a6804278.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, 2011
 
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-8351

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

Delaware
 
31-0791746
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio
 
45202
(Address of principal executive offices)
 
(Zip code)
 
(513) 762-6900
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
X
 
No
   

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

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

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

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

Class
 
Amount
 
Date
         
Capital Stock $1 Par Value
 
21,405,258 Shares
 
June 30, 2011
         
 


 
 
-1-

 
 
 
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES



Index

   
Page No.
 
PART I.    FINANCIAL INFORMATION:
     
     
    3  
         
    4  
         
    5  
         
    6  
         
    17  
         
    31  
         
    31  
         
PART II.   OTHER INFORMATION
       
    31  
         
    31  
         
    32  
         
    32  
         
    32  
         
    32  
         
    33  
EX – 31.1
EX – 31.2
EX – 31.3
EX – 32.1
EX – 32.2
EX – 32.3
EX – 101.INS
EX – 101.SCH
EX – 101.CAL
EX – 101.LAB
EX – 101.PRE

 
-2-

 
 
 PART I.   FINANCIAL INFORMATION
 CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 (in thousands, except share and per share data)
               
               
 
June 30,
     
December 31,
 
 
2011
     
2010
 
 ASSETS
             
     Current assets
             
          Cash and cash equivalents
  $ 50,941       $ 49,917  
          Accounts receivable less allowances of $12,257 (2010 - $13,332)
    118,281         112,999  
 Inventories
    8,682         7,728  
          Current deferred income taxes
    14,052         15,098  
 Prepaid income taxes
    1,300         770  
 Prepaid expenses
    10,344         10,285  
 Total current assets
    203,600         196,797  
     Investments of deferred compensation plans
    33,066         28,304  
     Properties and equipment, at cost, less accumulated depreciation of $142,247 (2010 - $132,696)
    81,471         79,292  
     Identifiable intangible assets less accumulated amortization of $28,155 (2010 - $27,438)
    56,358         56,410  
     Goodwill
    460,793         458,343  
 Other assets
    15,325         11,015  
Total Assets
  $ 850,613       $ 830,161  
                   
 LIABILITIES
                 
      Current liabilities
                 
 Accounts payable
  $ 39,459       $ 55,829  
 Income taxes
    2,096         1,161  
 Accrued insurance
    35,143         36,492  
     Accrued compensation
    43,633         39,719  
 Other current liabilities
    14,972         16,141  
   Total current liabilities
    135,303         149,342  
 Deferred income taxes
    24,053         25,085  
 Long-term debt
    162,932         159,208  
 Deferred compensation liabilities
    32,255         27,851  
 Other liabilities
    6,736         6,626  
Total Liabilities
    361,279         368,112  
                   
 STOCKHOLDERS' EQUITY
                 
Capital stock - authorized 80,000,000 shares $1 par; issued 30,906,532 shares (2010 - 30,381,863 shares)
    30,907         30,382  
  Paid-in capital
    391,507         365,007  
  Retained earnings
    505,736         473,316  
Treasury stock - 9,600,834 shares (2010 - 9,103,185 shares), at cost
    (440,809 )       (408,615 )
Deferred compensation payable in Company stock
    1,993         1,959  
   Total Stockholders' Equity
    489,334         462,049  
 Total Liabilities and Stockholders' Equity
  $ 850,613       $ 830,161  
                   
                   
 See accompanying notes to unaudited financial statements.
 
 
 
-3-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 (in thousands, except per share data)
                               
                               
                               
   
Three Months Ended June 30,
   
Six Months Ended June 30,
   
2011
     
2010
     
2011
     
2010
 
 Service revenues and sales
  $ 333,360       $ 314,995       $ 664,278       $ 623,808  
 Cost of services provided and goods sold (excluding depreciation)
    239,597         223,702         477,055         442,839  
 Selling, general and administrative expenses
    50,424         49,956         106,078         98,494  
 Depreciation
    6,358         6,194         12,646         11,663  
 Amortization
    1,139         1,287         2,109         2,511  
 Total costs and expenses
    297,518         281,139         597,888         555,507  
 Income from operations
    35,842         33,856         66,390         68,301  
 Interest expense
    (3,461 )       (2,999 )       (6,705 )       (5,951 )
 Other income - net
    714         10         2,816         196  
 Income before income taxes
    33,095         30,867         62,501         62,546  
 Income taxes
    (12,809 )       (12,012 )       (24,114 )       (24,333 )
 Net income
  $ 20,286       $ 18,855       $ 38,387       $ 38,213  
                                       
                                       
 Earnings Per Share
                                     
 Net income
  $ 0.96       $ 0.83       $ 1.82       $ 1.69  
   Average number of shares outstanding
    21,115         22,644         21,067         22,608  
                                       
 Diluted Earnings Per Share
                                     
 Net income
  $ 0.94       $ 0.82       $ 1.78       $ 1.66  
   Average number of shares outstanding
    21,637         23,080         21,586         23,012  
                                       
 Cash Dividends Per Share
  $ 0.14       $ 0.12       $ 0.28       $ 0.24  
                                       
See accompanying notes to unaudited financial statements.
 
 
-4-

 
 
 CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 (in thousands)
               
   
Six Months Ended
 
   
June 30,
   
2011
     
2010
 
Cash Flows from Operating Activities
             
      Net income
  $ 38,387       $ 38,213  
   Adjustments to reconcile net income to net cash provided by operating activities:
                 
 Depreciation and amortization
    14,755         14,174  
 Noncash long-term incentive compensation
    2,595         1,580  
 Provision for uncollectible accounts receivable
    4,365         4,863  
 Stock option expense
    4,495         4,397  
 Amortization of discount on convertible notes
    3,724         3,481  
 Provision for deferred income taxes
    (18 )       (2,364 )
 Changes in operating assets and liabilities, excluding amounts acquired in business combinations:
                 
Increase in accounts receivable
    (9,271 )       (53,169 )
Increase in inventories
    (954 )       (435 )
Increase in prepaid expenses
    (59 )       (35 )
     Increase/(decrease) in accounts payable and other current liabilities
    (6,603 )       3,035  
Increase in income taxes
    3,738         6,902  
Increase in other assets
    (5,652 )       (1,935 )
Increase in other liabilities
    4,514         2,938  
Excess tax benefit on share-based compensation
    (3,339 )       (1,802 )
Other sources
    450         434  
Net cash provided by operating activities
    51,127         20,277  
Cash Flows from Investing Activities
                 
      Capital expenditures
    (14,960 )       (11,942 )
   Business combinations, net of cash acquired
    (3,689 )       (30 )
   Other uses
    (869 )       (197 )
 Net cash used by investing activities
    (19,518 )       (12,169 )
Cash Flows from Financing Activities
                 
   Purchases of treasury stock
    (25,482 )       (10,149 )
   Decrease in cash overdrafts payable
    (7,814 )       (1,314 )
   Proceeds from issuance of capital stock
    7,698         3,475  
  Dividends paid
    (5,967 )       (5,481 )
  Debt issuance costs
    (2,723 )       -  
   Excess tax benefit on share-based compensation
    3,339         1,802  
  Other sources
    364         223  
  Net cash used by financing activities
    (30,585 )       (11,444 )
Increase/(Decrease) in Cash and Cash Equivalents
    1,024         (3,336 )
   Cash and cash equivalents at beginning of year
    49,917         112,416  
   Cash and cash equivalents at end of period
  $ 50,941       $ 109,080  
                   
See accompanying notes to unaudited financial statements.
 
 
-5-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements

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

We have prepared the accompanying unaudited consolidated financial statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.  Consequently, we have omitted certain disclosures required under generally accepted accounting principles in the United States (“GAAP”) for complete financial statements.  The December 31, 2010 balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP.  However, in our opinion, the financial statements presented herein contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows.  These financial statements are prepared on the same basis as and should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.

2.  Revenue Recognition
Both the VITAS segment and the Roto-Rooter segment recognize service revenues and sales when the earnings process has been completed.  Generally, this occurs when services are provided or products are delivered.  VITAS recognizes revenue at the estimated realizable amount due from third-party payers.  Medicare payments are subject to certain limitations, as described below.
 
