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CHEMED CORP - Quarter Report: 2012 June (Form 10-Q)

a50358290.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 June 30, 2012
 
 
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.)
 
255 E. Fifth Street, Suite 2600, Cincinnati, Ohio
45202
(Address of principal executive offices)
(Zip code)
 
(513) 762-6500
(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
 

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
19,099,057 Shares
June 30, 2012
     
 
 


 
-1-

 
 
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES
 
 
 
Index
 
 
         
Page No.
 
 
   
       
       
3
 
       
       
4
 
       
       
5
 
     
6
 
 
17
 
 
31
 
 
31
           
 
 
31
 
 
31
 
 
32
 
 
32
 
 
32
 
 
32
 
 
32
       
EX - 31.1
 
       
EX - 31.2
 
       
EX - 31.3
 
       
EX - 32.1
 
       
EX - 32.2
 
       
EX - 32.3
 
       
EX - 101.INS
 
       
EX - 101.SCH
 
       
EX - 101.CAL
 
       
EX - 101.DEF
 
       
EX - 101.LAB
 
       
EX - 101.PRE
 
 
 
-2-

 

             
 
 
 
UNAUDITED CONSOLIDATED BALANCE SHEET
 
(in thousands, except share and per share data)
 
             
             
   
June 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 59,966     $ 38,081  
Accounts receivable less allowances of $11,414 (2011 - $11,524)
    81,811       77,924  
Inventories - net
    8,146       8,668  
Current deferred income taxes
    13,226       12,540  
Prepaid income taxes
    4,187       2,131  
Prepaid expenses
    10,737       11,409  
Total current assets
    178,073       150,753  
Investments of deferred compensation plans
    33,215       31,629  
Properties and equipment, at cost, less accumulated depreciation of $155,406 (2011 - $146,709)
    88,571       82,951  
Identifiable intangible assets less accumulated amortization of $29,654 (2011 - $28,904)
    57,635       58,262  
Goodwill
    461,965       460,633  
Other assets
    11,669       11,677  
Total Assets
  $ 831,128     $ 795,905  
                 
LIABILITIES
               
Current liabilities
               
Accounts payable
  $ 51,002     $ 48,225  
Income taxes
    167       90  
Accrued insurance
    36,786       37,147  
Accrued compensation
    39,729       41,087  
Other current liabilities
    14,906       18,851  
Total current liabilities
    142,590       145,400  
Deferred income taxes
    25,257       29,463  
Long-term debt
    170,769       166,784  
Deferred compensation liabilities
    33,149       30,693  
Other liabilities
    11,918       9,881  
Total Liabilities
    383,683       382,221  
                 
STOCKHOLDERS' EQUITY
               
Capital stock - authorized 80,000,000 shares $1 par; issued 31,142,442 shares (2011 - 30,936,925 shares)
    31,142       30,937  
Paid-in capital
    410,957       398,094  
Retained earnings
    582,316       546,757  
Treasury stock - 12,141,664 shares (2011 - 11,880,051)
    (579,013 )     (564,091 )
Deferred compensation payable in Company stock
    2,043       1,987  
Total Stockholders' Equity
    447,445       413,684  
Total Liabilities and Stockholders' Equity
  $ 831,128     $ 795,905  
                 
   
See accompanying notes to unaudited consolidated financial statements.
 
 
 
-3-

 

                         
 
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
 
(in thousands, except per share data)
 
                         
                         
                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Service revenues and sales
  $ 354,170     $ 333,360     $ 707,113     $ 664,278  
Cost of services provided and goods sold (excluding depreciation)
    257,368       239,597       514,813       477,055  
Selling, general and administrative expenses
    49,770       50,424       102,937       106,078  
Depreciation
    6,380       6,358       12,621       12,646  
Amortization
    1,127       1,139       2,240       2,109  
Total costs and expenses
    314,645       297,518       632,611       597,888  
Income from operations
    39,525       35,842       74,502       66,390  
Interest expense
    (3,672 )     (3,461 )     (7,289 )     (6,705 )
Other income/(expense) - net
    (970 )     714       1,125       2,816  
Income before income taxes
    34,883       33,095       68,338       62,501  
Income taxes
    (13,609 )     (12,809 )     (26,619 )     (24,114 )
Net income
  $ 21,274     $ 20,286     $ 41,719     $ 38,387  
                                 
                                 
Earnings Per Share
                               
Net income
  $ 1.12     $ 0.96     $ 2.20     $ 1.82  
Average number of shares outstanding
    18,998       21,115       18,976       21,067  
                                 
Diluted Earnings Per Share
                               
Net income
  $ 1.10     $ 0.94     $ 2.16     $ 1.78  
Average number of shares outstanding
    19,369       21,637       19,357       21,586  
                                 
Cash Dividends Per Share
  $ 0.16     $ 0.14     $ 0.32     $ 0.28  
                                 
See accompanying notes to unaudited consolidated financial statements.
 

 
-4-

 
 
             
 
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
 
(in thousands)
 
             
   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
Cash Flows from Operating Activities
           
Net income
  $ 41,719     $ 38,387  
Adjustments to reconcile net income to net cash provided
               
by operating activities:
               
Depreciation and amortization
    14,861       14,755  
Deferred income taxes
    (4,895 )     (18 )
Provision for uncollectible accounts receivable
    4,730       4,365  
Amortization of discount on convertible notes
    3,985       3,724  
Stock option expense
    4,312       4,495  
Noncash long-term incentive compensation
    -       2,595  
Changes in operating assets and liabilities, excluding
               
amounts acquired in business combinations:
               
Increase in accounts receivable
    (8,543 )     (9,271 )
Decrease/(increase) in inventories
    522       (954 )
Decrease/(increase) in prepaid expenses
    672       (59 )
Decrease in accounts payable and other current liabilities
    (3,593 )     (6,603 )
Increase/(decrease) in income taxes
    (1,029 )     3,738  
Increase in other assets
    (2,283 )     (5,652 )
Increase in other liabilities
    4,493       4,514  
Excess tax benefit on share-based compensation
    (1,069 )     (3,339 )
Other sources
    773       450  
Net cash provided by operating activities
    54,655       51,127  
Cash Flows from Investing Activities
               
Capital expenditures
    (18,474 )     (14,960 )
Business combinations, net of cash acquired
    (1,500 )     (3,689 )
Other sources/(uses)
    357       (869 )
Net cash used by investing activities
    (19,617 )     (19,518 )
Cash Flows from Financing Activities
               
Dividends paid
    (6,160 )     (5,967 )
Purchases of treasury stock
    (12,841 )     (25,482 )
Proceeds from issuance of capital stock
    3,670       7,698  
Excess tax benefit on share-based compensation
    1,069       3,339  
Increase/(decrease) in cash overdrafts payable
    985       (7,814 )
Debt issuance costs
    -       (2,723 )
Other sources
    124       364  
Net cash used by financing activities
    (13,153 )     (30,585 )
Increase in Cash and Cash Equivalents
    21,885       1,024  
Cash and cash equivalents at beginning of year
    38,081       49,917  
Cash and cash equivalents at end of period
  $ 59,966     $ 50,941  
                 
See accompanying notes to unaudited consolidated financial statements.
 

 
-5-

 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Consolidated 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, 2011 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, 2011.

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 June 30, 2012, VITAS has approximately $510,000 in unbilled revenue included in accounts receivable (December 31, 2011 - $720,000).  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 revenue and 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 June 30, 2012, we did not record any Medicare cap liability.  During the six-month period ended June 30, 2012, we reversed Medicare cap liability for amounts recorded in the fourth quarter of 2011 for three programs’ projected 2012 measurement period liability.  We reversed these amounts as improving admissions trends in these programs indicate that the liability had been eliminated.

