a50614356.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 March 31, 2013
   
     
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-8351

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

   
Delaware
31-0791746
(State or other jurisdiction of incorporation or
organization)
 
(IRS Employer Identification No.)
255 E. Fifth Street, Suite 2600, Cincinnati, Ohio
45202
(Address of principal executive offices)
(Zip code)
 
(513) 762-6500
(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
   
No
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
18,868,108 Shares
March 31, 2013




 
-1-

 

CHEMED CORPORATION AND
SUBSIDIARY COMPANIES



Index

     
   
Page No.
   
  Item 1.    
     
 
3
     
     
 
4
     
     
 
5
     
    Notes to Unaudited Consolidated Financial Statements  
6
     
  Item 2.  
17
     
  Item 3.  
27
     
  Item 4.   
27
     
   
  Item 1.   
27
         
  Item 1A.  
27
         
  Item 2.  
28
         
  Item 3.  
28
         
  Item 4.  
28
         
  Item 5.  
28
         
  Item 6.  
28
    EX – 31.1     
    EX – 31.2     
    EX – 31.3     
    EX – 32.1     
    EX – 32.2     
    EX – 32.3     
    EX – 101.INS     
    EX – 101.SCH     
    EX – 101.CAL     
    EX – 101.DEF     
    EX – 101.LAB     
    EX – 101.PRE     
 
 
-2-

 

 
 
 
UNAUDITED CONSOLIDATED BALANCE SHEET
 
(in thousands, except share and per share data)
 
             
             
   
March 31,
   
December 31,
 
   
2013
   
2012
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 72,956     $ 69,531  
Accounts receivable less allowances of $11,933 (2012 - $10,892)
    127,220       93,333  
Inventories
    6,559       7,058  
Current deferred income taxes
    14,816       13,659  
Prepaid income taxes
    2,159       2,643  
Prepaid expenses
    12,539       11,447  
Total current assets
    236,249       197,671  
Investments of deferred compensation plans
    39,144       36,089  
Properties and equipment, at cost, less accumulated depreciation of $169,719 (2012 - $164,607)
    90,374       91,934  
Identifiable intangible assets less accumulated amortization of $30,791 (2012 - $30,414)
    56,798       57,177  
Goodwill
    465,734       465,832  
Other assets
    11,110       10,923  
Total Assets
  $ 899,409     $ 859,626  
                 
LIABILITIES
               
Current liabilities
               
Accounts payable
  $ 48,496     $ 48,472  
Income taxes
    12,912       4,938  
Accrued insurance
    43,041       40,654  
Accrued compensation
    38,552       45,457  
Other current liabilities
    17,917       17,301  
Total current liabilities
    160,918       156,822  
Deferred income taxes
    28,155       27,662  
Long-term debt
    177,004       174,890  
Deferred compensation liabilities
    38,481       35,599  
Other liabilities
    11,762       11,362  
Total Liabilities
    416,320       406,335  
                 
STOCKHOLDERS' EQUITY
               
Capital stock - authorized 80,000,000 shares $1 par; issued 31,956,848 shares (2012 - 31,589,366 shares)
    31,957       31,589  
Paid-in capital
    457,790       437,364  
Retained earnings
    641,946       623,035  
Treasury stock - 13,185,316 shares (2012 - 13,057,270)
    (650,668 )     (640,732 )
Deferred compensation payable in Company stock
    2,064       2,035  
Total Stockholders' Equity
    483,089       453,291  
Total Liabilities and Stockholders' Equity
  $ 899,409     $ 859,626  
                 
See accompanying notes to unaudited consolidated financial statements.
 

 
-3-

 

 
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
 
(in thousands, except per share data)
 
             
             
             
   
Three Months Ended March 31,
 
   
2013
   
2012
 
Service revenues and sales
  $ 366,641     $ 352,943  
Cost of services provided and goods sold (excluding depreciation)
    264,307       257,445  
Selling, general and administrative expenses
    55,560       53,167  
Depreciation
    6,795       6,241  
Amortization
    1,127       1,113  
Total costs and expenses
    327,789       317,966  
Income from operations
    38,852       34,977  
Interest expense
    (4,094 )     (3,617 )
Other income - net
    1,706       2,095  
Income before income taxes
    36,464       33,455  
Income taxes
    (14,186 )     (13,010 )
Net income
  $ 22,278     $ 20,445  
                 
                 
Earnings Per Share
               
Net income
  $ 1.20     $ 1.08  
Average number of shares outstanding
    18,522       18,958  
                 
Diluted Earnings Per Share
               
Net income
  $ 1.17     $ 1.06  
Average number of shares outstanding
    19,000       19,353  
                 
Cash Dividends Per Share
  $ 0.18     $ 0.16  
                 
See accompanying notes to unaudited consolidated financial statements.
 

 
-4-

 

 
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
 
(in thousands)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2013
   
2012
 
Cash Flows from Operating Activities
           
Net income
  $ 22,278     $ 20,445  
Adjustments to reconcile net income to net cash provided
               
by operating activities:
               
Depreciation and amortization
    7,922       7,354  
Deferred income taxes
    (681 )     (3,397 )
Provision for uncollectible accounts receivable
    2,967       2,245  
Amortization of discount on convertible notes
    2,114       1,975  
Stock option expense
    1,491       1,938  
Noncash long-term incentive compensation
    612       -  
Changes in operating assets and liabilities, excluding
               
amounts acquired in business combinations:
               
Increase in accounts receivable
    (36,706 )     (34,949 )
Decrease in inventories
    499       200  
Decrease/(increase) in prepaid expenses
    (1,092 )     1,833  
Decrease in accounts payable and other current liabilities
    (698 )     (3,894 )
Increase in income taxes
    10,139       15,532  
Increase in other assets
    (3,071 )     (3,654 )
Increase in other liabilities
    3,282       5,241  
Excess tax benefit on share-based compensation
    (1,891 )     (797 )
Other sources
    976       309  
Net cash provided by operating activities
    8,141       10,381  
Cash Flows from Investing Activities
               
Capital expenditures
    (5,406 )     (12,018 )
Business combinations, net of cash acquired
    -       (415 )
Other sources
    78       311  
Net cash used by investing activities
    (5,328 )     (12,122 )
Cash Flows from Financing Activities
               
Dividends paid
    (3,367 )     (3,072 )
Capital stock surrendered to pay taxes on stock-based compensation
    (3,389 )     (1,431 )
Proceeds from exercise of stock options
    10,168       1,042  
Excess tax benefit on share-based compensation
    1,891       797  
Increase/(decrease) in cash overdrafts payable
    (3,165 )     226  
Debt issuance costs
    (1,107 )     -  
Other sources/(uses)
    (419 )     312  
Net cash provided/(used) by financing activities
    612       (2,126 )
Increase/(Decrease) in Cash and Cash Equivalents
    3,425       (3,867 )
Cash and cash equivalents at beginning of year
    69,531       38,081  
Cash and cash equivalents at end of period
  $ 72,956     $ 34,214  
                 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
-5-

 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Consolidated Financial Statements

1.     Basis of Presentation
As used herein, the terms "We," "Company" and "Chemed" refer to Chemed Corporation or Chemed Corporation and its consolidated subsidiaries.
 