As of June 30, 2011, VITAS has approximately $1.6 million in unbilled revenue included in accounts receivable (December 31, 2010 - $2.8 million).  The unbilled revenue at VITAS relates to hospice programs currently undergoing focused medical reviews (“FMR”).  During FMR, surveyors working on behalf of the U.S. Federal government review certain patient files for compliance with Medicare regulations.  During the time the patient file is under review, we are unable to bill for care provided to those patients.  We make appropriate provisions to reduce our accounts receivable balance for potential denials of patient service revenue due to FMR activity.
 
Vitas provides charity care, in certain circumstances, to patients without charge when management of the hospice program determines that the patient does not have the financial wherewithal to make payment.  There is no revenue or associated accounts receivable in the accompanying consolidated financial statements related to charity care.  The cost of charity care is calculated by taking the ratio of charity care days to total days of care and multiplying by total cost of care.  The cost of charity care for the three and six month periods ended June 30, 2011 and 2010 is as follows (in thousands):

Three months ended
   
Six months ended
 
June 30,
   
June 30,
 
2011
   
2010
   
2011
   
2010
 
$ 1,763     $ 1,727     $ 3,522     $ 3,374  
 
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, 2011 we recorded $368,000 in Medicare cap liability for one small program for the 2011 measurement period.  During the six-month period ended June 30, 2011, we had a net Medicare cap liability reversal for amounts recorded in the fourth quarter of 2010.  We reversed these amounts as improving admissions trends in these programs indicate that the liability had been eliminated.  We also reversed the remaining Medicare cap liability for our Phoenix program due to expiration for the period under review.
 
 
-6-

 
 
Shown below is the Medicare cap liability activity for the periods ended June 30, 2011 and 2010 (in thousands):

     
June 30,
 
     
2011
   
2010
 
 
Beginning balance January 1,
  $ 1,371       $ 1,981    
 
Reversal - 2011 measurement period
    (743 )       -    
 
Accrual -  2011 measurement period
    299              
 
Reversal - 2010 measurement period
    -         (1,783 )  
 
  Other
    (198 )       -    
 
Ending balance June 30,
  $ 729       $ 198    

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,
   
       
2011
     
2010
     
2011
     
2010
 
  Service Revenues and Sales
 
         
 
             
 
   
 
VITAS
    $ 243,095       $ 226,638       $ 478,768       $ 449,578    
 
Roto-Rooter
      90,265         88,357         185,510         174,230    
                                        Total     $ 333,360       $ 314,995       $ 664,278       $ 623,808    
                                             
  After-tax Earnings
 
                                       
 
VITAS
    $ 18,589       $ 18,281       $ 36,714       $ 36,719    
 
Roto-Rooter
      9,092         8,860         17,602         16,673    
                                        Total       27,681         27,141         54,316         53,392    
 
Corporate
      (7,395 )       (8,286 )       (15,929 )       (15,179 )  
  Net income     $ 20,286       $ 18,855       $ 38,387       $ 38,213    

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

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

   
Net Income
   
For the Three Months Ended
June 30,
 
Income
   
Shares
   
Earnings per
Share
   
2011
                   
Earnings
  $ 20,286       21,115     $ 0.96    
Dilutive stock options
    -       433            
Nonvested stock awards
    -       89            
     Diluted earnings
  $ 20,286       21,637     $ 0.94    
                           
2010
                         
Earnings
  $ 18,855       22,644     $ 0.83    
Dilutive stock options
    -       348            
Nonvested stock awards
    -       88            
     Diluted earnings
  $ 18,855       23,080     $ 0.82    
 
 
-7-

 
 
   
Net Income
   
For the Six Months Ended
June 30,
 
Income
   
Shares
   
Earnings per
Share
   
2011
                   
Earnings
  $ 38,387       21,067     $ 1.82    
Dilutive stock options
    -       433            
Nonvested stock awards
    -       86            
     Diluted earnings
  $ 38,387       21,586     $ 1.78    
                           
2010
                         
Earnings
  $ 38,213       22,608     $ 1.69    
Dilutive stock options
    -       319            
Nonvested stock awards
    -       85            
     Diluted earnings
  $ 38,213       23,012     $ 1.66    

For the three and six-month periods ended June 30, 2011, 970,000 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 periods ended June 30, 2010, 976,000 and 991,000 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.  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       23,877       -       23,877       (25,542 )       (1,665 )
$ 90.73       279,119       -       279,119       (298,594 )       (19,475 )
$ 100.73       483,684       -       483,684       (517,430 )       (33,746 )
$ 110.73       651,299       119,575       770,874       (696,741 )       74,133  
$ 120.73       791,148       316,987       1,108,135       (846,347 )       261,788  
$ 130.73       909,602       484,198       1,393,800       (973,065 )       420,735  
                                               
a) Represents the number of incremental shares that must be included in the calculation of fully diluted shares under U.S. GAAP.
 
b) Represents the number of incremental shares to be issued by the Company upon conversion of the 1.875% Convertible Notes, assuming concurrent settlement of the note hedges and warrants.
 
 
 
-8-

 

5.      Long-Term Debt
On March 1, 2011, we replaced our existing credit agreement with our Revolving Credit Facility (“2011 Credit Agreement”).  Terms of the 2011 Credit Agreement consist of a five-year, $350 million revolving credit facility.  This 2011 Credit Agreement has a floating interest rate that is currently LIBOR plus 175 basis points.  The 2011 Credit Agreement also includes a $150 million expansion feature.  Debt issuance costs associated with the existing credit agreement were not material.   The 2011 Credit Agreement contains the following quarterly financial covenants:

 
Description
 
Requirement
 
         
 
Leverage Ratio (Consolidated Indebtedness/Consolidated  Adj. EBITDA)
 
< 3.50 to 1.00
 
         
 
Fixed Charge Coverage Ratio (Consolidated Free Cash Flow/Consolidated Fixed Charges)
 
> 1.50 to 1.00
 
         
 
Annual Operating Lease Commitment
 
< $30.0 million
 
 
We are in compliance with all debt covenants as of June 30, 2011.  We have issued $29.5 million in standby letters of credit as of June 30, 2011 for insurance purposes.  Issued letters of credit reduce our available credit under the 2011 Credit Agreement.  As of June 30, 2011, we have approximately $320.5 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $150 million expansion feature.

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

The following amounts are included in our consolidated balance sheet related to the Notes:
 
     
June 30, 2011
   
December 31, 2010
 
 
Principal amount of convertible debentures
  $ 186,956       $ 186,956    
 
Unamortized debt discount
    (24,024 )       (27,748 )  
 
Carrying amount of convertible debentures
  $ 162,932       $ 159,208    
 
Additional paid in capital (net of tax)
  $ 31,310       $ 31,310    
 
The following amounts comprise interest expense included in our consolidated income statement (in thousands):

     
Three months ended 
June 30,
   
Six months ended 
June 30,
 
     
2011
   
2010
   
2011
   
2010
 
 
Cash interest expense
  $ 1,288     $ 1,083     $ 2,440     $ 2,152  
 
Non-cash amortization of debt discount
    1,878       1,755       3,724       3,481  
 
Amortization of debt costs
    295       161       541       318  
 
Total interest expense
  $ 3,461     $ 2,999     $ 6,705     $ 5,951  
 
The unamortized debt discount will be amortized using the effective interest method over the remaining life of the Notes.  The effective rate on the Notes after adoption of the standard is approximately 6.875%.
 
 
-9-

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

   
Three months ended 
June 30,
   
Six months ended 
June 30,
   
2011
     
2010
     
2011
     
2010
 
Market value gains/(losses) on assets held in deferred compensation trust
  $ 743       $ (83 )     $ 2,807       $ 105  
Gain /(loss) on disposal of property and equipment
    32         (58 )       11         (152 )
Interest income
    62         150         123         225  
Other - net
    (123 )       1         (125 )       18  
     Other income - net
  $ 714       $ 10       $ 2,816       $ 196  
 
7.      Stock-Based Compensation Plans
In January 2011, we met a stock price target of $62.00 under our Long-Term Incentive Plan.  On January 14, 2011, the Compensation/Incentive Committee of the Board of Directors (“CIC”) approved a stock grant of 41,100 shares (including 7,350 shares from the discretionary pool) and the related allocation to participants.  The cumulative compensation expense related to the stock grant was $3.0 million.
 
