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CHEMED CORP - Quarter Report: 2016 March (Form 10-Q)

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

(Mark One)

    Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2016

    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) 762-6690
(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
 
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
 
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
 
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
 
16,557,177 Shares
 
March 31, 2016
 

 

 
-1-


CHEMED CORPORATION AND
SUBSIDIARY COMPANIES



Index

   
   
 
Page No.
 
 
 
3
   
 
4
   
 
5
   
6
   
14
   
25
   
25
   
 
25
   
25
   
26
   
26
   
26
   
26
   
27
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-


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
             
             
             
   
March 31, 2016
 
December 31, 2015
ASSETS
           
Current assets
           
Cash and cash equivalents
 
$
15,235
   
$
14,727
 
Accounts receivable less allowances of $13,631 (2015 - $13,244)
   
143,040
     
106,262
 
Inventories
   
6,102
     
6,314
 
Prepaid income taxes
   
3,258
     
10,653
 
Prepaid expenses
   
12,306
     
12,852
 
Total current assets
   
179,941
     
150,808
 
Investments of deferred compensation plans
   
49,195
     
49,481
 
Properties and equipment, at cost, less accumulated depreciation of $206,922 (2015 - $201,094)
   
119,331
     
117,370
 
Identifiable intangible assets less accumulated amortization of $32,960 (2015 - $32,866)
   
55,018
     
55,111
 
Goodwill
   
472,438
     
472,322
 
Other assets
   
6,996
     
7,233
 
Total Assets
 
$
882,919
   
$
852,325
 
                 
LIABILITIES
               
Current liabilities
               
Accounts payable
 
$
50,721
   
$
43,695
 
Current portion of long-term debt
   
18,000
     
7,500
 
Income taxes
   
11,129
     
-
 
Accrued insurance
   
45,628
     
43,972
 
Accrued compensation
   
43,844
     
52,817
 
Accrued legal
   
2,819
     
1,233
 
Other current liabilities
   
19,416
     
22,119
 
Total current liabilities
   
191,557
     
171,336
 
Deferred income taxes
   
16,861
     
21,041
 
Long-term debt
   
126,875
     
83,750
 
Deferred compensation liabilities
   
49,188
     
49,467
 
Other liabilities
   
13,617
     
13,478
 
Total Liabilities
   
398,098
     
339,072
 
Commitments and contingencies
               
STOCKHOLDERS' EQUITY
               
Capital stock - authorized 80,000,000 shares $1 par; issued 34,076,407 shares (2015 - 33,985,316 shares)
   
34,076
     
33,985
 
Paid-in capital
   
610,219
     
603,006
 
Retained earnings
   
886,604
     
865,845
 
Treasury stock - 17,618,767 shares (2015 - 17,187,540)
   
(1,048,509
)
   
(991,978
)
Deferred compensation payable in Company stock
   
2,431
     
2,395
 
Total Stockholders' Equity
   
484,821
     
513,253
 
Total Liabilities and Stockholders' Equity
 
$
882,919
   
$
852,325
 
                 
   
See accompanying notes to unaudited consolidated financial statements.
 
-3-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
             
             
             
   
Three Months Ended March 31,
   
2016
 
2015
Service revenues and sales
 
$
390,389
   
$
376,652
 
Cost of services provided and goods sold (excluding depreciation)
   
278,435
     
268,885
 
Selling, general and administrative expenses
   
59,045
     
59,037
 
Depreciation
   
8,424
     
8,032
 
Amortization
   
92
     
127
 
Total costs and expenses
   
345,996
     
336,081
 
Income from operations
   
44,393
     
40,571
 
Interest expense
   
(842
)
   
(969
)
Other income/(expense) - net
   
(2,924
)
   
563
 
Income before income taxes
   
40,627
     
40,165
 
Income taxes
   
(15,787
)
   
(15,628
)
Net income
 
$
24,840
   
$
24,537
 
                 
Earnings Per Share
               
Net income
 
$
1.49
   
$
1.45
 
Average number of shares outstanding
   
16,720
     
16,914
 
                 
Diluted Earnings Per Share
               
Net income
 
$
1.45
   
$
1.40
 
Average number of shares outstanding
   
17,170
     
17,466
 
                 
Cash Dividends Per Share
 
$
0.24
   
$
0.22
 
                 
See accompanying notes to unaudited consolidated financial statements.
 
-4-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
       
   
Three Months Ended March 31,
   
2016
 
2015 
Cash Flows from Operating Activities
           
Net income
 
$
24,840
   
$
24,537
 
Adjustments to reconcile net income to net cash provided
               
by operating activities:
               
Depreciation and amortization
   
8,516
     
8,159
 
Benefit for deferred income taxes
   
(4,202
)
   
(2,734
)
Provision for uncollectible accounts receivable
   
4,242
     
3,804
 
Stock option expense
   
2,563
     
1,444
 
Amortization of restricted stock awards
   
539
     
449
 
Amortization of debt issuance costs
   
130
     
131
 
Noncash long-term incentive compensation
   
(305
)
   
934
 
Changes in operating assets and liabilities:
               
Increase in accounts receivable
   
(41,050
)
   
(24,926
)
Decrease in inventories
   
212
     
2
 
Decrease in prepaid expenses
   
546
     
1,433
 
Decrease in accounts payable and other current liabilities
   
(7,567
)
   
(9,538
)
Increase in income taxes
   
19,448
     
11,696
 
Decrease/(increase) in other assets
   
410
     
(2,815
)
Increase/(decrease) in other liabilities
   
(140
)
   
2,569
 
Excess tax benefit on share-based compensation
   
(900
)
   
(2,900
)
Other sources/(uses)
   
(59
)
   
129
 
Net cash provided by operating activities
   
7,223
     
12,374
 
Cash Flows from Investing Activities
               
Capital expenditures
   
(11,473
)
   
(8,553
)
Other sources
   
153
     
351
 
Net cash used by investing activities
   
(11,320
)
   
(8,202
)
Cash Flows from Financing Activities
               
Proceeds from long-term debt
   
59,000
     
37,200
 
Payments on revolving line of credit
   
(3,500
)
   
(22,200
)
Payments on other long-term debt
   
(1,875
)
   
(1,250
)
Purchases of treasury stock
   
(52,460
)
   
-
 
Proceeds from exercise of stock options
   
2,887
     
4,899
 
Dividends paid
   
(4,081
)
   
(3,743
)
Capital stock surrendered to pay taxes on stock-based compensation
   
(4,020
)
   
(5,464
)
Excess tax benefit on share-based compensation
   
900
     
2,900
 
Increase/(decrease) in cash overdrafts payable
   
7,061
     
(1,528
)
Other uses
   
693
     
(783
)
Net cash provided by financing activities
   
4,605
     
10,031
 
Increase in Cash and Cash Equivalents
   
508
     
14,203
 
Cash and cash equivalents at beginning of year
   
14,727
     
14,132
 
Cash and cash equivalents at end of period
 
$
15,235
   
$
28,335
 
                 
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, 2015 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 state 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 audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.