We have prepared the accompanying unaudited consolidated financial statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.  Consequently, we have omitted certain disclosures required under generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. The December 31, 2012 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, 2012.

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 March 31, 2013, VITAS has approximately $1.1 million in unbilled revenue included in accounts receivable (December 31, 2012 - $457,000).  The unbilled revenue at VITAS relates to hospice programs currently undergoing various patient file reviews.  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 any governmental or other payer reviews resulting in denials of patient service revenue.  We believe our hospice programs comply with all payer requirements at the time of billing.  However, we cannot predict whether future billing reviews or similar audits by payers will result in material denials or reductions in revenue.

We actively monitor each of our hospice programs, by provider number, as to their specific admission, discharge rate and median length of stay data in an attempt to determine whether they are likely to exceed the annual per-beneficiary Medicare cap (“Medicare cap”).  Should we determine that revenues for a program are likely to exceed the Medicare cap based on projected trends, we attempt to institute corrective action to influence the patient mix or to increase patient admissions.  However, should we project our corrective action will not prevent that program from exceeding its Medicare cap, we estimate the amount of revenue recognized during the period that will require repayment to the Federal government under the Medicare cap and record the amount as a reduction to patient revenue.

During the three-month period ended March 31, 2013, we reversed Medicare cap liability for amounts recorded in the fourth quarter of 2012 for three programs’ projected 2013 measurement period liability.  We reversed these amounts as improving admissions trends in these programs indicate that the liability had been eliminated.

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

   
March 31,
 
   
2013
   
2012
 
Beginning balance January 1,
  $ 1,261     $ 2,965  
2013 measurement period
    (873 )     -  
2012 measurement period
    -       (2,577 )
Ending balance March 31,
  $ 388     $ 388  

 
-6-

 

Vitas provides charity care, in certain circumstances, to patients without charge when management of the hospice program determines, at the time services are performed, that the patient does not have the financial wherewithal to make payment.  There is no revenue or associated accounts receivable in the accompanying consolidated financial statements related to charity care.  The cost of charity care is calculated by taking the ratio of charity care days to total days of care and multiplying by total cost of care.  The cost of charity care is as follows (in thousands):

Three months ended
March 31,
2013
 
2012
$ 1,929   $ 2,250

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

   
Three months ended
 
   
March 31,
 
   
2013
   
2012
 
Service Revenues and Sales
       
 
 
VITAS
  $ 271,326     $ 260,847  
Roto-Rooter
    95,315       92,096  
Total
  $ 366,641     $ 352,943  
                 
After-tax Earnings
               
VITAS
  $ 20,142     $ 19,627  
Roto-Rooter
    9,624       7,496  
Total
    29,766       27,123  
Corporate
    (7,488 )     (6,678 )
Net income
  $ 22,278     $ 20,445  

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

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

       
Net Income
 
For the Three Months Ended March 31,
 
Income
   
Shares
   
Earnings per
Share
 
2013
                       
 
Earnings
 
$
 22,278
   
 18,522
   
$
 1.20
 
 
Dilutive stock options
   
 -
   
 371
         
 
Nonvested stock awards
   
 -
   
 107
         
 
Diluted earnings
 
$
 22,278
   
 19,000
   
$
 1.17
 
                         
2012
                       
 
Earnings
 
$
 20,445
   
 18,958
   
$
 1.08
 
 
Dilutive stock options
   
 -
   
 304
         
 
Nonvested stock awards
   
 -
   
 91
         
 
Diluted earnings
 
$
 20,445
   
 19,353
   
$
 1.06
 
 
 
-7-

 
 
For the three-month period ended March 31, 2013, 11,000 stock options were excluded from the computation of diluted earnings per share because they would have been anti-dilutive. For the three-month period ended March 31, 2012, 1.4 million stock options were excluded from the computation of diluted earnings per share.

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

The following table provides examples of how changes in our stock price impact the number of shares that would be included in our diluted earnings per share calculation at March 31, 2013.  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       52,828       -       52,828       (56,514 )     (3,686 )
$ 90.73       308,071       -       308,071       (329,565 )     (21,494 )
$ 100.73       512,635       -       512,635       (548,402 )     (35,767 )
$ 110.73       680,251       121,055       801,306       (727,713 )     73,593  
$ 120.73       820,100       320,910       1,141,010       (877,319 )     263,691  
$ 130.73       938,554       490,190       1,428,744       (1,004,037 )     424,707  

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.

5.     Long-Term Debt
On January 18, 2013, we replaced our existing credit agreement with our Revolving Credit Facility (“2013 Credit Agreement”).  Terms of the 2013 Credit Agreement consist of a five-year, $350 million revolving credit facility.  This 2013 Credit Agreement has a floating interest rate that is currently LIBOR plus 125 basis points.  The 2013 Credit Agreement also includes a $150 million expansion feature.  Debt issuance costs associated with the existing credit agreement were not material.  With respect to the 2013 Credit Agreement, deferred financing costs are immaterial.  The 2013 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

 
-8-

 

We are in compliance with all debt covenants as of March 31, 2013.  We have issued $29.2 million in standby letters of credit as of March 31, 2013 for insurance purposes.  Issued letters of credit reduce our available credit under the 2013 Credit Agreement.  As of March 31, 2013, we have approximately $320.8 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $150 million expansion feature.

The following amounts are included in our consolidated balance sheet related to the Notes:
 
   
March 31, 2013
   
December 31, 2012
 
Principal amount of convertible debentures
  $ 186,956     $ 186,956  
Unamortized debt discount
    (9,952 )     (12,066 )
Carrying amount of convertible debentures
  $ 177,004     $ 174,890  
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 March 31,
 
   
2013
   
2012
 
Cash interest expense
  $ 1,200     $ 1,334  
Non-cash amortization of debt discount
    2,114       1,975  
Amortization and write-off of debt costs
    780       308  
Total interest expense
  $ 4,094     $ 3,617  

The unamortized debt discount is being amortized using the effective interest method over the remaining life of the Notes.  The effective rate on the Notes is approximately 6.875% as of March 31, 2013.