On February 18, 2011, the CIC approved a time-based LTIP award of 42,000 shares of restricted stock to certain key employees.  The restricted shares cliff vest four years from the date of issuance.  The cumulative compensation expense related to the restricted award is $2.7 million and will be recognized ratably over the 4 year vesting period.  We assumed no forfeitures in determining the cumulative compensation expense of the grant.
 
On February 18, 2011, the CIC approved a grant of 35,713 shares of restricted stock to certain key employees.  The restricted shares cliff vest four years from the date of issuance.  The cumulative compensation expense related to the restricted stock award is $2.3 million and will be recognized ratably over the 4 year vesting period.  We assumed no forfeitures in determining the cumulative compensation expense of the grant.
 
On February 18, 2011, the CIC approved a grant of 513,100 stock options to certain employees.  The stock options vest ratably over three years from the date of issuance.  The cumulative compensation expense related to the stock option grant is $9.8 million and will be recognized over the 3 year vesting period.  We used the Black-Scholes option valuation method to determine the cumulative compensation expense of the grant.

8.    Independent Contractor Operations
The Roto-Rooter segment sublicenses with 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, 2011 totaling $1.4 million (December 31, 2010 -$1.1 million).  In most cases these loans are fully or partially secured by equipment owned by the contractor.  The interest rates on the loans range from 0% to 8% per annum and the remaining terms of the loans range from 2 months to 5 years at June 30, 2011.  We recorded the following from our independent contractors (in thousands):

   
Three months ended
 June 30,
   
Six months ended 
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 6,528     $ 5,562     $ 13,039     $ 11,217  
Pretax profits
    3,402       2,721       6,389       5,104  
 
 
-10-

 
 
 9.  Pension and Retirement Plans
All of the Company’s plans that provide retirement and similar benefits are defined contribution plans.  These expenses include the impact of market gains and losses on assets held in deferred compensation plans.  Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans for the three and six months ended June 30, 2011 and 2010 are as follows (in thousands):
 
Three months ended
   
Six months ended
 
June 30,
   
June 30,
 
2011
   
2010
   
2011
   
2010
 
$ 2,871     $ 2,200     $ 6,954     $ 4,746  
 
10.      Legal and Regulatory Matters
Litigation
On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from Roto-Rooter and Chemed.  They also seek payment of penalties, interest and plaintiffs’ attorney fees.  We contest these allegations.  In September 2010, the Court conditionally certified a class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  In June 2011, the Court granted certification of a class of technicians in 14 states on certain claims. We are unable to estimate our potential liability, if any, with respect to this case.
 
VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White.  This case alleges failure to pay overtime and failure to provide meal and rest periods to California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  VITAS contests these allegations.  In December 2009, the trial court denied Plaintiffs’ motion for class certification.  In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims. We are unable to estimate our potential liability, if any, with respect to this case.
 
Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.

Regulatory Matters
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the Office of Inspector General (“OIG”) for the Department of Health and Human Services documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review.   In February 2010, VITAS received a companion civil investigative demand (“CID”) from the State of Texas Attorney General’s Office, seeking related documents. In September 2010, it received a second CID and a second administrative subpoena seeking related documents.  In April 2011, the U.S. Attorney provided the Company with a copy of a qui tam complaint filed under seal in U.S. District Court for the Northern District of Texas.  In June 2011, the U.S. Attorney provided the company with a partially unsealed second qui tam complaint filed under seal in the U.S. District Court for the Western District of Texas.  In June 2011, the U.S. Attorney also provided the Company with a partially unsealed third qui tam complaint filed under seal in the Northern District of Illinois, Eastern Division.  The complaint and all the filings in each of these actions remain under seal.  The U.S. Attorney has not decided whether to intervene in any of the actions.  We are conferring with the U.S. Attorney regarding the Company’s defenses to each complaint’s allegations.   We can neither predict the outcome of this investigation nor estimate our potential liability, if any.  We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
 
In April 2005, the OIG served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services.  As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review.  It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges.  During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us.  The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florida with prejudice in July 2007.  The plaintiffs appealed this dismissal, which the Court of Appeals affirmed.  The government continues to investigate the complaint’s allegations.  In March 2009, we received a letter from the government reiterating the basis of their investigation.  We are unable to estimate our potential liability, if any, with respect to this matter. We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
 
 
-11-

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

11.      Related Party Agreement
VITAS has pharmacy services agreements ("Agreements") with Omnicare, Inc. and its subsidiaries (“OCR”) whereby OCR provides specified pharmacy services for VITAS and its hospice patients in geographical areas served by both VITAS and OCR.  The Agreements renew automatically for one-year terms.  Either party may cancel the Agreements at the end of any term by giving 90 days prior written notice.  VITAS made purchases from OCR of $9.8 million and $8.9 million for the three months ended June 30, 2011 and 2010, respectively.  VITAS made purchases from OCR of $19.1 million and $17.5 million for the six months ended June 30, 2011 and 2010, respectively.
 
Mr. Joel Gemunder retired as President and CEO of OCR during the third quarter of 2010 and is a director of the Company.  Ms. Andrea Lindell is a director of both OCR and the Company.  We believe that the terms of the Agreements are no less favorable to VITAS than we could negotiate with an unrelated party.

12.  Cash Overdrafts and Cash Equivalents
Included in accounts payable at June 30, 2011 is cash overdrafts payable of $3.3 million (December 31, 2010 - $11.1 million).

From time to time throughout the year, we invest excess cash in money market funds or repurchase agreements directly with major commercial banks.  We do not physically hold the collateral for repurchase agreements, but the term is less than 10 days.  We closely monitor the creditworthiness of the institutions with which we invest our overnight funds and the quality of the collateral underlying those investments.  We had $30.1 million in cash equivalents as of   June 30, 2011.  There was $45.5 million in cash equivalents as of December 31, 2010.  The weighted average rate of return for our cash equivalents was 0.2% for June 30, 2011 and 0.1% for December 31, 2010.

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

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of June 30, 2011 (in thousands):
 
         
Fair Value Measure
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
Mutual fund investments of deferred compensation plans held in trust
  $ 33,066     $ 33,066     $ -     $ -  
Long-term debt
    162,932       195,593       -       -  

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


 
-12-

 

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

   
Three months ended 
June 30,
   
Six months ended 
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Shares repurchased
    -       114,900       341,513       146,275  
Weighted average price per share
  $ -     $ 54.99     $ 63.79     $ 53.32  
 
15.  Business Combinations
On April 29, 2011, our VITAS segment completed an acquisition of the operating assets of Family Comfort Hospice which is based in Alabama.  This acquisition adds three Central-Alabama locations serving ten counties to VITAS’ network of hospice programs.  We made no acquisitions within the Roto-Rooter segment.  The purchase price of this acquisition is allocated as follows (in thousands):

Working capital
  $ 382  
Identifiable intangible assets
    664  
Goodwill
    2,345  
Other assets and liabilities - net
    298  
    $ 3,689  

 
 
-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, 2011 and December 31, 2010 for the balance sheet, the three and six months ended June 30, 2011 and June 30, 2010 for the income statement and the six months ended June 30, 2011  and  June 30, 2010 for the statement of cash flows (dollars in thousands):
 
