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CHEMED CORP - Quarter Report: 2011 September (Form 10-Q)

a50048755.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, 2011
   
 
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
 
19,881,497 Shares
 
September 30, 2011




 
 
-1-

 

CHEMED CORPORATION AND
SUBSIDIARY COMPANIES



Index

 
Page No.
PART I.    FINANCIAL INFORMATION:
 
  Item 1.  Financial Statements  
  Unaudited Consolidated Balance Sheet -  
  September 30, 2011 and December 31, 2010 3
     
  Unaudited Consolidated Statement of Income -  
  Three and nine months ended September 30, 2011 and 2010 4
     
  Unaudited Consolidated Statement of Cash Flows -  
  Nine months ended September 30, 2011 and 2010 5
     
  Notes to Unaudited Financial Statements 6
     
  Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 17 
     
  Item 3.  Quantitative and Qualitative Disclosures about Market Risk 31
     
  Item 4.  Controls and Procedures 31
     
PART II.   OTHER INFORMATION
 
 
31
     
 
31
     
 
32
     
 
32
     
 
32
     
 
32
     
 
33
  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
 
 
UNAUDITED CONSOLIDATED BALANCE SHEET
 
(in thousands, except share and per share data)
 
             
             
   
September 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS            
Current assets
           
Cash and cash equivalents
  $ 21,342     $ 49,917  
Accounts receivable less allowances of $12,033 (2010 - $13,332)
    112,721       112,999  
Inventories
    8,888       7,728  
Current deferred income taxes
    14,850       15,098  
Prepaid income taxes
    764       770  
Prepaid expenses
    10,031       10,285  
Total current assets
    168,596       196,797  
Investments of deferred compensation plans
    31,339       28,304  
Properties and equipment, at cost, less accumulated depreciation of $142,067 (2010 - $132,696)
    83,484       79,292  
Identifiable intangible assets less accumulated amortization of $28,530 (2010 - $27,438)
    55,983       56,410  
Goodwill     460,747       458,343  
Other assets
    14,907       11,015  
Total Assets
  $ 815,056     $ 830,161  
                 
LIABILITIES                
Current liabilities
               
Accounts payable
  $ 59,186     $ 55,829  
Income taxes
    8,267       1,161  
Accrued insurance
    35,655       36,492  
Accrued compensation
    40,376       39,719  
Other current liabilities
    17,308       16,141  
Total current liabilities
    160,792       149,342  
Deferred income taxes
    23,262       25,085  
Long-term debt
    164,841       159,208  
Deferred compensation liabilities
    30,267       27,851  
Other liabilities
    9,559       6,626  
Total Liabilities
    388,721       368,112  
                 
STOCKHOLDERS' EQUITY
               
Capital stock - authorized 80,000,000 shares $1 par; issued 30,913,424 shares (2010 - 30,381,863 shares)
    30,913       30,382  
Paid-in capital
    394,822       365,007  
Retained earnings
    524,197       473,316  
Treasury stock - 11,128,851 shares (2010 - 9,103,185 shares), at cost
    (525,555 )     (408,615 )
Deferred compensation payable in Company stock
    1,958       1,959  
Total Stockholders' Equity
    426,335       462,049  
Total Liabilities and Stockholders' Equity
  $ 815,056     $ 830,161  
 
See accompanying notes to unaudited financial statements.
 
 
-3-

 

 
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
 
(in thousands, except per share data)
 
                         
                         
                         
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Service revenues and sales
  $ 341,439     $ 320,451     $ 1,005,717     $ 944,259  
Cost of services provided and goods sold (excluding depreciation)
    245,063       227,915       722,118       670,754  
Selling, general and administrative expenses
    47,618       48,200       153,696       146,694  
Depreciation
    6,313       6,385       18,959       18,048  
Amortization
    1,134       1,196       3,243       3,707  
Total costs and expenses
    300,128       283,696       898,016       839,203  
Income from operations
    41,311       36,755       107,701       105,056  
Interest expense
    (3,555 )     (2,995 )     (10,260 )     (8,946 )
Other income/(expense) - net
    (1,935 )     222       881       418  
Income before income taxes
    35,821       33,982       98,322       96,528  
Income taxes
    (13,934 )     (12,994 )     (38,048 )     (37,327 )
Net income
  $ 21,887     $ 20,988     $ 60,274     $ 59,201  
                                 
                                 
Earnings Per Share
                               
Net income
  $ 1.06     $ 0.93     $ 2.88     $ 2.62  
Average number of shares outstanding
    20,674       22,597       20,934       22,604  
                                 
Diluted Earnings Per Share
                               
Net income
  $ 1.04     $ 0.91     $ 2.82     $ 2.57  
Average number of shares outstanding
    21,055       22,996       21,400       23,006  
                                 
Cash Dividends Per Share
  $ 0.16     $ 0.14     $ 0.44     $ 0.38  
 
See accompanying notes to unaudited financial statements.
 
 
-4-

 

 
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
 
(in thousands)
 
             
   
Nine Months Ended
 
   
September 30,
 
   
2011
   
2010
 
Cash Flows from Operating Activities
           
Net income
  $ 60,274     $ 59,201  
Adjustments to reconcile net income to net cash provided
               
by operating activities:
               
Depreciation and amortization
    22,202       21,755  
Stock option expense
    6,903       6,365  
Provision for uncollectible accounts receivable
    6,640       7,248  
Amortization of discount on convertible notes
    5,633       5,265  
Noncash long-term incentive compensation
    2,595       1,580  
Provision for deferred income taxes
    (1,608 )     (3,886 )
Changes in operating assets and liabilities, excluding
               
amounts acquired in business combinations:
               
Increase in accounts receivable
    (5,991 )     (59,528 )
Increase in inventories
    (1,160 )     (408 )
Decrease in prepaid expenses
    254       463  
Increase in accounts payable and other current liabilities
    2,654       12,479  
Increase in income taxes
    12,253       6,729  
Increase in other assets
    (3,811 )     (2,180 )
Increase in other liabilities
    3,567       3,960  
Excess tax benefit on share-based compensation
    (3,368 )     (1,823 )
Other sources
    899       770  
Net cash provided by operating activities
    107,936       57,990  
Cash Flows from Investing Activities
               
Capital expenditures
    (23,459 )     (19,107 )
Business combinations, net of cash acquired
    (3,689 )     (30 )
Other uses     (829 )     (448 )
Net cash used by investing activities
    (27,977 )     (19,585 )
Cash Flows from Financing Activities
               
Purchases of treasury stock
    (110,288 )     (10,175 )
Dividends paid
    (9,393 )     (8,682 )
Proceeds from issuance of capital stock
    7,979       3,632  
Excess tax benefit on share-based compensation
    3,368       1,823  
Debt issuance costs
    (2,723 )     -  
Increase/(decrease) in cash overdrafts payable
    2,297       (184 )
Other sources
    226       222  
Net cash used by financing activities
    (108,534 )     (13,364 )
Increase/(Decrease) in Cash and Cash Equivalents
    (28,575 )     25,041  
Cash and cash equivalents at beginning of year
    49,917       112,416  
Cash and cash equivalents at end of period
  $ 21,342     $ 137,457  
 
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, 2010 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, 2010.