Shown below is the Medicare cap liability activity for the periods ended (in thousands):

 
June 30,
 
 
2012
 
2011
 
Beginning balance January 1,
  $ 2,965     $ 1,371  
Reversal - 2012 measurement period
    (2,577 )     -  
Expense - 2011 measurement period
    -       299  
Reversal -  2011 measurement period
    -       (743 )
Other
    -       (198 )
Ending balance June 30,
  $ 388     $ 729  
 
 
-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 is as follows (in thousands):

Three months ended
 
Six months ended
June 30,
 
June 30,
2012
   
2011
 
2012
 
2011
  $ 1,789     $ 1,763     $ 4,038     $ 3,522

3.      Segments
Service revenues and sales and after-tax earnings by business segment are as follows (in thousands):
                         
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Service Revenues and Sales
       
 
         
 
 
VITAS
  $ 265,213     $ 243,095     $ 526,060     $ 478,768  
Roto-Rooter
    88,957       90,265       181,053       185,510  
Total
  $ 354,170     $ 333,360     $ 707,113     $ 664,278  
                                 
After-tax Earnings
                               
VITAS
  $ 20,433     $ 18,589     $ 40,060     $ 36,714  
Roto-Rooter
    8,074       9,092       15,569       17,602  
Total
    28,507       27,681       55,629       54,316  
Corporate
    (7,233 )     (7,395 )     (13,910 )     (15,929 )
Net income
  $ 21,274     $ 20,286     $ 41,719     $ 38,387  

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 (“EPS”) are computed using the weighted average number of shares of capital stock outstanding.  Earnings and diluted earnings per share are computed as follows (in thousands, except per share data):
                         
       
Net Income
 
For the Three Months Ended June 30,
 
Income
   
Shares
   
Earnings per
Share
 
2012
                       
 
Earnings
 
$
 21,274
   
 18,998
   
$
 1.12
 
 
Dilutive stock options
   
 -
   
 288
         
 
Nonvested stock awards
   
 -
   
 83
         
 
Diluted earnings
 
$
 21,274
   
 19,369
   
$
 1.10
 
                         
2011
                       
 
Earnings
 
$
 20,286
   
 21,115
   
$
 0.96
 
 
Dilutive stock options
   
 -
   
 433
         
 
Nonvested stock awards
   
 -
   
 89
         
 
Diluted earnings
 
$
 20,286
   
 21,637
   
$
 0.94
 
 
 
-7-

 
 
       
Net Income
 
For the Six Months Ended June 30,
 
Income
   
Shares
   
Earnings per
Share
 
2012
                       
 
Earnings
 
$
 41,719
   
 18,976
   
$
 2.20
 
 
Dilutive stock options
   
 -
   
 294
         
 
Nonvested stock awards
   
 -
   
 87
         
 
Diluted earnings
 
$
 41,719
   
 19,357
   
$
 2.16
 
                         
2011
                       
 
Earnings
 
$
 38,387
   
 21,067
   
$
 1.82
 
 
Dilutive stock options
   
 -
   
 433
         
 
Nonvested stock awards
   
 -
   
 86
         
 
Diluted earnings
 
$
 38,387
   
 21,586
   
$
 1.78
 

For the three and six-month periods ended June 30, 2012, 1.4 million stock options 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 six-month period ended June 30, 2011, 970,000 stock options 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 at June 30, 2012.  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 
 
 40,072 
 
 -
 
 40,072 
 
 (42,868)
 
 (2,796)
$
 90.73 
 
 295,315 
 
 -
 
 295,315 
 
 (315,919)
 
 (20,604)
$
 100.73 
 
 499,879 
 
 -
 
 499,879 
 
 (534,756)
 
 (34,877)
$
 110.73 
 
 667,495 
 
 120,403 
 
 787,898 
 
 (714,066)
 
 73,832 
$
 120.73 
 
 807,344 
 
 319,182 
 
 1,126,526 
 
 (863,672)
 
 262,854 
$
 130.73 
 
 925,798 
 
 487,550 
 
 1,413,348 
 
 (990,391)
 
 422,957 

                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.  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 June 30, 2012.  We have issued $29.4 million in standby letters of credit as of June 30, 2012 for insurance purposes.  Issued letters of credit reduce our available credit under the 2011 Credit Agreement.  As of June 30, 2012, we have approximately $320.6 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:

   
June 30, 2012
   
December 31, 2011
 
Principal amount of convertible debentures
  $ 186,956     $ 186,956  
Unamortized debt discount
    (16,187 )     (20,172 )
Carrying amount of convertible debentures
  $ 170,769     $ 166,784  
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 June 30,
    Six months ended June 30,  
 
2012
   
2011
   
2012
   
2011
 
Cash interest expense
$ 1,350     $ 1,288     $ 2,683     $ 2,440  
Non-cash amortization of debt discount
    2,009       1,878       3,985       3,724  
Amortization of debt costs
    313       295       621       541  
Total interest expense
$ 3,672     $ 3,461     $ 7,289     $ 6,705  

The unamortized debt discount is being amortized using the effective interest method over the remaining life of the Notes.  The effective rate on the Notes is approximately 6.875%.

 
-9-

 

6.      Other Income/(Expense) -- Net
Other income/(expense) -- net comprises the following (in thousands):
                         
 
Three months ended June 30,
   
Six months ended June 30,
 
 
2012
   
2011
   
2012
   
2011
 
Market value gains/(losses) on assets held in
                       
deferred compensation trust
 $ (948 )   $ 743     $ 1,185     $ 2,807  
Gain/(loss) on disposal of property and equipment
    (67 )     32       (148 )     11  
Interest income
    59       62       110       123  
Other - net
  (14 )     (123 )     (22 )     (125 )
Other income/(expense) - net
 $ (970 )   $ 714     $ 1,125     $ 2,816  

 7.    Stock-Based Compensation Plans
On February 17, 2012, the Compensation/Incentive Committee of the Board of Directors (“CIC”) approved a grant of 35,969 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 17, 2012, the CIC approved a grant of 442,350 stock options to certain employees.  The stock options vest ratably over three years from the date of issuance.  The cumulative compensation expense related to the stock option grant is $7.1 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 65 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 June 30, 2012 totaling $1.1 million (December 31, 2011 - $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 June 30, 2012.  We recorded the following from our independent contractors (in thousands):
                         
 
Three months ended June 30,
    Six months ended June 30,  
 
2012
   
2011
   
2012
   
2011
 
Revenues
$ 6,809     $ 6,528     $ 13,491     $ 13,039  
Pretax profits
    3,732       3,402       6,813       6,389  


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 are as follows (in thousands):
 
Three months ended June 30,
    Six months ended June 30,  
2012
   
2011
   
2012
   
2011
 
$ 1,162     $ 2,871     $ 5,854     $ 6,954  

 
-10-

 

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 nationwide class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  We are unable to estimate our potential liability, 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 a purported class of California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  We contest 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.

On January 12, 2012, the Greater Pennsylvania Carpenters Pension Fund filed a putative class action lawsuit in the United States District Court for the Southern District of Ohio against the Company, Kevin McNamara, David Williams, and Timothy O’Toole.  On April 9, 2012, the Court issued orders (a) renaming the suit as In re Chemed Corp. Securities Litigation, Civil Action No. 1:12-cv-28 (S.D. Ohio), (b) appointing the Greater Pennsylvania Carpenters Pension Fund and the Electrical Workers Pension Fund, Local 103, I.B.E.W. as Lead Plaintiffs; and (c) approving Lead Plaintiffs’ selection of Labaton Sucharow LLP and Robbins Geller Rudman & Dowd LLP as Co-Lead Counsel.  On June 18, 2012, Lead Plaintiffs filed an amended complaint alleging violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against all Defendants, and violation of Section 20(a) of the Securities Exchange Act of 1934 against Messrs. McNamara, Williams and O’Toole.  The suit’s allegations concern the VITAS hospice segment of the Company’s business.  Lead Plaintiffs seek, on behalf of a putative class of purchasers of Chemed Capital Stock between February 15, 2010 and November 16, 2011, compensatory damages in an unspecified amount and attorneys’ fees and expenses, arising from Defendants’ failure to disclose an alleged fraudulent scheme to enroll ineligible hospice patients and to fraudulently obtain payments from the federal government.  Defendants are required to move or otherwise respond to the amended complaint on or before August 17, 2012.  Defendants believe the claims are without merit, and intend to defend vigorously against them.

Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.

Regulatory Matters
In June 2012, VITAS received an administrative subpoena from the Office of the Inspector General (“OIG”) of the U.S. Department of Health and Human Services in connection with an investigation of possible improper claims submitted to the Medicare and Medicaid Programs.  It seeks production to the OIG of various categories of documents concerning the provision of hospice services, for headquarters and its Southern California programs, for the period January 1, 2007 through the date of the subpoena.  The categories of documents include policy, procedure and training manuals; documents concerning patient eligibility for hospice care, including referrals, admissions, certification, revocations and census information; documents concerning claims submitted to government programs; certain information concerning employees and their compensation; and documents concerning VITAS’ financial performance.  We are conferring with the U.S. Attorney’s Office for the Central District of California regarding the document requests.  We cannot predict the timing or outcome of this investigation, or estimate our potential liability, if any.
 
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the OIG documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review.   In February 2010, VITAS received a companion civil investigative demand (“CID”) from the State of Texas Attorney General’s Office, seeking related documents. In September 2010, it received a second CID and a second administrative subpoena seeking related documents.  In April 2011, the U.S. Attorney provided the Company with a copy of qui tam complaint filed under seal in the U.S. District Court for the Northern District of Texas.  The Court unsealed this complaint in November 2011.  The U.S. Attorney and the Attorney General for the State of Texas filed a notice in November 2011 that they had decided not to intervene at that time in the case.  They continue to investigate its allegations.  It was brought by Michael Rehfelt, a former VITAS San Antonio program general manager, against VITAS, the program’s former Regional Vice President Keith Becker, its former Medical Director Justos Cisneros, and their current employers:  Wellmed Medical Management, Care Level Management LLC, and Inspiris Inc.  Plaintiff dismissed his case against their current employers in March of 2012.  The case alleges admission and recertification of inappropriate patients, backdating revocations, and conspiring to admit inappropriate patients to hospice.  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.  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, if any.