June 30, 2011
         
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
ASSETS
                                     
Cash and cash equivalents
  $ 53,191       $ (8,582 )     $ 6,332       $ -       $ 50,941  
Accounts receivable, less allowances
    904         116,492         885         -         118,281  
Intercompany receivables
    -         190,014         -         (190,014 )       -  
Inventories
    -         7,889         793         -         8,682  
Current deferred income taxes
    (1,291 )       15,202         141         -         14,052  
Prepaid income taxes
    4,081         (2,442 )       (339 )       -         1,300  
Prepaid expenses
    903         9,250         191         -         10,344  
     Total current assets
    57,788         327,823         8,003         (190,014 )       203,600  
Investments of deferred compensation plans
    -         -         33,066         -         33,066  
Properties and equipment, at cost, less accumulated depreciation
    12,043         66,916         2,512         -         81,471  
Identifiable intangible assets less accumulated amortization
    -         56,358         -         -         56,358  
Goodwill
    -         456,208         4,585         -         460,793  
Other assets
    8,262         4,433         2,630         -         15,325  
Investments in subsidiaries
    752,252         20,712         -         (772,964 )       -  
          Total assets
  $ 830,345       $ 932,450       $ 50,796       $ (962,978 )     $ 850,613  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                         
Accounts payable
  $ (6 )     $ 38,994       $ 471       $ -       $ 39,459  
Intercompany payables
    182,383         -         7,631         (190,014 )       -  
Income taxes
    504         2,354         (762 )       -         2,096  
Accrued insurance
    228         34,915         -         -         35,143  
Accrued compensation
    1,996         41,098         539         -         43,633  
Other current liabilities
    1,923         12,918         131         -         14,972  
      Total current liabilities
    187,028         130,279         8,010         (190,014 )       135,303  
Deferred income taxes
    (11,774 )       45,482         (9,655 )       -         24,053  
Long-term debt
    162,932         -         -         -         162,932  
Deferred compensation liabilities
    -         -         32,255         -         32,255  
Other liabilities
    2,825         3,328         583         -         6,736  
Stockholders' equity
    489,334         753,361         19,603         (772,964 )       489,334  
     Total liabilities and stockholders' equity
  $ 830,345       $ 932,450       $ 50,796       $ (962,978 )     $ 850,613  

 
December 31, 2010
         
Guarantor
     
Non-Guarantor
     
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
ASSETS
                                     
Cash and cash equivalents
  $ 45,324       $ (1,571 )     $ 6,164       $ -       $ 49,917  
Accounts receivable, less allowances
    802         111,716         481         -         112,999  
Intercompany receivables
    -         172,426         -         (172,426 )       -  
Inventories
    -         7,191         537         -         7,728  
Current deferred income taxes
    (688 )       15,666         120         -         15,098  
Prepaid income taxes
    2,787         (1,809 )       (208 )       -         770  
Prepaid expenses
    782         9,244         259         -         10,285  
     Total current assets
    49,007         312,863         7,353         (172,426 )       196,797  
Investments of deferred compensation plans
    -         -         28,304         -         28,304  
Properties and equipment, at cost, less accumulated depreciation
    12,513         64,743         2,036         -         79,292  
Identifiable intangible assets less accumulated amortization
    -         56,410         -         -         56,410  
Goodwill
    -         453,864         4,479         -         458,343  
Other assets
    6,049         2,791         2,175         -         11,015  
Investments in subsidiaries
    716,815         18,696         -         (735,511 )       -  
          Total assets
  $ 784,384       $ 909,367       $ 44,347       $ (907,937 )     $ 830,161  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                         
Accounts payable
  $ 4,924       $ 50,457       $ 448       $ -       $ 55,829  
Intercompany payables
    167,067         -         5,359         (172,426 )       -  
Income taxes
    (7,190 )       8,745         (394 )       -         1,161  
Accrued insurance
    906         35,586         -         -         36,492  
Accrued compensation
    4,235         35,016         468         -         39,719  
Other current liabilities
    1,549         13,447         1,145         -         16,141  
      Total current liabilities
    171,491         143,251         7,026         (172,426 )       149,342  
Deferred income taxes
    (11,356 )       45,168         (8,727 )       -         25,085  
Long-term debt
    159,208         -         -         -         159,208  
Deferred compensation liabilities
    -         -         27,851         -         27,851  
Other liabilities
    2,992         3,123         511         -         6,626  
Stockholders' equity
    462,049         717,825         17,686         (735,511 )       462,049  
     Total liabilities and stockholders' equity
  $ 784,384       $ 909,367       $ 44,347       $ (907,937 )     $ 830,161  

 
 
-14-

 
 
For the three months ended 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 three months ended June 30, 2010
         
Guarantor
     
Non-Guarantor
     
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 Continuing Operations
                                     
 Service revenues and sales
  $ -       $ 308,825       $ 6,170       $ -       $ 314,995  
 Cost of services provided and goods sold
    -         220,455         3,247         -         223,702  
 Selling, general and administrative expenses
    6,508         42,302         1,146         -         49,956  
 Depreciation
    244         5,749         201         -         6,194  
 Amortization
    366         921         -         -         1,287  
      Total costs and expenses
    7,118         269,427         4,594         -         281,139  
      Income/ (loss) from operations
    (7,118 )       39,398         1,576         -         33,856  
 Interest expense
    (2,888 )       (111 )       -         -         (2,999 )
 Other (expense)/income - net
    3,670         (3,562 )       (98 )       -         10  
      Income/ (loss) before income taxes
    (6,336 )       35,725         1,478         -         30,867  
 Income tax (provision)/ benefit
    2,150         (13,567 )       (595 )       -         (12,012 )
 Equity in net income of subsidiaries
    23,041         994         -         (24,035 )       -  
 Net income
  $ 18,855       $ 23,152       $ 883       $ (24,035 )     $ 18,855  
 
 
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  

For the six months ended June 30, 2010
         
Guarantor
     
Non-Guarantor
     
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 Continuing Operations
                                     
 Service revenues and sales
  $ -       $ 611,827       $ 11,981       $ -       $ 623,808  
 Cost of services provided and goods sold
    -         436,655         6,184         -         442,839  
 Selling, general and administrative expenses
    12,206         83,619         2,669         -         98,494  
 Depreciation
    380         10,882         401         -         11,663  
 Amortization
    696         1,815         -         -         2,511  
      Total costs and expenses
    13,282         532,971         9,254         -         555,507  
      Income/ (loss) from operations
    (13,282 )       78,856         2,727         -         68,301  
 Interest expense
    (5,739 )       (212 )       -         -         (5,951 )
 Other (expense)/income - net
    7,291         (7,199 )       104         -         196  
      Income/ (loss) before income taxes
    (11,730 )       71,445         2,831         -         62,546  
 Income tax (provision)/ benefit
    3,894         (27,106 )       (1,121 )       -         (24,333 )
 Equity in net income of subsidiaries
    46,049         1,820         -         (47,869 )       -  
 Net income
  $ 38,213       $ 46,159       $ 1,710       $ (47,869 )     $ 38,213  

 
-15-

 
 
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:
                                     
  Change in cash overdrafts payable
    698         (8,512 )       -         (7,814 )
  Change in intercompany accounts
    26,733         (28,804 )       2,071         -  
  Dividends paid to shareholders
    (5,967 )       -         -         (5,967 )
  Purchases of treasury stock
    (25,438 )       -         (44 )       (25,482 )
  Proceeds from exercise of stock options
    7,698         -         -         7,698  
  Realized excess tax benefit on share based compensation
    3,339         -         -         3,339  
  Debt issuance cost
    (2,723 )       -         -         (2,723 )
  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  

 
For the six months ended June 30, 2010
         
Guarantor
     
Non-Guarantor
       
   
Parent
   
Subsidiaries
   
Subsidiaries
   
Consolidated
 Cash Flow from Operating Activities:
                             
 Net cash provided/(used) by operating activities
  $ (3,737 )     $ 24,585       $ (571 )     $ 20,277  
 Cash Flow from Investing Activities:
                                     
  Capital expenditures
    (10 )       (11,454 )       (478 )       (11,942 )
 Business combinations, net of cash acquired
    -         (30 )       -         (30 )
  Other uses - net
    (89 )       (88 )       (20 )       (197 )
       Net cash used by investing activities
    (99 )       (11,572 )       (498 )       (12,169 )
 Cash Flow from Financing Activities:
                                     
  Change in cash overdrafts payable
    1,338         (2,652 )       -         (1,314 )
  Change in intercompany accounts
    9,830         (11,478 )       1,648         -  
  Dividends paid to shareholders
    (5,481 )       -         -         (5,481 )
  Purchases of treasury stock
    (10,149 )       -         -         (10,149 )
  Proceeds from exercise of stock options
    3,475         -         -         3,475  
  Realized excess tax benefit on share based compensation
    702         1,100         -         1,802  
  Other sources - net
    -         -         223         223  
       Net cash provided/ (used) by financing activities
    (285 )       (13,030 )       1,871         (11,444 )
 Net increase/(decrease) in cash and cash equivalents
    (4,121 )       (17 )       802         (3,336 )
 Cash and cash equivalents at beginning of year
    109,331         (1,221 )       4,306         112,416  
 Cash and cash equivalents at end of period
  $ 105,210       $ (1,238 )     $ 5,108       $ 109,080  

