XNYS:CHE Chemed Corporation Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

CHE Fair Value Estimate
Premium
CHE Consider Buying
Premium
CHE Consider Selling
Premium
CHE Fair Value Uncertainty
Premium
CHE Economic Moat
Premium
CHE Stewardship
Premium
 


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, 2012
 
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-8351

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
 
No
X
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
 
Amount
 
Date
         
Capital Stock $1 Par Value
 
19,228,654 Shares
 
March 31, 2012
         



 
-1-
 
 
 
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES



Index

   
Page No.
 
PART I.    FINANCIAL INFORMATION:
     
Item 1.  Financial Statements
     
Unaudited Consolidated Balance Sheet -
March 31, 2012 and December 31, 2011
    3  
         
Unaudited Consolidated Statement of Income -
Three months ended March 31, 2012 and 2011
    4  
         
Unaudited Consolidated Statement of Cash Flows -
Three months ended March 31, 2012 and 2011
    5  
         
Notes to Unaudited Financial Statements
    6  
         
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
    16  
         
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
    25  
         
Item 4.  Controls and Procedures
    25  
         
PART II.   OTHER INFORMATION
       
Item 1.    Legal Proceedings
    25  
         
Item 1A. Risk Factors
    25  
         
Item 2.    Unregistered Sales of Equity Securities and Use of  Proceeds
    25  
         
Item 3.    Defaults Upon Senior Securities
    25  
         
Item 4.    Mine Safety Disclosures
    25  
         
Item 5.    Other Information
    26  
         
Item 6.    Exhibits
    26  
EX – 31.1
EX – 31.2
EX – 31.3
EX – 32.1
EX – 32.2
EX – 32.3
EX – 101.INS
EX – 101.SCH
EX – 101.CAL
EX – 101.DEF
EX – 101.LAB
EX – 101.PRE
 
 
-2-

 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
UNAUDITED CONSOLIDATED BALANCE SHEET
 
(in thousands, except share and per share data)
 
             
             
   
March 31,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 34,214     $ 38,081  
Accounts receivable less allowances of $11,376 (2011 - $11,524)
    110,656       77,924  
Inventories
    8,468       8,668  
Current deferred income taxes
    13,725       12,540  
Prepaid income taxes
    637       2,131  
Prepaid expenses
    9,576       11,409  
Total current assets
    177,276       150,753  
Investments of deferred compensation plans
    35,055       31,629  
Properties and equipment, at cost, less accumulated depreciation of $151,451 (2011 - $146,709)
    88,579       82,951  
Identifiable intangible assets less accumulated amortization of $29,278 (2011 - $28,904)
    57,941       58,262  
Goodwill
    461,064       460,633  
Other assets
    11,568       11,677  
Total Assets
  $ 831,483     $ 795,905  
                 
LIABILITIES
               
Current liabilities
               
Accounts payable
  $ 52,999     $ 48,225  
Income taxes
    13,334       90  
Accrued insurance
    37,305       37,147  
Accrued compensation
    35,834       41,087  
Other current liabilities
    15,724       18,851  
Total current liabilities
    155,196       145,400  
Deferred income taxes
    27,256       29,463  
Long-term debt
    168,759       166,784  
Deferred compensation liabilities
    34,186       30,693  
Other liabilities
    11,629       9,881  
Total Liabilities
    397,026       382,221  
                 
STOCKHOLDERS' EQUITY
               
Capital stock - authorized 80,000,000 shares $1 par; issued 31,063,058 shares (2011 - 30,936,925 shares)
    31,063       30,937  
Paid-in capital
    404,546       398,094  
Retained earnings
    564,130       546,757  
Treasury stock - 11,931,736 shares (2011 - 11,880,051 shares), at cost
    (567,279 )     (564,091 )
Deferred compensation payable in Company stock
    1,997       1,987  
Total Stockholders' Equity
    434,457       413,684  
Total Liabilities and Stockholders' Equity
  $ 831,483     $ 795,905  
                 
   
See accompanying notes to unaudited financial statements.
 