TAXES ON INCOME
In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-17 which simplifies the balance sheet classification required for deferred tax balances.  It allows for a company’s deferred tax assets and liabilities to be netted into a noncurrent account, either asset or liability, by jurisdiction.  The ASU is required to be adopted for annual periods beginning after December 15, 2016 and the interim periods within that annual period.  Early adoption is permitted.  Companies have the choice to adopt prospectively or retrospectively.  In order to simplify our balance sheet classification required for deferred tax balances, we adopted the ASU for our annual balance sheet as of December 31, 2015 on a prospective basis.  Prior periods have not been retrospectively adjusted.  We do not believe that this change results in a material comparability issue between years on our balance sheet

CLASSIFICATION ADJUSTMENTS
During the first quarter of 2016, we classified $539,000 of non-cash restricted stock award amortization in selling, general and administrative expenses.  We also recorded a classifications adjustment of $449,000 to decrease amortization and increase selling, general and administrative expenses in our Consolidated Statement of Income for the first quarter of 2015 related to non-cash restricted stock award amortization.  This classification adjustment does not impact income from operations, income before income taxes, net income, earnings per share, net cash provided by operating activities or our Consolidated Balance Sheet.  We believe the impact of the classification adjustments are immaterial to our consolidated financial statements for the current and prior periods.

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.

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.

During the first quarter of 2016, no Medicare cap was recorded.

In 2013, the U.S. government implemented automatic budget reductions of 2.0% for all government payees, including hospice benefits paid under the Medicare program.  In 2015, CMS determined that the Medicare cap should be calculated “as if” sequestration did not occur.  As a result of this decision, VITAS has received notification from our third party intermediary that an additional $1.9 million is owed for Medicare cap in two programs arising during the 2013 and 2014 measurement periods.  The amounts are automatically deducted from our semi-monthly PIP payments.  We do not believe that CMS is authorized under the sequestration authority or the statutory methodology for establishing the Medicare cap to the $1.9 million under their current “as if” methodology.  We have not recorded a reserve as of December 31, 2015 for the $1.9 million potential exposure.  We have appealed CMS’s methodology change with the appropriate regulatory appeal board.
 

-6-

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

 
 
March 31,     
 
 
2016 
 
2015
Beginning balance January 1,
 
$
1,165
   
$
6,112
 
2015 measurement period
   
-
     
(165
)
Payments
   
(618
)
   
(4,566
)
Ending balance March 31,
 
$
547
   
$
1,381
 

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 March 31,
 
2016
   
2015
 
$
1,806
   
$
1,974
 

3.   Segments

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

   
Three months ended March 31,
   
2016
 
2015
Service Revenues and Sales
           
VITAS
 
$
277,528
   
$
269,613
 
Roto-Rooter
   
112,861
     
107,039
 
Total
 
$
390,389
   
$
376,652
 
                 
After-tax Earnings
               
VITAS
 
$
19,087
   
$
19,315
 
Roto-Rooter
   
13,020
     
12,008
 
Total
   
32,107
     
31,323
 
Corporate
   
(7,267
)
   
(6,786
)
Net income
 
$
24,840
   
$
24,537
 

We report corporate administrative expenses and unallocated investing and financing income and expense not directly related to either segment as “Corporate”.

-7-


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 March 31,
 
Income
 
Shares
 
Earnings
per Share
2016
                 
Earnings
 
$
24,840
     
16,720
   
$
1.49
 
Dilutive stock options
   
-
     
305
         
Nonvested stock awards
   
-
     
145
         
Diluted earnings
 
$
24,840
     
17,170
   
$
1.45
 
                         
2015
                       
Earnings
 
$
24,537
     
16,914
   
$
1.45
 
Dilutive stock options
   
-
     
397
         
Nonvested stock awards
   
-
     
155
         
Diluted earnings
 
$
24,537
     
17,466
   
$
1.40
 

For the three month period ended March 31, 2016 and 2015, 421,000 and 411,000, respectively,  stock options were excluded from the computation of diluted earnings per share because they would have been anti-dilutive.

5.   Long-Term Debt

On June 30, 2014, we replaced our existing credit agreement with the Third Amended and Restated Credit Agreement (“2014 Credit Agreement”).  Terms of the 2014 Credit Agreement consist of a five-year, $350 million revolving credit facility and a $100 million term loan.  The 2014 Credit Agreement has a floating interest rate that is currently LIBOR plus 113 basis points.

The debt outstanding as of March 31, 2016 consists of the following:

Revolver
 
$
55,500
 
Term loan
   
89,375
 
Total
   
144,875
 
Current portion of term loan
   
(18,000
)
Long-term debt
 
$
126,875
 

Scheduled principal payments of the term loan are as follows:

       
2016
 
$
5,625
 
2017
   
8,750
 
2018
   
10,000
 
2019
   
65,000
 
   
$
89,375
 


-8-


The 2014 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
 
< $50.0 million

We are in compliance with all debt covenants as of March 31, 2016. We have issued $37.8 million in standby letters of credit as of March 31, 2016 for insurance purposes.  Issued letters of credit reduce our available credit under the 2014 Credit Agreement.  As of March 31, 2016, we have approximately $256.7 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility.

6.   Other Income/(Expense) – Net

Other income/(expense) -- net comprises the following (in thousands):
           
 
Three months ended March 31,
 
2016
 
2015 
Market value adjustment on assets held in
         
deferred compensation trust
$
(2,987
)
 
$
950
 
Gain/(loss) on disposal of property and equipment
 
(33
)
   
48
 
Interest income - net
 
97
     
44
 
Other - net
 
(1
)
   
(479
)
     Total other income/(expense) - net
$
(2,924
)
 
$
563
 

 7.   Stock-Based Compensation Plans

On February 19, 2016, the Compensation/Incentive Committee of the Board of Directors (“CIC”) granted 9,541 Performance Stock Units (“PSUs”) contingent upon the achievement of certain total shareholders return (“TSR”) targets as compared to the TSR of a group of peer companies for the three-year period ending December 31, 2018, the date at which such awards vest.  The cumulative compensation cost of the TSR-based PSU award to be recorded over the three year service period is $1.4 million.

On February 19, 2016, the CIC also granted 9,541 PSUs contingent upon the achievement of certain earnings per share (“EPS”) targets for the three-year period ending December 31, 2018.  At the end of each reporting period, the Company estimates the number of shares that it believes will ultimately be earned and records that expense over the service period of the award.  We currently estimate the cumulative compensation cost of the EPS-based PSUs to be recorded over the three year service period is $730,000.

8.   Independent Contractor Operations

The Roto-Rooter segment sublicenses with 69 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 March 31, 2016 totaling $1.7 million (December 31, 2015 - $1.8 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 7% per annum and the remaining terms of the loans range from 2.5 months to 5.4 years at March 31, 2016.  We recorded the following from our independent contractors (in thousands):
 

-9-


 
Three months ended March 31,
 
2016
 
2015
Revenues
$
9,858
   
$
9,464
 
Pretax profits
 
6,155
     
5,557
 

9.   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 March 31,
 
2016
 
 
2015
 
$
526
   
$
4,186
 

10.  Legal and Regulatory Matters

The VITAS segment of the Company’s business operates in a heavily-regulated industry.  As a result, the Company is subjected to inquiries and investigations by various government agencies, as well as to lawsuits, including qui tam actions.  The following sections describe the various ongoing material lawsuits and investigations of which the Company is currently aware.  It is not possible at this time for us to estimate either the timing or outcome of any of those matters, or whether any potential loss, or range of potential losses, is probable or estimable.