 
-16-

 

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

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

The following is a summary of the key operating results for the three and six months ended June 30, 2011 and 2010 (in thousands except per share amounts):

   
Three months ended June 30,
   
Six months ended June 30,
   
   
2011
   
2010
   
2011
   
2010
   
Service revenues and sales
  $ 333,360     $ 314,995     $ 664,278     $ 623,808    
Net income
  $ 20,286     $ 18,855     $ 38,387     $ 38,213    
Diluted EPS
  $ 0.94     $ 0.82     $ 1.78     $ 1.66    
Adjusted EBITDA
  $ 46,657     $ 44,886     $ 92,275     $ 87,957    
Adjusted EBITDA as a % of revenue
    14.0 %     14.2 %     13.9 %     14.1 %  
 
EBITDA and Adjusted EBITDA are not measures derived in accordance with GAAP.  We use Adjusted EBITDA as a measure of earnings for our LTIP awards.  We provide EBITDA and Adjusted EBITDA to help readers evaluate our operating results, compare our operating performance with that of similar companies that have different capital structures and help evaluate our ability to meet future debt service, capital expenditure and working capital requirements.  Our EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP.  A reconciliation of our net income to our EBITDA and Adjusted EBITDA is presented on pages 28 and 29.

For the three months ended June 30, 2011, the increase in consolidated service revenues and sales was driven by a 7.3% increase at VITAS and a 2.2% increase at Roto-Rooter.  The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 5.8%, driven by an increase in admissions of 6.0%, combined with Medicare price increases of approximately 2.1%.  Roto-Rooter was driven by a 1.5% price and mix shift increase and a 0.04% increase in job count. When excluding the impact of changes in the number of Company-owned branches, unit-for-unit job count at Roto-Rooter decreased 1.6% during the quarter. The remaining Roto-Rooter revenue increase is related mainly to our independent contractor operations. Consolidated net income increased 7.6% driven mainly by the increase in revenue.  Diluted EPS increased 14.6% as a result of the increase in net income and a lower number of shares outstanding.  Adjusted EBITDA as a percent of revenue was virtually flat when compared with the prior year. See page 30 for additional VITAS operating metrics.
 
For the six months ended June 30, 2011, the increase in consolidated service revenues and sales was driven by a 6.5% increase at VITAS and a 6.5% increase at Roto-Rooter.  The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 5.3%, driven by an increase in admissions of 6.2%, combined with Medicare price increases of approximately 2.1%.  Roto-Rooter was driven by a 3.4% price and mix shift increase and a 3.0% increase in job count. Consolidated net income was essential flat over prior year.  Diluted EPS increased 7.2% as a result of a lower number of shares outstanding.  Adjusted EBITDA as a percent of revenue was virtually flat when compared with the prior year.
 
VITAS expects to achieve full-year 2011 revenue growth, prior to Medicare cap, of 7.5% to 8.5%.  Admissions are estimated to increase approximately 6.5% to 7.0%.  Adjusted EBITDA margin prior to Medicare cap is estimated to be 15.3% to 15.8%.  Roto-Rooter expects full-year 2011 revenue growth of 6.5% to 8.5%.  The revenue estimate is a result of increased pricing of 3.0%, a favorable mix shift to higher revenue jobs, with job count growth estimated at 0.0% to 2.0%.  Adjusted EBITDA margin for 2011 is estimated to be in the range of 17.0% to 18.0%.  We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.
 
 
-17-

 
 
Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2010 to June 30, 2011 include the following:
 
• 
A $5.3 million increase in accounts receivable primarily at VITAS, related to timing of receipts from Medicare.
• 
A $16.4 million decrease in accounts payable related to timing of payments and a reduction in cash overdrafts payable.
• 
A $3.9 million increase in accrued compensation related to timing of payroll and bonus payments.
 
Net cash provided by operating activities increased $30.9 million due primarily to the change in accounts receivable offset by the change in accounts payable and other current liabilities. Management continually evaluates cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of available capital resources.
 
We have issued $29.5 million in standby letters of credit as of June 30, 2011, for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of June 30, 2011, we have approximately $320.5 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $150 million expansion feature. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

Commitments and Contingencies
Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly.  We are in compliance with all financial and other debt covenants as of June 30, 2011 and anticipate remaining in compliance throughout 2011.
 
On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from Roto-Rooter and Chemed.  They also seek payment of penalties, interest and plaintiffs’ attorney fees.  We contest these allegations.  In September 2010, the Court conditionally certified a class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  In June 2011, the Court granted certification of a class of technicians in 14 states on certain claims. We are unable to estimate our potential liability, if any, with respect to this case.
 
VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White.  This case alleges failure to pay overtime and failure to provide meal and rest periods to California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  VITAS contests these allegations.  In December 2009, the trial court denied Plaintiffs’ motion for class certification.  In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims. We are unable to estimate our potential liability, if any, with respect to this case.

Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.
 
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the Office of Inspector General (“OIG”) for the Department of Health and Human Services documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review.   In February 2010, VITAS received a companion civil investigative demand (“CID”) from the State of Texas Attorney General’s Office, seeking related documents. In September 2010, it received a second CID and a second administrative subpoena seeking related documents.  In April 2011, the U.S. Attorney provided the Company with a copy of a qui tam complaint filed under seal in U.S. District Court for the Northern District of Texas.  In June 2011, the U.S. Attorney provided the company with a partially unsealed second qui tam complaint filed under seal in the U.S. District Court for the Western District of Texas.  In June 2011, the U.S. Attorney also provided the Company with a partially unsealed third qui tam complaint filed under seal in the Northern District of Illinois, Eastern Division.  The complaint and all the filings in each of these actions remain under seal.  The U.S. Attorney has not decided whether to intervene in any of the actions.  We are conferring with the U.S. Attorney regarding the Company’s defenses to each complaint’s allegations.   We can neither predict the outcome of this investigation nor estimate our potential liability, if any.  We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
 
 
-18-

 
 
In April 2005, the OIG served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services.  As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review.  It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges.  During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us.  The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florida with prejudice in July 2007.  The plaintiffs appealed this dismissal, which the Court of Appeals affirmed.  The government continues to investigate the complaint’s allegations.  In March 2009, we received a letter from the government reiterating the basis of their investigation.  We are unable to estimate our potential liability, if any, with respect to this matter. We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
 
The costs to comply with either of these investigations were not material for any period presented.  Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

Results of Operations
Three months ended June 30, 2011 versus  2010 - Consolidated Results
 
Our service revenues and sales for the second quarter of 2011 increased 5.8% versus services and sales revenues for the second quarter of 2010.  Of this increase, $16.5 million was attributable to VITAS and $1.9 million was attributable to Roto-Rooter.  The following chart shows the components of those changes (dollar amounts in thousands):
 
   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
           
          Routine homecare
  $ 13,555       8.3  
          Continuous care
    2,111       5.7  
          General inpatient
    1,194       4.6  
          Medicare cap
    (403 )     -1151.4  
Roto-Rooter
               
          Plumbing
    852       2.0  
          Drain cleaning
    425       1.3  
          Other
    631       5.0  
                                      Total
  $ 18,365       5.8  
 
       The increase in VITAS’ revenues for the second quarter of 2011 versus the second quarter of 2010 was a result of increased ADC of 5.8% driven by an increase in admissions of 6.0%, combined with Medicare reimbursement rate increases of approximately 2.1%.  The ADC increase was driven by a 6.0% increase in routine homecare, an increase of 3.2% in general inpatient and an increase of a 3.1% in continuous care. In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.
 
