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CHEMED CORP - Quarter Report: 2010 September (Form 10-Q)

a6482237.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)

X
 
Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2010
 
   
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-8351

CHEMED CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
31-0791746
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio
 
45202
(Address of principal executive offices)
 
(Zip code)
 
(513) 762-6900
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
 
No
   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
X
 
No
   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer
X
 
Accelerated filer
   
Non-accelerated filer
   
Smaller reporting company
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
   
No
X
 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
 
Amount
 
Date
         
Capital Stock $1 Par Value
 
22,792,430 Shares
 
September 30, 2010
 
 
 
 
 
 
 
 
-1-

 
 
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES



Index
 
     
Page No.
     
     
Unaudited Consolidated Balance Sheet -      
    3
       
Unaudited Consolidated Statement of Income -      
    4
       
     
    5
       
    6
       
   
16
       
    30
       
    30 
       
     
   
30
       
   
30
       
   
31
       
   
31
       
   
31
       
   
31
       
   
32
EX – 31.1      
EX – 31.2      
EX – 31.3      
EX – 32.1      
EX – 32.2      
EX – 32.3      
EX – 101.INS       
EX – 101.SCH      
EX – 101.CAL      
EX – 101.LAB      
EX – 101.PRE      
 
 
 
 
-2-

 
 
 PART I.   FINANCIAL INFORMATION
 Item 1.   Financial Statements
 CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 (in thousands, except share and per share data)
             
             
 
September 30,
   
December 31,
 
 
2010
   
2009
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 137,457     $ 112,416  
Accounts receivable less allowances of $13,815 (2009 - $12,595)
    105,686       53,461  
Inventories
    7,951       7,543  
Current deferred income taxes
    14,650       13,701  
Prepaid income taxes
    337       749  
Prepaid expenses
    9,925       10,388  
 Total current assets
    276,006       198,258  
Investments of deferred compensation plans
    26,022       24,158  
Properties and equipment, at cost, less accumulated depreciation of $127,848
(2009 - $115,181)
    78,982       75,358  
Identifiable intangible assets less accumulated amortization of $27,101
(2009 - $25,349)
    56,097       57,920  
Goodwill
    450,095       450,042  
Other assets
    11,190       13,734  
 Total Assets
  $ 898,392     $ 819,470  
                 
LIABILITIES
               
Current liabilities
               
Accounts payable
  $ 52,552     $ 52,071  
Income taxes
    4,575       63  
Accrued insurance
    34,320       35,161  
Accrued compensation
    45,183       34,662  
Other current liabilities
    15,637       14,127  
Total current liabilities
    152,267       136,084  
Deferred income taxes
    23,045       25,924  
Long-term debt
    157,392       152,127  
Deferred compensation liabilities
    25,508       23,637  
Other liabilities
    6,624       4,536  
Total Liabilities
    364,836       342,308  
                 
STOCKHOLDERS' EQUITY
               
Capital stock - authorized 80,000,000 shares $1 par; issued 30,207,002 shares
(2009 - 29,890,628 shares)
    30,207       29,891  
Paid-in capital
    354,473       335,890  
Retained earnings
    453,886       403,366  
Treasury stock - 7,515,127 shares (2009 - 7,275,070 shares), at cost
    (306,977 )     (293,941 )
Deferred compensation payable in Company stock
    1,967       1,956  
Total Stockholders' Equity
    533,556       477,162  
Total Liabilities and Stockholders' Equity
  $ 898,392     $ 819,470  
                 
See accompanying notes to unaudited financial statements.
 
 
 
 
-3-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 (in thousands, except per share data)
                         
                         
                         
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Service revenues and sales
  $ 320,451     $ 296,794     $ 944,259     $ 886,987  
Cost of services provided and goods sold (excluding
depreciation)
    227,915       208,888       670,754       623,238  
Selling, general and administrative expenses
    48,200       48,148       146,694       143,521  
Depreciation
    6,385       5,361       18,048       16,024  
Amortization
    1,196       1,611       3,707       4,765  
Other operating expenses
    -       -       -       3,989  
 Total costs and expenses
    283,696       264,008       839,203       791,537  
 Income from operations
    36,755       32,786       105,056       95,450  
Interest expense
    (2,995 )     (2,853 )     (8,946 )     (8,839 )
Other income--net
    222       1,733       418       4,815  
 Income before income taxes
    33,982       31,666       96,528       91,426  
Income taxes
    (12,994 )     (12,456 )     (37,327 )     (35,627 )
 Net income
  $ 20,988     $ 19,210     $ 59,201     $ 55,799  
                                 
                                 
Earnings Per Share
                               
 Net income
  $ 0.93     $ 0.86     $ 2.62     $ 2.49  
 Average number of shares outstanding
    22,597       22,461       22,604       22,425  
                                 
Diluted Earnings Per Share
                               
 Net income
  $ 0.91     $ 0.84     $ 2.57     $ 2.46  
 Average number of shares outstanding
    22,996       22,744       23,006       22,679  
                                 
Cash Dividends Per Share
  $ 0.14     $ 0.12     $ 0.38     $ 0.24  
                                 
See accompanying notes to unaudited financial statements.
 
 
 
 
-4-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
(in thousands)
             
   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Cash Flows from Operating Activities
           
Net income
  $ 59,201     $ 55,799  
 Adjustments to reconcile net income to net cash provided
               
 by operating activities:
               
 Depreciation and amortization
    21,755       20,789  
 Provision for uncollectible accounts receivable
    7,248       8,297  
 Stock option expense
    6,365       6,699  
 Amortization of discount on convertible notes
    5,265       4,921  
 Provision for deferred income taxes
    (3,886 )     (1,336 )
 Noncash long-term incentive compensation
    1,580       -  
 Changes in operating assets and liabilities, excluding
               
 amounts acquired in business combinations:
               
Increase in accounts receivable
    (59,528 )     (16,936 )
Increase in inventories
    (408 )     (499 )
Decrease in prepaid expenses
    463       1,406  
Increase/(decrease) in accounts payable and other current liabilities
    12,479       (4,584 )
Increase in income taxes
    6,729       8,657  
Increase in other assets
    (2,180 )     (103 )
Increase/(decrease) in other liabilities
    3,960       (1,632 )
Excess tax benefit on share-based compensation
    (1,823 )     (1,519 )
Other sources
    770       588  
 Net cash provided by operating activities
    57,990       80,547  
Cash Flows from Investing Activities
               
Capital expenditures
    (19,107 )     (14,471 )
 Proceeds from sales of property and equipment
    182       1,519  
 Business combinations, net of cash acquired
    (30 )     (1,859 )
Other uses
    (630 )     (950 )
 Net cash used by investing activities
    (19,585 )     (15,761 )
Cash Flows from Financing Activities
               
 Purchases of treasury stock
    (10,140 )     (1,684 )
Dividends paid
    (8,682 )     (5,429 )
 Proceeds from issuance of capital stock
    3,632       486  
 Excess tax benefit on share-based compensation
    1,823       1,519  
 Changes in cash overdrafts payable
    (184 )     943  
 Repayment of long-term debt
    -       (14,599 )
 Net decrease in revolving line of credit
    -       (8,200 )
Other sources
    187       597  
 Net cash used by financing activities
    (13,364 )     (26,367 )
Increase in Cash and Cash Equivalents
    25,041       38,419  
Cash and cash equivalents at beginning of year
    112,416       3,628  
Cash and cash equivalents at end of period
  $ 137,457     $ 42,047  
                 
 See accompanying notes to unaudited financial statements.
 
 
 
 
-5-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements

1.  Basis of Presentation
 As used herein, the terms "We," "Company" and "Chemed" refer to Chemed Corporation or Chemed Corporation and its consolidated subsidiaries.

We have prepared the accompanying unaudited consolidated financial statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.  Consequently, we have omitted certain disclosures required under generally accepted accounting principles in the United States (“GAAP”) for complete financial statements.  The December 31, 2009 balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP.  However, in our opinion, the financial statements presented herein contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows.  These financial statements are prepared on the same basis as and should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2009.

2.  Revenue Recognition
Both the VITAS segment and the Roto-Rooter segment recognize service revenues and sales when the earnings process has been completed.  Generally, this occurs when services are provided or products are delivered.  VITAS recognizes revenue at the estimated realizable amount due from third-party payers.  Medicare payments are subject to certain limitations, as described below.

As of September 30, 2010, VITAS has approximately $5.6 million in unbilled revenue included in accounts receivable (December 31, 2009 - $9.9 million).  The unbilled revenue at VITAS relates to hospice programs currently undergoing focused medical reviews (“FMR”).  During FMR, surveyors working on behalf of the U.S. Federal government review certain patient files for compliance with Medicare regulations.  During the time the patient file is under review, we are unable to bill for care provided to those patients.  We make appropriate provisions to reduce our accounts receivable balance for potential denials of patient service revenue due to FMR activity.

We actively monitor each of our hospice programs, by provider number, as to their specific admission, discharge rate and median length of stay data in an attempt to determine whether they are likely to exceed the annual per-beneficiary Medicare cap (“Medicare cap”).  Should we determine that revenues for a program are likely to exceed the Medicare cap based on projected trends, we attempt to institute corrective action to influence the patient mix or to increase patient admissions.  However, should we project our corrective action will not prevent that program from exceeding its Medicare cap, we estimate the amount of revenue recognized during the period that will require repayment to the Federal government under the Medicare cap and record the amount as a reduction to patient revenue.  The Medicare cap measurement period is from September 29 through September 28 of the following year for admissions and from November 1 through October 31 of the following year for revenue.  During the three-month period ended September 30, 2010 we recorded $117,000 for one small program’s projected Medicare cap liability for the 2010 measurement period.  For the nine month period ended September 30, 2010, we reversed $1.7 million, net in Medicare cap liability for amounts recorded in the fourth quarter of 2009 for two programs’ projected 2010 measurement period liability.  For the three-month period ended September 30, 2009, we recorded $43,000 in Medicare cap liability related to a retroactive billing for 2006.  For the nine month period ended September 30, 2009, we reversed $235,000 for the 2009 measurement period offset by $43,000 in Medicare cap liability related to a retroactive billing for 2006.