6.     Other Income -- Net
Other income -- net comprises the following (in thousands):
             
   
Three months ended March 31,
 
   
2013
   
2012
 
Market value gains on assets held in deferred
           
compensation trust
  $ 1,472     $ 2,133  
Loss on disposal of property and equipment
    (78 )     (81 )
Interest income
    303       51  
Other - net
    9       (8 )
        Total other income - net
  $ 1,706     $ 2,095  

 7.    Stock-Based Compensation Plans
On February 20, 2013, the Compensation/Incentive Committee of the Board of Directors (“CIC”) approved a grant of 28,992 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.

8.     Independent Contractor Operations
The Roto-Rooter segment sublicenses with 66 independent contractors to operate certain plumbing repair and drain cleaning businesses in lesser-populated areas of the United States and Canada.  We had notes receivable from our independent contractors as of March 31, 2013 totaling $1.3 million (December 31, 2012 - $1.3 million).  In most cases these loans are fully or partially secured by equipment owned by the contractor.  The interest rates on the loans range from 0% to 8% per annum and the remaining terms of the loans range from 2 months to 5 years at March 31, 2013.  We recorded the following from our independent contractors (in thousands):
 
 
-9-

 
 
 
Three months ended March 31,
 
 
2013
   
2012
 
Revenues
$ 8,210     $ 6,682  
Pretax profits
  4,258       3,082  

9.     Retirement Plans
All of the Company’s plans that provide retirement and similar benefits are defined contribution plans.  These expenses include the impact of market gains and losses on assets held in deferred compensation plans.  Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans are as follows (in thousands):
 
Three months ended March 31,
2013
 
2012
$ 4,296   $ 4,695

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

Litigation
In February 2010, Chemed and Roto-Rooter were named as defendants in a lawsuit filed in the United States District Court for the Eastern District of New York, entitled Anthony Morangelli, et al., v. Chemed Corp. and Roto-Rooter Services Co., No. 10 CV-00876 (BMC).  The named plaintiffs in this lawsuit, who are current and former technicians employed by Roto-Rooter who were paid on a commission basis, asserted against Chemed and Roto-Rooter claims for violation of the Fair Labor Standards Act (“FLSA”) and claims for violations of the labor laws of multiple states.  Plaintiffs alleged that Chemed and Roto-Rooter failed to reimburse them for all business expenses incurred in connection with their employment, failed to compensate for all hours worked and made illegal deductions from pay.  Plaintiffs seek an unspecified amount of compensatory damages, liquidated damages, other penalties, fees and costs.

In June 2010, the Court conditionally certified a collective action under the FLSA and, in June 2011, it certified fourteen separate state law class actions.  On February 4, 2013, the Court dismissed all claims asserted against Chemed, dismissed plaintiffs’ illegal deduction claims and decertified from the class and collective actions significant portions plaintiffs’ business expense and uncompensated hours claims.  Roto-Rooter continues to contest Plaintiffs’ claims.
 
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, Bernadette Santos, et al. v. Vitas Healthcare Corporation of California, BC359356.  This case alleges failure to pay overtime and failure to provide meal and rest periods to a purported class of California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  We contest these allegations.  In December 2009, the trial court denied Plaintiffs’ motion for class certification.  In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims.  Plaintiffs filed an appeal of this decision.  In September 2012, in response to an order of reconsideration, the Court of Appeals reiterated its previous rulings.  In March 2013, the Court granted summary judgment dismissing the sales representatives’ claims as they are exempt employees.

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

 
-10-

 
 
 Regardless of the outcome of any of the preceding matters, litigation adversely affects us through defense costs, diversion of management time, and related publicity.
 
Regulatory Matters
In April 2005, VITAS received a subpoena from the Office of the Inspector General (“OIG”) of the U.S. Department of Health and Human Services requesting that VITAS produce various categories of documents from 1998 through the date of the subpoena in connection with an investigation into an alleged failure to appropriately bill Medicare and Medicaid for hospice services.  The requested categories of documents included patient medical and billing records for 320 past and then current patients from VITAS’s three largest programs; policy and procedure manuals; information concerning patient admissions, certifications, discharges, and lengths of stay; and census information.  In the third quarter of 2005, the OIG requested additional information from us.  In May 2006, VITAS received another subpoena from OIG seeking certain information concerning employees and their compensation from 1999 through 2004. In 2004, two former VITAS employees filed a related qui tam suit in U.S. District Court for the Southern District of Florida, United States, et al. ex rel. Barys v. Vitas Healthcare Corp., 1:04-cv-21431.  The complaint asserted violations of the federal False Claims Act against VITAS and certain of its affiliates, based on the alleged fraudulent admissions and recertification of ineligible patients.  In July 2007, the district court dismissed the suit with prejudice.  The U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal in November 2008.  In March 2009, VITAS received a letter from the Department of Justice indicating that its investigation of VITAS’s Florida programs is ongoing.

In July 2012, VITAS received an investigative subpoena from the Florida Attorney General seeking documents previously produced in the course of prior government investigations as well as, for the period January 1, 2007 through the date of production, billing records and procedures; information concerning business results, plans, and strategies; documents concerning patient eligibility for hospice care; and certain information concerning employees and their compensation.  We are conferring with the Attorney General regarding those document requests.
 
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting that VITAS deliver to the OIG various categories of documents for its headquarters and Texas programs from January 1, 2003 through the date of the subpoena.  The requested categories included policy and procedure manuals and information concerning Medicare and Medicaid billing and the provision of hospice services; patient medical records; information concerning business plans, strategies, and results and VITAS’s affiliated entities and referral sources; and certain information concerning employees and their compensation.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review.  In September 2010, VITAS received a second administrative subpoena from the Department of Justice seeking electronic documents of 10 current and former employees.  In April 2011, the U.S. Attorney provided the Company with a copy of a qui tam complaint filed under seal in the U.S. District Court for the Northern District of Texas, United States, et al. ex rel. Rehfeldt v. Vitas Healthcare Corp., 3:09-cv-0203.  In November 2011, the complaint was unsealed.  The U.S. Attorney and the Attorney General for the State of Texas filed notices in November 2011 stating that they had decided not to intervene in the case at that time but indicating that they continue to investigate the allegations.  The complaint asserts violations of the federal False Claims Act and the Texas Medicaid Fraud Prevention Act based on the alleged admission and re-certification of ineligible patients, conspiracy to admit ineligible patients, and backdating patient revocations.  The suit was brought by Michael Rehfeldt, a former general manager of VITAS’s San Antonio program, against VITAS, the San Antonio program’s former Regional Vice-President, Keith Becker, and former Medical Director, Justo Cisneros, and their respective then-current employers: Wellmed Medical Management, Care Level Management, LLC, Inspiris Hospice, LLC, and Inspiris, Inc.  The plaintiff dismissed all claims against their then-current employers in March and April of 2012.  In April 2013, the plaintiff voluntarily dismissed the complaint without prejudice.
 