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, 2011, VITAS has approximately $1.1 million in unbilled revenue included in accounts receivable (December 31, 2010 - $2.8 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, 2011 we recorded a reversal of $384,000 in Medicare cap liability for one small program for the 2011 measurement period.  During the nine-month period ended September 30, 2011, we had a net Medicare cap liability reversal for amounts recorded in the fourth quarter of 2010.  We reversed these amounts as improving admissions trends in these programs indicate that the liability had been eliminated.  We also reversed the remaining Medicare cap liability for our Phoenix program due to expiration for the period under review.
 
Shown below is the Medicare cap liability activity for the periods ended September 30, 2011 and 2010 (in thousands):
 
   
September 30,
 
   
2011
   
2010
 
Beginning balance January 1,
  $ 1,371     $ 1,981  
Reversal - 2011 measurement period
    (829 )     -  
Reversal - 2010 measurement period
    -       (1,783 )
Accrual -  2010 measurement period
    -       117  
Other
    (198 )     -  
Ending balance September 30,
  $ 344     $ 315  
 
 
-6-

 
 
Vitas provides charity care, in certain circumstances, to patients without charge when management of the hospice program determines, at the time services are performed, that the patient does not have the financial wherewithal to make payment.  There is no revenue or associated accounts receivable in the accompanying consolidated financial statements related to charity care.  The cost of charity care is calculated by taking the ratio of charity care days to total days of care and multiplying by total cost of care.  The cost of charity care for the three and nine month periods ended September 30, 2011 and 2010 is as follows (in thousands):
 
Three months ended
   
Nine months ended
 
September 30,
   
September 30,
 
2011
   
2010
   
2011
   
2010
 
$ 1,775     $ 2,012     $ 5,298     $ 5,386  

 
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,
 
   
2011
   
2010
   
2011
   
2010
 
Service Revenues and Sales
       
 
         
 
 
VITAS
  $ 252,944     $ 233,964     $ 731,712     $ 683,542  
Roto-Rooter
    88,495       86,487       274,005       260,717  
Total   $ 341,439     $ 320,451     $ 1,005,717     $ 944,259  
                                 
After-tax Earnings
                               
VITAS
  $ 20,970     $ 19,803     $ 57,684     $ 56,523  
Roto-Rooter
    8,016       7,747       25,618       24,420  
Total     28,986       27,550       83,302       80,943  
Corporate
    (7,099 )     (6,562 )     (23,028 )     (21,742 )
Net income   $ 21,887     $ 20,988     $ 60,274     $ 59,201  
 
We report corporate administrative expenses and unallocated investing and financing income and expense not directly related to either segment as “Corporate”.

4.   Earnings per Share
Earnings per share are computed using the weighted average number of shares of capital stock outstanding.  Earnings and diluted earnings per share for 2011 and 2010 are computed as follows (in thousands, except per share data):

   
Net Income
 
For the Three Months Ended
September 30,
 
Income
   
Shares
   
Earnings per
Share
 
2011
                 
Earnings
  $ 21,887       20,674     $ 1.06  
Dilutive stock options
    -       293          
Nonvested stock awards
    -       88          
Diluted earnings
  $ 21,887       21,055     $ 1.04  
                         
2010
                       
Earnings
  $ 20,988       22,597     $ 0.93  
Dilutive stock options
    -       304          
Nonvested stock awards
    -       95          
Diluted earnings
  $ 20,988       22,996     $ 0.91  
 
 
-7-

 
 
   
Net Income
 
For the Nine Months Ended
September 30,
 
Income
   
Shares
   
Earnings per
Share
 
2011
                 
Earnings
  $ 60,274       20,934     $ 2.88  
Dilutive stock options
    -       379          
Nonvested stock awards
    -       87          
Diluted earnings
  $ 60,274       21,400     $ 2.82  
                         
2010
                       
Earnings
  $ 59,201       22,604     $ 2.62  
Dilutive stock options
    -       314          
Nonvested stock awards
    -       88          
Diluted earnings
  $ 59,201       23,006     $ 2.57  
 
For the three and nine-month periods ended September 30, 2011, 1.5 million and 980,000 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, 2010, 990,000 and 986,000 stock options, respectively, were excluded from the computation of diluted earnings per share.
 
Diluted earnings per share may be impacted in the future 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       28,058       -       28,058       (30,015 )     (1,957 )
$ 90.73       283,300       -       283,300       (303,066 )     (19,766 )
$ 100.73       487,865       -       487,865       (521,903 )     (34,038 )
$ 110.73       655,480       119,789       775,269       (701,214 )     74,055  
$ 120.73       795,329       317,554       1,112,883       (850,820 )     262,063  
$ 130.73       913,783       485,064       1,398,847       (977,538 )     421,309  
 
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
On March 1, 2011, we replaced our existing credit agreement with our Revolving Credit Facility (“2011 Credit Agreement”).  Terms of the 2011 Credit Agreement consist of a five-year, $350 million revolving credit facility.  This 2011 Credit Agreement has a floating interest rate that is currently LIBOR plus 175 basis points.  The 2011 Credit Agreement also includes a $150 million expansion feature.  Debt issuance costs associated with the existing credit agreement were not material.   The 2011 Credit Agreement contains the following quarterly financial covenants:

Description
 
Requirement
     
Leverage Ratio (Consolidated Indebtedness/Consolidated  Adj. EBITDA)
 
< 3.50 to 1.00
     
Fixed Charge Coverage Ratio (Consolidated Free Cash Flow/Consolidated Fixed Charges)
 
> 1.50 to 1.00
     
Annual Operating Lease Commitment
 
< $30.0 million
 
We are in compliance with all debt covenants as of September 30, 2011.  We have issued $29.5 million in standby letters of credit as of September 30, 2011 for insurance purposes.  Issued letters of credit reduce our available credit under the 2011 Credit Agreement.  As of September 30, 2011, we have approximately $320.5 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $150 million expansion feature.
 
The following amounts are included in our consolidated balance sheet related to the Notes:
 
   
September 30, 2011
   
December 31, 2010
 
Principal amount of convertible debentures
  $ 186,956     $ 186,956  
Unamortized debt discount
    (22,115 )     (27,748 )
Carrying amount of convertible debentures
  $ 164,841     $ 159,208  
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,
 
   
2011
   
2010
   
2011
   
2010
 
Cash interest expense
  $ 1,345     $ 1,044     $ 3,786     $ 3,198  
Non-cash amortization of debt discount
    1,910       1,785       5,633       5,265  
Amortization of debt costs
    300       166       841       483  
Total interest expense
  $ 3,555     $ 2,995     $ 10,260     $ 8,946  

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%.
 
 
-9-

 

6.   Other Income/(Expense) -- Net
Other income/(expense) -- net comprises the following (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Market value gains/(losses) on assets held in
                       
deferred compensation trust
  $ (2,011 )   $ 243     $ 796     $ 348  
Loss on disposal of property and equipment
    (79 )     (141 )     (68 )     (293 )
Interest income
    74       109       197       334  
Other – net
    81       11       (44 )     29  
Other income/(expense) - net
  $ (1,935 )   $ 222     $ 881     $ 418  

 
7.   Stock-Based Compensation Plans
In January 2011, we met a stock price target of $62.00 under our Long-Term Incentive Plan.  On January 14, 2011, the Compensation/Incentive Committee of the Board of Directors (“CIC”) approved a stock grant of 41,100 shares (including 7,350 shares from the discretionary pool) and the related allocation to participants.  The cumulative compensation expense related to the stock grant was $3.0 million.
 