The increase in plumbing revenues for the second quarter of 2011 versus 2010 is attributable to a 2.1% increase in the average price per job and a 0.2% increase in the number of jobs performed.  The increase in the plumbing price per job was a result of favorable job mix shift to more expensive jobs such as excavation.  Our excavation job count increased by 7.9% compared to 2010.  On average, the price per job for our excavation jobs is approximately 5 times greater than the price per job of other plumbing jobs.  Drain cleaning revenues for the second quarter of 2011 versus 2010 reflect a 1.2% increase in price per job and a 0.1% increase in the number of jobs performed.  The increase in other revenues is attributable to an increase in our independent contractor operations.
 
The consolidated gross margin was 28.1% in the second quarter of 2011 as compared with 29.0% in the second quarter of 2010.  On a segment basis, VITAS’ gross margin was 21.9% in the second quarter of 2011 and 22.7% in the second quarter of 2010.  The decrease in VITAS’ gross margin is attributable to a Medicare cap accrual in 2011 versus an Medicare cap reversal in 2010, higher labor costs for admissions and Medicare compliance personnel and the opening of inpatient units which carry significant one time start-up costs as capacity begins to ramp-up.  The Roto-Rooter segment’s gross margin was 45.0% for the second quarter of 2011 as compared with 45.2% for the second quarter of 2010.
 
 
 
-19-

 
 
Selling, general and administrative expenses (“SG&A”) for the second quarter of 2011 and 2010 comprise (in thousands):
 
 
 
Three months ended 
June 30,
 
   
2011
   
2010
 
SG&A expenses before long-term incentive
             
    compensation and the impact of market gains and
             
    losses of deferred compensation plans
  $ 49,681     $ 48,240    
Long-term incentive compensation
    -       1,799    
Impact of market value gains on liabilities held in
                 
    deferred compensation trusts
    743       (83 )  
     Total SG&A expenses
  $ 50,424     $ 49,956    

Normal salary increases and revenue related expense increases between periods accounts for the 3.0% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans.

Depreciation expense increased 2.6% to $6.4 million when compared to the second quarter of 2010 due mainly to the installation of patient software at our VITAS segment during the second quarter of 2010.

 Other income for the second quarter of 2011 and 2010 comprise (in thousands):
 
 
   
Three months ended 
June 30,
 
   
2011
   
2010
 
Market value gains/(losses) on assets held in deferred
               
   compensation trusts
  $ 743       $ (83 )  
Interest income
    62         150    
Gain/(loss) on disposal of property and equipment
    32         (58 )  
Other
    (123 )       1    
     Total other income
  $ 714       $ 10    

Our effective income tax rate decreased to 38.7% in the second quarter of 2011 from 38.9% when compared with the second quarter of 2010.

Net income for both periods included the following after-tax items/adjustments that reduced after-tax earnings (in thousands):
 
   
Three months ended
June 30,
   
2011
   
2010
VITAS
             
          Legal expenses of OIG investigation
  $ (301 )     $ (74 )
          Acquisition expenses
    (31 )       -  
Roto-Rooter
                 
          Expenses of class action litigation
    (113 )       (63 )
          Acquisition expenses
    8         -  
Corporate
                 
          Stock option expense
    (1,620 )       (1,484 )
          Noncash impact of change in accounting for convertible debt
    (1,155 )       (1,068 )
          Long-term incentive compensation
    -         (1,124 )
Total
  $ (3,212 )     $ (3,813 )
 
 
 
-20-

 
 
Three months ended June 30, 2011 versus 2010 - Segment Results

The change in after-tax earnings for the second quarter of 2011 versus the second quarter of 2010 is due to (dollars in thousands):

   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
  $ 308       1.7  
Roto-Rooter
    232       2.6  
Corporate
    891       10.8  
    $ 1,431       7.6  

Six months ended June 30, 2011 versus  2010 - Consolidated Results
 
Our service revenues and sales for the first six months of 2011 increased 6.5% versus services and sales revenues for the first six months of 2010.  Of this increase, $29.2 million was attributable to VITAS and $11.3 million was attributable to Roto-Rooter.  The following chart shows the components of those changes (dollar amounts in thousands):
 
   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
           
          Routine homecare
  $ 24,981       7.8  
          Continuous care
    3,062       4.1  
          General inpatient
    2,288       4.4  
          Medicare cap
    (1,141 )     -64.0  
Roto-Rooter
               
          Plumbing
    6,979       8.6  
          Drain cleaning
    2,518       3.7  
          Other
    1,783       7.2  
                    Total
  $ 40,470       6.5  
 
The increase in VITAS’ revenues for the first six months of 2011 versus the first six months of 2010 was a result of increased ADC of 5.3% driven by an increase in admissions of 6.2%, combined with Medicare reimbursement rate increases of approximately 2.1%.  The ADC increase was driven by a 5.6% increase in routine homecare, an increase of 2.5% in general inpatient and an increase of 1.3% in continuous care. In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.
 
The increase in plumbing revenues for the first six months of 2011 versus 2010 is attributable to a 5.5% increase in the average price per job and a 3.4% increase in the number of jobs performed.  The increase in the plumbing price per job was a result of favorable job mix shift to more expensive jobs such as excavation.  Our excavation job count increased by 18.9% compared to 2010.  On average, the price per job for our excavation jobs is approximately 5 times greater than the price per job of other plumbing jobs.  Drain cleaning revenues for the second quarter of 2011 versus 2010 reflect a 2.9% increase in job count and a 0.9% increase in the average price per job.  The increase in other revenues is attributable to an increase in our independent contractor operations and an increase in product sales.
 
The consolidated gross margin was 28.2% in the first six months of 2011 as compared with 29.0% in the first six months of 2010.  On a segment basis, VITAS’ gross margin was 21.8% in the first six months of 2011 and 22.7% in the first six months of 2010.  The decrease in VITAS’ gross margin is attributable to a smaller Medicare cap reversal in 2011, higher labor costs for admissions and Medicare compliance personnel and the opening of inpatient units which carry significant one time start-up costs as capacity begins to ramp-up.  The Roto-Rooter segment’s gross margin was 44.6% for the first six months of 2011 as compared with 45.2% for the first six months of 2010.  The decrease in Roto-Rooter’s gross margin was attributable to continued mix shift to excavation which has higher revenue per job but a slightly lower gross margin percentage per job.  An unfavorable adjustment to casualty insurance also contributed to the margin decline.
 
 
 
-21-

 
 
Selling, general and administrative expenses (“SG&A”) for the first six months of 2011 and 2010 comprise (in thousands):
 
 
 
Six months ended 
June 30,
 
   
2011
   
2010
 
SG&A expenses before long-term incentive
           
    compensation and the impact of market gains and
           
    losses of deferred compensation plans
  $ 100,259     $ 96,590  
Long-term incentive compensation
    3,012       1,799  
Impact of market value gains on liabilities held in
               
    deferred compensation trusts
    2,807       105  
     Total SG&A expenses
  $ 106,078     $ 98,494  
 
Normal salary increases and revenue related expense increases between periods accounts for the 3.8% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans.
 
Depreciation expense increased 8.4% to $12.6 million for the first six months of 2011 due mainly to the installation of patient capture software at our VITAS segment in the second quarter of 2010.

 Other income for the second quarter of 2011 and 2010 comprise (in thousands):
 
   
Six months ended 
June 30,
   
2011
   
2010
Market value gains on assets held in deferred
             
   compensation trusts
  $ 2,807       $ 105  
Interest income
    123         225  
Gain/(loss) on disposal of property and equipment
    11         (152 )
Other
    (125 )       18  
     Total other income
  $ 2,816       $ 196  
 
Our effective income tax rate decreased to 38.6% in the first six months of 2011 from 38.9% when compared with the first six months of 2010.