Regulatory Matters and Litigation

On May 2, 2013, the government filed a False Claims Act complaint against the Company and certain of its hospice-related subsidiaries in the U.S. District Court for the Western District of Missouri, United States v. VITAS Hospice Services, LLC, et al., No. 4:13-cv-00449-BCW (the “2013 Action”).  Prior to that date, the Company received various qui tam lawsuits and subpoenas from the U.S. Department of Justice and OIG that have been previously disclosed.  The 2013 Action alleges that, since at least 2002, VITAS, and since 2004, the Company, submitted or caused the submission of false claims to the Medicare program by (a) billing Medicare for continuous home care services when the patients were not eligible, the services were not provided, or the medical care was inappropriate, and (b) billing Medicare for patients who were not eligible for the Medicare hospice benefit because they did not have a life expectancy of six months or less if their illnesses ran their normal course.  This complaint seeks treble damages, statutory penalties, and the costs of the action, plus interest.  The defendants filed a motion to dismiss on September 24, 2013.  On September 30, 2014, the Court denied the motion, except to the extent that claims were filed before July 24, 2002. On November 13, 2014, the government filed a Second Amended Complaint.  The Second Amended Complaint changed and supplemented some of the allegations, but did not otherwise expand the causes of action or the nature of the relief sought against VITAS.  VITAS filed its Answer to the Second Amended Complaint on August 11, 2015.  The Company is not able to reasonably estimate the probability of loss or range of loss at this time.

For additional procedural history of this litigation, please refer to our prior quarterly and annual filings. The net costs incurred related to U.S. v. Vitas and related regulatory matters were $2.3 million and $1.3 million for March 31, 2016 and 2015, respectively.

In November 2013, two shareholder derivative lawsuits were filed against the Company’s current and former directors, as well as certain of its officers, both of which are covered by the Company’s commercial insurance.  On November 6, 2013, KBC Asset Management NV filed suit in the United States District Court for the District of Delaware, KBC Asset Management NV, derivatively on behalf of Chemed Corp. v. McNamara, et al., No. 13 Civ. 1854 (LPS) (D. Del.).  It sued Kevin McNamara, Joel Gemunder, Patrick Grace, Thomas Hutton, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, Arthur Tucker, Jr., George Walsh III, Frank Wood, Timothy O’Toole, David Williams and Ernest Mrozek, together with the Company as nominal defendant.  Plaintiff alleges that since at least 2004, Chemed, through VITAS, has submitted or caused the submission of false claims to Medicare.  The suit alleges a claim for breach of fiduciary duty against the individual defendants, and seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.

-10-

 
On November 14, 2013, Mildred A. North filed suit in the United States District Court for the Southern District of Ohio, North, derivatively on behalf of Chemed Corp. v. Kevin McNamara, et al., No. 13 Civ. 833 (MDB) (S.D. Ohio).  She sued Kevin McNamara, David Williams, Timothy O’Toole, Joel Gemunder, Patrick Grace, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, George Walsh III, Frank Wood and Thomas Hutton, together with the Company as nominal defendant.  Plaintiff alleges that, between February 2010 and the present, the individual defendants breached their fiduciary duties as officers and directors of Chemed by, among other things, (a) allegedly causing VITAS to submit improper and ineligible claims to Medicare and Medicaid; and (b) allegedly misrepresenting the state of Chemed’s internal controls.  The suit alleges claims for breach of fiduciary duty, abuse of control and gross mismanagement against the individual defendants.  The complaint also alleges unjust enrichment and insider trading against Messrs. McNamara, Williams and O’Toole.  Plaintiff seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.

On January 29, 2014 defendants in North filed a motion to transfer that case to Delaware under 28 U.S.C § 1404(a). On February 12, 2014, defendants in KBC filed a motion to dismiss that case pursuant to Federal Rules of Civil Procedure 23.1 and 12(b)(6).  On September 19, 2014, the Ohio court granted defendants’ motion to transfer North to Delaware.  Following that decision and in light of that transfer, on September 29, 2014, the Delaware court denied without prejudice defendants’ motion to dismiss KBC, and referred both cases to Magistrate Judge Burke.

On October 15, 2014, Plaintiff KBC filed a motion to consolidate KBC with North.  On February 2, 2015 the court granted the motion for consolidation in full, appointing Plaintiff KBC the sole lead plaintiff and its counsel, the sole lead and liaison counsel.  The court ordered that both cases will proceed under the caption In re Chemed Corp. Shareholder and Derivative Litigation, No. 13 Civ. 1854 (LPS) (CJB) (D. Del.).  Plaintiff KBC has designated its pending complaint as the operative complaint in the consolidated proceedings.  Defendants subsequently renewed their motion to dismiss those claims and allegations.  On December 23, 2015, Magistrate Judge Burke issued a Report & Recommendation recommending that (1) defendants’ motion to dismiss be granted; (2) plaintiff be given 14 days from the date of affirmance by the district court to file an amended complaint addressing deficiencies with regard to their duty of loyalty claim; and (3) failure to do so should give rise to dismissal with prejudice.  The Report and Recommendation remains subject to review and affirmance by the district court judge overseeing the matter.  On January 11, 2016, Lead Plaintiff KBC filed Objections to the Report and Recommendations.  Defendants’ responses to those Objections were filed on January 28, 2016.

The Company intends to defend vigorously against the allegations in each of the above lawsuits.  Regardless of the outcome of any of the preceding matters, responding to the subpoenas and dealing with the various regulatory agencies and opposing parties can adversely affect us through defense costs, potential payments, diversion of management time, and related publicity.  Although the Company intends to defend them vigorously, there can be no assurance that those suits will not have a material adverse effect on the Company.

11.   Concentration of Risk

During the quarter VITAS had pharmacy services agreements with two service providers to provide specified pharmacy services for VITAS and its hospice patients.  VITAS made purchases from these two providers of $8.9 million and $9.2 million for the three months ended March 31, 2016 and 2015, respectively.  For the three-month period ending March 31, 2016 and 2015, respectively, purchases from these providers exceed 90% of all pharmacy services used by VITAS.

12.   Cash Overdrafts and Cash Equivalents

Included in accounts payable at March 31, 2016 is cash overdrafts payable of $16.4 million (December 31, 2015 - $9.3 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 $595,000 in cash equivalents as of March 31, 2016.  There was $76,000 in cash equivalents as of December 31, 2015.  The weighted average rate of return for our cash equivalents was 0.40% at March 31, 2016 and 0.20% at December 31, 2015.
 
-11-

 
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.  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.

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of March 31, 2016 (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
 
$
49,195
   
$
49,195
   
$
-
   
$
-
 
Long-term debt
   
144,875
     
-
     
144,875
     
-
 

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of December 31, 2015 (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
 
$
49,481
   
$
49,481
   
$
-
   
$
-
 
Long-term debt
   
91,250
     
-
     
91,250
     
-
 

For the mutual fund investments carrying value is fair value.  All outstanding long-term debt is at a floating interest rate tied to LIBOR. Therefore, the carrying amount is a reasonable estimation of fair value.