On February 18, 2011, the CIC approved a time-based LTIP award of 42,000 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 award is $2.7 million and will be recognized ratably over the 4 year vesting period.  We assumed no forfeitures in determining the cumulative compensation expense of the grant.
 
On February 18, 2011, the CIC approved a grant of 35,713 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 $2.3 million and will be recognized ratably over the 4 year vesting period.  We assumed no forfeitures in determining the cumulative compensation expense of the grant.
 
On February 18, 2011, the CIC approved a grant of 513,100 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 $9.8 million and will be recognized over the 3 year vesting period.  We used the Black-Scholes option valuation method to determine the cumulative compensation expense of the grant.

8.   Independent Contractor Operations
The Roto-Rooter segment sublicenses with 64 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, 2011 totaling $1.2 million (December 31, 2010 - $1.1 million).  In most cases these loans are fully or partially secured by equipment owned by the contractor.  The interest rates on the loans range from 0% to 8% per annum and the remaining terms of the loans range from 2 months to 5 years at September 30, 2011.  We recorded the following from our independent contractors (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 6,575     $ 5,507     $ 19,614     $ 16,724  
Pretax profits
    3,236       2,530       9,625       7,634  
 
 
-10-

 

 9.   Pension and Retirement Plans
All of the Company’s plans that provide retirement and similar benefits are defined contribution plans.  These expenses include the impact of market gains and losses on assets held in deferred compensation plans.  Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands):

Three months ended
   
Nine months ended
 
September 30,
   
September 30,
 
2011
   
2010
   
2011
   
2010
 
$ 105     $ 2,271     $ 7,058     $ 7,017  

 
10.  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 class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  In June 2011, the Court granted certification of a class of technicians in 14 states on certain claims. We are unable to estimate our potential liability or range of potential loss, if any, with respect to this case.
 
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 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.  In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims. Plaintiffs have filed an appeal of this decision.  We are unable to estimate our potential liability or range of potential loss, if any, with respect to this case.
 
Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.

Regulatory Matters
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the Office of Inspector General (“OIG”) for the Department of Health and Human Services 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.  In April 2011, the U.S. Attorney provided the Company with a copy of a qui tam complaint filed under seal in U.S. District Court for the Northern District of Texas.  In June 2011, the U.S. Attorney provided the company with a partially unsealed second qui tam complaint filed under seal in the U.S. District Court for the Western District of Texas.  In June 2011, the U.S. Attorney also provided the Company with a partially unsealed third qui tam complaint filed under seal in the Northern District of Illinois, Eastern Division.  The complaint and all the filings in each of these actions remain under seal.  The U.S. Attorney has not decided whether to intervene in any of the actions.  We are conferring with the U.S. Attorney regarding the Company’s defenses to each complaint’s allegations.   We can neither predict the outcome of this investigation nor estimate our potential liability or range of potential loss, if any.  We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
 
In April 2005, the OIG 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.  We are unable to estimate our potential liability or range of potential loss, if any, with respect to this matter. We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.

 
-11-

 
 
The costs to comply with either of these investigations were not material for any period presented.  Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

11.  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 $10.0 million and $9.0 million for the three months ended September 30, 2011 and 2010, respectively.  VITAS made purchases from OCR of $29.2 million and $26.5 million for the nine months ended September 30, 2011 and 2010, respectively.
 
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.  We believe that the terms of the Agreements are no less favorable to VITAS than we could negotiate with an unrelated party.

12.  Cash Overdrafts and Cash Equivalents
Included in accounts payable at September 30, 2011 is cash overdrafts payable of $13.4 million (December 31, 2010 - $11.1 million).
 
From time to time throughout the year, we invest excess cash in money market funds or repurchase agreements directly with major commercial banks.  We do not physically hold the collateral for repurchase agreements, but the term is less than 10 days.  We closely monitor the creditworthiness of the institutions with which we invest our overnight funds and the quality of the collateral underlying those investments.  We had $16.0 million in cash equivalents as of   September 30, 2011.  There was $45.5 million in cash equivalents as of December 31, 2010.  The weighted average rate of return for our cash equivalents was 0.2% for September 30, 2011 and 0.1% for December 31, 2010.

13.  Financial Instruments
FASB’s authoritative guidance on fair value measurements defines a hierarchy which prioritizes the inputs in fair value measurements.  Level 1 measurements are measurements using quoted prices in active markets for identical assets or liabilities.  Level 2 measurements use significant other observable inputs.  Level 3 measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions.  In recording the fair value of assets and liabilities, companies must use the most reliable measurement available.
 
The following shows the carrying value, fair value and the hierarchy for our financial instruments as of September 30, 2011 (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
  $ 31,339     $ 31,339     $ -     $ -  
Long-term debt
    164,841       186,021       -       -  
 
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.
 
 
-12-

 

14.  Capital Stock Transactions
On February 22, 2011 our Board of Directors authorized $100 million of capital stock repurchases under the newly established February 2011 repurchase program.   We repurchased the following capital stock for the three and nine months ended September 30, 2011 and 2010:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Shares repurchased
    1,530,030       -       1,871,543       146,275  
Weighted average price per share
  $ 55.39     $ -     $ 60.30     $ 53.32  


15.  Business Combinations
On April 29, 2011, our VITAS segment completed an acquisition of the operating assets of Family Comfort Hospice which is based in Alabama.  This acquisition adds three Central-Alabama locations serving ten counties to VITAS’ network of hospice programs.  We made no acquisitions within the Roto-Rooter segment.  The purchase price of this acquisition is allocated as follows (in thousands):
 
Working capital
  $ 382  
Identifiable intangible assets
    664  
Goodwill
    2,345  
Other assets and liabilities - net
    298  
    $ 3,689  
 
The operating results of Family Comfort Hospice have been included in our results of operations since the acquisition date and are not material for either the three or nine-month period ended September 30, 2011.

16.  Recent Accounting Statements
In September 2011, the FASB issued Accounting Standards Update “ASU” No. 2011-08 – Goodwill Impairment Testing which provides additional guidance related to the impairment testing of goodwill.  ASU No. 2011-08 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The revised guidance is effective for fiscal years beginning after December 15, 2011 but early adoption is permitted. Our impairment testing date is October 1 of each year and we adopted the new guidelines in the fourth quarter of 2011.  There was no impact as a result of the adoption.
 
In July 2011, the FASB issued ASU No. 2011-07 – Health Care Entities which provides additional guidance to health care entities related to the recognition of patient service revenue and related disclosures.  The additional guidance is effective for fiscal years beginning after December 15, 2011 but early adoption is permitted.  Management is still evaluating the impact of this guidance.