In February 2010, VITAS received a companion civil investigative demand (“CID”) from the Texas Attorney General seeking documents from January 1, 2002 through the date of the CID, and interrogatory responses in connection with a related investigation of possible fraudulent submission of Medicaid claims for non-qualifying patients and fraudulent shifting of costs from VITAS to the State of Texas and the United States.  The CID requested similar information sought by the Department of Justice’s May 2009 administrative subpoena, together with information concerning record-keeping and retention practices, and medical records concerning 117 patients.  In September 2010, VITAS received a second CID from the Texas Attorney General seeking additional documents concerning business plans and results, revocation forms for certain patients, and electronic documents of 10 current and former employees.
 
 
-11-

 
 
In June 2011, the U.S. Attorney provided the Company with a partially unsealed qui tam complaint filed under seal in the U.S. District Court for the Western District of Texas, United States, et al. ex rel. Urick v. Vitas HME Solutions, Inc. et al., 5:08-cv-0663.  The U.S. Attorney filed a notice in May 2012 stating that it had decided not to intervene in the case at that time but indicating that it continues to investigate the allegations.  In June 2012, the complaint was unsealed.  The complaint asserts violations of the federal False Claims Act and the Texas Medicaid Fraud Prevention Act based on allegations of a conspiracy to submit to Medicare and Medicaid false claims involving hospice services for ineligible patients, unnecessary medical supplies, failing to satisfy certain prerequisites for payment, and altering patient records, including backdating patient revocations.  The suit was brought by Barbara Urick, a registered nurse in VITAS’s San Antonio program, against VITAS, certain of its affiliates, and several former VITAS employees, including physicians Justo Cisneros and Antonio Cavasos and nurses Sally Schwenk, Diane Anest, and Edith Reed.  In September 2012, the plaintiff dismissed all claims against the individual defendants.  The complaint was served on the VITAS entities on April 12, 2013.

Also in June 2011, the U.S. Attorney provided the Company with a partially unsealed qui tam complaint filed under seal in the U.S. District Court for the Northern District of Illinois, United States, et al. ex rel. Spottiswood v. Chemed Corp., 1:07-cv-4566.  In April 2012, the complaint was unsealed.  The U.S. Attorney and Attorney General for the State of Illinois filed notices in April and May 2012, respectively, stating that they had decided not to intervene in the case at that time but indicating that they continue to investigate the allegations.  Plaintiff filed an amended complaint in November 2012.  The complaint asserts violations of the federal False Claims Act and the Illinois Whistleblower Reward and Protection Act based on allegations that VITAS fraudulently billed Medicare and Medicaid for providing unwarranted continuous care services.  The suit was brought by Laura Spottiswood, a former part-time pool registered nurse at VITAS, against Chemed, VITAS, and a VITAS affiliate.  The complaint was served on the defendants on    April 12, 2013.

In June 2012, VITAS received an administrative subpoena from OIG in connection with an investigation of possible improper claims submitted to the Medicare and Medicaid programs.  It seeks production of various categories of documents concerning the provision of hospice services, for headquarters and its Southern California programs, for the period January 1, 2007 through the date of the subpoena.  The categories of documents include policy, procedure and training manuals; documents concerning patient eligibility for hospice care, including referrals, admissions, certifications, revocations and census information; documents concerning claims submitted to government programs; certain information concerning employees and their compensation; and documents concerning VITAS’s financial performance.  In August 2012, the OIG also subpoenaed medical records for 268 patients from three Southern California programs.  We are conferring with the U.S. Attorney’s Office for the Central District of California regarding those document requests.

In September 2012, VITAS received an administrative subpoena from OIG seeking production of medical records for 102 patients in 10 states who received continuous care between 2004 and 2009.  In December 2012, it received a second such administrative subpoena from the OIG seeking medical records for 103 patients who received continuous care between 2009 and 2012.  We are conferring with the OIG regarding those requests.

The costs to comply with these investigations were not material for any period presented.  Regardless of the outcome of any of the preceding matters, responding to the subpoenas and dealing with the various regulatory agencies can adversely affect us through defense costs, diversion of management time, and related publicity.

11.  Concentration of Risk
VITAS has pharmacy services agreements ("Agreements") with Omnicare, Inc. and its subsidiaries (“OCR”) whereby OCR provides specified pharmacy services for VITAS and its hospice patients in geographical areas served by both VITAS and OCR.  The Agreements renew automatically for one-year terms.  Either party may cancel the Agreements at the end of any term by giving 90 days prior written notice.  VITAS made purchases from OCR of $9.6 million and $10.0 million for the three months ended March 31, 2013 and 2012, respectively.  For the three month periods ending March 31, 2013 and 2012, respectively, purchases from this vendor represent over 90% of all pharmacy services used by VITAS.

 
-12-

 

12.  Cash Overdrafts and Cash Equivalents
Included in accounts payable at March 31, 2013 is cash overdrafts payable of $9.1 million (December 31, 2012 - $12.2 million).

From time to time throughout the year, we invest excess cash in money market funds with major commercial banks. We closely monitor the creditworthiness of the institutions with which we invest our overnight funds.  We had $52.8 million in cash equivalents as of March 31, 2013.  There was $56.6 million in cash equivalents as of December 31, 2012.  The weighted average rate of return for our cash equivalents was 0.1% for March 31, 2013 and 0.2% for December 31, 2012.

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 March 31, 2013 (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
  $ 39,144     $ 39,144     $ -     $ -  
Long-term debt
    177,004       205,545       -       -  

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of December 31, 2012 (in thousands):

         
Fair Value Measure
 
   
Carrying Value
   
Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs (Level 3)
 
Mutual fund investments of deferred
                       
compensation plans held in trust
  $ 36,089     $ 36,089     $ -     $ -  
Long-term debt
    174,890       197,874       -       -  
 
For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount is a reasonable estimate of fair value because of the liquidity and short-term nature of these instruments.

14.  Capital Stock Repurchase Plan Transactions
We did not repurchase any capital stock for the three-months ended March 31, 2013 and 2012.  In February 2013, the Board of Directors authorized an additional $100 million for stock repurchase under Chemed’s existing share repurchase program. We currently have $114.7 million of authorization remaining under this share repurchase plan.

15.  Subsequent Events
Effective April 1, 2013 Medicare reduced hospice reimbursement rates for Medicare beneficiaries 2.0%.  This reduction impacts approximately 91.2% of VITAS’ revenue base.