14.   Capital Stock Repurchase Plan Transactions

We repurchased the following capital stock for the three months ended March 31, 2016 and 2015:
 
 
Three months ended March 31,
 
2016
 
2015
           
Total cost of repurchased shares (in thousands):
$
52,460
   
$
-
 
Shares repurchased
 
400,000
     
-
 
Weighted average price per share
$
131.15
   
$
-
 

In March 2016, the Board of Directors authorized an additional $100 million for stock repurchase under Chemed’s existing share repurchase program. We currently have $100.0 million of authorization remaining under this share repurchase plan.


-12-


15.   Recent Accounting Statements

In May 2014, the FASB issued Accounting Standards Update “ASU No. 2014-09 – Revenue from Contracts with Customers” which provides additional guidance to clarify the principles for recognizing revenue.  The standard will also be used to develop a common revenue standard for removing inconsistencies and weaknesses, improve comparability, provide more useful information to users through improved disclosure requirements, and simplify the preparation of financial statements.  The guidance is effective for fiscal years beginning after December 15, 2017.  We are currently evaluating the impact of this ASU on our existing revenue recognition policies and disclosures.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “ASU No. 2014-15 - Presentation of Financial Statements-Going Concern”.   ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for us for the annual period ending December 31, 2016 and interim periods thereafter. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations or cash flows.
 
In February 2016, the FASB issued Accounting Standards Update “ASU No. 2016-02 – Leases” which introduces a lessee model that brings most leases on to the balance sheets and updates lessor accounting  to align with changes in the lessee model and the revenue recognition standard.   The guidance is effective for fiscal years beginning after December 15, 2018.  We are currently evaluating the impact of this ASU on our financial statements, existing lease recognition policies and disclosures.
 
In March 2016, the FASB issued ASU No. 2016-09- “Compensation – Stock Compensation” which is part of the FASB’s Simplification Initiative.  The object of this initiative is to identify, evaluate, and improve areas of GAAP. The areas of simplification in this initiative involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The guidance is effective for fiscal years beginning after December 15, 2017.  We are currently evaluating the impact of this ASU on our financial statements.

16.   Goodwill

Shown below is movement in Goodwill (in thousands):

   
Vitas
 
Roto-Rooter
 
Total
Balance at December 31, 2014
 
$
328,301
   
$
138,421
   
$
466,722
 
Business combinations
   
-
     
5,944
     
5,944
 
Foreign currency adjustments
   
-
     
(344
)
   
(344
)
Balance at December 31, 2015
 
$
328,301
   
$
144,021
   
$
472,322
 
Foreign currency adjustments
   
-
     
116
     
116
 
Balance at March 31, 2016
 
$
328,301
   
$
144,137
   
$
472,438
 
 
-13-


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, drain cleaning, water restoration and other related 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 March 31,
 
2016
 
 
2015
Service revenues and sales
$
390,389
   
$
376,652
 
Net income
$
24,840
   
$
24,537
 
Diluted EPS
$
1.45
   
$
1.40
 
Adjusted net income
$
27,754
   
$
26,831
 
Adjusted diluted EPS
$
1.62
   
$
1.54
 
Adjusted EBITDA
$
54,480
   
$
52,849
 
Adjusted EBITDA as a % of revenue
 
14.0
%
   
14.0
%

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”) and Adjusted EBITDA are not measures derived in accordance with GAAP.  We provide non-GAAP measures 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 non-GAAP measures should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP.  A reconciliation of our non-GAAP measures is presented on pages 22-23.

For the three months ended March 31, 2016, the increase in consolidated service revenues and sales was driven by a 5.4% increase at Roto-Rooter and a 2.9% increase at VITAS.  The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines.  The increase in service revenues at VITAS was primarily a result of Medicare reimbursement rates increasing 0.6%, a 6.8% increase in days of care, offset by acuity mix shift which negatively impacted revenue 1.8% and changes in Medicare hospice reimbursement which negatively impacted revenue 2.1%. Consolidated net income increased 1.2% due to higher revenues at both VITAS and Roto-Rooter.  Diluted EPS increased 3.6% as a result of the increase in net income as well as a lower number of shares outstanding.  Adjusted EBITDA as a percent of revenue was essentially flat when compared to the prior year quarter.   See page 24 for additional VITAS operating metrics.

On January 1, 2016, CMS implemented a refinement to the Medicare hospice reimbursement per diem.  This rebasing eliminated the single tier per diem for routine home care (RHC) and replaced it with a two-tiered rate, with a higher rate for the first 60 days of a hospice patient’s care, and a lower rate for days 61 and after. In addition, CMS added for a Service Intensity Add-on (SIA) payment which provides for reimbursement of care provided by a registered nurse or social worker for RHC patients within seven days prior to death. The reimbursement for continuous care, inpatient care and respite care are not impacted by this rebasing.

The two tiered national per diem rate for RHC is $186.84 for the first 60 days and $146.83 for RHC beyond 60 days.  An individual hospice’s actual per diem rate is adjusted for differences in geographic cost of living.  We estimate rebasing in 2016 would be revenue neutral to a hospice if it has 37.6% of total RHC days-of-care provided to patients in their first 60 days of admission and 62.4% of total RHC days-of-care provided to patients after the 60 days.

Historically, VITAS had a 32/68 aggregate Days-of-Care ratio. High acuity care historically has represented 6% to 7% of VITAS’ total days-of-care.  VITAS high acuity days-of-care provided to patients within the first 60 days of admission represented approximately 15% of days-of-care provided to patients in the first 60 days of admission.  This results in a VITAS RHC Days-of-Care ratio of approximately 29/71.

-14-


In the first quarter of 2016, VITAS had a 25/75 RHC Days-of-Care ratio and generated approximately $1.0 million in SIA payments.  This resulted in 2.1% less revenue than under the previous Medicare reimbursement methodology.

VITAS expects its full-year 2016 revenue growth, prior to Medicare cap, to be in the range of 2.5% to 3.5%.  Admissions in 2016 are estimated to increase 3.0%.  Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 14.0% to 15.0%.  Medicare cap billing limitations are estimated to be $3.8 million in 2016. Roto-Rooter expects full-year 2016 revenue growth of 3.5% to 4.5%.  The revenue estimate is a based upon increased job pricing of approximately 1.0% and continued growth in water restoration services.  Adjusted EBITDA margin for 2016 is estimated in the range of 20.0% to 21.0%.  We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.

Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2015 to March 31, 2016 include the following:

A $36.8 million increase in accounts receivable due to timing of Medicare and Medicaid payments.
A $7.4 million decrease in prepaid income taxes due to timing of payments.
A $7.0 million increase in accounts payable due to timing of payments.
A $11.1 million decrease in income taxes due to timing of payments.
An $9.0 million decrease in accrued compensation due primarily to the payment of 2015 incentive compensation during the quarter.
A $53.6 million increase in long-term debt due primarily to borrowings on our revolving line of credit used mainly to purchase treasury shares during the quarter.

