxes. Our effective tax rate was 34.1 percent in the first quarter of 2007, compared
with 36.6 percent in the first quarter of 2006. Our effective tax rate in the first quarter of
2007 was lower than expected, primarily due to tax credits from prior years. Our effective tax
rate in the first quarter of 2006 was lower than expected, primarily due to the favorable revision
of estimated tax liabilities for prior tax years.
Financial Condition – March 31, 2007 and December 31, 2006
Receivables increased $52.4 million, with the largest portion attributable to the $34.3 million
receivable related to the sale of our investment in two hospitals. We received the sales proceeds
on April 16, 2007 at closing. The sale of our investment also resulted in the decrease to other
long-term assets.
There was a reclassification between long-term debt due within one year and long-term debt, because
the holders of our $400 million Convertible Senior Notes could convert their notes at March 31,
2007, as discussed further in Note 3 to our consolidated financial statements.
Liquidity and Capital Resources
Cash Flows. During the first quarter of 2007, we satisfied our cash requirements with cash
generated from operating activities. We used the cash principally for capital expenditures, the
paydown of debt, and the payment of dividends. Cash flows from operating activities were $93.9
million for the first quarter of 2007, an increase of $20.9 million from the first quarter of 2006.
The additional operating cash flows were primarily due to an increase in net income, excluding
non-cash charges.
Investing Activities. Our expenditures for property and equipment of $31.5 million in the
first quarter of 2007 included $8.3 million to construct new facilities and expand existing
facilities. In 2007, we opened one skilled nursing facility in January and one in April.
Debt Agreement. As of March 31, 2007, there were no loans outstanding under our $400 million
revolving credit facility, with an uncommitted option available to increase the facility by up to
an additional $100 million (accordion feature). After consideration of usage for letters of
credit,
17
$354.2
million, plus the accordion feature, was available for future borrowings.
The holders of our $100 million Convertible Senior Notes due 2023 and $400 million Convertible
Senior Notes due 2035 have the ability to convert their notes when the average of the last reported
stock price for 20 trading days immediately prior to conversion is greater than or equal to $37.34
and $53.70, respectively, which it was as of March 31, 2007. The holders of $6.6 million principal
amount of the Old Notes due 2023 can convert their notes into shares of our common stock. The
holders of $93.4 million principal amount of the New Notes due 2023 and $400 million principal
amount of Convertible Senior Notes due 2035 can convert their notes into cash for the principal
value and into shares of our common stock for the excess value, if any.
In addition, the holders of the $93.4 million principal amount of New Notes, the $400 million
principal amount of 2.125% Convertible Senior Notes, and the $250 million principal amount of 2.0%
Convertible Senior Notes may require us to convert or repurchase their notes upon the occurrence of
certain events, which we currently view as remote. We are required to satisfy the principal value
in cash upon conversion or repurchase.
Stock Purchase. At December 31, 2006, we had remaining authority to purchase $112.1 million
of our common stock. We repurchased no shares during the first quarter of 2007. We may use shares
repurchased for internal stock option and 401(k) match programs and for other uses, such as
possible acquisitions.
Cash Dividends. On April 25, 2007, we announced that Manor Care will pay a quarterly cash
dividend of 17 cents per share to shareholders of record on May 14, 2007. This dividend will
approximate $12.4 million and is payable May 29, 2007. Although we currently intend to declare and
pay regular quarterly cash dividends, 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 repurchases. 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-
18
looking
statements in this report by using words or phrases such as “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “may be,” “objective,” “plan,” “predict,” “project,” “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’ 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; general
economic and business conditions; conditions in financial markets; competition; our ability to
maintain or increase our revenues and control our operating costs; 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 obligation 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 3. Quantitative and Qualitative Disclosures About Market Risk
See the discussion of our market risk in our Form 10-K for the year ended December 31, 2006. The
fair value of our fixed-rate debt increased from $1,069.0 million at December 31, 2006 to $1,184.2
million at March 31, 2007.
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, 2007. There were no changes in our internal control over financial
reporting in the first
quarter of 2007 that materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
19
Part II. Other Information
Item 1. Legal Proceedings.
See Note 5 – Contingencies in the notes to the consolidated financial statements for a discussion
of litigation related to environmental matters and patient care-related claims.
Item 1A. Risk Factors.
There were no material changes in our risk factors included in our Form 10-K for the year ended
December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We did not repurchase any of our common stock during the first quarter of 2007. On May 10, 2006,
Manor Care announced that its Board of Directors authorized management to spend $300 million to
purchase common stock through December 31, 2007. As of March 31, 2007, we had $112.1 million
remaining authority.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits.
| |
|
|
| S-K Item |
|
|
| 601 No. |
|
|
10.1
|
|
Employment Agreement by and among Richard A. Parr II, Heartland Employment Services, LLC, and
Manor Care, Inc. |
|
|
|
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 |
20
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 May 7, 2007
|
|
By
|
|
/s/ Steven M. Cavanaugh |
|
|
|
|
|
|
|
|
|
Steven M. Cavanaugh, Vice President |
|
|
|
|
and Chief Financial Officer |
21
Exhibit Index
| |
|
|
| Exhibit |
|
|
10.1
|
|
Employment Agreement by and among Richard A. Parr II, Heartland Employment Services, LLC, and
Manor Care, Inc. |
|
|
|
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 |
22