The U.S. government revises hospice reimbursement rates on an annual basis using the Hospice Wage Index (HWI) and the Consumer Price Index plus a phase out of the Budget Neutrality Adjustment Factor (BNAF).  The HWI is geographically adjusted to reflect local differences in wages.  The BNAF is a portion of inflation calculated in prior years that is being phased out over a seven year period.  In August 2008, the U.S. government announced a 25% reduction in the BNAF for its fiscal 2009 (October 2008 through September 2009) pursuant to a three year phase-out of the BNAF.  The February 2009 American Recovery and Reinvestment Act mandated a one year delay in the BNAF phase-out.  In August 2009, the Centers for Medicare and Medicaid Services (CMS) revised the phase-out schedule of the BNAF.  CMS reduced the price increase in hospice reimbursement by 10% of the BNAF effective October 1, 2009.  The remaining 90% of the BNAF will be phased out over the next nine years by revising the October 1 reimbursement adjustment by 15% of the original BNAF inflation factor.  Based upon this revised schedule, 100% of the BNAF will be eliminated on October 1, 2015.  As a result, included in the nine months ended September 30, 2009 results, is $1.95 million of revenue for the retroactive price increase related to services provided by VITAS in the fourth quarter of 2008.
 

 
 
-6-

 

3.      Segments
Service revenues and sales and after-tax earnings by business segment are as follows (in thousands):

     
Three months ended
   
Nine months ended
 
     
September 30,
   
September 30,
 
     
2010
   
2009
   
2010
   
2009
 
Service Revenues and Sales
       
 
         
 
 
VITAS
    $ 233,964     $ 217,067     $ 683,542     $ 636,787  
Roto-Rooter
      86,487       79,727       260,717       250,200  
Total $ 320,451     $ 296,794     $ 944,259     $ 886,987  
                                   
After-tax Earnings
                               
VITAS
    $ 19,803     $ 18,148     $ 56,523     $ 52,442  
Roto-Rooter
      7,747       7,935       24,420       24,962  
Total     27,550       26,083       80,943       77,404  
Corporate
      (6,562 )     (6,873 )     (21,742 )     (21,605 )
Net income   $ 20,988     $ 19,210     $ 59,201     $ 55,799  

We report corporate administrative expenses and unallocated investing and financing income and expense not directly related to either segment as “Corporate”.  Historically, we have recorded stock award amortization as a corporate expense.  In the first quarter of 2010, our chief decision maker determined that this was an on-going expense and should be reported within the appropriate business segment.  Accordingly, stock award amortization has been reclassified to the corresponding business segment for all periods presented.

4.      Earnings per Share
Earnings per share are computed using the weighted average number of shares of capital stock outstanding.  Earnings and diluted earnings per share for 2010 and 2009 are computed as follows (in thousands, except per share data):
For the Three Months Ended September 30,
 
Net Income
   
Shares
   
Earnings per Share
 
2010
                 
Earnings
  $ 20,988       22,597     $ 0.93  
Dilutive stock options
    -       304          
Nonvested stock awards
    -       95          
     Diluted earnings
  $ 20,988       22,996     $ 0.91  
                         
2009
                       
Earnings
  $ 19,210       22,461     $ 0.86  
Dilutive stock options
    -       227          
Nonvested stock awards
    -       56          
     Diluted earnings
  $ 19,210       22,744     $ 0.84  
 
 
 
 
-7-

 
 
For the Nine Months Ended September 30,
 
Net Income
   
Shares
   
Earnings per Share
 
2010
                 
Earnings
  $ 59,201       22,604     $ 2.62  
Dilutive stock options
    -       314          
Nonvested stock awards
    -       88          
     Diluted earnings
  $ 59,201       23,006     $ 2.57  
                         
2009
                       
Earnings
  $ 55,799       22,425     $ 2.49  
Dilutive stock options
    -       212          
Nonvested stock awards
    -       42          
     Diluted earnings
  $ 55,799       22,679     $ 2.46  

For the three and nine-month periods ended September 30, 2010, 990,000 and 986,000 stock options, respectively were excluded from the computation of diluted earnings per share as their exercise prices were greater than the average market price for most of the period. For the three and nine-month periods ended September 30, 2009, 1.3 million and 1.7 million stock options were excluded from the computation of diluted earnings per share.

Diluted earnings per share may be impacted in future periods as the result of the issuance of our 1.875% Senior Convertible Notes (the “Notes”) and related purchased call options and sold warrants.  Per FASB’s authoritative guidance on the effect of contingently convertible instruments on diluted earnings per share and convertible bonds with an issuer option to settle for cash upon conversion, we will not include any shares related to the Notes in our calculation of diluted earnings per share until our average stock price for a quarter exceeds the current conversion price.  We would then include in our diluted earnings per share calculation those shares issuable using the treasury stock method.  The amount of shares issuable is based upon the amount by which the average stock price for the quarter exceeds the conversion price.  The purchased call option does not impact the calculation of diluted earnings per share as it is always anti-dilutive. The sold warrants become dilutive when our average stock price for a quarter exceeds the strike price of the warrant.

The following table provides examples of how changes in our stock price impact the number of shares that would be included in our diluted earnings per share calculation.  It also shows the impact on the number of shares issuable upon conversion of the Notes and settlement of the purchased call options and sold warrants:

     
Shares
         
Total Treasury
   
Shares Due
   
Incremental
 
     
Underlying 1.875%
         
Method
   
to the Company
   
Shares Issued/
 
Share     Convertible     Warrant     Incremental     under Notes      (Received) by the Company  
Price
   
Notes
   
Shares
   
Shares (a)
   
Hedges
   
upon Conversion (b)
 
$ 80.73       15,037       -       15,037       (16,087 )     (1,050 )
$ 90.73       270,280       -       270,280       (289,138 )     (18,858 )
$ 100.73       474,844       -       474,844       (507,974 )     (33,130 )
$ 110.73       642,460       119,123       761,583       (687,285 )     74,298  
$ 120.73       782,309       315,790       1,098,099       (836,891 )     261,208  
$ 130.73       900,763       482,369       1,383,132       (963,610 )     419,522  
 
a) Represents the number of incremental shares that must be included in the calculation of fully diluted shares under U.S. GAAP.
b) Represents the number of incremental shares to be issued by the Company upon conversion of the 1.875% Convertible Notes, assuming concurrent settlement of the note hedges and warrants.
 
 
 
 
-8-

 
 
5.      Long-Term Debt
We are in compliance with all debt covenants as of September 30, 2010.  We have issued $28.2 million in standby letters of credit as of September 30, 2010 for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of September 30, 2010, we have approximately $146.8 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $100 million expansion feature.

In May 2008, the FASB issued authoritative guidance for accounting for convertible debt instruments that may be settled in cash upon conversion including partial cash settlement.  This guidance requires all convertible debentures classified as Instruments B or C to separately account for the debt and equity pieces of the instrument.   Convertible debentures classified as Instruments B may be settled in either stock or cash equivalent to the conversion value and convertible debentures classified as Instruments C must settle the accreted value of the obligation in cash and may satisfy the excess conversion value in either cash or stock.  At inception of the convertible instrument, cash flows related to the convertible instrument are to be discounted using a market rate of interest.  We adopted the provisions of the guidance on January 1, 2009 and applied the guidance retrospectively.  Upon adoption, the Notes had a discount of approximately $55.1 million.

The following amounts are included in our consolidated balance sheet related to the Notes:
 
   
September 30,
 2010
   
December 31,
2009
 
Principal amount of convertible debentures
  $ 186,956     $ 186,956  
Unamortized debt discount
    (29,564 )     (34,829 )
Carrying amount of convertible debentures
  $ 157,392     $ 152,127  
Additional paid in capital (net of tax)
  $ 31,310     $ 31,310  


The following amounts comprise interest expense included in our consolidated income statement (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Cash interest expense
  $ 1,044     $ 1,014     $ 3,198     $ 3,438  
Non-cash amortization of debt discount
    1,785       1,668       5,265       4,921  
Amortization of debt costs
    166       171       483       480  
Total interest expense
  $ 2,995     $ 2,853     $ 8,946     $ 8,839  


The unamortized debt discount will be amortized using the effective interest method over the remaining life of the Notes.  The effective rate on the Notes after adoption of the standard is approximately 6.875%.

6.      Other Operating Expenses
For the nine-month period of 2009, we recorded pretax expenses of $4.0 million related to the costs of a contested proxy solicitation.  There were no other operating expenses for any other period presented.
 
 
 
 
-9-

 
 
7.      Other Income -- Net
Other income -- net comprises the following (in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Market value gains on assets held in
                       
    deferred compensation trust
  $ 243     $ 1,789     $ 348     $ 3,374  
Gain on settlement of company-owned life insurance
    -       -       -       1,211  
Loss on disposal of property and equipment
    (141 )     (159 )     (293 )     (213 )
Interest income
    109       86       334       375  
Other - net
    11       17       29       68  
     Total other income
  $ 222     $ 1,733     $ 418     $ 4,815  

 8.      Stock-Based Compensation Plans
On May 17, 2010 the stockholders approved the adoption of the Company’s 2010 Stock Incentive Plan.  The Stock Incentive Plan authorizes the issuance or transfer of a maximum of 1,750,000 shares of capital stock pursuant to stock incentives granted to key employees of the Company.  Stock incentives granted under the Stock Plan may be in the form of options to purchase capital stock or in the form of capital stock awards.
 
In April 2010, we met the stock price target of our Long-Term Incentive Plan.  The stock price hurdle of $54.00 was achieved during 30 trading days out of a 60 day trading day period. On April 16, 2010, the Compensation/Incentive Committee of the Board of Directors (“CIC”) approved a stock grant of 27,900 shares and the related allocation to participants.  The pretax cost of the stock grant was $1.8 million.