Net cash provided by operating activities decreased $5.2 million primarily as a result of an increase in accounts receivable offset by an increase in income taxes due to the timing of payments.  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 $37.8 million in standby letters of credit as of March 31, 2016, for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of March 31, 2016, we have approximately $256.7 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

Significant changes in our accounts receivable balances are typically driven mainly by the timing of payments received from the Federal government at our VITAS subsidiary.  We typically receive a payment in excess of $35.0 million from the Federal government from hospice services every other Friday.  The timing of period end will have a significant impact on the accounts receivable at VITAS.  These changes generally normalize over a two year period, as cash flow variations in one year are offset in the following year.

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 March 31, 2016 and anticipate remaining in compliance throughout the foreseeable future.

 The VITAS segment of the Company’s business operates in a heavily-regulated industry.  As a result, the Company is subjected to inquiries and investigations by various government agencies, as well as to lawsuits, including qui tam actions.  The following sections describe the various ongoing material lawsuits and investigations of which the Company is currently aware.  It is not possible at this time for us to estimate either the timing or outcome of any of those matters, or whether any potential loss, or range of potential losses, is probable or estimable.

On May 2, 2013, the government filed a False Claims Act complaint against the Company and certain of its hospice-related subsidiaries in the U.S. District Court for the Western District of Missouri, United States v. VITAS Hospice Services, LLC, et al., No. 4:13-cv-00449-BCW (the “2013 Action”).  Prior to that date, the Company received various qui tam lawsuits and subpoenas from the U.S. Department of Justice and OIG that have been previously disclosed.  The 2013 Action alleges that, since at least 2002, VITAS, and since 2004, the Company, submitted or caused the submission of false claims to the Medicare program by (a) billing Medicare for continuous home care services when the patients were not eligible, the services were not provided, or the medical care was inappropriate, and (b) billing Medicare for patients who were not eligible for the Medicare hospice benefit because they did not have a life expectancy of six months or less if their illnesses ran their normal course.  This complaint seeks treble damages, statutory penalties, and the costs of the action, plus interest.  The defendants filed a motion to dismiss on September 24, 2013.  On September 30, 2014, the Court denied the motion, except to the extent that claims were filed before July 24, 2002. On November 13, 2014, the government filed a Second Amended Complaint.  The Second Amended Complaint changed and supplemented some of the allegations, but did not otherwise expand the causes of action or the nature of the relief sought against VITAS.  VITAS filed its Answer to the Second Amended Complaint on August 11, 2015.  The Company is not able to reasonably estimate the probability of loss or range of loss at this time.

-15-

 
For additional procedural history of this litigation, please refer to our prior quarterly and annual filings. The net costs incurred related to U.S. v. Vitas and related regulatory matters were $2.3 million and $1.3 million for March 31, 2016 and 2015, respectively.

In November 2013, two shareholder derivative lawsuits were filed against the Company’s current and former directors, as well as certain of its officers, both of which are covered by the Company’s commercial insurance.  On November 6, 2013, KBC Asset Management NV filed suit in the United States District Court for the District of Delaware, KBC Asset Management NV, derivatively on behalf of Chemed Corp. v. McNamara, et al., No. 13 Civ. 1854 (LPS) (D. Del.).  It sued Kevin McNamara, Joel Gemunder, Patrick Grace, Thomas Hutton, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, Arthur Tucker, Jr., George Walsh III, Frank Wood, Timothy O’Toole, David Williams and Ernest Mrozek, together with the Company as nominal defendant.  Plaintiff alleges that since at least 2004, Chemed, through VITAS, has submitted or caused the submission of false claims to Medicare.  The suit alleges a claim for breach of fiduciary duty against the individual defendants, and seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.

On November 14, 2013, Mildred A. North filed suit in the United States District Court for the Southern District of Ohio, North, derivatively on behalf of Chemed Corp. v. Kevin McNamara, et al., No. 13 Civ. 833 (MDB) (S.D. Ohio).  She sued Kevin McNamara, David Williams, Timothy O’Toole, Joel Gemunder, Patrick Grace, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, George Walsh III, Frank Wood and Thomas Hutton, together with the Company as nominal defendant.  Plaintiff alleges that, between February 2010 and the present, the individual defendants breached their fiduciary duties as officers and directors of Chemed by, among other things, (a) allegedly causing VITAS to submit improper and ineligible claims to Medicare and Medicaid; and (b) allegedly misrepresenting the state of Chemed’s internal controls.  The suit alleges claims for breach of fiduciary duty, abuse of control and gross mismanagement against the individual defendants.  The complaint also alleges unjust enrichment and insider trading against Messrs. McNamara, Williams and O’Toole.  Plaintiff seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.

On January 29, 2014 defendants in North filed a motion to transfer that case to Delaware under 28 U.S.C § 1404(a). On February 12, 2014, defendants in KBC filed a motion to dismiss that case pursuant to Federal Rules of Civil Procedure 23.1 and 12(b)(6).  On September 19, 2014, the Ohio court granted defendants’ motion to transfer North to Delaware.  Following that decision and in light of that transfer, on September 29, 2014, the Delaware court denied without prejudice defendants’ motion to dismiss KBC, and referred both cases to Magistrate Judge Burke.

On October 15, 2014, Plaintiff KBC filed a motion to consolidate KBC with North.  On February 2, 2015 the court granted the motion for consolidation in full, appointing Plaintiff KBC the sole lead plaintiff and its counsel, the sole lead and liaison counsel.  The court ordered that both cases will proceed under the caption In re Chemed Corp. Shareholder and Derivative Litigation, No. 13 Civ. 1854 (LPS) (CJB) (D. Del.).  Plaintiff KBC has designated its pending complaint as the operative complaint in the consolidated proceedings.  Defendants subsequently renewed their motion to dismiss those claims and allegations.  On December 23, 2015, Magistrate Judge Burke issued a Report & Recommendation recommending that (1) defendants’ motion to dismiss be granted; (2) plaintiff be given 14 days from the date of affirmance by the district court to file an amended complaint addressing deficiencies with regard to their duty of loyalty claim; and (3) failure to do so should give rise to dismissal with prejudice.  The Report and Recommendation remains subject to review and affirmance by the district court judge overseeing the matter.  On January 11, 2016, Lead Plaintiff KBC filed Objections to the Report and Recommendations.  Defendants’ responses to those Objections were filed on January 28, 2016.

The Company intends to defend vigorously against the allegations in each of the above lawsuits.  Regardless of the outcome of any of the preceding matters, responding to the subpoenas and dealing with the various regulatory agencies and opposing parties can adversely affect us through defense costs, potential payments, diversion of management time, and related publicity.  Although the Company intends to defend them vigorously, there can be no assurance that those suits will not have a material adverse effect on the Company.

-16-

 
Results of Operations
Three months ended March 31, 2016 versus 2015 - Consolidated Results
Our service revenues and sales for the first quarter of 2016 increased 3.6% versus services and sales revenues for the first quarter of 2015.  Of this increase, $7.9 million was attributable to VITAS and $5.8 million was attributable to Roto-Rooter.  The following chart shows the components of those changes (in thousands):
 
   
Increase/(Decrease)
   
Amount
 
Percent
VITAS
           
Routine homecare
 
$
10,309
     
5.0
 
Continuous care
   
(1,030
)
   
(2.7
)
General inpatient
   
(1,199
)
   
(4.5
)
Medicare cap
   
(165
)
   
(100.0
)
Roto-Rooter
               
Plumbing
   
1,988
     
4.3
 
Drain cleaning
   
1,357
     
3.8
 
Water restoration
   
2,007
     
19.2
 
Contractor operations
   
394
     
4.2
 
Other
   
76
     
1.5
 
Total
 
$
13,737
     
3.6
 

The increase in VITAS’ revenues for the first quarter of 2016 versus the first quarter of 2015 was a primarily a result of Medicare reimbursement rates increasing approximately 0.6%, a 6.8% increase in days of care offset by acuity mix shift which negatively impacted revenue 1.8% and changes in Medicare hospice reimbursement which negatively impacted revenue 2.1%.