 
-11-

 
 
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 investigations.  In July 2012, we received an administrative subpoena from the Office of the Attorney General of Florida seeking documents from January 1, 2007 covering areas including billing, marketing, referrals, incentives, patient eligibility for hospice care, claims submitted to government programs, and VITAS’ financial performance.  We are conferring with the government’s counsel regarding the document requests.  We are unable to estimate the timing or outcome of this investigation or our potential liability, if any, with respect to this matter.

Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

11.  Concentration of Risk
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 $10.2 million and $9.8 million for the three months ended June 30, 2012 and 2011, respectively.  VITAS made purchases from OCR of $20.3 million and $19.1 million for the six months ended June 30, 2012 and 2011, respectively.  For the three and six month periods ending June 30, 2012 and 2011, respectively, purchases from this vendor represent over 90% of all pharmacy services used by VITAS.

12.  Cash Overdrafts and Cash Equivalents
Included in accounts payable at June 30, 2012 is cash overdrafts payable of $11.3 million (December 31, 2011 - $10.3 million).
 
From time to time throughout the year, we invest excess cash in money market funds with major commercial banks. We closely monitor the creditworthiness of the institutions with which we invest our overnight funds.  We had $53.4 million in cash equivalents as of June 30, 2012.  There was $32.5 million in cash equivalents as of December 31, 2011.  The weighted average rate of return for our cash equivalents was 0.2% for June 30, 2012 and 0.1% for December 31, 2011.

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.

 
-12-

 

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of June 30, 2012 (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
  $ 33,215     $ 33,215     $ -     $ -  
Long-term debt
    170,769       187,984       -       -  

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.

14.  Capital Stock Transactions
We repurchased the following capital stock for the three and six-months ended June 30, 2012 and 2011:
                         
 
Three months ended June 30,
    Six months ended June 30,  
 
2012
   
2011
   
2012
   
2011
 
                         
Shares repurchased
    199,900       -       199,900       341,513  
Weighted average price per share
  $ 55.72     $ -     $ 55.72     $ 63.79  

15.  Business Combinations
In the first six months of 2012, we completed three business combinations within our Roto-Rooter segment for $1.5 million in cash to increase our market penetration in Bend, Oregon; Shreveport, Louisiana; and Boise, Idaho.  A substantial portion of this aggregate purchase price was allocated to goodwill.  The operating results of these business combinations have been included in our results of operations since the acquisition date and are not material for the three and six-month periods ended June 30, 2012 nor for the comparable prior year periods.

 
-13-

 

16. Guarantor Subsidiaries
Our 1.875% Notes are fully and unconditionally guaranteed on an unsecured, jointly, and severally liable basis by certain of our 100% owned subsidiaries.  The following unaudited, condensed, consolidating financial data presents the composition of the parent company (Chemed), the guarantor subsidiaries and the non-guarantor subsidiaries as of June 30, 2012 and December 31, 2011 for the balance sheet, the three and six months ended June 30, 2012 and June 30, 2011 for the income statement and the six months ended June 30, 2012 and June 30, 2011 for the statement of cash flows (dollars in thousands):
                               
June 30, 2012
       
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                             
Cash and cash equivalents
  $ 53,280     $ (803 )   $ 7,489     $ -     $ 59,966  
Accounts receivable, less allowances
    1,082       80,120       609       -       81,811  
Intercompany receivables
    -       303,347       -       (303,347 )     -  
Inventories - net
    -       7,414       732       -       8,146  
Current deferred income taxes
    (1,311 )     14,329       208       -       13,226  
Prepaid income taxes
    4,701       (890 )     376       -       4,187  
Prepaid expenses
    980       9,554       203       -       10,737  
     Total current assets
    58,732       413,071       9,617       (303,347 )     178,073  
Investments of deferred compensation plans
    -       -       33,215       -       33,215  
Properties and equipment, at cost, less accumulated depreciation
    11,203       74,761       2,607       -       88,571  
Identifiable intangible assets less accumulated amortization
    -       57,635       -       -       57,635  
Goodwill
    -       457,487       4,478       -       461,965  
Other assets
    7,010       1,733       2,926       -       11,669  
Investments in subsidiaries
    833,241       23,043       -       (856,284 )     -  
          Total assets
  $ 910,186     $ 1,027,730     $ 52,843     $ (1,159,631 )   $ 831,128  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                       
Accounts payable
  $ (748 )   $ 51,304     $ 446     $ -     $ 51,002  
Intercompany payables
    298,601       -       4,746       (303,347 )     -  
Income taxes
    -       -       167       -       167  
Accrued insurance
    402       36,384       -       -       36,786  
Accrued compensation
    2,020       37,166       543       -       39,729  
Other current liabilities
    1,992       12,618       296       -       14,906  
      Total current liabilities
    302,267       137,472       6,198       (303,347 )     142,590  
Deferred income taxes
    (13,314 )     49,264       (10,693 )     -       25,257  
Long-term debt
    170,769       -       -       -       170,769  
Deferred compensation liabilities
    -       30       33,119       -       33,149  
Other liabilities
    3,019       6,394       2,505       -       11,918  
Stockholders' equity
    447,445       834,570       21,714       (856,284 )     447,445  
     Total liabilities and stockholders' equity
  $ 910,186     $ 1,027,730     $ 52,843     $ (1,159,631 )   $ 831,128  
                                         
December 31, 2011
         
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                                       
Cash and cash equivalents
  $ 32,470     $ (1,422 )   $ 7,033     $ -     $ 38,081  
Accounts receivable, less allowances
    606       76,816       502       -       77,924  
Intercompany receivables
    -       273,413       -       (273,413 )     -  
Inventories - net
    -       8,032       636       -       8,668  
Current deferred income taxes
    (650 )     13,059       131       -       12,540  
Prepaid income taxes
    (114 )     1,689       556       -       2,131  
Prepaid expenses
    503       10,757       149       -       11,409  
     Total current assets
    32,815       382,344       9,007       (273,413 )     150,753  
Investments of deferred compensation plans
    -       -       31,629       -       31,629  
Properties and equipment, at cost, less accumulated depreciation
    11,641       68,755       2,555       -       82,951  
Identifiable intangible assets less accumulated amortization
    -       58,262       -       -       58,262  
Goodwill
    -       456,183       4,450       -       460,633  
Other assets
    7,616       1,552       2,509       -       11,677  
Investments in subsidiaries
    793,277       21,148       -       (814,425 )     -  
          Total assets
  $ 845,349     $ 988,244     $ 50,150     $ (1,087,838 )   $ 795,905  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                       
Accounts payable
  $ (683 )   $ 48,490     $ 418     $ -     $ 48,225  
Intercompany payables
    269,042       -       4,371       (273,413 )     -  
Income taxes
    -       -       90       -       90  
Accrued insurance
    489       36,658       -       -       37,147  
Accrued compensation
    3,828       36,655       604       -       41,087  
Other current liabilities
    1,719       15,728       1,404       -       18,851  
      Total current liabilities
    274,395       137,531       6,887       (273,413 )     145,400  
Deferred income taxes
    (12,330 )     51,601       (9,808 )     -       29,463  
Long-term debt
    166,784       -       -       -       166,784  
Deferred compensation liabilities
    -       -       30,693       -       30,693  
Other liabilities
    2,816       4,630       2,435       -       9,881  
Stockholders' equity
    413,684       794,482       19,943       (814,425 )     413,684  
     Total liabilities and stockholders' equity
  $ 845,349     $ 988,244     $ 50,150     $ (1,087,838 )   $ 795,905  
 
 
-14-

 


                               
For the three months ended June 30, 2012
       
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
Continuing Operations
                             
Service revenues and sales
  $ -     $ 347,017     $ 7,153     $ -     $ 354,170  
Cost of services provided and goods sold
    -       253,434       3,934       -       257,368  
Selling, general and administrative expenses
    5,937       43,356       477       -       49,770  
Depreciation
    234       5,926       220       -       6,380  
Amortization
    481       646       -       -       1,127  
     Total costs and expenses
    6,652       303,362       4,631       -       314,645  
     Income/ (loss) from operations
    (6,652 )     43,655       2,522       -       39,525  
Interest expense
    (3,487 )     (171 )     (14 )     -       (3,672 )
Other (expense)/income - net
    4,340       (4,357 )     (953 )     -       (970 )
     Income/ (loss) before income taxes
    (5,799 )     39,127       1,555       -       34,883  
Income tax (provision)/ benefit
    1,918       (14,918 )     (609 )     -       (13,609 )
Equity in net income of subsidiaries
    25,155       990       -       (26,145 )     -  
Net income
  $ 21,274     $ 25,199     $ 946     $ (26,145 )   $ 21,274  
                                         