Net income for both periods included the following after-tax items/adjustments that reduced after-tax earnings (in thousands):
 
   
Six months ended
June 30,
   
2011
   
2010
VITAS
             
          Legal expenses of OIG investigation
  $ (618 )     $ (173 )
          Acquisition expenses
    (71 )       -  
Roto-Rooter
                 
          Expenses of class action litigation
    (414 )       (63 )
          Acquisition expenses
    4         -  
Corporate
                 
          Stock option expense
    (2,843 )       (2,782 )
          Noncash impact of change in accounting for convertible debt
    (2,287 )       (2,115 )
          Long-term incentive compensation
    (1,880 )       (1,124 )
Total
  $ (8,109 )     $ (6,257 )
 
 
 
-22-

 

Six months ended June 30, 2011 versus 2010 - Segment Results

The change in after-tax earnings for the first six months of 2011 versus the first six months of 2010 is due to (dollars in thousands):

   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
  $ (5 )       0.0  
Roto-Rooter
    929         5.6  
Corporate
    (750 )       -4.9  
    $ 174         0.5  


 
 
-23-

 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2011
 (in thousands)(unaudited)
                         
                       
   
VITAS
   
Roto-Rooter
   
Corporate
   
Chemed
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):
                 
                             
     
VITAS
     
Roto-Rooter
     
Corporate
     
Chemed
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 )
                                 
                                 
               
After-tax benefit/(cost):
   
VITAS
     
Roto-Rooter
     
Corporate
     
Consolidated
 
     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 )
 
 
-24-

 
 
 
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2010
 (in thousands)(unaudited)
                         
                       
   
VITAS
   
Roto-Rooter
     
Corporate
     Chemed
Consolidated
 
 2010 (a)
                       
 Service revenues and sales
  $ 226,638     $ 88,357     $ -     $ 314,995  
 Cost of services provided and goods sold
    175,257       48,445       -       223,702  
 Selling, general and administrative expenses
    18,404       24,192       7,360       49,956  
 Depreciation
    4,103       1,950       141       6,194  
 Amortization
    788       132       367       1,287  
 Total costs and expenses
    198,552       74,719       7,868       281,139  
 Income/(loss) from operations
    28,086       13,638       (7,868 )     33,856  
 Interest expense
    (48 )     (64 )     (2,887 )     (2,999 )
 Intercompany interest income/(expense)
    1,350       773       (2,123 )     -  
 Other income/(expense)—net
    45       14       (49 )     10  
 Income/(expense) before income taxes
    29,433       14,361       (12,927 )     30,867  
 Income taxes
    (11,152 )     (5,501 )     4,641       (12,012 )
 Net income/(loss)
  $ 18,281     $ 8,860     $ (8,286 )   $ 18,855  
                                 
                                 
(a) The following amounts are included in net income (in thousands):
                 
                             
     
VITAS
     
Roto-Rooter
     
Corporate
     
Chemed
Consolidated
 
Pretax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (2,346 )   $ (2,346 )
     Long-term incentive compensation
    -       -       (1,799 )     (1,799 )
     Noncash impact of accounting for convertible debt
    -       -       (1,688 )     (1,688 )
     Expenses of class action litigation
    -       (105 )     -       (105 )
     Legal expenses of OIG investigation
    (118 )     -       -       (118 )
          Total
  $ (118 )   $ (105 )   $ (5,833 )   $ (6,056 )
                                 
                                 
               
     
VITAS
     
Roto-Rooter
     
Corporate
     
Consolidated
 
After-tax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (1,484 )   $ (1,484 )
     Long-term incentive compensation
    -       -       (1,124 )     (1,124 )
     Noncash impact of accounting for convertible debt
    -       -       (1,068 )     (1,068 )
     Expenses of class action litigation
    -       (63 )     -       (63 )
     Legal expenses of OIG investigation
    (74 )     -       -       (74 )
          Total
  $ (74 )   $ (63 )   $ (3,676 )   $ (3,813 )
 
-25-

 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2011
 (in thousands)(unaudited)
                         
                       
             
     
VITAS
     
Roto-Rooter
     
Corporate
   
Chemed
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):
                 
                             
     
VITAS
     
Roto-Rooter
     
Corporate
     
Chemed
Consolidated
 
Pretax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (4,495 )   $ (4,495 )
     Long-term incentive compensation
    -       -       (3,012 )     (3,012 )
     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 )
                                 
                                 
     
VITAS
     
Roto-Rooter
     
Corporate
     
Consolidated
 
After-tax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (2,843 )   $ (2,843 )
     Long-term incentive compensation
    -       -       (2,287 )     (2,287 )
     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 )
 
-26-

 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2010
 (in thousands)(unaudited)
                         
                       
             
                         
 2010 (a)
   
VITAS
     
Roto-Rooter
     
Corporate
     Chemed
Consolidated
 
 Service revenues and sales
  $ 449,578     $ 174,230     $ -     $ 623,808  
 Cost of services provided and goods sold
    347,350       95,489       -       442,839  
 Selling, general and administrative expenses
    36,550       48,950       12,994       98,494  
 Depreciation
    7,587       3,901       175       11,663  
 Amortization
    1,559       255       697       2,511  
 Total costs and expenses
    393,046       148,595       13,866       555,507  
 Income/(loss) from operations
    56,532       25,635       (13,866 )     68,301  
 Interest expense
    (80 )     (132 )     (5,739 )     (5,951 )
 Intercompany interest income/(expense)
    2,639       1,475       (4,114 )     -  
 Other income/(expense)—net
    6       24       166       196  
 Income/(expense) before income taxes
    59,097       27,002       (23,553 )     62,546  
 Income taxes
    (22,378 )     (10,329 )     8,374       (24,333 )
 Net income/(loss)
  $ 36,719     $ 16,673     $ (15,179 )   $ 38,213  
                                 
                                 
(a) The following amounts are included in net income (in thousands):
                 
                             
     
VITAS
     
Roto-Rooter
     
Corporate
     
Chemed
Consolidated
 
Pretax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (4,397 )   $ (4,397 )
     Long-term incentive compensation
    -       -       (1,799 )     (1,799 )
     Noncash impact of accounting for convertible debt
    -       -       (3,343 )     (3,343 )
     Expenses of class action litigation
    -       (105 )     -       (105 )
     Legal expenses of OIG investigation
    (278 )     -       -       (278 )
          Total
  $ (278 )   $ (105 )   $ (9,539 )   $ (9,922 )
                                 
                                 
     
VITAS
     
Roto-Rooter
     
Corporate
     
Consolidated
 
After-tax benefit/(cost):
                               
     Stock option expense
  $ -     $ -     $ (2,782 )   $ (2,782 )
     Long-term incentive compensation
    -       -       (2,115 )     (2,115 )
     Noncash impact of accounting for convertible debt
    -       -       (1,124 )     (1,124 )
     Expenses of class action litigation
    -       (63 )     -       (63 )
     Legal expenses of OIG investigation
    (173 )     -       -       (173 )
          Total
  $ (173 )   $ (63 )   $ (6,021 )   $ (6,257 )
 
-27-

 
 
Consolidating Summary and Reconciliation of Adjusted EBITDA
                         
Chemed Corporation and Subsidiary Companies
                       
(in thousands)
                   
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  
                                 
                           
Chemed
 
 For the three months ended June 30, 2010
VITAS
 
Roto-Rooter
Corporate
 
Consolidated
 
                                 
 Net income/(loss)
  $ 18,281     $ 8,860     $ (8,286 )   $ 18,855  
 Add/(deduct):
                               
 Interest expense
    48       64       2,887       2,999  
 Income taxes
    11,152       5,501       (4,641 )     12,012  
 Depreciation
    4,103       1,950       141       6,194  
 Amortization
    788       132       367       1,287  
 EBITDA
    34,372       16,507       (9,532 )     41,347  
 Add/(deduct):
                               
 Legal expenses of OIG investigation
    118       -       -       118  
 Long-term incentive compensation
    -       -       1,799       1,799  
 Expenses of class action litigation
    -       105       -       105  
 Stock option expense
    -       -       2,346       2,346  
 Advertising cost adjustment
    -       (679 )     -       (679 )
 Interest income
    (90 )     (25 )     (35 )     (150 )
 Intercompany interest income/(expense)
    (1,350 )     (773 )     2,123       -  
 Adjusted EBITDA
  $ 33,050     $ 15,135     $ (3,299 )   $ 44,886  
 
-28-

 

Consolidating Summary and Reconciliation of Adjusted EBITDA
                         
Chemed Corporation and Subsidiary Companies
                       
(in thousands)
                   