 
-13-

 
 
17.  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, 2011 and December 31, 2010 for the balance sheet, the three and nine months ended September 30, 2011 and September 30, 2010 for the income statement and the nine months ended September 30, 2011  and  September 30, 2010 for the statement of cash flows (dollars in thousands):
 
September 30, 2011
       
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                             
Cash and cash equivalents
  $ 15,950     $ (1,449 )   $ 6,841     $ -     $ 21,342  
Accounts receivable, less allowances
    641       111,650       430       -       112,721  
Intercompany receivables
    -       214,413       -       (214,413 )     -  
Inventories
    -       8,137       751       -       8,888  
Current deferred income taxes
    (1,435 )     16,104       181       -       14,850  
Prepaid income taxes
    4,606       (3,432 )     (410 )     -       764  
Prepaid expenses
    671       9,181       179       -       10,031  
Total current assets
    20,433       354,604       7,972       (214,413 )     168,596  
Investments of deferred compensation plans
    -       -       31,339       -       31,339  
Properties and equipment, at cost, less accumulated depreciation
    11,825       69,197       2,462       -       83,484  
Identifiable intangible assets less accumulated amortization
    -       55,983       -       -       55,983  
Goodwill
    -       456,208       4,539       -       460,747  
Other assets
    7,957       4,352       2,598       -       14,907  
Investments in subsidiaries
    771,709       21,404       -       (793,113 )     -  
Total assets
  $ 811,924     $ 961,748     $ 48,910     $ (1,007,526 )   $ 815,056  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                       
Accounts payable
  $ 7,715     $ 51,056     $ 415     $ -     $ 59,186  
Intercompany payables
    209,680       -       4,733       (214,413 )     -  
Income taxes
    6,800       1,575       (108 )     -       8,267  
Accrued insurance
    352       35,303       -       -       35,655  
Accrued compensation
    2,946       36,899       531       -       40,376  
Other current liabilities
    2,900       14,238       170       -       17,308  
Total current liabilities
    230,393       139,071       5,741       (214,413 )     160,792  
Deferred income taxes
    (12,629 )     45,661       (9,770 )     -       23,262  
Long-term debt
    164,841       -       -       -       164,841  
Deferred compensation liabilities
    -       -       30,267       -       30,267  
Other liabilities
    2,984       4,176       2,399       -       9,559  
Stockholders' equity
    426,335       772,840       20,273       (793,113 )     426,335  
Total liabilities and stockholders' equity
  $ 811,924     $ 961,748     $ 48,910     $ (1,007,526 )   $ 815,056  
 
 
December 31, 2010
       
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                             
Cash and cash equivalents
  $ 45,324     $ (1,571 )   $ 6,164     $ -     $ 49,917  
Accounts receivable, less allowances
    802       111,716       481       -       112,999  
Intercompany receivables
    -       172,426       -       (172,426 )     -  
Inventories
    -       7,191       537       -       7,728  
Current deferred income taxes
    (688 )     15,666       120       -       15,098  
Prepaid income taxes
    2,787       (1,809 )     (208 )     -       770  
Prepaid expenses
    782       9,244       259       -       10,285  
Total current assets
    49,007       312,863       7,353       (172,426 )     196,797  
Investments of deferred compensation plans
    -       -       28,304       -       28,304  
Properties and equipment, at cost, less accumulated depreciation     12,513       64,743       2,036       -       79,292  
Identifiable intangible assets less accumulated amortization     -       56,410       -       -       56,410  
Goodwill
    -       453,864       4,479       -       458,343  
Other assets
    6,049       2,791       2,175       -       11,015  
Investments in subsidiaries
    716,815       18,696       -       (735,511 )     -  
Total assets
  $ 784,384     $ 909,367     $ 44,347     $ (907,937 )   $ 830,161  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                       
Accounts payable
  $ 4,924     $ 50,457     $ 448     $ -     $ 55,829  
Intercompany payables
    167,067       -       5,359       (172,426 )     -  
Income taxes
    (7,190 )     8,745       (394 )     -       1,161  
Accrued insurance
    906       35,586       -       -       36,492  
Accrued compensation
    4,235       35,016       468       -       39,719  
Other current liabilities
    1,549       13,447       1,145       -       16,141  
Total current liabilities
    171,491       143,251       7,026       (172,426 )     149,342  
Deferred income taxes
    (11,356 )     45,168       (8,727 )     -       25,085  
Long-term debt
    159,208       -       -       -       159,208  
Deferred compensation liabilities
    -       -       27,851       -       27,851  
Other liabilities
    2,992       3,123       511       -       6,626  
Stockholders' equity
    462,049       717,825       17,686       (735,511 )     462,049  
Total liabilities and stockholders' equity
  $ 784,384     $ 909,367     $ 44,347     $ (907,937 )   $ 830,161  
 
 
-14-

 

For the three months ended September 30, 2011  
 
   
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
Continuing Operations
                             
Service revenues and sales
  $ -     $ 334,937     $ 6,502     $ -     $ 341,439  
Cost of services provided and goods sold
    -       241,604       3,459       -       245,063  
Selling, general and administrative expenses
    5,678       42,595       (655 )     -       47,618  
Depreciation
    235       5,870       208       -       6,313  
Amortization
    467       667       -       -       1,134  
Total costs and expenses
    6,380       290,736       3,012       -       300,128  
Income/ (loss) from operations
    (6,380 )     44,201       3,490       -       41,311  
Interest expense
    (3,361 )     (194 )     -       -       (3,555 )
Other (expense)/income - net
    4,379       (4,301 )     (2,013 )     -       (1,935 )
Income/ (loss) before income taxes
    (5,362 )     39,706       1,477       -       35,821  
Income tax (provision)/ benefit
    1,677       (15,029 )     (582 )     -       (13,934 )
Equity in net income of subsidiaries
    25,572       953       -       (26,525 )     -  
Net income
  $ 21,887     $ 25,630     $ 895     $ (26,525 )   $ 21,887  

 
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
    -       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 nine months ended September 30, 2011  
 
   
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
Continuing Operations
                             
Service revenues and sales
  $ -     $ 985,500     $ 20,217     $ -     $ 1,005,717  
Cost of services provided and goods sold
    -       711,335       10,783       -       722,118  
Selling, general and administrative expenses
    17,936       130,617       5,143       -       153,696  
Depreciation
    711       17,651       597       -       18,959  
Amortization
    1,287       1,956       -       -       3,243  
Total costs and expenses
    19,934       861,559       16,523       -       898,016  
Income/ (loss) from operations
    (19,934 )     123,941       3,694       -       107,701  
Interest expense
    (9,814 )     (446 )     -       -       (10,260 )
Other (expense)/income - net
    12,011       (11,918 )     788       -       881  
Income/ (loss) before income taxes
    (17,737 )     111,577       4,482       -       98,322  
Income tax (provision)/ benefit
    5,863       (42,164 )     (1,747 )     -       (38,048 )
Equity in net income of subsidiaries
    72,148       2,861       -       (75,009 )     -  
Net income
  $ 60,274     $ 72,274     $ 2,735     $ (75,009 )   $ 60,274  


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
    -       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  
 
 
-15-

 

For the nine months ended September 30, 2011
       
Guarantor
   
Non-Guarantor
       
   
Parent
   
Subsidiaries
   
Subsidiaries
   
Consolidated
 
Cash Flow from Operating Activities:
                       
Net cash provided by operating activities
  $ 21,558     $ 83,903     $ 2,475     $ 107,936  
Cash Flow from Investing Activities:
                               
Capital expenditures
    (23 )     (22,378 )     (1,058 )     (23,459 )
Business combinations, net of cash acquired
    -       (3,689 )     -       (3,689 )
Other sources/(uses) - net
    (150 )     (713 )     34       (829 )
Net cash used by investing activities
    (173 )     (26,780 )     (1,024 )     (27,977 )
Cash Flow from Financing Activities:
                               