                                         
For the three months ended June 30, 2011
         
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
Continuing Operations
                                       
Service revenues and sales
  $ -     $ 326,406     $ 6,954     $ -     $ 333,360  
Cost of services provided and goods sold
    -       235,855       3,742       -       239,597  
Selling, general and administrative expenses
    5,574       42,441       2,409       -       50,424  
Depreciation
    237       5,919       202       -       6,358  
Amortization
    465       674       -       -       1,139  
     Total costs and expenses
    6,276       284,889       6,353       -       297,518  
     Income/ (loss) from operations
    (6,276 )     41,517       601       -       35,842  
Interest expense
    (3,321 )     (140 )     -       -       (3,461 )
Other (expense)/income - net
    3,862       (3,888 )     740       -       714  
     Income/ (loss) before income taxes
    (5,735 )     37,489       1,341       -       33,095  
Income tax (provision)/ benefit
    1,783       (14,083 )     (509 )     -       (12,809 )
Equity in net income of subsidiaries
    24,238       875       -       (25,113 )     -  
Net income
  $ 20,286     $ 24,281     $ 832     $ (25,113 )   $ 20,286  
                                         
For the six months ended June 30, 2012
         
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
Continuing Operations
                                       
Service revenues and sales
  $ -     $ 692,631     $ 14,482     $ -     $ 707,113  
Cost of services provided and goods sold
    -       506,861       7,952       -       514,813  
Selling, general and administrative expenses
    11,133       87,703       4,101       -       102,937  
Depreciation
    467       11,717       437       -       12,621  
Amortization
    951       1,289       -       -       2,240  
     Total costs and expenses
    12,551       607,570       12,490       -       632,611  
     Income/ (loss) from operations
    (12,551 )     85,061       1,992       -       74,502  
Interest expense
    (6,920 )     (340 )     (29 )     -       (7,289 )
Other (expense)/income - net
    8,746       (8,798 )     1,177       -       1,125  
     Income/ (loss) before income taxes
    (10,725 )     75,923       3,140       -       68,338  
Income tax (provision)/ benefit
    3,499       (28,882 )     (1,236 )     -       (26,619 )
Equity in net income of subsidiaries
    48,945       1,972       -       (50,917 )     -  
Net income
  $ 41,719     $ 49,013     $ 1,904     $ (50,917 )   $ 41,719  
                                         
                                         
For the six months ended June 30, 2011
         
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
Continuing Operations
                                       
Service revenues and sales
  $ -     $ 650,563     $ 13,715     $ -     $ 664,278  
Cost of services provided and goods sold
    -       469,731       7,324       -       477,055  
Selling, general and administrative expenses
    12,258       88,022       5,798       -       106,078  
Depreciation
    476       11,781       389       -       12,646  
Amortization
    820       1,289       -       -       2,109  
     Total costs and expenses
    13,554       570,823       13,511       -       597,888  
     Income/ (loss) from operations
    (13,554 )     79,740       204       -       66,390  
Interest expense
    (6,453 )     (252 )     -       -       (6,705 )
Other (expense)/income - net
    7,632       (7,617 )     2,801       -       2,816  
     Income/ (loss) before income taxes
    (12,375 )     71,871       3,005       -       62,501  
Income tax (provision)/ benefit
    4,186       (27,135 )     (1,165 )     -       (24,114 )
Equity in net income of subsidiaries
    46,576       1,908       -       (48,484 )     -  
Net income
  $ 38,387     $ 46,644     $ 1,840     $ (48,484 )   $ 38,387  
 
 
-15-

 

For the six months ended June 30, 2012
       
Guarantor
   
Non-Guarantor
       
   
Parent
   
Subsidiaries
   
Subsidiaries
   
Consolidated
 
Cash Flow from Operating Activities:
                       
Net cash provided by operating activities
  $ (3,716 )   $ 57,667     $ 704     $ 54,655  
Cash Flow from Investing Activities:
                               
 Capital expenditures
    (28 )     (17,966 )     (480 )     (18,474 )
 Business combinations, net of cash acquired
    -       (1,500 )     -       (1,500 )
 Other sources/(uses) - net
    200       167       (10 )     357  
      Net cash used by investing activities
    172       (19,299 )     (490 )     (19,617 )
Cash Flow from Financing Activities:
                               
 Change in cash overdrafts payable
    (46 )     1,031       -       985  
 Change in intercompany accounts
    38,573       (38,780 )     207       -  
 Dividends paid to shareholders
    (6,160 )     -       -       (6,160 )
 Purchases of treasury stock
    (12,783 )     -       (58 )     (12,841 )
 Proceeds from exercise of stock options
    3,670       -       -       3,670  
 Realized excess tax benefit on share based compensation
    1,069       -       -       1,069  
 Other sources - net
    31       -       93       124  
      Net cash used by financing activities
    24,354       (37,749 )     242       (13,153 )
Net increase in cash and cash equivalents
    20,810       619       456       21,885  
Cash and cash equivalents at beginning of year
    32,470       (1,422 )     7,033       38,081  
Cash and cash equivalents at end of period
  $ 53,280     $ (803 )   $ 7,489     $ 59,966  
                                 
For the six months ended June 30, 2011
         
Guarantor
   
Non-Guarantor
         
   
Parent
   
Subsidiaries
   
Subsidiaries
   
Consolidated
 
Cash Flow from Operating Activities:
                               
Net cash provided/(used) by operating activities
  $ 3,594     $ 48,849     $ (1,316 )   $ 51,127  
Cash Flow from Investing Activities:
                               
 Capital expenditures
    (5 )     (14,085 )     (870 )     (14,960 )
 Business combinations, net of cash acquired
    -       (3,689 )     -       (3,689 )
 Other sources/(uses) - net
    (103 )     (771 )     5       (869 )
      Net cash used by investing activities
    (108 )     (18,545 )     (865 )     (19,518 )
Cash Flow from Financing Activities:
                               
 Purchases of treasury stock
    (25,438 )     -       (44 )     (25,482 )
 Change in cash overdrafts payable
    698       (8,512 )     -       (7,814 )
 Change in intercompany accounts
    26,733       (28,804 )     2,071       -  
 Proceeds from exercise of stock options
    7,698       -       -       7,698  
 Dividends paid to shareholders
    (5,967 )     -       -       (5,967 )
 Debt issuance costs
    (2,723 )     -       -       (2,723 )
 Realized excess tax benefit on share based compensation
    3,339       -       -       3,339  
 Other sources - net
    41       1       322       364  
      Net cash provided/(used) by financing activities
    4,381       (37,315 )     2,349       (30,585 )
Net increase/(decrease) in cash and cash equivalents
    7,867       (7,011 )     168       1,024  
Cash and cash equivalents at beginning of year
    45,324       (1,571 )     6,164       49,917  
Cash and cash equivalents at end of period
  $ 53,191     $ (8,582 )   $ 6,332     $ 50,941  

 
-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 (in thousands except per share amounts):
                         
 
Three months ended June 30,
   
Six months ended June 30,
 
 
2012
   
2011
   
2012
   
2011
 
Service revenues and sales
  $ 354,170     $ 333,360     $ 707,113     $ 664,278  
Net income
  $ 21,274     $ 20,286     $ 41,719     $ 38,387  
Diluted EPS
  $ 1.10     $ 0.94     $ 2.16     $ 1.78  
Adjusted EBITDA
  $ 48,173     $ 46,657     $ 94,513     $ 92,275  
Adjusted EBITDA as a % of revenue
    13.6  %     14.0  %     13.4  %     13.9  %

Earnings before interest, taxes and depreciation and amortization (“EBITDA”) and Adjusted EBITDA are not measures derived in accordance with GAAP.  We use Adjusted EBITDA as a measure of earnings for our long-term incentive plan 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 June 30, 2012, the increase in consolidated service revenues and sales was driven by a 9.1% increase at VITAS partially offset by a 1.4% decrease at Roto-Rooter.  The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 6.0%, driven by an increase in admissions of 4.0%, and Medicare price increases of approximately 2.5%.  The decrease in service revenues at Roto-Rooter was driven by a 3.7% decrease in job count partially offset by a 2.2% price and mix shift increase.  Consolidated net income increased 4.9%.  Diluted EPS increased 17.0% as a result of the increase in net income and a lower number of shares outstanding.  Adjusted EBITDA as a percent of revenue decreased 0.4% as a result of the decrease in service revenues at Roto-Rooter.  See page 30 for additional VITAS operating metrics.

For the six months ended June 30, 2012, the increase in consolidated service revenues and sales was driven by a 9.9% increase at VITAS partially offset by a 2.4% decrease at Roto-Rooter.  The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 6.0%, driven by an increase in admissions of 3.7% and Medicare price increases of approximately 2.5%.  The decrease in service revenues at Roto-Rooter was driven by a 4.9% decrease in job count partially offset by a 2.3% price and mix shift increase.  Consolidated net income increased 8.7%.  Diluted EPS increased 21.3% as a result of the increase in net income and a lower number of shares outstanding.  Adjusted EBITDA as a percent of revenue decreased 0.5% as a result of the decrease in service revenues at Roto-Rooter.  See page 30 for additional VITAS operating metrics.