On February 18, 2010, the CIC approved a grant of 47,896 shares of restricted stock to certain key employees.  The restricted shares cliff vest four years from the date of issuance.  The cumulative compensation expense related to the restricted stock award is $2.5 million and will be recognized ratably over the four-year vesting period.  We assumed no forfeitures in determining the cumulative compensation expense of the grant.

On February 18, 2010, the CIC approved a grant of 515,100 stock options to certain employees.  The stock options vest ratably over three years from the date of issuance.  The cumulative compensation expense related to the stock option grant is $7.8 million and will be recognized over the three-year vesting period.  We used the Black-Scholes option valuation method to determine the cumulative compensation expense of the grant.

9.    Independent Contractor Operations
The Roto-Rooter segment sublicenses with sixty-one independent contractors to operate certain plumbing repair and drain cleaning businesses in lesser-populated areas of the United States and Canada.  We had notes receivable from our independent contractors as of September 30, 2010 totaling $1.2 million (December 31, 2009 -$1.3 million).  In most cases these loans are fully or partially secured by equipment owned by the contractor.  The interest rates on the loans range from zero to 8% per annum and the remaining terms of the loans range from two months to 5 years at September 30, 2010.  During the three months ended September 30, 2010, we recorded revenues of $5.5 million (2009 - $5.3 million) and pretax profits of $2.5 million (2009 - $2.4 million) from our independent contractors.  During the nine months ended September 30, 2010, we recorded revenues of $16.7 million (2009 - $16.0 million) and pretax profits of $7.6 million (2009 - $7.1 million) from our independent contractors.

10.  Pension and Retirement Plans
All of the Company’s plans that provide retirement and similar benefits are defined contribution plans.  Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans were $2.3 million and $4.3 million for the three months ended September 30, 2010 and 2009, respectively. Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans were $7.0 million and $11.3 million for the nine months ended September 30, 2010 and 2009, respectively.
 
 
 
 
-10-

 
 
11.   Legal and Regulatory Matters

Litigation
On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from     Roto-Rooter and Chemed.  They also seek payment of penalties, interest and plaintiffs’ attorney fees.  We contest these allegations.  In September 2010, the Court conditionally certified a nationwide class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  There has been no final determination of the merits of collective treatment of the case.  The lawsuit is in its early stage and we are unable to estimate our potential liability, if any, with respect to these allegations.

VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White.  This case alleges failure to pay overtime and failure to provide meal and rest periods to a purported class of California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  VITAS contests these allegations.  In December 2009, the trial court denied Plaintiffs’ motion for class certification. The lawsuit is in its early stages and we are unable to estimate our potential liability, if any, with respect to these allegations.

Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.  In the normal course of business, we are a party to various claims and legal proceedings.  We record a reserve for these matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable.

Regulatory Matters
In April 2005, the Office of Inspector General (“OIG”) for the Department of Health and Human Services served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services.  As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review.  It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges.  During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us.  The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florida with prejudice in July 2007.  The plaintiffs appealed this dismissal, which the Court of Appeals affirmed.  The government continues to investigate the complaint’s allegations.  In March 2009, we received a letter from the government reiterating the basis of their investigation.

In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the OIG documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review.   In February 2010, VITAS received a companion civil investigative demand (“CID”) from the state of Texas Attorney General’s Office, seeking related documents. In September 2010, it received a second CID and a second administrative subpoena seeking related documents.  Based on the early stage of the investigation and the limited information we have at this time, we cannot predict the outcome of this investigation.  We believe that we are in material compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.

The costs to comply with either of these investigations were not material for any period presented.  We are unable to predict the outcome of these matters or the impact, if any, that the investigation may have on our business, results of operations, liquidity or capital resources.  Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

12.   Related Party Agreement
VITAS has pharmacy services agreements ("Agreements") with Omnicare, Inc. and its subsidiaries (“OCR”) whereby OCR provides specified pharmacy services for VITAS and its hospice patients in geographical areas served by both VITAS and OCR.  The Agreements renew automatically for one-year terms.  Either party may cancel the Agreements at the end of any term by giving 90 days prior written notice.  VITAS made purchases from OCR of $9.0 million and $8.5 million for the three months ended September 30, 2010 and 2009, respectively.  VITAS made purchases from OCR of $26.5 million and $24.6 million for the nine months ended September 30, 2010 and 2009, respectively.
 
 
 
-11-

 

Mr. Joel Gemunder retired as President and CEO of OCR during the third quarter of 2010 and is a director of the Company.  Ms. Andrea Lindell is a director of both OCR and the Company. Mr. Kevin J. McNamara, President, Chief Executive Officer and a director of the Company, is a director emeritus of OCR.  We believe that the terms of the Agreements are no less favorable to VITAS than we could negotiate with an unrelated party.

13.  Cash Overdrafts Payable
Included in accounts payable at September 30, 2010 is cash overdrafts payable of $11.5 million (December 31, 2009 - $11.7 million).

14.   Financial Instruments
We adopted the provisions of the FASB’s authoritative guidance on fair value measurements.  This statement defines a hierarchy which prioritizes the inputs in fair value measurements.  Level 1 measurements are measurements using quoted prices in active markets for identical assets or liabilities.  Level 2 measurements use significant other observable inputs.  Level 3 measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions.  In recording the fair value of assets and liabilities, companies must use the most reliable measurement available.

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of September 30, 2010 (in thousands):
 
         
Fair Value Measure
 
   
Carrying Value
   
Quoted Prices in
Active Markets for Identical Assets 
(Level 1)
   
Significant Other
 Observable Inputs
 (Level 2)
   
Significant
 Unobservable
Inputs (Level 3)
 
Mutual fund investments of deferred
     compensation plans held in trust
  $ 26,022     $ 26,022     $ -     $ -  
Long-term debt
    157,392       181,114       -       -  

For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount is a reasonable estimate of fair value because of the liquidity and short-term nature of these instruments.

15.  Capital Stock Transactions
On April 26, 2007, our Board of Directors authorized a $150 million stock repurchase program.  On May 19, 2008, our Board of Directors authorized an additional $56 million to the April 2007 stock repurchase program.  For the quarter ended September 30, 2010, there were no shares repurchased.  For the nine months ended September 30, 2010, we repurchased 146,275 shares at a weighted average cost per share of $53.32. For the quarter and nine months ended September 30, 2009 we repurchased no stock.
 
 
 
 
-12-

 
 
16.  Guarantor Subsidiaries
Our 1.875% Notes are fully and unconditionally guaranteed on an unsecured, jointly and severally liable basis by certain of our 100% owned subsidiaries.  The following unaudited, condensed, consolidating financial data presents the composition of the parent company (Chemed), the guarantor subsidiaries and the non-guarantor subsidiaries as of September 30, 2010 and December 31, 2009 for the balance sheet, the three and nine months ended September 30, 2010 and September 30, 2009 for the income statement and the nine months ended September 30, 2010  and  September 30, 2009 for the statement of cash flows (dollars in thousands):
 
September 30, 2010
       
Guarantor
   
Non-Guarantor
 
Consolidating
     
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                             
Cash and cash equivalents
  $ 131,776     $ 314     $ 5,367     $ -     $ 137,457  
Accounts receivable, less allowances
    913       104,115       658       -       105,686  
Intercompany receivables
    -       175,204       -       (175,204 )     -  
Inventories
    -       7,301       650       -       7,951  
Current deferred income taxes
    (1,164 )     15,680       134       -       14,650  
Prepaid income taxes
    4,109       (3,490 )     (282 )     -       337  
Prepaid expenses
    946       8,811       168       -       9,925  
     Total current assets
    136,580       307,935       6,695       (175,204 )     276,006  
Investments of deferred compensation plans
    -       -       26,022       -       26,022  
Properties and equipment, at cost, less accumulated depreciation
    12,747       63,983       2,252       -       78,982  
Identifiable intangible assets less accumulated amortization
    -       56,097       -       -       56,097  
Goodwill
    -       445,639       4,456       -       450,095  
Other assets
    6,204       2,729       2,257       -       11,190  
Investments in subsidiaries
    696,578       18,261       -       (714,839 )     -  
          Total assets
  $ 852,109     $ 894,644     $ 41,682     $ (890,043 )   $ 898,392  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                 
Accounts payable
  $ (1,725 )   $ 53,857     $ 420     $ -     $ 52,552  
Intercompany payables
    169,942       -       5,262       (175,204 )     -  
Income taxes
    (4,848 )     8,791       632       -       4,575  
Accrued insurance
    666       33,654       -       -       34,320  
Accrued compensation
    3,064       41,632       487       -       45,183  
Other current liabilities
    3,084       12,433       120       -       15,637  
      Total current liabilities
    170,183       150,367       6,921       (175,204 )     152,267  
Deferred income taxes
    (11,958 )     43,473       (8,470 )     -       23,045  
Long-term debt
    157,392       -       -       -       157,392  
Deferred compensation liabilities
    -       -       25,508       -       25,508  
Other liabilities
    2,936       3,212       476       -       6,624  
Stockholders' equity
    533,556       697,592       17,247       (714,839 )     533,556  
     Total liabilities and stockholders' equity
  $ 852,109     $ 894,644     $ 41,682     $ (890,043 )   $ 898,392  
                                         
                                         
                                         