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  
                                 
                           
Chemed
 
 For the six months ended June 30, 2010
VITAS
 
Roto-Rooter
Corporate
 
Consolidated
 
                                 
 Net income/(loss)
  $ 36,719     $ 16,673     $ (15,179 )   $ 38,213  
 Add/(deduct):
                               
 Interest expense
    80       132       5,739       5,951  
 Income taxes
    22,378       10,329       (8,374 )     24,333  
 Depreciation
    7,587       3,901       175       11,663  
 Amortization
    1,559       255       697       2,511  
 EBITDA
    68,323       31,290       (16,942 )     82,671  
 Add/(deduct):
                               
 Legal expenses of OIG investigation
    278       -       -       278  
 Expenses of class action litigation
    -       105       -       105  
 Long-term incentive compensation
    -       -       1,799       1,799  
 Stock option expense
    -       -       4,397       4,397  
 Advertising cost adjustment
    -       (1,068 )     -       (1,068 )
 Interest income
    (135 )     (27 )     (63 )     (225 )
 Intercompany interest income/(expense)
    (2,639 )     (1,475 )     4,114       -  
 Adjusted EBITDA
  $ 65,827     $ 28,825     $ (6,695 )   $ 87,957  
 
-29-

 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
OPERATING STATISTICS FOR VITAS SEGMENT
(unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
OPERATING STATISTICS
 
2011
   
2010
   
2011
   
2010
 
Net revenue ($000)
                       
Homecare
  $ 177,067     $ 163,512     $ 345,719     $ 320,738  
Inpatient
    27,183       25,989       54,569       52,281  
Continuous care
    39,213       37,102       77,838       74,776  
Total before Medicare cap allowance
  $ 243,463     $ 226,603     $ 478,126     $ 447,795  
Medicare cap allowance
    (368 )     35       642       1,783  
Total
  $ 243,095     $ 226,638     $ 478,768     $ 449,578  
Net revenue as a percent of total
                               
     before Medicare cap allowance
                               
Homecare
    72.7 %     72.1 %     72.2 %     71.6 %
Inpatient
    11.2       11.5       11.4       11.7  
Continuous care
    16.1       16.4       16.4       16.7  
Total before Medicare cap allowance
    100.0       100.0       100.0       100.0  
Medicare cap allowance
    (0.2 )     -       0.1       0.4  
Total
    99.8 %     100.0 %     100.1 %     100.4 %
Average daily census (days)
                               
Homecare
    9,229       8,345       9,031       8,229  
Nursing home
    3,034       3,223       3,034       3,193  
Routine homecare
    12,263       11,568       12,065       11,422  
Inpatient
    447       433       449       438  
Continuous care
    601       583       602       594  
Total
    13,311       12,584       13,116       12,454  
                                 
Total Admissions
    15,294       14,423       31,092       29,267  
Total Discharges
    14,885       14,132       30,419       28,685  
Average length of stay (days)
    77.1       77.4       78.0       76.6  
Median length of stay (days)
    14.0       14.0       14.0       14.0  
ADC by major diagnosis
                               
Neurological
    34.2 %     32.8 %     34.2 %     32.8 %
Cancer
    17.7       18.1       17.8       18.5  
Cardio
    11.5       12.0       11.7       11.9  
Respiratory
    6.9       6.5       6.8       6.6  
Other
    29.7       30.6       29.5       30.2  
Total
    100.0 %     100.0 %     100.0 %     100.0 %
Admissions by major diagnosis
                               
Neurological
    19.4 %     18.5 %     19.5 %     18.6 %
Cancer
    32.8       33.8       32.2       33.8  
Cardio
    10.8       11.2       11.0       11.4  
Respiratory
    8.5       8.5       8.8       8.5  
Other
    28.5       28.0       28.5       27.7  
Total
    100.0 %     100.0 %     100.0 %     100.0 %
Direct patient care margins
                               
Routine homecare
    52.4 %     52.1 %     51.7 %     51.6 %
Inpatient
    13.3       12.3       13.1       13.7  
Continuous care
    20.2       21.2       20.4       21.0  
Homecare margin drivers (dollars per patient day)
                               
Labor costs
  $ 53.23     $ 52.52     $ 54.28     $ 53.21  
Drug costs
    8.21       7.67       8.08       7.72  
Home medical equipment
    6.66       7.26       6.66       7.38  
Medical supplies
    2.83       2.46       2.79       2.45  
Inpatient margin drivers (dollars per patient day)
                               
Labor costs
  $ 311.26     $ 301.81     $ 308.97     $ 294.27  
Continuous care margin drivers (dollars per patient day)
                               
Labor costs
  $ 550.40     $ 530.05     $ 547.29     $ 528.23  
Bad debt expense as a percent of revenues
    0.8 %     0.9 %     0.7 %     0.9 %
 Accounts receivable --
                               
  Days of revenue outstanding- excluding unapplied Medicare payments
    37.2       42.3    
n.a.
   
n.a.
 
  Days of revenue outstanding- including unapplied Medicare payments
    36.8       34.1    
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, 2011, we had no variable rate debt outstanding.  At June 30, 2011, the fair value of the Notes approximates $195.6 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 programs for the first six months of 2011:

         
Weighted
     Cumulative        
   
Total Number
   
Average
   
Shares
   
Dollar Amount
 
   
of Shares
   
Price Paid Per
   
Repurchased Under
   
Remaining Under
 
   
Repurchased
   
Share
   
the Program
   
The Program
 
                         
April 2007 Program
                       
January 1 through January 31, 2011
    300,513     $ 63.62       3,654,157     $ 24,543  
February 1 through February 28, 2011
    377       65.03       3,654,534       -  
March 1 through March 31, 2011
    -       -       3,654,534     $ -  
 First Quarter Total - April 2007 Program
    300,890     $ 63.62                  
                                 
February 2011 Program
                               
January 1 through January 31, 2011
    -     $ -       -     $ -  
February 22, 2011 Authorization
    -       -       -       100,000,000  
February 1 through February 28, 2011
    40,623       65.03       40,623       97,358,313  
March 1 through March 31, 2011
    -       -       40,623     $ 97,358,313  
 First Quarter Total - February 2011 Program
    40,623     $ 65.03                  
                                 
April 1 through April 30, 2011
    -     $ -       -     $ 97,358,313  
May 1 through May 31, 2011
    -       -       -       97,358,313  
June 1 through June 30, 2011
    -       -       -     $ 97,358,313  
 Second Quarter Total - February 2011 Program
    -     $ -                  
                                 
On February 22, 2011 our Board of Directors authorized $100 million under the newly established February 2011 Repurchase Program.
 

Item 3.    Defaults Upon Senior Securities

None

Item 4.    Removed and reserved

Item 5.    Other Information
 
Item 5(a). Submission of Matters to a Vote of Security Holders:  Disclosure regarding frequency of shareholder advisory vote on Executive Compensation

The company has decided to include a non-binding advisory say-on-pay in its proxy materials every year.

The next required non-binding shareholder advisory vote regarding the frequency interval will be held in six years at the Company’s 2017 Annual Meeting of Shareholders.
 
 
-32-

 

Item 6.    Exhibits

Exhibit No.
 
Description
     
31.1
 
Certification by Kevin J. McNamara pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.
     
31.2
 
Certification by David P. Williams pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange  Act of 1934.
     
31.3
 
Certification by Arthur V. Tucker, Jr. pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.
     
32.1
 
Certification by Kevin J. McNamara pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification by David P. Williams pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.3
 
Certification by Arthur V. Tucker, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS
 
XBRL Instance Document
     
101.SCH
 
XBRL Taxonomy Extension Schema
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
     
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

           
Chemed Corporation
 
           
(Registrant)
 
               
               
Dated:
 
August 5, 2011
 
By:
 
Kevin J. McNamara
 
           
Kevin J. McNamara
 
           
(President and Chief Executive Officer)
 
               
               
Dated:
 
August 5, 2011
 
By:
 
David P. Williams
 
           
David P. Williams
 
           
(Executive Vice President and Chief Financial Officer)
 
               
               
Dated:
 
August 5, 2011
 
By:
 
Arthur V. Tucker, Jr.
 
           
Arthur V. Tucker, Jr.
 
           
(Vice President and Controller)
 

 
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