VITAS expects to achieve full-year 2012 revenue growth, prior to Medicare cap, of 7.5% to 9.0%.  Admissions are estimated to increase approximately 3.5% to 4.0%.  Adjusted EBITDA margin prior to Medicare cap is estimated to be 14.5% to 15.0%.  Roto-Rooter expects full-year 2012 revenue growth equal to the prior year.  The revenue estimate is a result of increased pricing of approximately 2.0%, a favorable mix shift to higher revenue jobs, with job count estimated to range between down 2.0% to 4.0%.  Adjusted EBITDA margin for 2012 is estimated to be in the range of 16.0% to 17.0%.  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, 2011 to June 30, 2012 include the following:

                •  
A $3.9 million increase in accounts receivable related to the timing of receipts.
                •  
A $5.6 million increase in properties and equipment due to the opening of the Florida Home Medical Equipment location and a data center relocation.
                •  
A $2.8 million increase in accounts payable related to timing of payments.
                •  
A $3.9 million decrease in other current liabilities primarily due to a $2.6 million decrease in accrued Medicare cap.
                •  
A $1.4 million decrease in accrued compensation related to the timing of payments of incentive compensation.

Net cash provided by operating activities increased by $3.5 million due primarily to the change in the increase in net income. 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 $29.4 million in standby letters of credit as of June 30, 2012, for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of June 30, 2012, we have approximately $320.6 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 June 30, 2012 and anticipate remaining in compliance throughout 2012.
 
On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from Roto-Rooter and Chemed.  They also seek payment of penalties, interest and plaintiffs’ attorney fees.  We contest these allegations.  In September 2010, the Court conditionally certified a nationwide class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  We are unable to estimate our potential liability, 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 a purported class of California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  We contest 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.
 
On January 12, 2012, the Greater Pennsylvania Carpenters Pension Fund filed a putative class action lawsuit in the United States District Court for the Southern District of Ohio against the Company, Kevin McNamara, David Williams, and Timothy O’Toole.  On April 9, 2012, the Court issued orders (a) renaming the suit as In re Chemed Corp. Securities Litigation, Civil Action No. 1:12-cv-28 (S.D. Ohio), (b) appointing the Greater Pennsylvania Carpenters Pension Fund and the Electrical Workers Pension Fund, Local 103, I.B.E.W. as Lead Plaintiffs; and (c) approving Lead Plaintiffs’ selection of Labaton Sucharow LLP and Robbins Geller Rudman & Dowd LLP as Co-Lead Counsel.  On June 18, 2012, Lead Plaintiffs filed an amended complaint alleging violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against all Defendants, and violation of Section 20(a) of the Securities Exchange Act of 1934 against Messrs. McNamara, Williams and O’Toole.  The suit’s allegations concern the VITAS hospice segment of the Company’s business.  Lead Plaintiffs seek, on behalf of a putative class of purchasers of Chemed Capital Stock between February 15, 2010 and November 16, 2011, compensatory damages in an unspecified amount and attorneys’ fees and expenses, arising from Defendants’ failure to disclose an alleged fraudulent scheme to enroll ineligible hospice patients and to fraudulently obtain payments from the federal government.  Defendants are required to move or otherwise respond to the amended complaint on or before August 17, 2012.  Defendants believe the claims are without merit, and intend to defend vigorously against them.
 
 
-18-

 
 
Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.
 
In June 2012, VITAS received an administrative subpoena from the Office of the Inspector General (“OIG”) of the U.S. Department of Health and Human Services in connection with an investigation of possible improper claims submitted to the Medicare and Medicaid Programs.  It seeks production to the OIG of various categories of documents concerning the provision of hospice services, for headquarters and its Southern California programs, for the period January 1, 2007 through the date of the subpoena.  The categories of documents include policy, procedure and training manuals; documents concerning patient eligibility for hospice care, including referrals, admissions, certification, revocations and census information; documents concerning claims submitted to government programs; certain information concerning employees and their compensation; and documents concerning VITAS’ financial performance.  We are conferring with the U.S. Attorney’s Office for the Central District of California regarding the document requests.  We cannot predict the timing or outcome of this investigation, or estimate our potential liability, if any.
 
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the OIG documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review.   In February 2010, VITAS received a companion civil investigative demand (“CID”) from the State of Texas Attorney General’s Office, seeking related documents. In September 2010, it received a second CID and a second administrative subpoena seeking related documents.  In April 2011, the U.S. Attorney provided the Company with a copy of qui tam complaint filed under seal in the U.S. District Court for the Northern District of Texas.  The Court unsealed this complaint in November 2011.  The U.S. Attorney and the Attorney General for the State of Texas filed a notice in November 2011 that they had decided not to intervene at that time in the case.  They continue to investigate its allegations.  It was brought by Michael Rehfelt, a former VITAS San Antonio program general manager, against VITAS, the program’s former Regional Vice President Keith Becker, its former Medical Director Justos Cisneros, and their current employers:  Wellmed Medical Management, Care Level Management LLC, and Inspiris Inc.  Plaintiff dismissed his case against their current employers in March of 2012.  The case alleges admission and recertification of inappropriate patients, backdating revocations, and conspiring to admit inappropriate patients to hospice.  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.  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, if any.
 
In April 2005, the Office of Inspector General (“OIG”) for the Department of Health and Human Services served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services.  As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review.  It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges.  During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us.  The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florida with prejudice in July 2007.  The plaintiffs appealed this dismissal, which the Court of Appeals affirmed.  The government continues to investigate the complaint’s allegations.  In March 2009, we received a letter from the government reiterating the basis of their investigations.  In July 2012, we received an administrative subpoena from the Office of the Attorney General of Florida seeking documents from January 1, 2007 covering areas including billing, marketing, referrals, incentives, patient eligibility for hospice care, claims submitted to government programs, and VITAS’s financial performance.  We are conferring with the government’s counsel regarding the document requests.  We are unable to estimate the timing or outcome of this investigation or our potential liability, if any, with respect to this matter.

Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

 
-19-

 

Results of Operations
Three months ended June 30, 2012 versus  2011 - Consolidated Results
Our service revenues and sales for the second quarter of 2012 increased 6.2% versus services and sales revenues for the second quarter of 2011.  Of this increase, $22.1 million was attributable to VITAS partially offset by a $1.3 million decrease at Roto-Rooter.  The following chart shows the components of those changes (in thousands):
 
   
Increase/(Decrease)
   
Amount
 
Percent
VITAS
         
Routine homecare
 
$
 16,083
 
 9.1
Continuous care
   
 3,603
 
 9.2
General inpatient
   
 2,064
 
 7.6
Medicare cap
   
 368
 
 100.0
Roto-Rooter
         
Plumbing
   
 (575)
 
 (1.3)
Drain cleaning
   
 (562)
 
 (1.6)
Contractor Operations
   
 281
 
 4.3
Other
   
 (452)
 
 (6.8)
Total
 
$
 20,810
 
 6.2

The increase in VITAS’ revenues for the second quarter of 2012 versus the second quarter of 2011 was a result of increased ADC of 6.0% driven by an increase in admissions of 4.0% and Medicare reimbursement rate increases of approximately 2.5%.  The ADC increase was driven by a 6.1% increase in routine homecare, an increase of 4.3% in general inpatient and an increase of a 6.2% in continuous care.  In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The decrease in plumbing revenues for the second quarter of 2012 versus 2011 is attributable to a 1.8% decrease in the average price per job partially offset by a 0.3% increase in job count.  Our excavation job count increased by 8.0% compared to 2011.  Drain cleaning revenues for the second quarter of 2012 versus 2011 reflect a 5.6% decrease in the number of jobs perfomed partially offset by a 4.3% increase in the price per job.  Contractor operations revenue increased 4.3% for the second quarter of 2012.
 
The consolidated gross margin was 27.3% in the second quarter of 2012 as compared with 28.1% in the second quarter of 2011.  On a segment basis, VITAS’ gross margin was 21.6% in the second quarter of 2012 and 21.9% in the second quarter of 2011.  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 44.3% for the second quarter of 2012 as compared with 45.0% for the second quarter of 2011.  The decrease in Roto-Rooter’s gross margin is primarily the result of increased medical costs combined with lower revenue.
 
Selling, general and administrative expenses (“SG&A”) comprise (in thousands):
             
 
Three months ended June 30,
 
 
2012
   
2011
 
SG&A expenses before the impact of market gains
           
of deferred compensation plans
$ 50,718     $ 49,681  
Impact of market value gains/(losses) on liabilities
               
held in deferred compensation trusts
    (948 )     743  
Total SG&A expenses
$ 49,770     $ 50,424  

Normal salary increases and revenue related expense increases between periods accounts for the 2.1% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans.

Interest expense increased 6.1% between periods primarily as a result of the increase in amortization of bond discount expense.
 