                                         
December 31, 2009
         
Guarantor
   
Non-Guarantor
 
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                                       
Cash and cash equivalents
  $ 109,331     $ (1,221 )   $ 4,306     $ -     $ 112,416  
Accounts receivable, less allowances
    618       52,303       540       -       53,461  
Intercompany receivables
    -       149,888       -       (149,888 )     -  
Inventories
    -       7,009       534       -       7,543  
Current deferred income taxes
    (378 )     14,048       31       -       13,701  
Prepaid expenses
    (2,457 )     13,706       (112 )     -       11,137  
     Total current assets
    107,114       235,733       5,299       (149,888 )     198,258  
Investments of deferred compensation plans
    -       -       24,158       -       24,158  
Properties and equipment, at cost, less accumulated depreciation
    10,309       62,912       2,137       -       75,358  
Identifiable intangible assets less accumulated amortization
    -       57,920       -       -       57,920  
Goodwill
    -       445,662       4,380       -       450,042  
Other assets
    11,190       2,232       312       -       13,734  
Investments in subsidiaries
    643,572       15,523       -       (659,095 )     -  
          Total assets
  $ 772,185     $ 819,982     $ 36,286     $ (808,983 )   $ 819,470  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                 
Accounts payable
  $ (2,411 )   $ 54,084     $ 398     $ -     $ 52,071  
Intercompany payables
    147,744       -       2,144       (149,888 )     -  
Income taxes
    (2,145 )     2,159       49       -       63  
Accrued insurance
    1,231       33,930       -       -       35,161  
Accrued compensation
    4,235       30,020       407       -       34,662  
Other current liabilities
    1,643       11,367       1,117       -       14,127  
      Total current liabilities
    150,297       131,560       4,115       (149,888 )     136,084  
Deferred income taxes
    (10,549 )     43,183       (6,710 )     -       25,924  
Long-term debt
    152,127       -       -       -       152,127  
Deferred compensation liabilities
    -       -       23,637       -       23,637  
Other liabilities
    3,148       1,388       -       -       4,536  
Stockholders' equity
    477,162       643,851       15,244       (659,095 )     477,162  
     Total liabilities and stockholders' equity
  $ 772,185     $ 819,982     $ 36,286     $ (808,983 )   $ 819,470  
 
 
 
 
-13-

 
 
For the three months ended September 30, 2010
       
Guarantor
   
Non-Guarantor
 
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
 Continuing Operations
                             
 Service revenues and sales
  $ -     $ 313,787     $ 6,664     $ -     $ 320,451  
 Cost of services provided and goods sold (excluding depreciation)
    -       224,316       3,599       -       227,915  
 Selling, general and administrative expenses
    5,134       41,648       1,418       -       48,200  
 Depreciation
    241       5,945       199       -       6,385  
 Amortization
    370       826       -       -       1,196  
      Total costs and expenses
    5,745       272,735       5,216       -       283,696  
      Income/ (loss) from operations
    (5,745 )     41,052       1,448       -       36,755  
 Interest expense
    (2,893 )     (102 )     -       -       (2,995 )
 Other (expense)/income - net
    3,889       (3,902 )     235       -       222  
      Income/ (loss) before income taxes
    (4,749 )     37,048       1,683       -       33,982  
 Income tax (provision)/ benefit
    1,498       (13,859 )     (633 )     -       (12,994 )
 Equity in net income of subsidiaries
    24,239       1,005       -       (25,244 )     -  
 Net income
  $ 20,988     $ 24,194     $ 1,050     $ (25,244 )   $ 20,988  
                                         
For the three months ended September 30, 2009
         
Guarantor
   
Non-Guarantor
 
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
 Continuing Operations
                                       
 Service revenues and sales
  $ -     $ 291,121     $ 5,673     $ -     $ 296,794  
 Cost of services provided and goods sold (excluding depreciation)
    -       205,940       2,948       -       208,888  
 Selling, general and administrative expenses
    5,568       39,721       2,859       -       48,148  
 Depreciation
    166       5,016       179       -       5,361  
 Amortization
    315       1,296       -       -       1,611  
      Total costs and expenses
    6,049       251,973       5,986       -       264,008  
      Income/ (loss) from operations
    (6,049 )     39,148       (313 )     -       32,786  
 Interest expense
    (2,759 )     (94 )     -       -       (2,853 )
 Other income - net
    1,188       (1,271 )     1,816       -       1,733  
      Income/ (loss) before income taxes
    (7,620 )     37,783       1,503       -       31,666  
 Income tax (provision)/ benefit
    2,452       (14,317 )     (591 )     -       (12,456 )
 Equity in net income of subsidiaries
    24,378       903       -       (25,281 )     -  
 Net income
  $ 19,210     $ 24,369     $ 912     $ (25,281 )   $ 19,210  
                                         
For the nine months ended September 30, 2010
       
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
 Continuing Operations
                                       
 Service revenues and sales
  $ -     $ 925,614     $ 18,645     $ -     $ 944,259  
 Cost of services provided and goods sold (excluding depreciation)
    -       660,971       9,783       -       670,754  
 Selling, general and administrative expenses
    17,340       125,267       4,087       -       146,694  
 Depreciation
    621       16,827       600       -       18,048  
 Amortization
    1,066       2,641       -       -       3,707  
      Total costs and expenses
    19,027       805,706       14,470       -       839,203  
      Income/ (loss) from operations
    (19,027 )     119,908       4,175       -       105,056  
 Interest expense
    (8,632 )     (314 )     -       -       (8,946 )
 Other (expense)/income - net
    11,180       (11,101 )     339       -       418  
      Income/ (loss) before income taxes
    (16,479 )     108,493       4,514       -       96,528  
 Income tax (provision)/ benefit
    5,392       (40,965 )     (1,754 )     -       (37,327 )
 Equity in net income of subsidiaries
    70,288       2,825       -       (73,113 )     -  
 Net income
  $ 59,201     $ 70,353     $ 2,760     $ (73,113 )   $ 59,201  
                                         
For the nine months ended September 30, 2009
         
Guarantor
   
Non-Guarantor
 
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
 Continuing Operations
                                       
 Service revenues and sales
  $ -     $ 869,642     $ 17,345     $ -     $ 886,987  
 Cost of services provided and goods sold (excluding depreciation)
    -       614,385       8,853       -       623,238  
 Selling, general and administrative expenses
    16,836       119,699       6,986       -       143,521  
 Depreciation
    465       15,039       520       -       16,024  
 Amortization
    905       3,860       -       -       4,765  
 Other operating expenses
    3,989       -       -       -       3,989  
      Total costs and expenses
    22,195       752,983       16,359       -       791,537  
      Income/ (loss) from operations
    (22,195 )     116,659       986       -       95,450  
 Interest (expense)/income
    (8,286 )     (559 )     6       -       (8,839 )
 Other (expense)/income - net
    1,678       (1,510 )     4,647       -       4,815  
      Income/ (loss) before income taxes
    (28,803 )     114,590       5,639       -       91,426  
 Income tax (provision)/ benefit
    9,870       (43,533 )     (1,964 )     -       (35,627 )
 Equity in net income of subsidiaries
    74,732       3,803       -       (78,535 )     -  
 Net income
  $ 55,799     $ 74,860     $ 3,675     $ (78,535 )   $ 55,799  
 
 
 
 
-14-

 
 
For the nine months ended September 30, 2010
       
Guarantor
   
Non-Guarantor
       
   
Parent
   
Subsidiaries
   
Subsidiaries
   
Consolidated
 
 Cash Flow from Operating Activities:
                       
 Net cash provided/(used) by operating activities
  $ (4,364 )   $ 61,703     $ 651     $ 57,990  
 Cash Flow from Investing Activities:
                               
  Capital expenditures
    (14 )     (18,399 )     (694 )     (19,107 )
  Business combinations, net of cash acquired
    -       (30 )     -       (30 )
  Proceeds from sale of property and equipment
    -       176       6       182  
  Other uses - net
    (116 )     (489 )     (25 )     (630 )
       Net cash used by investing activities
    (130 )     (18,742 )     (713 )     (19,585 )
 Cash Flow from Financing Activities:
                               
  Change in cash overdrafts payable
    508       (692 )     -       (184 )
  Change in intercompany accounts
    40,895       (41,841 )     946       -  
  Dividends paid to shareholders
    (8,682 )     -       -       (8,682 )
  Purchases of treasury stock
    (10,129 )     -       (11 )     (10,140 )
  Proceeds from exercise of stock options
    3,632       -       -       3,632  
  Realized excess tax benefit on share based compensation
    716       1,107       -       1,823  
  Other sources - net
    (1 )     -       188       187  
       Net cash provided/ (used) by financing activities
    26,939       (41,426 )     1,123       (13,364 )
 Net increase/(decrease) in cash and cash equivalents
    22,445       1,535       1,061       25,041  
 Cash and cash equivalents at beginning of year
    109,331       (1,221 )     4,306       112,416  
 Cash and cash equivalents at end of period
  $ 131,776     $ 314     $ 5,367     $ 137,457  
                                 
For the nine months ended September 30, 2009
         
Guarantor
   
Non-Guarantor
         
   
Parent
   
Subsidiaries
   
Subsidiaries
   
Consolidated
 
 Cash Flow from Operating Activities:
                               
 Net cash provided/(used) by operating activities
  $ (2,579 )   $ 77,254     $ 5,872     $ 80,547  
 Cash Flow from Investing Activities:
                               
  Capital expenditures
    (44 )     (14,007 )     (420 )     (14,471 )
  Business combinations, net of cash acquired
    -       (1,859 )     -       (1,859 )
  Proceeds from sale of property and equipment
    1,286       233       -       1,519  
  Other uses - net
    (458 )     (676 )     184       (950 )
       Net cash provided/(used) by investing activities
    784       (16,309 )     (236 )     (15,761 )
 Cash Flow from Financing Activities:
                               
  Change in cash overdrafts payable
    (602 )     1,545       -       943  
  Change in intercompany accounts
    69,635       (64,031 )     (5,604 )     -  
  Dividends paid to shareholders
    (5,429 )     -       -       (5,429 )
  Purchases of treasury stock
    (1,684 )     -       -       (1,684 )
  Proceeds from exercise of stock options
    486       -       -       486  
  Realized excess tax benefit on share based compensation
    1,519       -       -       1,519  
  Repayment of long-term debt
    (22,700 )     (99 )     -       (22,799 )
  Other sources/(uses) - net
    (84 )     262       419       597  
       Net cash provided/ (used) by financing activities
    41,141       (62,323 )     (5,185 )     (26,367 )
 Net increase/(decrease) in cash and cash equivalents
    39,346       (1,378 )     451       38,419  
 Cash and cash equivalents at beginning of year
    65       202       3,361       3,628  
 Cash and cash equivalents at end of period
  $ 39,411     $ (1,176 )   $ 3,812     $ 42,047  
 
 
 
 
-15-

 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary
We operate through our two wholly owned subsidiaries, VITAS Healthcare Corporation and Roto-Rooter Group, Inc.  VITAS focuses on hospice care that helps make terminally ill patients’ final days as comfortable as possible.  Through its teams of doctors, nurses, home health aides, social workers, clergy and volunteers, VITAS provides direct medical services to patients, as well as spiritual and emotional counseling to both patients and their families.  Roto-Rooter’s services are focused on providing plumbing and drain cleaning services to both residential and commercial customers.  Through its network of company-owned branches, independent contractors and franchisees, Roto-Rooter offers plumbing and drain cleaning service to over 90% of the U.S. population.