Days of care during the quarter ended March 31 were as follows:

                   
   
Days of Care
 
Increase/(Decrease)
   
2016
 
2015
 
Percent
                   
Routine homecare
   
1,335,167
     
1,241,733
     
7.5
 
Continuous care
   
50,970
     
52,840
     
(3.5
)
General inpatient
   
38,249
     
39,573
     
(3.3
)
Total days of care
   
1,424,386
     
1,334,146
     
6.8
 

Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the first quarter of 2016 versus 2015 is attributable to a 0.4% increase in job count and a 3.9% increase in a combination of price and service mix shift.  Drain cleaning revenues for the first quarter of 2016 versus 2015 reflect a 0.3% increase in the number of jobs performed combined with a price and service mix shift of 3.5%.  Water restoration for the first quarter of 2016 versus 2015 increased 19.2% as a result of continued expansion of this service offering into other Roto-Rooter locations.  Contractor operations increased 4.2% and Other Roto-Rooter revenue increased 1.5%.
The consolidated gross margin was 28.7% in the first quarter of 2016 as compared with 28.6% in the first quarter of 2015.  On a segment basis, VITAS’ gross margin was 21.0% in the first quarter of 2016 as compared with 21.2%, in the first quarter of 2015.  The Roto-Rooter segment’s gross margin was 47.6% for the first quarter of 2016 compared with 47.3% in the first quarter of 2015.

-17-


Selling, general and administrative expenses (“SG&A”) comprise (in thousands):

 
Three months ended March 31,
 
2016
 
2015
SG&A expenses before market value adjustments of deferred compensation
         
plans, long-term incentive compensation, and OIG investigation expenses
$
59,937
   
$
55,879
 
Long-term incentive compensation
 
(241
)
   
934
 
Expenses related to OIG investigation
 
2,336
     
1,274
 
Impact of market value adjustments related to assets held in deferred
             
compensation trusts
 
(2,987
)
   
950
 
Total SG&A expenses
$
59,045
   
$
59,037
 

SG&A expenses before long-term incentive compensation, expenses related to OIG investigation and the impact of market gains/(losses) of deferred compensation plans for the first quarter of 2016 were up 7.3% when compared to the first quarter of 2015.  The increase was mainly a result of the increase in variable expenses caused by increased revenue as well as normal salary increases, higher incentive compensation costs and higher bad debt expense in 2016.

Other income/(expense) - net comprise (in thousands):
 
 
Three months ended March 31,
 
2016
 
2015
Market value adjustment on assets held in
         
deferred compensation trusts
$
(2,987
)
 
$
950
 
Gain/(loss) on disposal of property and equipment
 
(33
)
   
48
 
Interest income - net
 
97
     
44
 
Other
 
(1
)
   
(479
)
Total other income/(expense) - net
$
(2,924
)
 
$
563
 

Our effective income tax rate was 38.9% in the first quarter of 2016 essentially equal to the first quarter of 2015.

Net income for both periods included the following after-tax items/adjustments that reduced or increased after-tax earnings (in thousands):
 
   
Three months ended March 31,
 
   
2016
   
2015
 
VITAS
           
Expenses related to OIG investigation
 
$
(1,443
)
 
$
(790
)
Roto-Rooter
               
Expenses related to litigation settlements
   
-
     
(3
)
Corporate
               
Stock option expense
   
(1,621
)
   
(910
)
Long-term incentive compensation
   
152
     
(591
)
Expenses related to securities litigation
   
(2
)
   
-
 
Total
 
$
(2,914
)
 
$
(2,294
)


-18-


Three months ended March 31, 2016 versus 2015 - Segment Results

The change in after-tax earnings for the first quarter of 2016 versus the first quarter of 2015 is due to (in thousands):

 
Increase/(Decrease)
 
Amount
 
Percent
VITAS
$
(228
)
   
(1.2
)
Roto-Rooter
 
1,012
     
8.4
 
Corporate
 
(481
)
   
(7.1
)
 
$
303
     
1.2
 

VITAS’ after-tax earnings were negatively impacted in 2016 compared to 2015 by a $2.7 million increase in SG&A expenses driven mainly by $653,000 in additional OIG expenses and approximately $585,000  after-tax increase in bad debt expense.   After-tax earnings as a percent of revenue in the first quarter of 2016 were 6.9%, a decrease of 0.3% over the first quarter of 2015.

Roto-Rooter’s after-tax earnings were positively impacted in 2016 compared to 2015 primarily by a $2.0 million revenue increase in Roto-Rooter’s water restoration line of business, a $2.0 million increase in plumbing revenue and a $1.4 million increase in sewer and drain cleaning revenue.  After-tax earnings as a percent of revenue at Roto-Rooter in 2016 were 11.5% as compared to 11.2% in 2015.
 

-19-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2016
(in thousands)(unaudited)
                     
               
 
Chemed
   
VITAS
 
 Roto-Rooter
 
Corporate
 
Consolidated
2016 (a)
                       
Service revenues and sales
 
$
277,528
   
$
112,861
   
$
-
   
$
390,389
 
Cost of services provided and goods sold
   
219,266
     
59,169
     
-
     
278,435
 
Selling, general and administrative expenses
   
24,783
     
29,807
     
4,455
     
59,045
 
Depreciation
   
4,781
     
3,501
     
142
     
8,424
 
Amortization
   
14
     
78
     
-
     
92
 
Total costs and expenses
   
248,844
     
92,555
     
4,597
     
345,996
 
Income/(loss) from operations
   
28,684
     
20,306
     
(4,597
)
   
44,393
 
Interest expense
   
(59
)
   
(93
)
   
(690
)
   
(842
)
Intercompany interest income/(expense)
   
2,103
     
948
     
(3,051
)
   
-
 
Other income/(expense)—net
   
41
     
23
     
(2,988
)
   
(2,924
)
Income/(expense) before income taxes
   
30,769
     
21,184
     
(11,326
)
   
40,627
 
Income taxes
   
(11,682
)
   
(8,164
)
   
4,059
     
(15,787
)
Net income/(loss)
 
$
19,087
   
$
13,020
   
$
(7,267
)
 
$
24,840
 
                                 
(a) The following amounts are included in net income (in thousands):
 
                         
 
Chemed
   
VITAS
 
Roto-Rooter 
 
Corporate 
 
Consolidated 
Pretax benefit/(cost):
                               
Stock option expense
 
$
-
   
$
-
   
$
(2,563
)
 
$
(2,563
)
Long-term incentive compensation
   
-
     
-
     
241
     
241
 
Expenses related to securities litigation
   
-
     
-
     
(3
)
   
(3
)
Expenses related to OIG investigation
   
(2,336
)
   