 
-20-

 
 
Other income/(expense) comprise (in thousands):
             
   
Three months ended June 30,
 
   
2012
   
2011
 
Market value gains/(losses) on assets held in deferred
           
compensation trusts
  $ (948 )   $ 743  
Gain/(loss) on disposal of property and equipment
    (67 )     32  
Interest Income
    59       62  
Other
    (14 )     (123 )
Total other income/(expense)
  $ (970 )   $ 714  

Our effective income tax rate increased to 39.0% in the second quarter of 2012 from 38.7% when compared with the second quarter of 2011.

Net income for both periods included the following after-tax items/adjustments that reduced after-tax earnings (in thousands):
             
   
Three Months Ended June 30,
 
   
2012
   
2011
 
VITAS
           
Legal expenses of OIG investigation
  $ (121 )   $ (301 )
Acquisition expenses
    -       (31 )
Roto-Rooter
               
Expenses of class action litigation
    (49 )     (113 )
Acquisition expenses
    (12 )     8  
Corporate
               
Stock option expense
    (1,502 )     (1,620 )
Expenses of securities litigation
    (124 )     -  
Noncash impact of change in accounting for convertible debt
    (1,248 )     (1,155 )
Total
  $ (3,056 )   $ (3,212 )

Three months ended June 30, 2012 versus 2011 - Segment Results

The change in after-tax earnings for the second quarter of 2012 versus the second quarter of 2011 is due to (in thousands):
       
 
Increase/(Decrease)
 
 
Amount
   
Percent
 
VITAS
$ 1,844       9.9  
Roto-Rooter
    (1,018 )     (11.2 )
Corporate
    162       2.2  
  $ 988       4.9  

 
-21-

 

Results of Operations
Six months ended June 30, 2012 versus  2011 - Consolidated Results
Our service revenues and sales for the first six months of 2012 increased 6.4% versus services and sales revenues for the first six months of 2011.  Of this increase, $47.3 million was attributable to VITAS partially offset by a $4.5 million decrease at Roto-Rooter.  The following chart shows the components of those changes (in thousands):
           
   
Increase/(Decrease)
   
Amount
 
Percent
VITAS
         
Routine homecare
 
$
34,028
 
 9.8
Continuous care
   
 7,499
 
 9.6
General inpatient
   
 3,830
 
 7.0
Medicare cap
   
 1,935
 
 301.4
Roto-Rooter
         
Plumbing
   
 (1,938)
 
 (2.2)
Drain cleaning
   
 (2,142)
 
 (3.0)
Contractor Operations
   
 452
 
 3.5
Other
   
 (829)
 
 (6.1)
Total
 
$
 42,835
 
 6.4

The increase in VITAS’ revenues for the first six months of 2012 versus the first six months of 2011 was a result of increased ADC of 6.0% driven by an increase in admissions of 3.7% and Medicare reimbursement rate increases of approximately 2.5%.  The ADC increase was driven by a 6.1% increase in routine homecare, an increase of 4.5% in general inpatient and an increase of a 5.5% in continuous care. Medicare cap increased 301.4% as a result of the reversal of amounts recorded in the fourth quarter of 2011 due to improving admissions trends.  In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The decrease in plumbing revenues for the first six months of 2012 versus 2011 is attributable to a 0.9% decrease in the number of jobs performed as well as a 1.5% decrease in the average price per job.  Our excavation job count increased by 7.1% compared to 2011.  Drain cleaning revenues for the first six months of 2012 versus 2011 reflect a 6.9% decrease in the number of jobs perfomed partially offset by a 4.2% increase in the price per job.  Contractor operations revenue increased 3.5% for the first six months of 2012.
 
The consolidated gross margin was 27.2% for the first six months of 2012 as compared with 28.2% for the first six months of 2011.  On a segment basis, VITAS’ gross margin was 21.4% for the first six months of 2012 and 21.8% for the first six months of 2011.  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 44.0% for the first six months of 2012 as compared with 44.6% for the first six months of 2011.  The decrease in Roto-Rooter’s gross margin is primarily the result of increased medical costs combined with lower revenue.
 
Selling, general and administrative expenses (“SG&A”) comprise (in thousands):
             
 
Six months ended June 30,
 
 
2012
   
2011
 
SG&A expenses before long-term incentive
           
compensation and the impact of market gains and
           
losses of deferred compensation plans
$ 101,752     $ 100,259  
Long-term incentive compensation
    -       3,012  
Impact of market value gains on liabilities held in
               
deferred compensation trusts
    1,185       2,807  
Total SG&A expenses
$ 102,937     $ 106,078  

Normal salary increases and revenue related expense increases between periods accounts for the 1.5% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans.
 
 
-22-

 
 
Interest expense increased 8.7% between periods as a result of the debt refinancing that took place in the first quarter of 2011.

Other income/(expense) comprise (in thousands):
             
   
Six months ended June 30,
 
   
2012
   
2011
 
Market value gains on assets held in deferred
           
compensation trusts
  $ 1,185     $ 2,807  
Gain/(loss) on disposal of property and equipment
    (148 )     11  
Interest Income
    110       123  
Other
    (22 )     (125 )
Total other income
  $ 1,125     $ 2,816  

Our effective income tax rate increased to 39.0% for the first six months of 2012 from 38.6% when compared with the first six months of 2011.

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

   
Six Months Ended June 30,
 
   
2012
   
2011
 
VITAS
           
Legal expenses of OIG investigation
  $ (165 )   $ (618 )
Acquisition expenses
    -       (71 )
Roto-Rooter
               
Expenses of class action litigation
    (442 )     (414 )
Acquisition expenses
    (21 )     4  
Corporate
               
Stock option expense
    (2,727 )     (2,843 )
Expenses of securities litigation
    (124 )     -  
Noncash impact of change in accounting for convertible debt
    (2,472 )     (2,287 )
Long-term incentive compensation
    -       (1,880 )
Total
  $ (5,951 )   $ (8,109 )

Six months ended June 30, 2012 versus 2011 - Segment Results

The change in after-tax earnings for the first six months of 2012 versus the first months six of 2011 is due to (in thousands):
       
 
Increase/(Decrease)
 
 
Amount
   
Percent
 
VITAS
  $ 3,346       9.1  
Roto-Rooter
    (2,033 )     (11.5 )
Corporate
    2,019       12.7  
    $ 3,332       8.7  

 
-23-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE THREE MONTHS ENDED JUNE 30, 2012
 
(in thousands)(unaudited)
 
                   
               
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
2012 (a)
                       
Service revenues and sales
  $ 265,213     $ 88,957     $ -     $ 354,170  
Cost of services provided and goods sold
    207,839       49,529       -       257,368  
Selling, general and administrative expenses
    20,471       24,372       4,927       49,770  
Depreciation
    4,164       2,085       131       6,380  
Amortization
    488       157       482       1,127  
Total costs and expenses
    232,962       76,143       5,540       314,645  
Income/(loss) from operations
    32,251       12,814       (5,540 )     39,525  
Interest expense
    (63 )     (107 )     (3,502 )     (3,672 )
Intercompany interest income/(expense)
    812       430       (1,242 )     -  
Other income/(expense)—net
    (1 )     (33 )     (936 )     (970 )
Income/(expense) before income taxes
    32,999       13,104       (11,220 )     34,883  
Income taxes
    (12,566 )     (5,030 )     3,987       (13,609 )
Net income/(loss)
  $ 20,433     $ 8,074     $ (7,233 )   $ 21,274  
                                 
(a) The following amounts are included in net income (in thousands):
 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
Pretax benefit/(cost):
                               
Stock option expense
  $ -     $ -     $ (2,374 )   $ (2,374 )
Noncash impact of accounting for convertible debt
    -       -       (1,973 )     (1,973 )
Expenses of class action litigation
    -       (80 )     -       (80 )
Expenses of securities litigation
    -       -       (197 )     (197 )
Acquisition expenses
    -       (20 )     -       (20 )
Legal expenses of OIG investigation
    (195 )     -       -       (195 )
Total
  $ (195 )   $ (100 )   $ (4,544 )   $ (4,839 )
                                 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
After-tax benefit/(cost):
                               
Stock option expense
  $ -     $ -     $ (1,502 )   $ (1,502 )
Noncash impact of accounting for convertible debt
    -       -       (1,248 )     (1,248 )
Expenses of class action litigation
    -       (49 )     -       (49 )
Expenses of securities litigation
    -       -       (124 )     (124 )
Acquisition expenses
    -       (12 )     -       (12 )
Legal expenses of OIG investigation
    (121 )     -       -       (121 )
Total
  $ (121 )   $ (61 )   $ (2,874 )   $ (3,056 )

 
-24-

 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE THREE MONTHS ENDED JUNE 30, 2011
 
(in thousands)(unaudited)
 
                   
               
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
2011 (a)
                       