Change in cash overdrafts payable
    208       2,089       -       2,297  
Change in intercompany accounts
    60,028       (59,090 )     (938 )     -  
Dividends paid to shareholders
    (9,393 )     -       -       (9,393 )
Purchases of treasury stock
    (110,221 )     -       (67 )     (110,288 )
Proceeds from exercise of stock options
    7,979       -       -       7,979  
Realized excess tax benefit on share based compensation
    3,368       -       -       3,368  
Debt issuance cost
    (2,723 )     -       -       (2,723 )
Other sources/(uses) - net
    (5 )     -       231       226  
Net cash used by financing activities
    (50,759 )     (57,001 )     (774 )     (108,534 )
Net increase/(decrease) in cash and cash equivalents
    (29,374 )     122       677       (28,575 )
Cash and cash equivalents at beginning of year
    45,324       (1,571 )     6,164       49,917  
Cash and cash equivalents at end of period
  $ 15,950     $ (1,449 )   $ 6,841     $ 21,342  

 
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 )
Other uses - net
    (116 )     (313 )     (19 )     (448 )
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
    (10,164 )     -       (11 )     (10,175 )
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
    34       -       188       222  
Net cash provided/(used) by financing activities
    26,939       (41,426 )     1,123       (13,364 )
Net increase 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  
 
 
-16-

 

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, 2011 and 2010 (in thousands except per share amounts):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Service revenues and sales
  $ 341,439     $ 320,451     $ 1,005,717     $ 944,259  
Net income
  $ 21,887     $ 20,988     $ 60,274     $ 59,201  
Diluted EPS
  $ 1.04     $ 0.91     $ 2.82     $ 2.57  
Adjusted EBITDA
  $ 49,556     $ 46,280     $ 141,831     $ 134,237  
Adjusted EBITDA as a % of revenue
    14.5 %     14.4 %     14.1 %     14.2 %
 
EBITDA and Adjusted EBITDA are not measures derived in accordance with GAAP.  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 EBITDA and Adjusted EBITDA is presented on pages 28 and 29.
 
For the three months ended September 30, 2011, the increase in consolidated service revenues and sales was driven by a 8.1% increase at VITAS and a 2.3% increase at Roto-Rooter.  The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 6.2%, driven by an increase in admissions of 2.7% and a 2.4% increase in average length of stay, combined with Medicare price increases of approximately 2.1%.  Roto-Rooter was driven by a 0.2% price and mix shift increase and a 1.5% increase in job count. The remaining Roto-Rooter revenue increase is related mainly to our independent contractor operations. Consolidated net income increased 4.3% driven mainly by the increase in revenue.  Diluted EPS increased 14.3% as a result of the increase in net income and a lower number of shares outstanding.  Adjusted EBITDA as a percent of revenue was virtually flat when compared with the prior year.  See page 30 for additional operating metrics.
 
For the nine months ended September 30, 2011, the increase in consolidated service revenues and sales was driven by a 7.0% increase at VITAS and a 5.1% 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 5.1%, combined with Medicare price increases of approximately 2.1%.  Roto-Rooter was driven by a 2.4% price and mix shift increase and a 2.5% increase in job count. Consolidated net income increased 1.8% driven mainly by the increase in revenue.  Diluted EPS increased 9.7% as a result of the increase in net income and a lower number of shares outstanding.  Adjusted EBITDA as a percent of revenue was virtually flat when compared with the prior year.
 
VITAS expects to achieve full-year 2011 revenue growth, prior to Medicare cap, of 7.5% to 8.0%.  Admissions are estimated to increase approximately 5.0% to 5.5%.  Adjusted EBITDA margin prior to Medicare cap is estimated to be 15.2% to 15.7%.  Roto-Rooter expects full-year 2011 revenue growth of 4.5% to 5.5%.  The revenue estimate is a result of increased pricing of 2.0% to 3.0%, a favorable mix shift to higher revenue jobs, with job count growth estimated at 0.0% to 1.0%.  Adjusted EBITDA margin for 2011 is estimated to be in the range of 17.0% 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.

 
-17-

 

Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2010 to September 30, 2011 include the following:

•          
A $3.8 million increase in other long-term assets related to an increase in deferred long-term debt costs due to our debt refinancing as well an increase in licensure expenses at Vitas.
•          
A $3.4 million increase in accounts payable related to timing of payments.
•          
A $7.1 million increase in income taxes payable related to timing of payments.
 
Net cash provided by operating activities increased $49.9 million due primarily to the change in accounts receivable.  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 $29.5 million in standby letters of credit as of September 30, 2011, for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of September 30, 2011, we have approximately $320.5 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $150 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.  We are in compliance with all financial and other debt covenants as of September 30, 2011 and anticipate remaining in compliance throughout 2011.
 
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 class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  In June 2011, the Court granted certification of a class of technicians in 14 states on certain claims. We are unable to estimate our potential liability or range of potential loss, if any, with respect to this case.
 
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 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.  In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims. Plaintiffs have filed an appeal of this decision.  We are unable to estimate our potential liability or potential range of loss, if any, with respect to this case.
 
Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.
 
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the Office of Inspector General (“OIG”) for the Department of Health and Human Services 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.  In April 2011, the U.S. Attorney provided the Company with a copy of a qui tam complaint filed under seal in U.S. District Court for the Northern District of Texas.  In June 2011, the U.S. Attorney provided the company with a partially unsealed second qui tam complaint filed under seal in the U.S. District Court for the Western District of Texas.  In June 2011, the U.S. Attorney also provided the Company with a partially unsealed third qui tam complaint filed under seal in the Northern District of Illinois, Eastern Division.  The complaint and all the filings in each of these actions remain under seal.  The U.S. Attorney has not decided whether to intervene in any of the actions.  We are conferring with the U.S. Attorney regarding the Company’s defenses to each complaint’s allegations.   We can neither predict the outcome of this investigation nor estimate our potential liability or potential range of loss, if any.  We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.

 
-18-

 
 
In April 2005, the OIG 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.  We are unable to estimate our potential liability or potential range of loss, if any, with respect to this matter. We believe that we are in 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.  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, 2011 versus  2010 - Consolidated Results
 
Our service revenues and sales for the third quarter of 2011 increased 6.5% versus services and sales revenues for the third quarter of 2010.  Of this increase, $19.0 million was attributable to VITAS and $2.0 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
  $ 14,849       8.8  
Continuous care
    1,301       3.4  
General inpatient
    2,329       9.0  
Medicare cap
    501       428.2  
Roto-Rooter
               
Plumbing
    502       1.2  
Drain cleaning
    785       2.5  
Contractor operations
    1,068       19.4  
Other
    (347 )     -5.0  
Total   $ 20,988       6.5  
 
The increase in VITAS’ revenues for the third quarter of 2011 versus the third quarter of 2010 was a result of increased ADC of 6.2% driven by an increase in admissions of 2.7% and a 2.4% increase in average length of stay, combined with Medicare reimbursement rate increases of approximately 2.1%.  The ADC increase was driven by a 6.5% increase in routine homecare, an increase of 7.3% in general inpatient and an increase of a 0.5% 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 2011 versus 2010 is attributable to a 4.1% increase in the number of jobs performed offset by a 2.9% decrease in the average price per job.  Our excavation job count increased by 13.6% compared to 2010.  Drain cleaning revenues for the third quarter of 2011 versus 2010 reflect a 2.3% increase in price per job and a 0.2% increase in the number of jobs performed.  Contractor operations revenue increased 19.4% for the first nine months of 2011, as a result of acquisitions and higher job count.
 