The following is a summary of the key operating results for the three and nine months ended September 30, 2010 and 2009 (in thousands except per share amounts):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Service revenues and sales
  $ 320,451     $ 296,794     $ 944,259     $ 886,987  
Net income
  $ 20,988     $ 19,210     $ 59,201     $ 55,799  
Diluted EPS
  $ 0.91     $ 0.84     $ 2.57     $ 2.46  
Adjusted EBITDA*
  $ 46,280     $ 43,496     $ 134,237     $ 129,370  
Adjusted EBITDA as a % of revenue
    14.4 %     14.7 %     14.2 %     14.6 %

*See pages 27 - 28 for reconciliation to GAAP measures.

For the three months ended September 30, 2010, the increase in consolidated service revenues and sales was driven by a 7.8% increase at VITAS while Roto-Rooter revenues increased by 8.5%.  The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 6.1%, driven by an increase in admissions of 5.4%, combined with Medicare price increases of approximately 1.3%.  Roto-Rooter was driven by an approximate 9.3% price and mix shift increase offset by a 0.4% decrease in job count. Consolidated net income increased 9.3% mainly as a result of the increase in revenues.  Diluted EPS increased as the result of increased earnings.  Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the third quarter of 2010 increased 6.4% from the third quarter of 2009 mainly as a result of increased earnings.

For the nine months ended September 30, 2010, the increase in consolidated service revenues and sales was driven by a 7.3% increase at VITAS and a 4.2% increase at Roto-Rooter.  The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 5.6%, driven by an increase in admissions of 4.8%, combined with Medicare price increases of approximately 1.3%.  Roto-Rooter was driven by an approximate 7.3% price and mix shift increase offset by a 2.9% decrease in job count. Consolidated net income increased 6.1% over prior year.  Diluted EPS increased as a result of increased earnings.  Adjusted EBITDA for the nine month period ended September 30, 2010 increased 3.8% when compared to the same period in 2009 mainly as a result of increased earnings.

EBITDA and Adjusted EBITDA are not measures derived in accordance with GAAP and exclude components that are important to understanding our financial performance.  We use Adjusted EBITDA as a measure of earnings for our LTIP awards.  We provide EBITDA and Adjusted EBITDA to help readers evaluate our operating results, compare our operating performance with that of similar companies that have different capital structures and help evaluate our ability to meet future debt service, capital expenditure and working capital requirements.  Our EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP.  A reconciliation of our net income to our Adjusted EBITDA is presented on pages 27 - 28.

VITAS expects to achieve full-year 2010 revenue growth, prior to Medicare cap and BNAF, of 7.5% to 8.2%.  Admissions are estimated to increase 4.0% to 5.0%.  Adjusted EBITDA margin prior to Medicare cap is estimated to be 15.3% to 15.6%.  Roto-Rooter expects full-year 2010 revenue growth of 4.5% to 5.5%.  The revenue estimate is a result of increased pricing of 3.0%, a favorable mix shift to higher revenue jobs, offset by a job count decline estimated at 2.0% to 3.0%.  Adjusted EBITDA margin for 2010 is estimated to be in the range of 17.5% to 18.0%.  We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.
 
 
 
 
-16-

 

Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2009 to September 30, 2010 include the following:

 
A $52.2 million increase in accounts receivable primarily at VITAS, related to timing of Medicare payments and refund of overpayments from prior years.  The balance at September 30, 2010 is comparable with the balance at September 30, 2009.
 
A $4.5 million increase in income taxes payable, related to timing of payments.
 
A $10.5 million increase in accrued compensation due primarily to the timing of payroll disbursements in the current period versus prior year end.

 Net cash provided by operating activities decreased $22.6 million due primarily to the increase in accounts receivable, partially offset by the increase in net income and decrease in accounts payable and other current liabilities.  Management continually evaluates cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of available capital resources.

We have issued $28.2 million in standby letters of credit as of September 30, 2010, for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of September 30, 2010, we have approximately $146.8 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $100 million expansion feature. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

Commitments and Contingencies
Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly.  In connection therewith, we are in compliance with all financial and other debt covenants as of September 30, 2010 and anticipate remaining in compliance throughout 2010.

On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from Roto-Rooter and Chemed.  They also seek payment of penalties, interest and Plaintiffs’ attorney fees.  We contest these allegations.  In June 2010, the Court conditionally certified a nationwide class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  There has been no final determination of the merits of collective treatment of the case.  The lawsuit is in its early stage and we are unable to estimate our potential liability, if any with respect to these allegations.

VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White.  This case alleges failure to pay overtime and failure to provide meal and rest periods to a purported class of California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  VITAS contests these allegations.  In December 2009, the trial court denied Plantiffs’ motion for class certification. The lawsuit is in its early stages and we are unable to estimate our potential liability, if any, with respect to these allegations.

In April 2005, the Office of Inspector General (“OIG”) for the Department of Health and Human Services served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services.  As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review.  It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges.  During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us.  The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florida with prejudice in July 2007.  The plaintiffs appealed this dismissal, which the Court of Appeals affirmed.  The government continues to investigate the complaint’s allegations.  In March 2009, we received a letter from the government reiterating the basis of their investigation.

In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the OIG documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review. In February 2010, VITAS received a companion civil investigative demand (“CID”) from the state of Texas Attorney General’s office, seeking related documents.  In September 2010, it received a second CID and a second administrative subpoena seeking related documents. Based on the early stage of the investigation and the limited information we have at this time, we cannot predict the outcome of this investigation.  We believe that we are in material compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
 
 
 
 
-17-

 
 
We are unable to predict the outcome of these matters or the impact, if any, that the investigation may have on our business, results of operations, liquidity or capital resources.  Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

Results of Operations
Three months ended September 30, 2010 versus  2009 - Consolidated Results

Our service revenues and sales for the third quarter of 2010 increased 8.0% versus services and sales revenues for the third quarter of 2009.  Of this increase, $16.9 million was attributable to VITAS and $6.8 million was attributable to Roto-Rooter.  The following chart shows the components of those changes (dollar amounts in thousands):
 
   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
           
Routine homecare
  $ 12,227       7.8 %
Continuous care
    2,838       7.9 %
General inpatient
    1,906       7.9 %
Medicare cap
    (74 )     -172.1 %
Roto-Rooter
               
Plumbing
    6,026       16.7 %
Drain cleaning
    185       0.6 %
Other
    549       4.6 %
Total
  $ 23,657       8.0 %

The increase in VITAS’ revenues for the third quarter of 2010 versus the third quarter of 2009 was a result of increased ADC of 6.1% driven by an increase in admissions of 5.4%, combined with Medicare reimbursement rate increases of approximately 1.3%.  The ADC increase was driven by a 6.1% increase in routine homecare, an increase of 5.2% in general inpatient and a 6.0% increase in continuous care. In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the third quarter of 2010 versus 2009 is attributable to a 13.5% increase in the average price per job and a 3.2% increase in the number of jobs performed.  The increase in the plumbing price per job was a combination of increased pricing and favorable job mix shift to more expensive jobs such as excavation.  Our excavation job count increased by 14.6% compared to 2009.  On average, the price per job for our excavation jobs is approximately 5.5 times greater than the price per job of other plumbing jobs.  Drain cleaning revenues for the third quarter of 2010 versus 2009 reflect a 3.0% increase in the average price per jobs, while the job count decreased 2.3%.  The increase in other revenues is attributable to an increase in our independent contractor operations and an increase in product sales.
 
The consolidated gross margin was 28.9% in the third quarter of 2010 as compared with 29.6% in the third quarter of 2009.  On a segment basis, VITAS’ gross margin was 23.1% in the third quarter of 2010 and 23.4% in the third quarter of 2009.  The decrease in VITAS’ gross margin is attributable to higher labor costs for admissions and Medicare compliance personnel and the opening of inpatient units which carry significant one time start-up costs as capacity begins to ramp-up.  The Roto-Rooter segment’s gross margin was 44.6% for the third quarter of 2010 as compared with 46.4% for the third quarter of 2009.  The decrease in Roto-Rooter’s gross margin was attributable to continued mix shift to excavation which has higher revenue per job but a slightly lower gross margin percentage per job.  An unfavorable adjustment to medical insurance also contributed to the margin decline.
 
 
 
 
-18-

 
 
Selling, general and administrative expenses (“SG&A”) for the third quarter of 2010 and 2009 comprise (in thousands):
 
   
Three Months Ended
September 30,
 
   
2010
   
2009
 
SG&A expenses before the impact of market gains
           
    of deferred compensation plans
  $ 47,957     $ 46,359  
Impact of market value gains on liabilities
               
    held in deferred compensation trusts
    243       1,789  
     Total SG&A expenses
  $ 48,200     $ 48,148  
 
Normal salary increases and revenue related expense increases between periods accounts for the 3.4% increase in SG&A expenses before the impact of market gains of deferred compensation plans from $46.4 million in the third quarter of 2009 to $48.0 million in the third quarter of 2010.

Depreciation expense increased $1.0 million to $6.4 million in the third quarter of 2010 due to the installation of patient capture software at our VITAS segment in the second quarter of 2010.