-
     
-
     
(2,336
)
Total
 
$
(2,336
)
 
$
-
   
$
(2,325
)
 
$
(4,661
)
                                 
                         
 
Chemed
   
VITAS
 
Roto-Rooter
 
Corporate 
 
Consolidated
After-tax benefit/(cost):
                               
Stock option expense
 
$
-
   
$
-
   
$
(1,621
)
 
$
(1,621
)
Long-term incentive compensation
   
-
     
-
     
152
     
152
 
Expenses related to securities litigation
   
-
     
-
     
(2
)
   
(2
)
Expenses related to OIG investigation
   
(1,443
)
   
-
     
-
     
(1,443
)
Total
 
$
(1,443
)
 
$
-
   
$
(1,471
)
 
$
(2,914
)


-20-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2015
(in thousands)(unaudited)
                     
               
 
Chemed
   
VITAS
 
Roto-Rooter 
 
Corporate 
 
Consolidated 
2015 (a)
                       
Service revenues and sales
 
$
269,613
   
$
107,039
   
$
-
   
$
376,652
 
Cost of services provided and goods sold
   
212,495
     
56,390
     
-
     
268,885
 
Selling, general and administrative expenses
   
22,078
     
28,802
     
8,157
     
59,037
 
Depreciation
   
4,785
     
3,094
     
153
     
8,032
 
Amortization
   
60
     
67
     
-
     
127
 
Total costs and expenses
   
239,418
     
88,353
     
8,310
     
336,081
 
Income/(loss) from operations
   
30,195
     
18,686
     
(8,310
)
   
40,571
 
Interest expense
   
(57
)
   
(96
)
   
(816
)
   
(969
)
Intercompany interest income/(expense)
   
1,726
     
838
     
(2,564
)
   
-
 
Other income/(expense)—net
   
(433
)
   
46
     
950
     
563
 
Income/(expense) before income taxes
   
31,431
     
19,474
     
(10,740
)
   
40,165
 
Income taxes
   
(12,116
)
   
(7,466
)
   
3,954
     
(15,628
)
Net income/(loss)
 
$
19,315
   
$
12,008
   
$
(6,786
)
 
$
24,537
 
                                 
(a) The following amounts are included in net income (in thousands):
 
                         
 
Chemed
   
 
VITAS
 
Roto-Rooter
 
Corporate
 
Consolidated
Pretax benefit/(cost):
                               
Stock option expense
 
$
-
   
$
-
   
$
(1,444
)
 
$
(1,444
)
Long-term incentive compensation
   
-
     
-
     
(934
)
   
(934
)
Expenses related to litigation settlements
   
-
     
(5
)
   
-
     
(5
)
Expenses related to OIG investigation
   
(1,274
)
   
-
     
-
     
(1,274
)
Total
 
$
(1,274
)
 
$
(5
)
 
$
(2,378
)
 
$
(3,657
)
                                 
                         
 
Chemed  
    VITAS
 
Roto-Rooter
 
Corporate
 
Consolidated
After-tax benefit/(cost):
                               
Stock option expense
 
$
-
   
$
-
   
$
(910
)
 
$
(910
)
Long-term incentive compensation
   
-
     
-
     
(591
)
   
(591
)
Expenses related to litigation settlements
   
-
     
(3
)
   
-
     
(3
)
Expenses related to OIG investigation
   
(790
)
   
-
     
-
     
(790
)
Total
 
$
(790
)
 
$
(3
)
 
$
(1,501
)
 
$
(2,294
)


-21-


                         
Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA
 
                         
Chemed Corporation and Subsidiary Companies
       
(in thousands)
                 
Chemed
For the three months ended March 31, 2016
VITAS
Roto-Rooter
Corporate
Consolidated
                         
Net income/(loss)
 
$
19,087
   
$
13,020
   
$
(7,267
)
 
$
24,840
 
Add/(deduct):
                               
Interest expense
   
59
     
93
     
690
     
842
 
Income taxes
   
11,682
     
8,164
     
(4,059
)
   
15,787
 
Depreciation
   
4,781
     
3,501
     
142
     
8,424
 
Amortization
   
14
     
78
     
-
     
92
 
EBITDA
   
35,623
     
24,856
     
(10,494
)
   
49,985
 
Add/(deduct):
                               
Intercompany interest expense/(income)
   
(2,103
)
   
(948
)
   
3,051
     
-
 
Interest income
   
(79
)
   
(17
)
   
(1
)
   
(97
)
Expenses related to OIG investigation
   
2,336
     
-
     
-
     
2,336
 
Amortization of stock awards
   
131
     
81
     
327
     
539
 
Expenses related to securities litigation
   
-
     
-
     
3
     
3
 
Advertising cost adjustment
   
-
     
(608
)
   
-
     
(608
)
Stock option expense
   
-
     
-
     
2,563
     
2,563
 
Long-term incentive compensation
   
-
     
-
     
(241
)
   
(241
)
Adjusted EBITDA
 
$
35,908
   
$
23,364
   
$
(4,792
)
 
$
54,480
 
                                 
                         
Chemed
For the three months ended March 31, 2015
VITAS
Roto-Rooter
Corporate
Consolidated
                                 
Net income/(loss)
 
$
19,315
   
$
12,008
   
$
(6,786
)
 
$
24,537
 
Add/(deduct):
                               
Interest expense
   
57
     
96
     
816
     
969
 
Income taxes
   
12,116
     
7,466
     
(3,954
)
   
15,628
 
Depreciation
   
4,785
     
3,094
     
153
     
8,032
 
Amortization
   
60
     
67
     
-
     
127
 
EBITDA
   
36,333
     
22,731
     
(9,771
)
   
49,293
 
Add/(deduct):
                               
Intercompany interest expense/(income)
   
(1,726
)
   
(838
)
   
2,564
     
-
 
Interest income
   
(34
)
   
(10
)
   
-
     
(44
)
Expenses related to OIG investigation
   
1,274
     
-
     
-
     
1,274
 
Amortization of stock awards
   
107
     
41
     
301
     
449
 
Advertising cost adjustment
   
-
     
(506
)
   
-
     
(506
)
Expenses related to litigation settlements
   
-
     
5
     
-
     
5
 
Long-term incentive compensation
   
-
     
-
     
934
     
934
 
Stock option expense
   
-
     
-
     
1,444
     
1,444
 
Adjusted EBITDA
 
$
35,954
   
$
21,423
   
$
(4,528
)
 
$
52,849
 


-22-


RECONCILIATION OF ADJUSTED NET INCOME
(in thousands, except per share data)(unaudited)
             
   
Three Months Ended March 31,
   
2016
 
2015
Net income as reported
 
$
24,840
   
$
24,537
 
                 
Add/(deduct) after-tax cost of:
               
Stock option expense
   
1,621
     
910
 
Expenses of OIG investigation
   
1,443
     
790
 
Long-term incentive compensation
   
(152
)
   