 
-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 March 31, 2013 and December 31, 2012 for the balance sheet, the three months ended March 31, 2013 and March 31, 2012 for the income statement and the three months ended March 31, 2013 and March 31, 2012 for the statement of cash flows (dollars in thousands):
 
                               
March 31, 2013
       
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                             
Cash and cash equivalents
  $ 62,174     $ 2,588     $ 8,194     $ -     $ 72,956  
Accounts receivable, including intercompany
    1,373       462,614       904       (337,671 )     127,220  
Inventories
    -       5,929       630       -       6,559  
Current deferred income taxes
    -       15,943       281       (1,408 )     14,816  
Prepaid income taxes
    9,402       -       -       (7,243 )     2,159  
Prepaid expenses
    459       11,908       172       -       12,539  
     Total current assets
    73,408       498,982       10,181       (346,322 )     236,249  
Investments of deferred compensation plans
    -       -       39,144       -       39,144  
Properties and equipment, at cost, less accumulated depreciation
    10,755       77,039       2,580       -       90,374  
Identifiable intangible assets less accumulated amortization
    -       56,798       -       -       56,798  
Goodwill
    -       461,277       4,457       -       465,734  
Other assets
    17,827       1,869       14,768       (23,354 )     11,110  
Investments in subsidiaries
    895,885       24,721       -       (920,606 )     -  
          Total assets
  $ 997,875     $ 1,120,686     $ 71,130     $ (1,290,282 )   $ 899,409  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                       
Accounts payable, including intercompany
  $ 327,166     $ 54,770     $ 4,231     $ (337,671 )   $ 48,496  
Income taxes
    -       16,662       3,493       (7,243 )     12,912  
Accrued insurance
    1,808       41,233       -       -       43,041  
Accrued compensation
    1,035       37,102       415       -       38,552  
Other current liabilities
    4,613       14,366       346       (1,408 )     17,917  
      Total current liabilities
    334,622       164,133       8,485       (346,322 )     160,918  
Deferred income taxes
    -       51,509       -       (23,354 )     28,155  
Long-term debt
    177,004       -       -       -       177,004  
Deferred compensation liabilities
    -       -       38,481       -       38,481  
Other liabilities
    3,160       7,748       854       -       11,762  
Stockholders' equity
    483,089       897,296       23,310       (920,606 )     483,089  
     Total liabilities and stockholders' equity
  $ 997,875     $ 1,120,686     $ 71,130     $ (1,290,282 )   $ 899,409  
                                         
December 31, 2012
         
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                                       
Cash and cash equivalents
  $ 56,342     $ 4,674     $ 8,515     $ -     $ 69,531  
Accounts receivable, including intercompany
    925       427,341       889       (335,822 )     93,333  
Inventories
    -       6,505       553       -       7,058  
Current deferred income taxes
    -       14,633       173       (1,147 )     13,659  
Prepaid income taxes
    4,043       -       -       (1,400 )     2,643  
Prepaid expenses
    564       10,656       227       -       11,447  
     Total current assets
    61,874       463,809       10,357       (338,369 )     197,671  
Investments of deferred compensation plans
    -       -       36,089       -       36,089  
Properties and equipment, at cost, less accumulated depreciation
    10,984       78,236       2,714       -       91,934  
Identifiable intangible assets less accumulated amortization
    -       57,177       -       -       57,177  
Goodwill
    -       461,277       4,555       -       465,832  
Other assets
    19,025       2,005       13,797       (23,904 )     10,923  
Investments in subsidiaries
    874,692       24,298       -       (898,990 )     -  
          Total assets
  $ 966,575     $ 1,086,802     $ 67,512     $ (1,261,263 )   $ 859,626  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                       
Accounts payable, including intercompany
  $ 325,916     $ 53,934     $ 4,444     $ (335,822 )   $ 48,472  
Income taxes
    1,019       3,816       1,503       (1,400 )     4,938  
Accrued insurance
    1,339       39,315       -       -       40,654  
Accrued compensation
    4,119       40,891       447       -       45,457  
Other current liabilities
    2,786       13,903       1,759       (1,147 )     17,301  
      Total current liabilities
    335,179       151,859       8,153       (338,369 )     156,822  
Deferred income taxes
    -       51,566       -       (23,904 )     27,662  
Long-term debt
    174,890       -       -       -       174,890  
Deferred compensation liabilities
    -       -       35,599       -       35,599  
Other liabilities
    3,215       7,352       795       -       11,362  
Stockholders' equity
    453,291       876,025       22,965       (898,990 )     453,291  
     Total liabilities and stockholders' equity
  $ 966,575     $ 1,086,802     $ 67,512     $ (1,261,263 )   $ 859,626  
 
 
-14-

 

                               
For the three months ended March 31, 2013
       
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
Continuing Operations
                             
Service revenues and sales
  $ -     $ 359,056     $ 7,585     $ -     $ 366,641  
Cost of services provided and goods sold
    -       259,977       4,330       -       264,307  
Selling, general and administrative expenses
    5,872       46,572       3,116       -       55,560  
Depreciation
    240       6,325       230       -       6,795  
Amortization
    482       645       -       -       1,127  
Other operating expenses
    -       -       -       -       -  
     Total costs and expenses
    6,594       313,519       7,676       -       327,789  
     Income/ (loss) from operations
    (6,594 )     45,537       (91 )     -       38,852  
Interest expense
    (3,975 )     (105 )     (14 )     -       (4,094 )
Other (expense)/income - net
    4,273       (4,035 )     1,468       -       1,706  
     Income/ (loss) before income taxes
    (6,296 )     41,397       1,363       -       36,464  
Income tax (provision)/ benefit
    2,133       (15,817 )     (502 )     -       (14,186 )
Equity in net income of subsidiaries
    26,441       910       -       (27,351 )     -  
Net income
  $ 22,278     $ 26,490     $ 861     $ (27,351 )   $ 22,278  
                                         
                                         
For the three months ended March 31, 2012
         
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
Continuing Operations
                                       
Service revenues and sales
  $ -     $ 345,614     $ 7,329     $ -     $ 352,943  
Cost of services provided and goods sold
    -       253,427       4,018       -       257,445  
Selling, general and administrative expenses
    5,196       44,347       3,624       -       53,167  
Depreciation
    234       5,790       217       -       6,241  
Amortization
    469       644       -       -       1,113  
     Total costs and expenses
    5,899       304,208       7,859       -       317,966  
     Income/ (loss) from operations
    (5,899 )     41,406       (530 )     -       34,977  
Interest expense
    (3,433 )     (169 )     (15 )     -       (3,617 )
Other (expense)/income - net
    4,406       (4,441 )     2,130       -       2,095  
     Income/ (loss) before income taxes
    (4,926 )     36,796       1,585       -       33,455  
Income tax (provision)/ benefit
    1,581       (13,964 )     (627 )     -       (13,010 )
Equity in net income of subsidiaries
    23,790       982       -       (24,772 )     -  
Net income
  $ 20,445     $ 23,814     $ 958     $ (24,772 )   $ 20,445  

 
-15-

 

                         
For the three months ended March 31, 2013
       
Guarantor
   
Non-Guarantor
       
   
Parent
   
Subsidiaries
   
Subsidiaries
   
Consolidated
 
Cash Flow from Operating Activities:
                       
