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CHE > SEC Filings for CHE > Form 10-Q on 25-Jul-2013All Recent SEC Filings

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Form 10-Q for CHEMED CORP


25-Jul-2013

Quarterly Report


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

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

The following is a summary of the key operating results (in thousands except per share amounts):

                                        Three months ended June 30,            Six months ended June 30,
                                         2013                 2012              2013                2012
Service revenues and sales          $      357,198       $      354,170     $     723,839       $    707,113
Net income                          $       14,608       $       21,274     $      36,886       $     41,719
Diluted EPS                         $         0.77       $         1.10     $        1.94       $       2.16
Adjusted net income                 $       27,232       $       24,330     $      53,372       $     47,670
Adjusted diluted EPS                $         1.44       $         1.26     $        2.81       $       2.46
Adjusted EBITDA                     $       52,943       $       48,173     $     104,239       $     94,513
Adjusted EBITDA as a % of revenue             14.8 %               13.6 %            14.4 %             13.4 %

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization ("EBITDA") and Adjusted EBITDA are not measures derived in accordance with GAAP. We use Adjusted EBITDA as a measure of earnings for our long-term incentive plan awards. We provide non-GAAP measures to help readers evaluate our operating results, compare our operating performance with that of similar companies that have different capital structures and help evaluate our ability to meet future debt service, capital expenditure and working capital requirements. Our non-GAAP measures should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP. A reconciliation of our non-GAAP measures are presented on pages 31- 33.

For the three months ended June 30, 2013, the increase in consolidated service revenues and sales was driven by a 5.3% increase at Roto-Rooter and a 0.6% decrease at VITAS. The increase in service revenues at Roto-Rooter was driven by a 2.4% increase in job count as well as a 2.9% increase in price and mix shift. The decrease in service revenues at VITAS was a result of Medicare reimbursement rates declining approximately 1.1%, increased ADC of 4.0%, an $855,000 Medicare cap charge during the quarter and level of care mix shift. Consolidated net income decreased 31.3% primarily as a result of a tentative litigation settlement at Roto-Rooter. Diluted EPS decreased 30.0% as a result of the decrease in net income offset by a lower number of shares outstanding. Adjusted EBITDA as a percent of revenue increased 1.2% mainly as a result of improved gross profit margins at Roto-Rooter. See page 34 for additional VITAS operating metrics.

For the six months ended June 30, 2013, the increase in consolidated service revenues and sales was driven by a 4.4% increase at Roto-Rooter and a 1.7% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by a 1.8% increase in job count as well as a 2.6% increase in price and mix shift. The increase in service revenues at VITAS was a result of a decrease in Medicare reimbursement rates, increased ADC of 4.7%, a $2.6 million net reversal of Medicare cap in 2012 that did not recur in 2013 and level of care mix shift. Consolidated net income decreased 11.6% primarily as a result of a tentative litigation settlement at Roto-Rooter. Diluted EPS decreased 10.2% as a result of the decrease in net income offset by a lower number of shares outstanding. Adjusted EBITDA as a percent of revenue increased 1.0% mainly as a result of improved gross profit margins at Roto-Rooter. See page 34 for additional VITAS operating metrics.

Effective October 1, 2012, Medicare increased the hospice reimbursement rates by approximately 0.9% and effective April 1, 2013, as a result of sequestration, Medicare reduced hospice reimbursement rates for Medicare beneficiaries 2.0% for a net decline of 1.1% in reimbursement rates. The effect of changes in Medicare reimbursement rates impacts approximately 91.2% of VITAS' revenue base. VITAS expects to achieve full-year 2013 revenue growth, prior to Medicare cap, of 0.5% to 2.0%. Admissions are estimated to increase approximately 2.0% to 4.0%. Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 14.0% to 14.5%. Roto-Rooter expects full-year 2013 revenue of 4.0% to 5.0%. The revenue estimate is a result of increased pricing of approximately 3.5%, a favorable mix shift to higher revenue jobs, with job count estimated to increase 0.5% to 1.0%. Adjusted EBITDA margin for 2013 is estimated to be in the range of 19.0% 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.

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Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2012 to June 30, 2013 include the following:

? A $17.0 million decrease in accounts receivable related to the timing of receipts.

? A $12.6 million decrease in accounts payable due to timing of payments.

? A $16.5 million increase in other current liabilities primarily due to a litigation settlement at Roto-Rooter.

? A $179.2 million reclass of our convertible notes from long-term to current as they are due in May 2014.

Net cash provided by operating activities increased $30.0 million primarily as a result of a decrease in accounts receivable and an increase in 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 $33.0 million in standby letters of credit as of June 30, 2013, for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of June 30, 2013, we have approximately $317.0 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, 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. In June 2013 the parties reached an agreement to settle the case for $14.3 million plus applicable payroll taxes ($9.0 million total after tax), which is subject to Court approval. As such, $14.8 million is recorded as other operating expense in the quarter ended June 30, 2013 Statement of Income.

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. On June 7, 2013, following the filing of U.S. v. VITAS, discussed below, Plaintiffs' filed a motion for leave to file a second amended complaint. Defendants oppose this motion. Defendants believe the Plaintiffs claims are without merit, and intend to defend vigorously against them.

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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 OIG 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.

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. On May 1, 2013 following the plaintiff's motion to dismiss voluntarily and the government's consent, the Court dismissed this 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.