591
 
Expenses related to securities settlements
   
2
     
-
 
Expenses related to litigation settlements
   
-
     
3
 
Adjusted net income
 
$
27,754
   
$
26,831
 
                 
Diluted Earnings Per Share As Reported
               
Net income
 
$
1.45
   
$
1.40
 
Average number of shares outstanding
   
17,170
     
17,466
 
                 
Adjusted Diluted Earnings Per Share
               
Adjusted net income
 
$
1.62
   
$
1.54
 
Adjusted average number of shares outstanding
   
17,170
     
17,466
 


-23-


             
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
OPERATING STATISTICS FOR VITAS SEGMENT
(unaudited)
 
   
Three Months Ended March 31,
OPERATING STATISTICS
 
2016
 
2015
Net revenue ($000)
           
Homecare
 
$
214,850
   
$
204,541
 
Inpatient
   
25,517
     
26,716
 
Continuous care
   
37,161
     
38,191
 
Total before Medicare cap allowance
 
$
277,528
   
$
269,448
 
Medicare cap allowance
   
-
     
165
 
Total
 
$
277,528
   
$
269,613
 
Net revenue as a percent of total before Medicare cap allowances
               
Homecare
   
77.4
%
   
75.9
%
Inpatient
   
9.2
     
9.9
 
Continuous care
   
13.4
     
14.2
 
Total before Medicare cap allowance
   
100.0
     
100.0
 
Medicare cap allowance
   
-
     
0.1
 
Total
   
100.0
%
   
100.1
%
Average daily census (days)
               
Homecare
   
11,681
     
10,877
 
Nursing home
   
2,991
     
2,920
 
Routine homecare
   
14,672
     
13,797
 
Inpatient
   
421
     
440
 
Continuous care
   
560
     
587
 
Total
   
15,653
     
14,824
 
Total Admissions
   
16,868
     
17,268
 
Total Discharges
   
16,743
     
16,990
 
Average length of stay (days)
   
83.7
     
79.0
 
Median length of stay (days)
   
15.0
     
13.0
 
ADC by major diagnosis
               
Cerebro
   
22.1
%
   
23.7
%
Neurological
   
31.2
     
28.0
 
Cancer
   
15.3
     
16.9
 
Cardio
   
17.3
     
17.8
 
Respiratory
   
7.9
     
7.8
 
Other
   
6.2
     
5.8
 
Total
   
100.0
%
   
100.0
%
Admissions by major diagnosis
               
Cerebro
   
11.3
     
12.9
%
Neurological
   
20.9
     
18.6
 
Cancer
   
30.5
     
30.6
 
Cardio
   
15.5
     
15.8
 
Respiratory
   
10.9
     
10.8
 
Other
   
10.9
     
11.3
 
Total
   
100.0
%
   
100.0
%
Direct patient care margins
               
Routine homecare
   
52.1
%
   
52.7
%
Inpatient
   
5.7
     
8.4
 
Continuous care
   
15.1
     
15.9
 
Homecare margin drivers (dollars per patient day)
               
Labor costs
 
$
56.72
   
$
57.21
 
Drug costs
   
5.93
     
6.50
 
Home medical equipment
   
6.68
     
6.41
 
Medical supplies
   
2.85
     
2.92
 
Inpatient margin drivers (dollars per patient day)
               
Labor costs
 
$
338.73
   
$
339.37
 
Continuous care margin drivers (dollars per patient day)
               
Labor costs
 
$
599.38
   
$
587.63
 
Bad debt expense as a percent of revenues
   
1.3
%
   
1.0
%
Accounts receivable -- Days of revenue outstanding- excluding unapplied Medicare payments
   
38.3
     
41.3
 
Accounts receivable -- Days of revenue outstanding- including unapplied Medicare payments
   
36.8
     
39.1
 


-24-

 
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
The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit.  At March 31, 2016, the Company had $144.9 million of variable rate debt outstanding.  For each $10 million dollars borrowed under the credit facility, an increase or decrease of 100 basis points (1% point), increases or decreases the Company’s annual interest expense by $100,000.

The Company continually evaluates this interest rate exposure and periodically weighs the cost versus the benefit of fixing the variable interest rates through a variety of hedging techniques.

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 10, 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.

-25-


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 three months of 2016:

   
Total Number
   
Weighted
   
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, 2016
   
-
   
$
-
     
6,535,584
   
$
52,485,644
 
February 1 through February 29, 2016
   
153,997
     
129.22
     
6,689,581
     
32,585,505
 
March 1 through March 31, 2016
   
246,003
     
132.35
     
6,935,584
   
$
100,025,990
 
                                 
First Quarter Total
   
400,000
   
$
131.15
                 
                                 
On March 14, 2016 our Board of Directors authorized an additional $100 million under the February 2011 Repurchase Program.
 

Item 3.     Defaults Upon Senior Securities

None

Item 4.     Mine Safety Disclosures

None

Item 5.     Other Information

Stockholder Proposals for the 2017 Annual Meeting of the Stockholders

Any stockholder proposals for the 2017 Annual Meeting of Stockholders must be in writing and received by the Secretary of the Company by December 9, 2016 to be eligible for inclusion in the Company’s proxy statement and accompanying proxy for such meeting, unless the date of the 2017 Annual Meeting of Stockholders is changed by more than 30 days from May 16, 2017, in which case such proposal must be received a reasonable time before the Company begins to print and send its proxy materials for such meeting. If a stockholder intends to bring a matter before the 2017 Annual Meeting of Stockholders other than by submitting a proposal for inclusion in the Company’s proxy materials for such meeting he or she must provide notice of the proposal to the Company’s secretary at our principal executive offices no earlier than January 16, 2017, and not later than February 15, 2017, for such notice to be considered timely. If the date of the 2017 meeting is advanced by more than 30 days, or delayed by more than 90 days from May 16, 2017, such proposal must be received not earlier than the close of business on the 120th day prior to such Annual Meeting and not later than the close of business on the later of the 90th day prior to such meeting, or, if the first public announcement of such meeting is less than 100 days prior to it, the 10th day following the day the Company made such public announcement.

If a stockholder intends to propose a “proxy access” nominee pursuant to Section 1.11 of the Company’s By-Laws, he or she must provide notice of the proposal to the Company’s secretary at the Company’s principal executive offices no earlier than December 17, 2016, and not later than January 16, 2017, for such notice to be considered timely. The proxy access provisions of the Company’s By-Laws permit an eligible stockholder (or a group of no more than 20 eligible stockholders) owning 3% or more of the Company’s capital stock continuously for at least three years to nominate director candidates representing up to two or 20% of the Board (whichever is greater), and, upon the eligible stockholder’s satisfaction of certain conditions as outlined in the Company’s By-Laws, require the Company to include such nominees in the Company’s proxy statement and proxy card for the annual meeting of stockholders. These proxy access provisions were adopted by the Board of Directors in February 2016. 
 
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Item 6.       Exhibits

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

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
           
Chemed Corporation
           
(Registrant)
             
             
Dated:
 
May 2, 2016
 
By:
 
/s/ Kevin J. McNamara
           
Kevin J. McNamara
           
(President and Chief Executive Officer)
             
             
Dated:
 
May 2, 2016
 
By:
 
/s/ David P. Williams
           
David P. Williams
           
(Executive Vice President and Chief Financial Officer)
             
             
Dated:
 
May 2, 2016
 
By:
 
/s/ Arthur V. Tucker, Jr.
           
Arthur V. Tucker, Jr.
           
(Vice President and Controller)
 
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