Net cash provided by operating activities
  $ (4,511 )   $ 12,302     $ 350     $ 8,141  
Cash Flow from Investing Activities:
                               
 Capital expenditures
    (10 )     (5,278 )     (118 )     (5,406 )
 Business combinations, net of cash acquired
    -       -       -       -  
 Other sources/(uses) - net
    (16 )     71       23       78  
      Net cash used by investing activities
    (26 )     (5,207 )     (95 )     (5,328 )
Cash Flow from Financing Activities:
                               
 Change in cash overdrafts payable
    (554 )     (2,611 )     -       (3,165 )
 Change in intercompany accounts
    6,731       (6,570 )     (161 )     -  
 Dividends paid to shareholders
    (3,367 )     -       -       (3,367 )
 Debt issuance costs
    (1,107 )     -       -       (1,107 )
 Capital stock surrendered to pay taxes on stock-based compensation
    (3,389 )     -       -       (3,389 )
 Proceeds from exercise of stock options
    10,168       -       -       10,168  
 Realized excess tax benefit on share based compensation
    1,891       -       -       1,891  
 Other sources/(uses) - net
    (4 )     -       (415 )     (419 )
      Net cash provided/(used) by financing activities
    10,369       (9,181 )     (576 )     612  
Net increase in cash and cash equivalents
    5,832       (2,086 )     (321 )     3,425  
Cash and cash equivalents at beginning of year
    56,342       4,674       8,515       69,531  
Cash and cash equivalents at end of period
  $ 62,174     $ 2,588     $ 8,194     $ 72,956  
                                 
For the three months ended March 31, 2012
         
Guarantor
   
Non-Guarantor
         
   
Parent
   
Subsidiaries
   
Subsidiaries
   
Consolidated
 
Cash Flow from Operating Activities:
                               
Net cash provided by operating activities
  $ (5,365 )   $ 14,625     $ 1,121     $ 10,381  
Cash Flow from Investing Activities:
                               
 Capital expenditures
    (14 )     (11,664 )     (340 )     (12,018 )
 Business combinations, net of cash acquired
    -       (415 )     -       (415 )
 Other sources/(uses) - net
    220       113       (22 )     311  
      Net cash used by investing activities
    206       (11,966 )     (362 )     (12,122 )
Cash Flow from Financing Activities:
                               
 Capital stock surrendered to pay taxes on stock-based compensation
    (1,431 )     -       -       (1,431 )
 Change in cash overdrafts payable
    (46 )     272       -       226  
 Change in intercompany accounts
    1,607       (841 )     (766 )     -  
 Proceeds from exercise of stock options
    1,042       -       -       1,042  
 Dividends paid to shareholders
    (3,072 )     -       -       (3,072 )
 Debt issuance costs
    -       -       -       -  
 Realized excess tax benefit on share based compensation
    797       -       -       797  
 Other sources/(uses) - net
    (4 )     -       316       312  
      Net cash used by financing activities
    (1,107 )     (569 )     (450 )     (2,126 )
Net increase/(decrease) in cash and cash equivalents
    (6,266 )     2,090       309       (3,867 )
Cash and cash equivalents at beginning of year
    32,470       (1,422 )     7,033       38,081  
Cash and cash equivalents at end of period
  $ 26,204     $ 668     $ 7,342     $ 34,214  

 
-16-

 

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

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

The following is a summary of the key operating results (in thousands except per share amounts):
           
 
Three months ended March 31,
 
 
2013
   
2012
 
Service revenues and sales
$ 366,641     $ 352,943  
Net income
$ 22,278     $ 20,445  
Diluted EPS
$ 1.17     $ 1.06  
Adjusted EBITDA
$ 51,296     $ 46,340  
Adjusted EBITDA as a % of revenue
  14.0 %     13.1 %

Earnings before interest, taxes and depreciation and amortization (“EBITDA”) and Adjusted EBITDA are not measures derived in accordance with GAAP.  We use Adjusted EBITDA as a measure of earnings for our long-term incentive plan awards.  We provide EBITDA and Adjusted EBITDA to help readers evaluate our operating results, compare our operating performance with that of similar companies that have different capital structures and help evaluate our ability to meet future debt service, capital expenditure and working capital requirements.  Our EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP.  A reconciliation of our net income to our EBITDA and Adjusted EBITDA is presented on page 25.

For the three months ended March 31, 2013, the increase in consolidated service revenues and sales was driven by a 4.0% increase at VITAS and a 3.5% 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 5.0%, increased discharges of 4.0% and Medicare price increases of approximately 0.9%.  The increase in service revenues at Roto-Rooter was driven by a 0.1% increase in job count as well as a 2.2% increase in price and mix shift.  Consolidated net income increased 9.0%.  Diluted EPS increased 10.4% as a result of the increase in net income and a lower number of shares outstanding.  Adjusted EBITDA as a percent of revenue increased 86 basis points mainly as a result of improved margins at Roto-Rooter.  See page 26 for additional VITAS operating metrics.

Effective April 1, 2013 Medicare reduced hospice reimbursement rates for Medicare beneficiaries 2.0%.  This reduction impacts approximately 91.2% of VITAS’ revenue base.  VITAS expects to achieve full-year 2013 revenue growth, prior to Medicare cap, of 4.5% to 5.5%.  Admissions are estimated to increase approximately 5.0% to 6.0%.  Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 13.8% to 14.2%.  Roto-Rooter expects full-year 2013 revenue of 2.5% to 4.0%.  The revenue estimate is a result of increased pricing of approximately 1.5%, a favorable mix shift to higher revenue jobs, with job count estimated to increase 0.1% to 0.5%.  Adjusted EBITDA margin for 2013 is estimated to be in the range of 18.0% to 19.5%.  We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.

Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2012 to March 31, 2013 include the following:

A $33.9 million increase in accounts receivable related to the timing of receipts.
A $8.0 million increase in income taxes due to timing of payments.
A $6.9 million decrease in accrued compensation related to the timing of payments of incentive compensation.
 
 
-17-

 
 
Net cash provided by operating activities decreased by $2.2 million.  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 $29.2 million in standby letters of credit as of March 31, 2013, for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of March 31, 2013, we have approximately $320.8 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 March 31, 2013 and anticipate remaining in compliance throughout 2013.

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

In February 2010, Chemed and Roto-Rooter were named as defendants in a lawsuit filed in the United States District Court for the Eastern District of New York, entitled Anthony Morangelli, et al., v. Chemed Corp. and Roto-Rooter Services Co., No. 10 CV-00876 (BMC).  The named plaintiffs in this lawsuit, who are current and former technicians employed by Roto-Rooter who were paid on a commission basis, asserted against Chemed and Roto-Rooter claims for violation of the Fair Labor Standards Act (“FLSA”) and claims for violations of the labor laws of multiple states.  Plaintiffs alleged that Chemed and Roto-Rooter failed to reimburse them for all business expenses incurred in connection with their employment, failed to compensate for all hours worked and made illegal deductions from pay.  Plaintiffs seek an unspecified amount of compensatory damages, liquidated damages, other penalties, fees and costs.