The consolidated gross margin was 28.2% in the third quarter of 2011 as compared with 28.9% in the third quarter of 2010.  On a segment basis, VITAS’ gross margin was 22.4% in the third quarter of 2011 and 23.1% in the third quarter of 2010.  The decrease in VITAS’ gross margin is attributable to higher labor costs for admissions and Medicare compliance personnel and the opening of new operations, both new locations and new inpatient units, which carry significant start-up costs as capacity begins to ramp-up.  The Roto-Rooter segment’s gross margin was 45.0% for the third quarter of 2011 as compared with 44.6% for the third quarter of 2010.
 
 
-19-

 
 
Selling, general and administrative expenses (“SG&A”) for the third quarter of 2011 and 2010 comprise (in thousands):
 
   
Three months ended
September 30,
 
   
2011
   
2010
 
SG&A expenses before long-term incentive
           
compensation and the impact of market gains and
           
losses of deferred compensation plans
  $ 49,629     $ 47,957  
Impact of market value gains/(losses) on liabilities held in
               
deferred compensation trusts
    (2,011 )     243  
Total SG&A expenses
  $ 47,618     $ 48,200  
 
Normal salary increases and revenue related expense increases between periods accounts for the 3.5% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans.
 
Interest expense increased 18.7% between periods as a result of the debt refinancing that took place in the first quarter of 2011.
 
Other income/(expense) for the third quarter of 2011 and 2010 comprise (in thousands):
 
   
Three months ended
September 30,
 
   
2011
   
2010
 
Market value gains/(losses) on assets held in deferred
           
compensation trusts
  $ (2,011 )   $ 243  
Loss on disposal of property and equipment
    (79 )     (141 )
Interest income
    74       109  
Other
    81       11  
Total other income/(expense)-net
  $ (1,935 )   $ 222  
 
Our effective income tax rate increased to 38.9% in the third quarter of 2011 from 38.2% when compared with the third quarter of 2010.
 
Net income for both periods included the following after-tax items/adjustments that reduced after-tax earnings (in thousands):
 
   
Three months ended September 30,
 
   
2011
   
2010
 
VITAS
           
Legal expenses of OIG investigation
  $ (131 )   $ (69 )
Acquisition expenses
    (2 )     -  
Roto-Rooter
               
Expenses of class action litigation
    (467 )     (194 )
Corporate
               
Stock option expense
    (1,523 )     (1,244 )
Noncash impact of change in accounting for convertible debt
    (1,177 )     (1,088 )
Total
  $ (3,300 )   $ (2,595 )
 
 
-20-

 

Three months ended September 30, 2011 versus 2010 - Segment Results
 
The change in after-tax earnings for the third quarter of 2011 versus the third quarter of 2010 is due to (dollars in thousands):

   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
  $ 1,167       5.9  
Roto-Rooter
    269       3.5  
Corporate
    (537 )     -8.2  
    $ 899       4.3  

Nine months ended September 30, 2011 versus  2010 - Consolidated Results
 
Our service revenues and sales for the first nine months of 2011 increased 6.5% versus services and sales revenues for the first nine months of 2010.  Of this increase, $48.2 million was attributable to VITAS and $13.3 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
  $ 39,830       8.1  
Continuous care
    4,362       3.8  
General inpatient
    4,617       5.9  
Medicare cap
    (639 )     -38.4  
Roto-Rooter
               
Plumbing
    7,481       6.1  
Drain cleaning
    3,303       3.3  
Contractor operations
    2,890       17.3  
Other
    (386 )     -1.9  
Total   $ 61,458       6.5  
 
The increase in VITAS’ revenues for the first nine months of 2011 versus the first nine months of 2010 was a result of increased ADC of 5.6% driven by an increase in admissions of 5.1%, combined with Medicare reimbursement rate increases of approximately 2.1%.  The ADC increase was driven by a 5.9% increase in routine homecare, an increase of 4.2% in general inpatient and an increase of 1.0% 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 2011 versus 2010 is attributable to a 2.6% increase in the average price per job and a 3.6% increase in the number of jobs performed.  The increase in the plumbing price per job was a result of favorable job mix shift to more expensive jobs such as excavation.  Our excavation job count increased by 17.1% compared to 2010.  On average, the price per job for our excavation jobs is approximately 5 times greater than the price per job of other plumbing jobs.  Drain cleaning revenues for the first nine months of 2011 versus 2010 reflect a 2.0% increase in job count and a 1.3% increase in the average price per job.  Contractor operation revenues increased 17.3%, due to acquisitions and higher job count.
 
The consolidated gross margin was 28.2% in the first nine months of 2011 as compared with 29.0% in the first nine months of 2010.  On a segment basis, VITAS’ gross margin was 22.0% in the first nine months of 2011 and 22.9% in the first nine months of 2010.  The decrease in VITAS’ gross margin is attributable to a smaller Medicare cap reversal in 2011, higher labor costs for admissions and Medicare compliance personnel and the opening of new operations, both new locations and inpatient units, which carry significant time start-up costs as capacity begins to ramp-up.  The Roto-Rooter segment’s gross margin was 44.7% for the first nine months of 2011 as compared with 45.0% for the first nine months of 2010.
 
 
-21-

 
 
Selling, general and administrative expenses (“SG&A”) for the first nine months of 2011 and 2010 comprise (in thousands):
 
   
Nine months ended
September 30,
 
   
2011
   
2010
 
SG&A expenses before long-term incentive
           
compensation and the impact of market gains and
           
losses of deferred compensation plans
  $ 149,888     $ 144,547  
Long-term incentive compensation
    3,012       1,799  
Impact of market value gains on liabilities held in
               
deferred compensation trusts
    796       348  
Total SG&A expenses
  $ 153,696     $ 146,694  
 
Normal salary increases and revenue related expense increases between periods accounts for the 3.7% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans.
 
Depreciation expense increased 5.0% to $19.0 million for the first nine months of 2011 due mainly to the installation of patient capture software at our VITAS segment in the second quarter of 2010.
 
Interest expense increased 14.7% between periods as a result of the debt refinancing that took place in the first quarter of 2011.
 
Other income for the third quarter of 2011 and 2010 comprise (in thousands):
 
   
Nine months ended
September 30,
 
   
2011
   
2010
 
Market value gains on assets held in deferred
           
compensation trusts
  $ 796     $ 348  
Loss on disposal of property and equipment
    (68 )     (293 )
Interest Income
    197       334  
Other
    (44 )     29  
Total other income
  $ 881     $ 418  
 
Our effective income tax rate was 38.7% in the first nine months of 2011 which was essentially flat when compared with the first nine months of 2010.
 