 Other income for the third quarter of 2010 and 2009 comprise (in thousands):
 
   
Three Months Ended
September 30,
 
   
2010
   
2009
 
Interest income
  $ 109     $ 86  
Market value gains on assets held in deferred
               
   compensation trusts
    243       1,789  
Loss on disposal of property and equipment
    (141 )     (159 )
Other
    11       17  
     Total other income
  $ 222     $ 1,733  
 
Our effective income tax rate decreased to 38.2% in the third quarter of 2010 from 39.3% when compared with the third quarter of 2009.  This decrease relates primarily to a $236,000 tax adjustment required upon expiration of certain statutes.

Net income for both periods included the following after-tax items/adjustments that reduced after-tax earnings (in thousands):

   
2010
   
2009
 
VITAS
           
  Costs associated with the OIG investigation
  $ (69 )   $ (213 )
Roto-Rooter
               
Costs of class action lawsuit
    (194 )     -  
Corporate
               
Stock option expense
    (1,244 )     (1,401 )
  Noncash interest expense related to accounting for
               
conversion feature of the convertible notes
    (1,088 )     (1,006 )
Total
  $ (2,595 )   $ (2,620 )
 
 
 
 
-19-

 
 
Three months ended September 30, 2010 versus 2009 - Segment Results

The change in after-tax earnings for the third quarter of 2010 versus the third quarter of 2009 is due to (dollars in thousands):

   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
  $ 1,655       9.1 %
Roto-Rooter
    (188 )     -2.4 %
Corporate
    311       4.5 %
    $ 1,778       9.3 %


Nine months ended September 30, 2010 versus  2009 - Consolidated Results

Our service revenues and sales for the first nine months of 2010 increased 6.5% versus services and sales revenues for the first nine months of 2009.  Of this increase, $46.8 million was attributable to VITAS and $10.5 million was attributable to Roto-Rooter.  The following chart shows the components of those changes (dollars in thousands):

   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
           
  Routine homecare   $ 33,884       7.4 %
  Continuous care     7,909       7.5 %
  General inpatient     5,438       7.5 %
  Medicare cap     1,474       767.7 %
  BNAF     (1,950 )     -100.0 %
                 
Roto-Rooter
               
  Plumbing     11,194       10.0 %
  Drain cleaning     (2,003 )     -2.0 %
  Other     1,326       3.7 %
    Total   $ 57,272       6.5 %

The increase in VITAS’ revenues for the first nine months of 2010 versus the first nine months of 2009 was a result of increased ADC of 5.6% driven by an increase in admissions of 4.8%, combined with Medicare reimbursement rate increases of approximately 1.3%.  The ADC increase was driven by a 5.6% increase in routine homecare, an increase of 6.7% in general inpatient and a 5.3% increase in continuous care. In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the first nine months of 2010 versus 2009 is attributable to a 9.7% increase in the average price per job and a 0.8% increase in the number of jobs performed.  The increase in the plumbing price per job was a combination of increased pricing and favorable job mix shift to more expensive jobs such as excavation.  Our excavation job count increased by 15.2% compared to 2009.  On average, the price per job for our excavation jobs is approximately 5.5 times greater than the price per job of other plumbing jobs.  Drain cleaning revenues for the first nine months of 2010 versus 2009 reflect a 2.8% increase in the price per job offset by a 4.7% decrease in the number of jobs.  The increase in other revenues is attributable to an increase in our independent contractor operations and an increase in product sales.
 
The consolidated gross margin was 29.0% in the first nine months of 2010 as compared with 29.7% in the first nine months of 2009.  On a segment basis, VITAS’ gross margin was 22.9% in the first nine months of 2010 and 23.4% in the first nine months of 2009.  The decrease in VITAS’ gross margin is attributable to higher labor costs for admissions and Medicare compliance personnel and the opening of inpatient units which carry significant one time start-up costs as capacity begins to ramp-up. The Roto-Rooter segment’s gross margin was 45.0% for the first nine months of 2010 as compared with 45.9% for the first nine months of 2009.  The decrease in Roto-Rooter’s gross margin is attributable to continued mix shift to excavation which has higher revenue per job but slightly lower gross margin percentage per job.
 
 
 
 
-20-

 
 
Selling, general and administrative expenses (“SG&A”) for the first nine months of 2010 and comprise (in thousands):

   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
SG&A expenses before long-term incentive
           
    compensation and the impact of market gains
           
    of deferred compensation plans
  $ 144,547     $ 140,147  
Long-term incentive compensation
    1,799       -  
Impact of market value gains on liabilities
               
    held in deferred compensation trusts
    348       3,374  
     Total SG&A expenses
  $ 146,694     $ 143,521  

Normal salary increases and revenue related expense increases between periods account for the 3.1% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans from $140.1 million for the first nine months of 2009 to $144.5 million for the first nine months of 2010.
 
Depreciation expense increased $2.0 million in the first nine months of 2010 to $18.0 million due to the installation of patient capture software at our VITAS segment in the second quarter of 2010.

Other income for the first nine months of 2010 and 2009 comprise (in thousands):
 
 

   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
Interest income
  $ 334     $ 375  
Market value gains on assets held in deferred
               
   compensation trusts
    348       3,374  
Loss on disposal of property and equipment
    (293 )     (213 )
Non-taxable income from certain investments held
               
   deferred compensation trusts
    -       1,211  
Other
    29       68  
     Total other income
  $ 418     $ 4,815  

Our effective income tax rate of 38.7% in the first nine months of 2010 decreased from 39.0% in the first nine months of 2009.
 

 
 
-21-

 

Net income for both periods included the following after-tax items/adjustments that increased/(reduced) after-tax earnings (in thousands):

   
2010
   
2009
 
VITAS
           
  Costs associated with the OIG investigation   $ (242 )   $ (274 )
Roto-Rooter
               
  Costs of class action lawsuit     (257 )     -  
Corporate
               
  Stock option expense     (4,026 )     (4,237 )
  Long-term incentive compensation     (1,124 )     -  
  Noncash interest expense related to accounting for                
  conversion feature of the convertible notes     (3,203 )     (2,961 )
  Expenses of contested proxy solicitation     -       (2,525 )
  Impact of non-deductible losses and non-taxable gains on                
  investments held in deferred compensation trusts     -       756  
Total
  $ (8,852 )   $ (9,241 )
 
 
Nine months ended September 30, 2010 versus 2009 - Segment Results

The change in after-tax earnings for the first nine months of 2010 versus the first nine months of 2009 is due to (dollars in thousands):

   
Increase/(Decrease)
   
   
Amount
   
Percent
   
VITAS
  $ 4,081       7.8 %  
Roto-Rooter
    (542 )     -2.2 %  
Corporate
    (137 )     -0.6 %  
    $ 3,402       6.1 %  
 
 

 
 
-22-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010
 (in thousands)(unaudited)
                         
                     
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
 2010 (a)
                       
 Service revenues and sales
  $ 233,964     $ 86,487     $ -     $ 320,451  
 Cost of services provided and goods sold
    179,997       47,918       -       227,915  
 Selling, general and administrative expenses
    18,370       24,573       5,257       48,200  
 Depreciation
    4,321       1,925       139       6,385  
 Amortization
    694       133       369       1,196  
 Total costs and expenses
    203,382       74,549       5,765       283,696  
 Income/(loss) from operations
    30,582       11,938       (5,765 )     36,755  
 Interest expense
    (48 )     (55 )     (2,892 )     (2,995 )
 Intercompany interest income/(expense)
    1,139       651       (1,790 )     -  
 Other income/(expense)—net
    (92 )     11       303       222  
 Income/(loss) before income taxes
    31,581       12,545       (10,144 )     33,982  
 Income taxes
    (11,778 )     (4,798 )     3,582       (12,994 )
 Net income/(loss)
  $ 19,803     $ 7,747     $ (6,562 )   $ 20,988  
                                 
                                   
(a) The following amounts are included in net income (in thousands):
                 
                         
 
 
                                 
                             
Chemed
 
     
VITAS
     
Roto-Rooter
     
Corporate
     
Consolidated
 
Pretax benefit/(cost):
                               
    Stock option expense
  $ -     $ -     $ (1,968 )   $ (1,968 )
    Noncash impact of accounting for convertible debt
  -       -       (1,721 )     (1,721 )
    Expenses of class action lawsuit
    -       (322 )     -       (322 )
Expenses incurred in connection with the Office of Inspector
                 
          General investigation
    (112 )     -       -       (112 )
          Total
  $ (112 )   $ (322 )   $ (3,689 )   $ (4,123 )
                                 
                                 
                         
 
 
                         
                     
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
After-tax benefit/(cost):
                       
    Stock option expense
  $ -     $ -     $ (1,244 )   $ (1,244 )
    Noncash impact of accounting for convertible debt
  -       -       (1,088 )     (1,088 )
    Expenses of class action lawsuit
    -       (194 )     -       (194 )
Expenses incurred in connection with the Office of Inspector
                 
          General investigation
    (69 )     -       -       (69 )
          Total
  $ (69 )   $ (194 )   $ (2,332 )   $ (2,595 )
 
 
 
 
 
-23-

 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009
 
(in thousands)(unaudited)
 
                   
               
Chemed
 
   
VITAS
 
Roto-Rooter
 
Corporate
 
Consolidated
 
2009 (a)
                 
Service revenues and sales
  $ 217,067   $ 79,727   $ -   $ 296,794  
Cost of services provided and goods sold
    166,183     42,705     -     208,888  
Selling, general and administrative expenses
    18,227     22,740     7,181     48,148  
Depreciation
    3,292     2,005     64     5,361  
Amortization
    1,179     117     315     1,611  
Total costs and expenses
    188,881     67,567     7,560     264,008  
Income/(loss) from operations
    28,186     12,160     (7,560 )   32,786  
Interest expense
    (51 )   (43 )   (2,759 )   (2,853 )
Intercompany interest income/(expense)
    1,178     684     (1,862 )   -  
Other income/(expense)-net
    (86 )   15     1,804     1,733  
Income/(loss) before income taxes
    29,227     12,816     (10,377 )   31,666  
Income taxes
    (11,079 )   (4,881 )   3,504     (12,456 )
Net income/(loss)
  $ 18,148   $ 7,935   $ (6,873 ) $ 19,210  
                           