In June 2010, the Court conditionally certified a collective action under the FLSA and, in June 2011, it certified fourteen separate state law class actions.  On February 4, 2013, the Court dismissed all claims asserted against Chemed, dismissed plaintiffs’ illegal deduction claims and decertified from the class and collective actions significant portions plaintiffs’ business expense and uncompensated hours claims.  Roto-Rooter continues to contest Plaintiffs’ claims.
  
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, Bernadette Santos, et al. v. Vitas Healthcare Corporation of California, BC359356.  This case alleges failure to pay overtime and failure to provide meal and rest periods to a purported class of California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  We contest these allegations.  In December 2009, the trial court denied Plaintiffs’ motion for class certification.  In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims.  Plaintiffs filed an appeal of this decision.  In September 2012, in response to an order of reconsideration, the Court of Appeals reiterated its previous rulings.  In March 2013, the court granted summary judgment dismissing the sales representatives claims as they are exempt employees.

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

 
 
Regardless of the outcome of any of the preceding matters, litigation adversely affects us through defense costs, diversion of management time, and related publicity.

In April 2005, VITAS received a subpoena from the Office of the Inspector General (“OIG”) of the U.S. Department of Health and Human Services requesting that VITAS produce various categories of documents from 1998 through the date of the subpoena in connection with an investigation into an alleged failure to appropriately bill Medicare and Medicaid for hospice services.  The requested categories of documents included patient medical and billing records for 320 past and then current patients from VITAS’s three largest programs; policy and procedure manuals; information concerning patient admissions, certifications, discharges, and lengths of stay; and census information.  In the third quarter of 2005, the OIG requested additional information from us.  In May 2006, VITAS received another subpoena from OIG seeking certain information concerning employees and their compensation from 1999 through 2004. In 2004, two former VITAS employees filed a related qui tam suit in U.S. District Court for the Southern District of Florida, United States, et al. ex rel. Barys v. Vitas Healthcare Corp., 1:04-cv-21431.  The complaint asserted violations of the federal False Claims Act against VITAS and certain of its affiliates, based on the alleged fraudulent admissions and recertification of ineligible patients.  In July 2007, the district court dismissed the suit with prejudice.  The U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal in November 2008.  In March 2009, VITAS received a letter from the Department of Justice indicating that its investigation of VITAS’s Florida programs is ongoing.

In July 2012, VITAS received an investigative subpoena from the Florida Attorney General seeking documents previously produced in the course of prior government investigations as well as, for the period January 1, 2007 through the date of production, billing records and procedures; information concerning business results, plans, and strategies; documents concerning patient eligibility for hospice care; and certain information concerning employees and their compensation.  We are conferring with the Attorney General regarding those document requests.
 
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting that VITAS deliver to the OIG various categories of documents for its headquarters and Texas programs from January 1, 2003 through the date of the subpoena.  The requested categories included policy and procedure manuals and information concerning Medicare and Medicaid billing and the provision of hospice services; patient medical records; information concerning business plans, strategies, and results and VITAS’s affiliated entities and referral sources; and certain information concerning employees and their compensation.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review.  In September 2010, VITAS received a second administrative subpoena from the Department of Justice seeking electronic documents of 10 current and former employees.  In April 2011, the U.S. Attorney provided the Company with a copy of a qui tam complaint filed under seal in the U.S. District Court for the Northern District of Texas, United States, et al. ex rel. Rehfeldt v. Vitas Healthcare Corp., 3:09-cv-0203.  In November 2011, the complaint was unsealed.  The U.S. Attorney and the Attorney General for the State of Texas filed notices in November 2011 stating that they had decided not to intervene in the case at that time but indicating that they continue to investigate the allegations.  The complaint asserts violations of the federal False Claims Act and the Texas Medicaid Fraud Prevention Act based on the alleged admission and re-certification of ineligible patients, conspiracy to admit ineligible patients, and backdating patient revocations.  The suit was brought by Michael Rehfeldt, a former general manager of VITAS’s San Antonio program, against VITAS, the San Antonio program’s former Regional Vice-President, Keith Becker, and former Medical Director, Justo Cisneros, and their respective then-current employers: Wellmed Medical Management, Care Level Management, LLC, Inspiris Hospice, LLC, and Inspiris, Inc.  The plaintiff dismissed all claims against their then-current employers in March and April of 2012.  In April 2013, the plaintiff voluntarily dismissed the complaint without prejudice.
 
In February 2010, VITAS received a companion civil investigative demand (“CID”) from the Texas Attorney General seeking documents from January 1, 2002 through the date of the CID, and interrogatory responses in connection with a related investigation of possible fraudulent submission of Medicaid claims for non-qualifying patients and fraudulent shifting of costs from VITAS to the State of Texas and the United States.  The CID requested similar information sought by the Department of Justice’s May 2009 administrative subpoena, together with information concerning record-keeping and retention practices, and medical records concerning 117 patients.  In September 2010, VITAS received a second CID from the Texas Attorney General seeking additional documents concerning business plans and results, revocation forms for certain patients, and electronic documents of 10 current and former employees.
 
In June 2011, the U.S. Attorney provided the Company with a partially unsealed qui tam complaint filed under seal in the U.S. District Court for the Western District of Texas, United States, et al. ex rel. Urick v. Vitas HME Solutions, Inc. et al., 5:08-cv-0663.  The U.S. Attorney filed a notice in May 2012 stating that it had decided not to intervene in the case at that time but indicating that it continues to investigate the allegations.  In June 2012, the complaint was unsealed.  The complaint asserts violations of the federal False Claims Act and the Texas Medicaid Fraud Prevention Act based on allegations of a conspiracy to submit to Medicare and Medicaid false claims involving hospice services for ineligible patients, unnecessary medical supplies, failing to satisfy certain prerequisites for payment, and altering patient records, including backdating patient revocations.  The suit was brought by Barbara Urick, a registered nurse in VITAS’s San Antonio program, against VITAS, certain of its affiliates, and several former VITAS employees, including physicians Justo Cisneros and Antonio Cavasos and nurses Sally Schwenk, Diane Anest, and Edith Reed.  In September 2012, the plaintiff dismissed all claims against the individual defendants.  The complaint was served on the VITAS entities on April 12, 2013.