Net income for both periods included the following after-tax items/adjustments that reduced after-tax earnings (in thousands):
 
   
Nine months ended September 30,
 
   
2011
   
2010
 
VITAS
           
Legal expenses of OIG investigation
  $ (749 )   $ (242 )
Acquisition expenses
    (73 )     -  
Roto-Rooter
               
Expenses of class action litigation
    (881 )     (257 )
Acquisition expenses
    4       -  
Corporate
               
Stock option expense
    (4,366 )     (4,026 )
Noncash impact of change in accounting for convertible debt
    (3,464 )     (3,203 )
Long-term incentive compensation
    (1,880 )     (1,124 )
Total
  $ (11,409 )   $ (8,852 )
 
 
-22-

 
 
Nine months ended September 30, 2011 versus 2010 - Segment Results
 
The change in after-tax earnings for the first nine months of 2011 versus the first nine months of 2010 is due to (dollars in thousands):

   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
  $ 1,161       2.1  
Roto-Rooter
    1,198       4.9  
Corporate
    (1,286 )     -5.9  
    $ 1,073       1.8  
 
 
 
 
-23-

 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
 
(in thousands)(unaudited)
 
                           
                       
Chemed
 
     
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
2011 (a)
                         
Service revenues and sales
    $ 252,944     $ 88,495     $ -     $ 341,439  
Cost of services provided and goods sold
      196,407       48,656       -       245,063  
Selling, general and administrative expenses
      18,945       25,057       3,616       47,618  
Depreciation
      4,123       2,058       132       6,313  
Amortization
      510       156       468       1,134  
Total costs and expenses
      219,985       75,927       4,216       300,128  
Income/(loss) from operations
      32,959       12,568       (4,216 )     41,311  
Interest expense
      (62 )     (132 )     (3,361 )     (3,555 )
Intercompany interest income/(expense)
      834       451       (1,285 )     -  
Other income/(expense)—net
      62       (7 )     (1,990 )     (1,935 )
Income/(expense) before income taxes
      33,793       12,880       (10,852 )     35,821  
Income taxes
      (12,823 )     (4,864 )     3,753       (13,934 )
Net income/(loss)
    $ 20,970     $ 8,016     $ (7,099 )   $ 21,887  
                                   
                                   
(a)   The following amounts are included in net income (in thousands):
                 

 
                     
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
Pretax benefit/(cost):
                       
Stock option expense
  $ -     $ -     $ (2,408 )   $ (2,408 )
Noncash impact of accounting for convertible debt
    -       -       (1,861 )     (1,861 )
Expenses of class action litigation
    -       (770 )     -       (770 )
Acquisition expenses
    (2 )     -       -       (2 )
Legal expenses of OIG investigation
    (212 )     -       -       (212 )
Total   $ (214 )   $ (770 )   $ (4,269 )   $ (5,253 )
                                 
                                 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
After-tax benefit/(cost):
                               
Stock option expense
  $ -     $ -     $ (1,523 )   $ (1,523 )
Noncash impact of accounting for convertible debt
    -       -       (1,177 )     (1,177 )
Expenses of class action litigation
    -       (467 )     -       (467 )
Acquisition expenses
    (2 )     -       -       (2 )
Legal expenses of OIG investigation
    (131 )     -       -       (131 )
Total   $ (133 )   $ (467 )   $ (2,700 )   $ (3,300 )
 
 
-24-

 
 
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/(expense) 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 litigation
    -       (322 )     -       (322 )
Legal expenses of OIG investigation
    (112 )     -       -       (112 )
Total   $ (112 )   $ (322 )   $ (3,689 )   $ (4,123 )
                                 
                                 
   
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 litigation
    -       (194 )     -       (194 )
Legal expenses of OIG investigation
    (69 )     -       -       (69 )
Total   $ (69 )   $ (194 )   $ (2,332 )   $ (2,595 )
 
 
-25-

 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
 
(in thousands)(unaudited)
 
                           
                       
Chemed
 
     
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
2011 (a)                          
Service revenues and sales
    $ 731,712     $ 274,005     $ -     $ 1,005,717  
Cost of services provided and goods sold
      570,648       151,470       -       722,118  
Selling, general and administrative expenses
      57,392       76,181       20,123       153,696  
Depreciation
      12,489       6,067       403       18,959  
Amortization
      1,513       443       1,287       3,243  
Total costs and expenses
      642,042       234,161       21,813       898,016  
Income/(loss) from operations
      89,670       39,844       (21,813 )     107,701  
Interest expense
      (172 )     (274 )     (9,814 )     (10,260 )
Intercompany interest income/(expense)
      3,263       1,742       (5,005 )     -  
Other income/(expense)—net
      3       (2 )     880       881  
Income/(expense) before income taxes
      92,764       41,310       (35,752 )     98,322  
Income taxes
      (35,080 )     (15,692 )     12,724       (38,048 )
Net income/(loss)
    $ 57,684     $ 25,618     $ (23,028 )   $ 60,274  
                                   
                                   
(a)   The following amounts are included in net income (in thousands):
                 


                     
Chemed
 
   
VITAS
    Roto-Rooter    
Corporate
   
Consolidated
 
Pretax benefit/(cost):
                       
Stock option expense
  $ -     $ -     $ (6,903 )   $ (6,903 )
Long-term incentive compensation
    -       -       (3,012 )     (3,012 )
Noncash impact of accounting for convertible debt
    -       -       (5,476 )     (5,476 )
Expenses of class action litigation
    -       (1,451 )     -       (1,451 )
Acquisition expenses
    (117 )     6       -       (111 )
Legal expenses of OIG investigation
    (1,209 )     -       -       (1,209 )
Total   $ (1,326 )   $ (1,445 )   $ (15,391 )   $ (18,162 )
                                 
                                 
   
VITAS
    Roto-Rooter    
Corporate
   
Consolidated
 
After-tax benefit/(cost):
                               
Stock option expense
  $ -     $ -     $ (4,366 )   $ (4,366 )
Long-term incentive compensation
    -       -       (1,880 )     (1,880 )
Noncash impact of accounting for convertible debt
    -       -       (3,464 )     (3,464 )
Expenses of class action litigation
    -       (881 )     -       (881 )
Acquisition expenses
    (73 )     4       -       (69 )
Legal expenses of OIG investigation
    (749 )     -       -       (749 )
Total   $ (822 )   $ (877 )   $ (9,710 )   $ (11,409 )
 
 
-26-

 

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/(expense) 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 litigation
    -       (427 )     -       (427 )
Legal expenses of OIG investigation
    (390 )     -       -       (390 )
Total   $ (390 )   $ (427 )   $ (13,228 )   $ (14,045 )
                                 
                                 
   
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 litigation
    -       (257 )     -       (257 )
Legal expenses of OIG investigation
    (242 )     -       -       (242 )
Total   $ (242 )   $ (257 )   $ (8,353 )   $ (8,852 )
 
 
-27-

 

Consolidating Summary and Reconciliation of Adjusted EBITDA
 
                         
Chemed Corporation and Subsidiary Companies
                       
(in thousands)
                   
Chemed
 
For the three months ended September 30, 2011
 
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
                         
Net income/(loss)
  $ 20,970     $ 8,016     $ (7,099 )   $ 21,887  
Add/(deduct):
                               
Interest expense
    62       132       3,361       3,555  
Income taxes
    12,823       4,864       (3,753 )     13,934  
Depreciation
    4,123       2,058       132       6,313  
Amortization
    510       156       468       1,134  
EBITDA
    38,488       15,226       (6,891 )     46,823  
Add/(deduct):
                               
Legal expenses of OIG investigation
    212       -       -       212  
Acquisition expenses
    2       -       -       2  
Expenses of class action litigation
    -       770       -       770  
Stock option expense
    -       -       2,408       2,408  
Advertising cost adjustment
    -       (585 )     -       (585 )
Interest income
    (43 )     (12 )     (19 )     (74 )
Intercompany interest income/(expense)
    (834 )     (451 )     1,285       -  
Adjusted EBITDA
  $ 37,825     $ 14,948     $ (3,217 )   $ 49,556  
                                 
                           
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  
Expenses of class action litigation
    -       322       -       322  
Stock option expense
    -       -       1,968       1,968  
Advertising cost adjustment
    -       (571 )     -       (571 )
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  
 
 
-28-

 