Service revenues and sales
  $ 243,095     $ 90,265     $ -     $ 333,360  
Cost of services provided and goods sold
    189,940       49,657       -       239,597  
Selling, general and administrative expenses
    19,735       24,384       6,305       50,424  
Depreciation
    4,199       2,025       134       6,358  
Amortization
    520       155       464       1,139  
Total costs and expenses
    214,394       76,221       6,903       297,518  
Income/(loss) from operations
    28,701       14,044       (6,903 )     35,842  
Interest expense
    (62 )     (77 )     (3,322 )     (3,461 )
Intercompany interest income/(expense)
    1,215       652       (1,867 )     -  
Other income/(expense)—net
    (90 )     15       789       714  
Income/(expense) before income taxes
    29,764       14,634       (11,303 )     33,095  
Income taxes
    (11,175 )     (5,542 )     3,908       (12,809 )
Net income/(loss)
  $ 18,589     $ 9,092     $ (7,395 )   $ 20,286  
                                 
                   
(a) The following amounts are included in net income (in thousands):
                 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
Pretax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (2,562 )   $ (2,562 )
     Noncash impact of accounting for convertible debt
    -       -       (1,825 )     (1,825 )
     Expenses of class action litigation
    -       (186 )     -       (186 )
     Acquisition expenses
    (51 )     12       -       (39 )
     Legal expenses of OIG investigation
    (486 )     -       -       (486 )
          Total
  $ (537 )   $ (174 )   $ (4,387 )   $ (5,098 )
                                 
                         
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
After-tax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (1,620 )   $ (1,620 )
     Noncash impact of accounting for convertible debt
    -       -       (1,155 )     (1,155 )
     Expenses of class action litigation
    -       (113 )     -       (113 )
     Acquisition expenses
    (31 )     8       -       (23 )
     Legal expenses of OIG investigation
    (301 )     -       -       (301 )
          Total
  $ (332 )   $ (105 )   $ (2,775 )   $ (3,212 )
 
 
-25-

 

 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE SIX MONTHS ENDED JUNE 30, 2012
 
(in thousands)(unaudited)
 
                   
               
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
2012 (a)
                       
Service revenues and sales
  $ 526,060     $ 181,053     $ -     $ 707,113  
Cost of services provided and goods sold
    413,459       101,354       -       514,813  
Selling, general and administrative expenses
    40,219       50,525       12,193       102,937  
Depreciation
    8,188       4,171       262       12,621  
Amortization
    978       311       951       2,240  
Total costs and expenses
    462,844       156,361       13,406       632,611  
Income/(loss) from operations
    63,216       24,692       (13,406 )     74,502  
Interest expense
    (126 )     (214 )     (6,949 )     (7,289 )
Intercompany interest income/(expense)
    1,566       825       (2,391 )     -  
Other income/(expense)—net
    (32 )     (54 )     1,211       1,125  
Income/(expense) before income taxes
    64,624       25,249       (21,535 )     68,338  
Income taxes
    (24,564 )     (9,680 )     7,625       (26,619 )
Net income/(loss)
  $ 40,060     $ 15,569     $ (13,910 )   $ 41,719  
                                 
                 
(a) The following amounts are included in net income (in thousands):
                 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
Pretax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (4,312 )   $ (4,312 )
     Noncash impact of accounting for convertible debt
    -       -       (3,908 )     (3,908 )
     Expenses of class action litigation
    -       (727 )     -       (727 )
     Expenses of securities litigation
    -       -       (197 )     (197 )
     Acquisition expenses
    -       (35 )     -       (35 )
     Legal expenses of OIG investigation
    (266 )     -       -       (266 )
          Total
  $ (266 )   $ (762 )   $ (8,417 )   $ (9,445 )
                                 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
After-tax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (2,727 )   $ (2,727 )
     Noncash impact of accounting for convertible debt
    -       -       (2,472 )     (2,472 )
     Expenses of class action litigation
    -       (442 )     -       (442 )
     Expenses of securities litigation
    -       -       (124 )     (124 )
     Acquisition expenses
    -       (21 )     -       (21 )
     Legal expenses of OIG investigation
    (165 )     -       -       (165 )
          Total
  $ (165 )   $ (463 )   $ (5,323 )   $ (5,951 )
 
 
-26-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE SIX MONTHS ENDED JUNE 30, 2011
 
(in thousands)(unaudited)
 
                       
                   
Chemed
 
 
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
2011 (a)
                       
Service revenues and sales
  $ 478,768     $ 185,510     $ -     $ 664,278  
Cost of services provided and goods sold
    374,241       102,814       -       477,055  
Selling, general and administrative expenses
    38,446       51,124       16,508       106,078  
Depreciation
    8,366       4,009       271       12,646  
Amortization
    1,003       287       819       2,109  
Total costs and expenses
    422,056       158,234       17,598       597,888  
Income/(loss) from operations
    56,712       27,276       (17,598 )     66,390  
Interest expense
    (110 )     (142 )     (6,453 )     (6,705 )
Intercompany interest income/(expense)
    2,428       1,291       (3,719 )     -  
Other income/(expense)—net
    (59 )     5       2,870       2,816  
Income/(expense) before income taxes
    58,971       28,430       (24,900 )     62,501  
Income taxes
    (22,257 )     (10,828 )     8,971       (24,114 )
Net income/(loss)
  $ 36,714     $ 17,602     $ (15,929 )   $ 38,387  
                                 
                 
(a) The following amounts are included in net income (in thousands):
                 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
Pretax benefit/(cost):
                               
     Long-term incentive compensation
  $ -     $ -     $ (3,012 )   $ (3,012 )
     Stock option expense
    -       -       (4,495 )     (4,495 )
     Noncash impact of accounting for convertible debt
    -       -       (3,615 )     (3,615 )
     Expenses of class action litigation
    -       (681 )     -       (681 )
     Acquisition expenses
    (115 )     6       -       (109 )
     Legal expenses of OIG investigation
    (997 )     -       -       (997 )
          Total
  $ (1,112 )   $ (675 )   $ (11,122 )   $ (12,909 )
                                 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
After-tax benefit/(cost):
  $       $       $       $    
     Long-term incentive compensation
    -       -       (2,287 )     (2,287 )
     Stock option expense
    -       -       (2,843 )     (2,843 )
     Noncash impact of accounting for convertible debt
    -       -       (1,880 )     (1,880 )
     Expenses of class action litigation
    -       (414 )     -       (414 )
     Acquisition expenses
    (71 )     4       -       (67 )
     Legal expenses of OIG investigation
    (618 )     -       -       (618 )
          Total
  $ (689 )   $ (410 )   $ (7,010 )   $ (8,109 )

 
-27-

 
 
Consolidating Summary and Reconciliation of Adjusted EBITDA
 
                         
Chemed Corporation and Subsidiary Companies
       
(in thousands)
                 
Chemed
 
For the three months ended June 30, 2012
VITAS
 
Roto-Rooter
 
Corporate
 
Consolidated
 
                         
Net income/(loss)
  $ 20,433     $ 8,074     $ (7,233 )   $ 21,274  
Add/(deduct):
                               
Interest expense
    63       107       3,502       3,672  
Income taxes
    12,566       5,030       (3,987 )     13,609  
Depreciation
    4,164       2,085       131       6,380  
Amortization
    488       157       482       1,127  
EBITDA
    37,714       15,453       (7,105 )     46,062  
Add/(deduct):
                               
Legal expenses of OIG investigation
    195       -       -       195  
Acquisition expenses
    -       20       -       20  
Expenses of class action litigation
    -       80       -       80  
Expenses of securities litigation
    -       -       197       197  
Stock option expense
    -       -       2,374       2,374  
Advertising cost adjustment
    -       (696 )     -       (696 )
Interest income
    (42 )     (2 )     (15 )     (59 )
Intercompany interest income/(expense)
    (812 )     (430 )     1,242       -  
Adjusted EBITDA
  $ 37,055     $ 14,425     $ (3,307 )   $ 48,173  
                                 
                         
Chemed
 
For the three months ended June 30, 2011
VITAS
 
Roto-Rooter
 
Corporate
 
Consolidated
 
                                 
Net income/(loss)
  $ 18,589     $ 9,092     $ (7,395 )   $ 20,286  
Add/(deduct):
                               
Interest expense
    62       77       3,322       3,461  
Income taxes
    11,175       5,542       (3,908 )     12,809  
Depreciation
    4,199       2,025       134       6,358  
Amortization
    520       155       464       1,139  
EBITDA
    34,545       16,891       (7,383 )     44,053  
Add/(deduct):
                               
Legal expenses of OIG investigation
    486       -       -       486  
Acquisition expenses
    51       (12 )     -       39  
Expenses of class action litigation
    -       186       -       186  
Stock option expense
    -       -       2,562       2,562  
Advertising cost adjustment
    -       (607 )     -       (607 )
Interest income
    (7 )     (9 )     (46 )     (62 )
Intercompany interest income/(expense)
    (1,215 )     (652 )     1,867       -  
Adjusted EBITDA
  $ 33,860     $ 15,797     $ (3,000 )   $ 46,657  

 
-28-

 

Consolidating Summary and Reconciliation of Adjusted EBITDA
 
                         
Chemed Corporation and Subsidiary Companies
       
(in thousands)
                 