 
-19-

 
 
Also in June 2011, the U.S. Attorney provided the Company with a partially unsealed qui tam complaint filed under seal in the U.S. District Court for the Northern District of Illinois, United States, et al. ex rel. Spottiswood v. Chemed Corp., 1:07-cv-4566.  In April 2012, the complaint was unsealed.  The U.S. Attorney and Attorney General for the State of Illinois filed notices in April and May 2012, respectively, stating that they had decided not to intervene in the case at that time but indicating that they continue to investigate the allegations.  Plaintiff filed an amended complaint in November 2012.  The complaint asserts violations of the federal False Claims Act and the Illinois Whistleblower Reward and Protection Act based on allegations that VITAS fraudulently billed Medicare and Medicaid for providing unwarranted continuous care services.  The suit was brought by Laura Spottiswood, a former part-time pool registered nurse at VITAS, against Chemed, VITAS, and a VITAS affiliate.  The complaint was served on the defendants on April 12, 2013.

In June 2012, VITAS received an administrative subpoena from OIG in connection with an investigation of possible improper claims submitted to the Medicare and Medicaid programs.  It seeks production of various categories of documents concerning the provision of hospice services, for headquarters and its Southern California programs, for the period January 1, 2007 through the date of the subpoena.  The categories of documents include policy, procedure and training manuals; documents concerning patient eligibility for hospice care, including referrals, admissions, certifications, revocations and census information; documents concerning claims submitted to government programs; certain information concerning employees and their compensation; and documents concerning VITAS’s financial performance.  In August 2012, the OIG also subpoenaed medical records for 268 patients from three Southern California programs.  We are conferring with the U.S. Attorney’s Office for the Central District of California regarding those document requests.

In September 2012, VITAS received an administrative subpoena from OIG seeking production of medical records for 102 patients in 10 states who received continuous care between 2004 and 2009.  In December 2012, it received a second such administrative subpoena from the OIG seeking medical records for 103 patients who received continuous care between 2009 and 2012.  We are conferring with the OIG regarding those requests.

The costs to comply with these investigations were not material for any period presented.  Regardless of the outcome of any of the preceding matters, responding to the subpoenas and dealing with the various regulatory agencies can adversely affect us through defense costs, diversion of management time, and related publicity.

Results of Operations
Three months ended March 31, 2013 versus  2012 - Consolidated Results
Our service revenues and sales for the first quarter of 2013 increased 3.9% versus services and sales revenues for the first quarter of 2012.  Of this increase, $10.5 million was attributable to VITAS as well as a $3.2 million increase at Roto-Rooter.  The following chart shows the components of those changes (in thousands):

   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
             
Routine homecare
 
$
 10,063
   
 5.4
 
Continuous care
   
 2,804
   
 6.6
 
General inpatient
   
 (684)
   
 (2.3)
 
Medicare cap
   
 (1,704)
   
 (66.1)
 
Roto-Rooter
             
Plumbing
   
 (390)
   
 (0.9
Drain cleaning
   
 2,606
   
 7.4
 
Contractor operations
   
 1,528
   
 22.9
 
HVAC operations
   
 (544)
   
 (100.0
Other
   
 19
   
 0.3
 
Total
 
$
 13,698
   
 3.9
 
 
 
-20-

 
 
The increase in VITAS’ revenues for the first quarter of 2013 versus the first quarter of 2012 was a result of increased ADC of 5.3% driven by an increase in admissions of 5.0%, increased discharges of 4.0% and Medicare reimbursement rate increases of approximately 0.9%.  In the first quarter of 2013, VITAS recorded a positive revenue adjustment of $0.9 million related to eliminating the Medicare Cap billing limitation recorded in the fourth quarter of 2012.  This compares with $2.6 million of additional revenue recorded in the first quarter of 2012.  The ADC increase was driven by a 5.4% increase in routine homecare, an increase of 7.8% in continuous care and a decrease of 0.8% in general inpatient.  In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The decrease in plumbing revenues for the first quarter of 2013 versus 2012 is attributable to a 4.2% decrease in job count offset by a 2.1% increase in the average price per job.  Drain cleaning revenues for the first quarter of 2013 versus 2012 reflect a 3.0% increase in the number of jobs perfomed as well as a 4.3% increase in the price per job.  Contractor operations revenue increased 22.9% for the first quarter of 2013 due to four acquisitions that were completed in 2012 as well as improved operating conditions.  HVAC operations decreased as a result of the shut-down of Roto-Rooter’s one remaining HVAC operation during the third quarter of 2012.  The Other category was essentially flat when compared to the first quarter of 2012.
 
The consolidated gross margin was 27.9% in the first quarter of 2013 as compared with 27.1% in the first quarter of 2012.  On a segment basis, VITAS’ gross margin was 21.4% in the first quarter of 2013 and 21.2% in the first quarter of 2012.  The Roto-Rooter segment’s gross margin was 46.3% for the first quarter of 2013 as compared with 43.7% for the first quarter of 2012.  The increase in Roto-Rooter’s gross margin is the result of higher revenue, lower health care and casualty insurance costs and reduced field operating expenses.
 
Selling, general and administrative expenses (“SG&A”) comprise (in thousands):

   
Three months ended March 31,
 
   
2013
   
2012
 
SG&A expenses before the impact of market gains of deferred compensation
           
plans, long-term incentive compensation, and OIG investigation expenses
  $ 52,437     $ 50,963  
Long-term incentive compensation
    612       -  
Expenses related to OIG investigation
    1,039       71  
Impact of market value gains on liabilities held in
               
deferred compensation trusts
    1,472       2,133  
Total SG&A expenses
  $ 55,560     $ 53,167  

Normal salary increases and revenue related expense increases between periods account for the 2.9% increase in SG&A expenses before long-term incentive compensation, expenses related to OIG investigation and the impact of market gains of deferred compensation plans.

Interest expense increased 13.2% between periods primarily as a result of the increase in amortization of bond discount expense and the increase in deferred debt issuance costs resulting from the 2013 Credit Agreement.

Other income - net comprise (in thousands):
             
   
Three months ended March 31,
 
   
2013
   
2012
 
Market value gains on assets held in deferred
           
compensation trusts
  $ 1,472     $ 2,133  
Loss on disposal of property and equipment
    (78 )     (81 )
Interest income
    303       51  
Other
    9       (8 )
Total other income - net
  $ 1,706     $ 2,095  
 
Our effective income tax rate was 38.9% in the first quarter of 2013 and in the first quarter of 2012.

 
-21-

 
 
Net income for both periods included the following after-tax items/adjustments that reduced after-tax earnings (in thousands):
             
   
Three months ended March 31,
 
   
2013
   
2012
 
VITAS
           
Legal expenses of OIG investigation
  $ (644 )   $ (44 )
Roto-Rooter
               
Expenses of severance arrangements
    (184 )     -  
Expenses of class action litigation
    (86 )     (393 )
Acquisition expenses
    -       (9 )
Corporate
               
Stock option expense
    (943 )     (1,225