                             
    (a) The following amounts are included in net income (in thousands):
                   
                     
Chemed
 
   
VITAS
 
Roto-Rooter
 
Corporate
 
Consolidated
 
Pretax benefit/(cost):
                         
Stock option expense
  $ -   $ -   $ (2,214 ) $ (2,214 )
Noncash impact of accounting for convertible debt
  -     -     (1,591 )   (1,591 )
Expenses incurred in connection with the Office of Inspector
                       
General investigation
    (343 )   -     -     (343 )
Total
  $ (343 ) $ -   $ (3,805 ) $ (4,148 )
                           
                           
                     
Chemed
 
   
VITAS
 
Roto-Rooter
 
Corporate
 
Consolidated
 
After-tax benefit/(cost):
                         
Stock option expense
  $ -   $ -   $ (1,401 ) $ (1,401 )
Noncash impact of accounting for convertible debt
  -     -     (1,006 )   (1,006 )
Expenses incurred in connection with the Office of Inspector
                       
General investigation
    (213 )   -     -     (213 )
Total
  $ (213 ) $ -   $ (2,407 ) $ (2,620 )
 
 
 
 
 
-24-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
 
(in thousands)(unaudited)
 
                         
                     
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
2010 (a)
                       
Service revenues and sales
  $ 683,542     $ 260,717     $ -     $ 944,259  
Cost of services provided and goods sold
    527,347       143,407       -       670,754  
Selling, general and administrative expenses
    54,920       73,523       18,251       146,694  
Depreciation
    11,909       5,826       313       18,048  
Amortization
    2,253       388       1,066       3,707  
Total costs and expenses
    596,429       223,144       19,630       839,203  
Income/(loss) from operations
    87,113       37,573       (19,630 )     105,056  
Interest expense
    (127 )     (187 )     (8,632 )     (8,946 )
Intercompany interest income/(expense)
    3,778       2,126       (5,904 )     -  
Other income/(expense)—net
    (85 )     35       468       418  
Income/(loss) before income taxes
    90,679       39,547       (33,698 )     96,528  
Income taxes
    (34,156 )     (15,127 )     11,956       (37,327 )
Net income/(loss)
  $ 56,523     $ 24,420     $ (21,742 )   $ 59,201  
                                 
                                   
    (a) The following amounts are included in net income (in thousands):
                         
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
Pretax benefit/(cost):
                               
Stock option expense
  $ -     $ -     $ (6,365 )   $ (6,365 )
Long-term incentive compensation
    -       -       (1,799 )     (1,799 )
Noncash impact of accounting for convertible debt
  -       -       (5,064 )     (5,064 )
Expenses of class action lawsuit
    -       (427 )     -       (427 )
Expenses incurred in connection with the Office of Inspector
                             
General investigation
    (390 )     -       -       (390 )
Total
  $ (390 )   $ (427 )   $ (13,228 )   $ (14,045 )
                                 
                                 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
After-tax benefit/(cost):
                               
Stock option expense
  $ -     $ -     $ (4,026 )   $ (4,026 )
Long-term incentive compensation
    -       -       (1,124 )     (1,124 )
Noncash impact of accounting for convertible debt
  -       -       (3,203 )     (3,203 )
Expenses of class action lawsuit
    -       (257 )     -       (257 )
Expenses incurred in connection with the Office of Inspector
                             
General investigation
    (242 )     -       -       (242 )
Total
  $ (242 )   $ (257 )   $ (8,353 )   $ (8,852 )
 
 
 
 
 
-25-

 


CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(in thousands)(unaudited)
 
                         
                     
Chemed
 
   
VITAS
     Roto-Rooter
 
   Corporate
 
 
Consolidated
 
 2009 (a)
                       
 Service revenues and sales
  $ 636,787     $ 250,200     $ -     $ 886,987  
 Cost of services provided and goods sold
    487,990       135,248       -       623,238  
 Selling, general and administrative expenses
    53,650       69,959       19,912       143,521  
 Depreciation
    9,767       6,094       163       16,024  
 Amortization
    3,537       323       905       4,765  
 Other operating expenses
    -       -       3,989       3,989  
 Total costs and expenses
    554,944       211,624       24,969       791,537  
 Income/(loss) from operations
    81,843       38,576       (24,969 )     95,450  
 Interest expense
    (415 )     (138 )     (8,286 )     (8,839 )
 Intercompany interest income/(expense)
    3,091       1,801       (4,892 )     -  
 Other income-net
    35       137       4,643       4,815  
 Income/(loss) before income taxes
    84,554       40,376       (33,504 )     91,426  
 Income taxes
    (32,112 )     (15,414 )     11,899       (35,627 )
 Net income/(loss)
  $ 52,442     $ 24,962     $ (21,605 )   $ 55,799  
                                 
                                   
    (a) The following amounts are included in net income (in thousands):
                 
                           
Chemed
 
   
VITAS
     Roto-Rooter
 
    Corporate
 
 
Consolidated
 
Pretax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (6,699 )   $ (6,699 )
     Noncash impact of accounting for convertible debt
  -       -       (4,682 )     (4,682 )
Non-taxable income on certain investments held in deferred
                 
          compensation trusts
    -       -       1,211       1,211  
     Expenses associated with contested proxy solicitation
  -       -       (3,989 )     (3,989 )
Expenses incurred in connection with the Office of Inspector
                 
          General investigation
    (442 )     -       -       (442 )
          Total
  $ (442 )   $ -     $ (14,159 )   $ (14,601 )
                                 
                                 
                           
Chemed
 
   
VITAS
     Roto-Rooter
 
   Corporate
 
 
Consolidated
 
After-tax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (4,237 )   $ (4,237 )
     Noncash impact of accounting for convertible debt
  -       -       (2,961 )     (2,961 )
Non-taxable income on certain investments held in deferred
                 
          compensation trusts
    -       -       1,211       1,211  
Income tax impact of nondeductible losses on investments
                 
          held in deferred compensation trusts
    -       -       (455 )     (455 )
     Expenses associated with contested proxy solicitation
  -       -       (2,525 )     (2,525 )
Expenses incurred in connection with the Office of Inspector
                 
          General investigation
    (274 )     -       -       (274 )
          Total
  $ (274 )   $ -     $ (8,967 )   $ (9,241 )
                                 

 
 

 
-26-

 

 
Consolidating Summary and Reconciliation of Adjusted EBITDA
   
Chemed Corporation and Subsidiary Companies
                       
(in thousands)
                   
Chemed
 
 For the three months ended September 30, 2010
 
VITAS
    Roto-Rooter
 
 
Corporate
   
Consolidated
 
                         
 Net income/(loss)
  $ 19,803     $ 7,747     $ (6,562 )   $ 20,988  
 Add/(deduct):
                               
 Interest expense
    48       55       2,892       2,995  
 Income taxes
    11,778       4,798       (3,582 )     12,994  
 Depreciation
    4,321       1,925       139       6,385  
 Amortization
    694       133       369       1,196  
 EBITDA
    36,644       14,658       (6,744 )     44,558  
 Add/(deduct):
                               
 Legal expenses of OIG investigation
    112       -       -       112  
 Stock option expense
    -       -       1,968       1,968  
 Advertising cost adjustment
    -       (571 )     -       (571 )
 Expenses of class action litigation
    -       322       -       322  
 Interest income
    (37 )     (10 )     (62 )     (109 )
 Intercompany interest income/(expense)
    (1,139 )     (651 )     1,790       -  
 Adjusted EBITDA
  $ 35,580     $ 13,748     $ (3,048 )   $ 46,280  
                                 
                           
Chemed
 
 For the three months ended September 30, 2009
 
VITAS
     Roto-Rooter
 
 
Corporate
   
Consolidated
 
                                 
 Net income/(loss)
  $ 18,148     $ 7,935     $ (6,873 )   $ 19,210  
 Add/(deduct):
                               
 Interest expense
    51       43       2,759       2,853  
 Income taxes
    11,079       4,881       (3,504 )     12,456  
 Depreciation
    3,292       2,005       64       5,361  
 Amortization
    1,179       117       315       1,611  
 EBITDA
    33,749       14,981       (7,239 )     41,491  
 Add/(deduct):
                               
 Legal expenses of OIG investigation
    343       -       -       343  
 Stock option expense
    -       -       2,214       2,214  
 Advertising cost adjustment
    -       (466 )     -       (466 )
 Interest income
    (53 )     (9 )     (24 )     (86 )
 Intercompany interest income/(expense)
    (1,178 )     (684 )     1,862       -  
 Adjusted EBITDA
  $ 32,861     $ 13,822     $ (3,187 )   $ 43,496  
                                 
 

 
 
 
-27-

 
 
 
Consolidating Summary and Reconciliation of Adjusted EBITDA
                         
Chemed Corporation and Subsidiary Companies
                       
(in thousands)
                   
Chemed
 
 For the nine months ended September 30, 2010
 
VITAS
   
Roto-Rooter
 
Corporate
   
Consolidated
 
                         
 Net income/(loss)
  $ 56,523     $ 24,420     $ (21,742 )   $ 59,201  
 Add/(deduct):
                               
 Interest expense
    127       187       8,632       8,946  
 Income taxes
    34,156       15,127       (11,956 )     37,327  
 Depreciation
    11,909       5,826       313       18,048  
 Amortization
    2,253       388       1,066       3,707  
 EBITDA
    104,968       45,948       (23,687 )     127,229  
 Add/(deduct):
                               
 Legal expenses of OIG investigation
    390       -       -       390  
 Stock option expense
    -       -       6,365       6,365  
 Advertising cost adjustment
    -       (1,639 )     -       (1,639 )
 Expenses of class action litigation
    -       427       -       427  
 Long-term incentive compensation
    -       -       1,799       1,799  
 Interest income
    (172 )     (37 )     (125 )     (334 )
 Intercompany interest income/(expense)
    (3,778 )     (2,126 )     5,904       -  
 Adjusted EBITDA
  $ 101,408     $ 42,573     $ (9,744 )   $ 134,237  
                                 