Consolidating Summary and Reconciliation of Adjusted EBITDA
 
                         
Chemed Corporation and Subsidiary Companies
                       
(in thousands)                    
Chemed
 
For the nine months ended September 30, 2011
 
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
                         
Net income/(loss)
  $ 57,684     $ 25,618     $ (23,028 )   $ 60,274  
Add/(deduct):
                               
Interest expense
    172       274       9,814       10,260  
Income taxes
    35,080       15,692       (12,724 )     38,048  
Depreciation
    12,489       6,067       403       18,959  
Amortization
    1,513       443       1,287       3,243  
EBITDA
    106,938       48,094       (24,248 )     130,784  
Add/(deduct):
                               
Legal expenses of OIG investigation
    1,209       -       -       1,209  
Acquisition expenses
    117       (6 )     -       111  
Expenses of class action litigation
    -       1,451       -       1,451  
Long-term incentive compensation
    -       -       3,012       3,012  
Stock option expense
    -       -       6,903       6,903  
Advertising cost adjustment
    -       (1,442 )     -       (1,442 )
Interest income
    (86 )     (28 )     (83 )     (197 )
Intercompany interest income/(expense)
    (3,263 )     (1,742 )     5,005       -  
Adjusted EBITDA
  $ 104,915     $ 46,327     $ (9,411 )   $ 141,831  
                                 
                           
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  
Expenses of class action litigation
    -       427       -       427  
Long-term incentive compensation
    -       -       1,799       1,799  
Stock option expense
    -       -       6,365       6,365  
Advertising cost adjustment
    -       (1,639 )     -       (1,639 )
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  
 
 
-29-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
OPERATING STATISTICS FOR VITAS SEGMENT
 
(unaudited)  
                         
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
OPERATING STATISTICS
 
2011
   
2010
   
2011
   
2010
 
Net revenue ($000)
                       
Homecare
  $ 184,155     $ 169,306     $ 529,874     $ 490,044  
Inpatient
    28,292       25,963       82,861       78,244  
Continuous care
    40,113       38,812       117,950       113,588  
Total before Medicare cap allowance
  $ 252,560     $ 234,081     $ 730,685     $ 681,876  
Medicare cap allowance
    384       (117 )     1,027       1,666  
Total
  $ 252,944     $ 233,964     $ 731,712     $ 683,542  
Net revenue as a percent of total
                               
before Medicare cap allowance
                               
Homecare
    72.9 %     72.3 %     72.5 %     71.8 %
Inpatient
    11.2       11.1       11.3       11.5  
Continuous care
    15.9       16.6       16.2       16.7  
Total before Medicare cap allowance
    100.0       100.0       100.0       100.0  
Medicare cap allowance
    0.2       (0.1 )     0.1       0.2  
Total
    100.2 %     99.9 %     100.1 %     100.2 %
Average daily census (days)
                               
Homecare
    9,485       8,586       9,185       8,350  
Nursing home
    3,118       3,250       3,062       3,212  
Routine homecare
    12,603       11,836       12,247       11,562  
Inpatient
    456       425       451       433  
Continuous care
    599       596       601       595  
Total
    13,658       12,857       13,299       12,590  
                                 
Total Admissions
    14,879       14,483       45,971       43,750  
Total Discharges
    14,682       14,076       45,104       42,767  
Average length of stay (days)
    80.1       78.2       78.7       77.1  
Median length of stay (days)
    15.0       15.0       14.0       14.0  
ADC by major diagnosis
                               
Neurological
    34.3 %     33.4 %     34.4 %     33.2 %
Cancer
    17.5       18.5       17.7       18.4  
Cardio
    11.3       11.9       11.6       11.9  
Respiratory
    6.6       6.5       6.8       6.6  
Other
    30.3       29.7       29.5       29.9  
Total
    100.0 %     100.0 %     100.0 %     100.0 %
Admissions by major diagnosis
                               
Neurological
    19.0 %     18.4 %     19.3 %     18.6 %
Cancer
    34.7       35.8       33.1       34.6  
Cardio
    10.4       11.1       10.9       11.3  
Respiratory
    7.8       7.5       8.5       8.1  
Other
    28.1       27.2       28.2       27.4  
Total
    100.0 %     100.0 %     100.0 %     100.0 %
Direct patient care margins
                               
Routine homecare
    52.4 %     52.7 %     52.0 %     52.2 %
Inpatient
    12.4       12.3       12.9       13.3  
Continuous care
    20.7       21.1       20.5       21.0  
Homecare margin drivers (dollars per patient day)
                               
Labor costs
  $ 53.13     $ 51.97     $ 53.88     $ 52.79  
Drug costs
    8.26       7.89       8.14       7.78  
Home medical equipment
    6.64       6.54       6.65       6.71  
Medical supplies
    2.81       2.66       2.80       2.53  
Inpatient margin drivers (dollars per patient day)
                               
Labor costs
  $ 312.72     $ 304.42     $ 310.25     $ 297.63  
Continuous care margin drivers (dollars per patient day)
                               
Labor costs
  $ 555.63     $ 536.83     $ 550.09     $ 531.14  
Bad debt expense as a percent of revenues
    0.8 %     0.9 %     0.7 %     0.9 %
Accounts receivable --
                               
Days of revenue outstanding- excluding unapplied Medicare payments
    38.9       39.7    
n.a.
   
n.a.
 
Days of revenue outstanding- including unapplied Medicare payments
    34.6       34.9    
n.a.
   
n.a.
 
 
 
-30-

 
 
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, 2011, we had no variable rate debt outstanding.  At September 30, 2011, the fair value of the Notes approximates $186.0 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 2011:
 
         
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, 2011
    300,513     $ 63.62       3,654,157     $ 24,543  
February 1 through February 28, 2011
    377       65.03       3,654,534       -  
March 1 through March 31, 2011
    -       -       3,654,534     $ -  
                                 
First Quarter Total - April 2007 Program
    300,890     $ 63.62                  
                                 
February 2011 Program
                               
January 1 through January 31, 2011
    -     $ -       -     $ -  
February 22, 2011 Authorization
    -       -       -       100,000,000  
February 1 through February 28, 2011
    40,623       65.03       40,623       97,358,313  
March 1 through March 31, 2011
    -       -       40,623     $ 97,358,313  
                                 
First Quarter Total - February 2011 Program
    40,623     $ 65.03                  
                                 
April 1 through April 30, 2011
    -     $ -       40,623     $ 97,358,313  
May 1 through May 31, 2011
    -       -       40,623       97,358,313  
June 1 through June 30, 2011
    -       -       40,623     $ 97,358,313  
                                 
Second Quarter Total - February 2011 Program
    -     $ -                  
                                 
July 1 through July 31, 2011
    41,112     $ 60.15       81,735     $ 94,885,576  
August 1 through August 31, 2011
    710,172       55.51       791,907       55,460,568  
September 1 through September 30, 2011
    778,746       55.02       1,570,653     $ 12,615,182  
                                 
Third Quarter Total - February 2011 Program
    1,530,030     $ 55.39                  
 
On February 22, 2011 our Board of Directors authorized $100 million under the newly established February 2011 Repurchase 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 4, 2011
 
By:
Kevin J. McNamara
         
Kevin J. McNamara
         
(President and Chief Executive Officer)
           
           
 
Dated:
November 4, 2011
 
By:
David P. Williams
         
David P. Williams
         
(Executive Vice President and Chief Financial Officer)
           
           
 
Dated:
November 4, 2011
 
By:
Arthur V. Tucker, Jr.
         
Arthur V. Tucker, Jr.
         
(Vice President and Controller)


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