Chemed
 
For the six months ended June 30, 2012
VITAS
 
Roto-Rooter
 
Corporate
 
Consolidated
 
                         
Net income/(loss)
  $ 40,060     $ 15,569     $ (13,910 )   $ 41,719  
Add/(deduct):
                               
Interest expense
    126       214       6,949       7,289  
Income taxes
    24,564       9,680       (7,625 )     26,619  
Depreciation
    8,188       4,171       262       12,621  
Amortization
    978       311       951       2,240  
EBITDA
    73,916       29,945       (13,373 )     90,488  
Add/(deduct):
                               
Legal expenses of OIG investigation
    266       -       -       266  
Acquisition expenses
    -       35       -       35  
Expenses of class action litigation
    -       727       -       727  
Expenses of securities litigation
    -       -       197       197  
Stock option expense
    -       -       4,312       4,312  
Advertising cost adjustment
    -       (1,402 )     -       (1,402 )
Interest income
    (72 )     (10 )     (28 )     (110 )
Intercompany interest income/(expense)
    (1,566 )     (825 )     2,391       -  
Adjusted EBITDA
  $ 72,544     $ 28,470     $ (6,501 )   $ 94,513  
                                 
                         
Chemed
 
For the six months ended June 30, 2011
VITAS
 
Roto-Rooter
 
Corporate
 
Consolidated
 
                                 
Net income/(loss)
  $ 36,714     $ 17,602     $ (15,929 )   $ 38,387  
Add/(deduct):
                               
Interest expense
    110       142       6,453       6,705  
Income taxes
    22,257       10,828       (8,971 )     24,114  
Depreciation
    8,366       4,009       271       12,646  
Amortization
    1,003       287       819       2,109  
EBITDA
    68,450       32,868       (17,357 )     83,961  
Add/(deduct):
                               
Legal expenses of OIG investigation
    997       -       -       997  
Acquisition expenses
    115       (6 )     -       109  
Expenses of class action litigation
    -       681       -       681  
Long-term incentive compensation
    -       -       3,012       3,012  
Stock option expense
    -       -       4,495       4,495  
Advertising cost adjustment
    -       (857 )     -       (857 )
Interest income
    (44 )     (16 )     (63 )     (123 )
Intercompany interest income/(expense)
    (2,428 )     (1,291 )     3,719       -  
Adjusted EBITDA
  $ 67,090     $ 31,379     $ (6,194 )   $ 92,275  
 
 
-29-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
OPERATING STATISTICS FOR VITAS SEGMENT
 
(unaudited)
 
                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
OPERATING STATISTICS
 
2012
   
2011
   
2012
   
2011
 
Net revenue ($000)
                       
Homecare
  $ 193,150     $ 177,067     $ 379,747     $ 345,719  
Inpatient
    29,247       27,183       58,399       54,569  
Continuous care
    42,816       39,213       85,337       77,838  
Total before Medicare cap allowance
  $ 265,213     $ 243,463     $ 523,483     $ 478,126  
Medicare cap allowance
    -       (368 )     2,577       642  
Total
  $ 265,213     $ 243,095     $ 526,060     $ 478,768  
Net revenue as a percent of total
                               
before Medicare cap allowance
                               
Homecare
    72.9  %     72.7  %     72.5  %     72.2  %
Inpatient
    11.0        11.2       11.2       11.4  
Continuous care
    16.1       16.1       16.3       16.4  
Total before Medicare cap allowance
    100.0       100.0       100.0       100.0  
Medicare cap allowance
    -       (0.2 )     0.5       0.1  
Total
    100.0  %     99.8  %     100.5  %     100.1  %
Average daily census (days)
                               
Homecare
    9,971       9,229       9,792       9,031  
Nursing home
    3,036       3,034       3,011       3,034  
Routine homecare
    13,007       12,263       12,803       12,065  
Inpatient
    466       447       469       449  
Continuous care
    638       601       635       602  
Total
    14,111       13,311       13,907       13,116  
                                 
Total Admissions
    15,912       15,294       32,234       31,092  
Total Discharges
    15,508       14,885       31,707       30,419  
Average length of stay (days)
    74.0       77.1       78.3       78.0  
Median length of stay (days)
    14.0       14.0       14.0       14.0  
ADC by major diagnosis
                               
Neurological
    33.6  %     34.2  %     34.0  %     34.2  %
Cancer
    17.7       17.7       17.8       17.8  
Cardio
    11.6       11.5       11.5       11.7  
Respiratory
    6.7       6.9       6.7       6.8  
Other
    30.4       29.7       30.0       29.5  
Total
    100.0  %     100.0  %     100.0  %     100.0  %
Admissions by major diagnosis
                               
Neurological
    18.9  %     19.4  %     19.2  %     19.5  %
Cancer
    33.5       32.8       32.9       32.2  
Cardio
    10.8       10.8       11.3       11.0  
Respiratory
    8.1       8.5       8.5       8.8  
Other
    28.7       28.5       28.1       28.5  
Total
    100.0  %     100.0  %     100.0  %     100.0  %
Direct patient care margins
                               
Routine homecare
    52.4  %     52.4  %     51.4  %     51.7  %
Inpatient
    12.7       13.3       13.4       13.1  
Continuous care
    19.7       20.2       19.8       20.4  
Homecare margin drivers (dollars per patient day)
                               
Labor costs
  $ 54.56     $ 53.23     $ 56.13     $ 54.28  
Drug costs
    8.31       8.21       8.32       8.08  
Home medical equipment
    6.79       6.66       6.80       6.66  
Medical supplies
    2.79       2.83       2.77       2.79  
Inpatient margin drivers (dollars per patient day)
                               
Labor costs
  $ 321.16     $ 311.26     $ 317.73     $ 308.97  
Continuous care margin drivers (dollars per patient day)
                               
Labor costs
  $ 569.98     $ 550.40     $ 569.76     $ 547.29  
Bad debt expense as a percent of revenues
    0.8  %     0.8  %     0.8  %     0.7  %
Accounts receivable --
                               
  Days of revenue outstanding- excluding unapplied Medicare payments
    35.0       37.2    
n.a
   
n.a
 
  Days of revenue outstanding- including unapplied Medicare payments
    30.6       36.8    
n.a
   
n.a
 
 
 
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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information

Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The words “believe”, “expect”, “hope”, “anticipate”, “plan” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made.  These forward-looking statements are based on current expectations and assumptions and involve various known and unknown risks, uncertainties, contingencies and other factors, which could cause Chemed’s actual results to differ from those expressed in such forward-looking statements.  Variances in any or all of the risks, uncertainties, contingencies, and other factors from our assumptions could cause actual results to differ materially from these forward-looking statements and trends.  In addition, our ability to deal with the unknown outcomes of these events, many of which are beyond our control, may affect the reliability of projections and other financial matters.  Investors are cautioned that such forward-looking statements are subject to inherent risk and there are no assurances that the matters contained in such statements will be achieved.  Chemed does not undertake and specifically disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of a new information, future events or otherwise.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposure relates to interest rate risk exposure through variable interest rate borrowings.  At June 30, 2012, we had no variable rate debt outstanding.  At June 30, 2012, the fair value of the Notes approximates $188.0 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.

 
-31-

 
 
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 program for the first six months of 2012:
                         
   
Total
Number
   
Weighted
Average
   
Cumulative Shares
   
Dollar Amount
 
   
of Shares
   
Price Paid Per
   
Repurchased Under
   
Remaining Under
 
   
Repurchased
   
Share
   
the Program
   
The Program
 
                         
February 2011 Program
                       
January 1 through January 31, 2012
    -     $ -       2,602,513     $ 75,268,254  
February 1 through February 29, 2012
    -       -       2,602,513       75,268,254  
March 1 through March 31, 2012
    -       -       2,602,513     $ 75,268,254  
                                 
First Quarter Total - February 2011 Program
    -     $ -                  
                                 
April 1 through April 30, 2012
    -     $ -       2,602,513     $ 75,268,254  
May 31 through May 31, 2012
    168,812       55.77       2,771,325       65,853,060  
June 1 through June 30, 2012
    31,088       55.42       2,802,413     $ 64,130,136  
                                 
Second Quarter Total - February 2011 Program
    199,900     $ 55.72                  

Item 3.   Defaults Upon Senior Securities

None

Item 4.   Mine Safety Disclosures

None

Item 5.   Other Information

None

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.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
     
     
 
 
-32-

 
 
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:
 
August 2, 2012
 
By:
 
/s/ Kevin J. McNamara
             
Kevin J. McNamara
             
(President and Chief Executive Officer)
               
               
 
Dated:
 
August 2, 2012
 
By:
 
/s/ David P. Williams
             
David P. Williams
             
(Executive Vice President and Chief Financial Officer)
               
               
 
Dated:
 
August 2, 2012
 
By:
 
/s/ Arthur V. Tucker, Jr.
             
Arthur V. Tucker, Jr.
             
(Vice President and Controller)

-33-