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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 ("Urick"). 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 ("Spottiswood"). 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. On May 29 and June 4, 2013, respectively, the Court granted the government's motion to partially intervene in Spottiswood and in Urick on the allegations that Vitas submitted or caused to be submitted false or fraudulent claims for continuous care and routine home care on behalf of certain ineligible Medicare beneficiaries. The Court also transferred them to the U.S. District Court for the Western District of Missouri under docket Nos. 4:13-cv-505 and 4:13-cv-563, respectively. The government has told Vitas it intends to consolidate these cases with the 2013 Action described below.

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.

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.

On May 2, 2013, the government filed a False Claims Act complaint against the Company and certain of its hospice-related subsidiaries in the U.S. District Court for the Western District of Missouri, United States v. VITAS Hospice Services, LLC, et al., 4:13-cv-00449-BCW (the "2013 Action"). The 2013 Action alleges that, since at least 2002, VITAS, and since 2004, the Company, submitted or caused the submission of false claims to the Medicare program by (a) billing Medicare for continuous home care services when the patients were not eligible, the services were not provided, or the medical care was inappropriate, and (b) billing Medicare for patients who were not eligible for the Medicare hospice benefit because they did not have a life expectancy of six months or less if their illnesses ran their normal course. This complaint seeks treble damages, statutory penalties, and the costs of the action, plus interest.

On May 6, 2013, the U.S. District Court for the Western District of Missouri, at the request of the government, unsealed a qui tam complaint against VITAS and VITAS Healthcare Corporation of California, United States ex rel. Charles Gonzales v. Vitas Healthcare Corporation, et al., CV 12-0761-R ("Gonzales"). The case was transferred from the Central District of California to the Western District of Missouri under docket No. 4:13-cv-344. The government has filed a notice of election to intervene in the Gonzales complaint. The Gonzales complaint alleges that VITAS' Los Angeles program falsely certified and recertified patients as eligible for the Medicare Hospice Benefit. It alleges violations of the False Claims Act and seeks treble damages, civil penalties, recovery of costs, attorneys' fees and expenses, and pre- and post-judgment interest. In its notice of election to intervene in Gonzales, the government stated that it intends to seek to consolidate the 2013 Action with Gonzales as a related matter. Upon consolidation, the government stated that the complaint in the 2013 Action will supersede the Gonzales complaint.

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The Company intends to defend vigorously against the allegations in each of the above lawsuits. The costs to comply with these investigations were $996,000 and $2.0 million for the three and six month periods ended June 30, 2013. 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 June 30, 2013 versus 2012 - Consolidated Results
Our service revenues and sales for the second quarter of 2013 increased 0.9%
versus services and sales revenues for the second quarter of 2012. Of this
increase, $4.6 million was attributable to Roto-Rooter offset by a $1.6 million
decrease at VITAS. The following chart shows the components of those changes (in
thousands):

                          Increase/(Decrease)
                          Amount        Percent
VITAS
Routine homecare         $    7,123         3.7
Continuous care              (4,555 )     (10.6 )
General inpatient            (3,358 )     (11.5 )
Medicare cap                   (855 )         -
Roto-Rooter
Plumbing                      1,421         3.4
Drain cleaning                2,791         8.3
Contractor operations         1,345        19.8
HVAC operations                (577 )    (100.0 )
Other                          (307 )      (5.5 )
Total                    $    3,028         0.9

The decrease in VITAS' revenues for the second quarter of 2013 versus the second quarter of 2012 was a combination of Medicare reimbursement rates declining approximately 1.1%, increased ADC of 4.0%, and level of care mix shift. In the second quarter of 2013, VITAS recorded a Medicare Cap charge of $855,000 related to one program's projected 2013 Medicare Cap liability. This compares with no Medicare Cap liability recorded in the second quarter of 2012. The ADC increase was driven by a 5.0% increase in routine homecare, a decrease of 8.6% in continuous care and a decrease of 6.9% in general inpatient. 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 2013 versus 2012 is attributable to a 1.1% decrease in job count offset by a 4.5% increase in price and mix shift. Drain cleaning revenues for the second quarter of 2013 versus 2012 reflect a 4.8% increase in the number of jobs perfomed as well as a 3.5% increase in price and mix shift. Contractor operations revenue increased 19.8% for the second 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 consolidated gross margin was 28.5% in the second quarter of 2013 as compared with 27.3% in the second quarter of 2012. On a segment basis, VITAS' gross margin was 21.9% in the second quarter of 2013 and 21.6% in the second quarter of 2012. The Roto-Rooter segment's gross margin was 47.1% for the second quarter of 2013 as compared with 44.3% for the second 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.

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

                                                                   Three months ended June 30,
                                                                    2013                 2012
SG&A expenses before the impact of market gains of deferred
compensation
plans, long-term incentive compensation, and OIG
investigation expenses                                         $       50,554       $       50,523
Long-term incentive compensation                                          494                    -
Expenses related to OIG investigation                                     996                  195
Impact of market value gains/(losses) on liabilities held in
deferred compensation trusts                                            1,063                 (948 )
Total SG&A expenses                                            $       53,107       $       49,770

SG&A expenses before long-term incentive compensation, expenses related to OIG investigation and the impact of market gains of deferred compensation plans for the second quarter of 2013 were essentially flat when compared to the second quarter of 2012.

. . .

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