                           
Chemed
 
 For the nine months ended September 30, 2009
 
VITAS
      Roto-Rooter
 
 
Corporate
   
Consolidated
 
                                 
 Net income/(loss)
  $ 52,442     $ 24,962     $ (21,605 )   $ 55,799  
 Add/(deduct):
                               
 Interest expense
    415       138       8,286       8,839  
 Income taxes
    32,112       15,414       (11,899 )     35,627  
 Depreciation
    9,767       6,094       163       16,024  
 Amortization
    3,537       323       905       4,765  
 EBITDA
    98,273       46,931       (24,150 )     121,054  
 Add/(deduct):
                               
 Non-taxable income from certain investments held in
                               
 deferred compensation trusts
    -       -       (1,211 )     (1,211 )
 Expenses associated with contested proxy solicitation
    -       -       3,989       3,989  
 Legal expenses of OIG investigation
    442       -       -       442  
 Stock option expense
    -       -       6,699       6,699  
 Advertising cost adjustment
    -       (1,228 )     -       (1,228 )
 Interest income
    (250 )     (44 )     (81 )     (375 )
 Intercompany interest income/(expense)
    (3,091 )     (1,801 )     4,892       -  
 Adjusted EBITDA
  $ 95,374     $ 43,858     $ (9,862 )   $ 129,370  
                                 
 
 
 
 
 
-28-

 

 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
OPERATING STATISTICS FOR VITAS SEGMENT
(unaudited)
                                 
                                 
   
Three Months Ended September 30,
      Nine Months Ended September 30,    
OPERATING STATISTICS
 
2010
     
2009
     
2010
     
2009
   
Net revenue ($000)
                               
Homecare
  $ 169,306       $ 157,079       $ 490,044       $ 456,160    
Inpatient
    25,963         24,057         78,244         72,806    
Continuous care
    38,812         35,974         113,588         105,679    
Total before Medicare cap allowance and 2008 BNAF
  $ 234,081       $ 217,110       $ 681,876       $ 634,645    
Estimated BNAF
    -         -         -         1,950    
Medicare cap allowance
    (117 )       (43 )       1,666         192    
Total
  $ 233,964       $ 217,067       $ 683,542       $ 636,787    
Net revenue as a percent of total
                                       
     before Medicare cap allowance
                                       
Homecare
    72.3   %     72.3   %     71.8   %     71.8   %
Inpatient
    11.1         11.1         11.5         11.5    
Continuous care
    16.6         16.6         16.7         16.7    
Total before Medicare cap allowance and 2008 BNAF
    100.0         100.0         100.0         100.0    
Estimated BNAF
    -         -         -         0.3    
Medicare cap allowance
    (0.1 )       -         0.2         -    
Total
    99.9   %     100.0   %     100.2   %     100.3   %
Average daily census (days)
                                       
Homecare
    8,586         7,835         8,350         7,661    
Nursing home
    3,250         3,316         3,212         3,291    
Routine homecare
    11,836         11,151         11,562         10,952    
Inpatient
    425         404         433         406    
Continuous care
    596         562         595         565    
Total
    12,857         12,117         12,590         11,923    
                                         
Total Admissions
    14,483         13,735         43,750         41,743    
Total Discharges
    14,076         13,441         42,767         41,064    
Average length of stay (days)
    78.2         78.0         77.1         75.0    
Median length of stay (days)
    15.0         14.0         14.0         14.0    
ADC by major diagnosis
                                       
Neurological
    33.4   %     33.1   %     33.2   %     33.0   %
Cancer
    18.5         19.1         18.4         19.2    
Cardio
    11.9         12.2         11.9         12.2    
Respiratory
    6.5         6.2         6.6         6.5    
Other
    29.7         29.4         29.9         29.1    
Total
    100.0   %     100.0   %     100.0   %     100.0   %
Admissions by major diagnosis
                                       
Neurological
    18.4   %     17.9   %     18.6   %     17.9   %
Cancer
    35.8         36.8         34.6         35.6    
Cardio
    11.1         11.1         11.3         11.8    
Respiratory
    7.5         6.8         8.1         7.5    
Other
    27.2         27.4         27.4         27.2    
Total
    100.0   %     100.0   %     100.0   %     100.0   %
Direct patient care margins
                                       
Routine homecare
    52.7   %     51.7   %     52.2   %     51.8   %
Inpatient
    12.3         12.8         13.3         15.7    
Continuous care
    21.1         20.6         21.0         20.3    
Homecare margin drivers (dollars per patient day)
                                       
Labor costs
  $ 51.97       $ 52.56       $ 52.79       $ 52.40    
Drug costs
    7.89         7.59         7.78         7.65    
Home medical equipment
    6.54         7.03         6.71         6.85    
Medical supplies
    2.66         2.48         2.53         2.37    
Inpatient margin drivers (dollars per patient day)
                                       
Labor costs
  $ 304.42       $ 294.24       $ 297.63       $ 282.74    
Continuous care margin drivers (dollars per patient day)
                                       
Labor costs
  $ 536.83       $ 530.88       $ 531.14       $ 524.84    
Bad debt expense as a percent of revenues
    0.9   %     1.1   %     0.9   %     1.1   %
 Accounts receivable --
                                       
  Days of revenue outstanding- excluding unapplied Medicare payments
    39.7         52.8      
n.a.
     
n.a.
   
  Days of revenue outstanding- including unapplied Medicare payments
    34.9         37.0      
n.a.
     
n.a.
   
                                         
 
 
 
 
 
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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information
Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The words “believe”, “expect”, “hope”, “anticipate”, “plan” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made.  These forward-looking statements are based on current expectations and assumptions and involve various known and unknown risks, uncertainties, contingencies and other factors, which could cause Chemed’s actual results to differ from those expressed in such forward-looking statements.  Variances in any or all of the risks, uncertainties, contingencies, and other factors from our assumptions could cause actual results to differ materially from these forward-looking statements and trends.  In addition, our ability to deal with the unknown outcomes of these events, many of which are beyond our control, may affect the reliability of projections and other financial matters.  Investors are cautioned that such forward-looking statements are subject to inherent risk and there are no assurances that the matters contained in such statements will be achieved.  Chemed does not undertake and specifically disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of a new information, future events or otherwise.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposure relates to interest rate risk exposure through variable interest rate borrowings.  At September 30, 2010, we had no variable rate debt outstanding.  At September 30, 2010, the fair value of the Notes approximates $181.1 million which have a face value of $187.0 million.

Item 4.    Controls and Procedures
We carried out an evaluation, under the supervision of our President and Chief Executive Officer and with the participation of the Executive Vice President and Chief Financial Officer and the Vice President and Controller, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the President and Chief Executive Officer, Executive Vice President and Chief Financial Officer and Vice President and Controller have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.  There has been no change in our internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION
Item 1.    Legal Proceedings

For information regarding the Company’s legal proceedings, see note 11, Legal and Regulatory Matters, under Part I, Item I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K.

 

 
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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

Item 2(c). Purchases of Equity Securities by Issuer and Affiliated Purchasers

The following table shows the activity related to our share repurchase programs for the first nine months of  2010:

         
Weighted
             
   
Total Number
   
Average
   
Cumulative Shares
   
Dollar Amount
 
   
of Shares
   
Price Paid Per
   
Repurchased Under
   
Remaining Under
 
   
Repurchased
   
Share
   
the Program
   
The Program
 
                         
April 2007 Program
                       
      January 1 through January 31, 2010
    31,375     $ 47.17       1,736,972     $ 51,718,696  
      February 1 through February 29, 2010
    -     $ -       1,736,972     $ 51,718,696  
      March 1 through March 31, 2010
    -     $ -       1,736,972     $ 51,718,696  
      First Quarter Total - April 2007 Program
    31,375     $ 47.17                  
                                 
      April 1 through April 30, 2010
    -     $ -       1,736,972     $ 51,718,696  
      May 1 through May 31, 2010
    38,492     $ 53.70       1,775,464     $ 49,651,677  
      June 1 through June 30, 2010
    76,408     $ 55.65       1,851,872     $ 45,399,865  
      Second Quarter Total - April 2007 Program
    114,900     $ 54.99                  
                                 
      July 1 through July 31, 2010
    -     $ -       1,851,872     $ 45,399,865  
      August 1 through August 31, 2010
    -     $ -       1,851,872     $ 45,399,865  
      September 1 through September 30, 2010
    -     $ -       1,851,872     $ 45,399,865  
      Third Quarter Total - April 2007 Program
    -     $ -                  
 
On April 26, 2007, our Board of Directors authorized a $150 million share repurchase plan with no expiration date.
On May 20, 2008 our Board of Directors authorized an additional $56 million under the April 2007 Program.

    Item 3.    Defaults Upon Senior Securities

None

    Item 4.    Removed and Reserved

    Item 5.    Other Information

None
 

 

 
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Item 6.   Exhibits

Exhibit No.
 
Description
     
     
31.1
 
Certification by Kevin J. McNamara pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.
     
31.2
 
Certification by David P. Williams pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange  Act of 1934.
     
31.3
 
Certification by Arthur V. Tucker, Jr. pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.
     
32.1
 
Certification by Kevin J. McNamara pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification by David P. Williams pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.3
 
Certification by Arthur V. Tucker, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS
 
XBRL Instance Document
     
101.SCH
 
XBRL Taxonomy Extension Schema
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
     
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase


SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


       
Chemed Corporation
 
       
(Registrant)
 
           
           
Dated:
November 3, 2010
 
By:
Kevin J. McNamara
 
       
Kevin J. McNamara
 
       
(President and Chief Executive Officer)
 
           
           
Dated:
November 3, 2010
 
By:
David P. Williams
 
       
David P. Williams
 
       
(Executive Vice President and Chief Financial Officer)
 
           
           
Dated:
November 3, 2010
 
By:
Arthur V. Tucker, Jr.
 
       
Arthur V. Tucker, Jr.
 
       
(Vice President and Controller)
 

 
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