 
-3-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
 
(in thousands, except per share data)
 
             
             
             
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Service revenues and sales
  $ 352,943     $ 330,918  
Cost of services provided and goods sold (excluding depreciation)
    257,445       237,458  
Selling, general and administrative expenses
    53,167       55,654  
Depreciation
    6,241       6,288  
Amortization
    1,113       970  
Total costs and expenses
    317,966       300,370  
Income from operations
    34,977       30,548  
Interest expense
    (3,617 )     (3,244 )
Other income - net
    2,095       2,102  
Income before income taxes
    33,455       29,406  
Income taxes
    (13,010 )     (11,305 )
Net income
  $ 20,445     $ 18,101  
                 
                 
Earnings Per Share
               
Net income
  $ 1.08     $ 0.86  
Average number of shares outstanding
    18,958       21,055  
                 
Diluted Earnings Per Share
               
Net income
  $ 1.06     $ 0.84  
Average number of shares outstanding
    19,353       21,568  
                 
Cash Dividends Per Share
  $ 0.16     $ 0.14  
                 
See accompanying notes to unaudited financial statements.
 

 
-4-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
 
(in thousands)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Cash Flows from Operating Activities
           
Net income
  $ 20,445     $ 18,101  
Adjustments to reconcile net income to net cash provided
               
by operating activities:
               
Depreciation and amortization
    7,354       7,258  
Provision for deferred income taxes
    (3,397 )     814  
Provision for uncollectible accounts receivable
    2,245       2,111  
Amortization of discount on convertible notes
    1,975       1,846  
Stock option expense
    1,938       1,933  
Noncash long-term incentive compensation
    -       2,595  
Changes in operating assets and liabilities, excluding
               
amounts acquired in business combinations:
               
Decrease/(increase) in accounts receivable
    (34,949 )     17,923  
Decrease/(increase) in inventories
    200       (239 )
Decrease in prepaid expenses
    1,833       747  
Decrease in accounts payable and other current liabilities
    (3,894 )     (12,137 )
Increase in income taxes
    15,532       9,739  
Increase in other assets
    (3,654 )     (3,667 )
Increase in other liabilities
    5,241       3,227  
Excess tax benefit on share-based compensation
    (797 )     (1,895 )
Other sources
    309       185  
Net cash provided by operating activities
    10,381       48,541  
Cash Flows from Investing Activities
               
Capital expenditures
    (12,018 )     (6,173 )
Business combinations, net of cash acquired
    (415 )     -  
Other sources/(uses)
    311       (109 )
Net cash used by investing activities
    (12,122 )     (6,282 )
Cash Flows from Financing Activities
               
Dividends paid
    (3,072 )     (2,977 )
Purchases of treasury stock
    (1,431 )     (24,260 )
Proceeds from issuance of capital stock
    1,042       3,647  
Excess tax benefit on share-based compensation
    797       1,895  
Increase/(decrease) in cash overdrafts payable
    226       (8,310 )
Debt issuance costs
    -       (2,708 )
Other sources
    312       282  
Net cash used by financing activities
    (2,126 )     (32,431 )
Increase/(Decrease) in Cash and Cash Equivalents
    (3,867 )     9,828  
Cash and cash equivalents at beginning of year
    38,081       49,917  
Cash and cash equivalents at end of period
  $ 34,214     $ 59,745  
                 
See accompanying notes to unaudited financial statements.
 

 
-5-

 
 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements

1.  Basis of Presentation
 As used herein, the terms "We," "Company" and "Chemed" refer to Chemed Corporation or Chemed Corporation and its consolidated subsidiaries.
 
We have prepared the accompanying unaudited consolidated financial statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.  Consequently, we have omitted certain disclosures required under generally accepted accounting principles in the United States (“GAAP”) for complete financial statements.  The December 31, 2011 balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP.  However, in our opinion, the financial statements presented herein contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows.  These financial statements are prepared on the same basis as and should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.

2.  Revenue Recognition
Both the VITAS segment and the Roto-Rooter segment recognize service revenues and sales when the earnings process has been completed.  Generally, this occurs when services are provided or products are delivered.  VITAS recognizes revenue at the estimated realizable amount due from third-party payers.  Medicare payments are subject to certain limitations, as described below.
 
As of March 31, 2012, VITAS has approximately $838,000 in unbilled revenue included in accounts receivable (December 31, 2011 - $720,000).  The unbilled revenue at VITAS relates to hospice programs currently undergoing focused medical reviews (“FMR”).  During FMR, surveyors working on behalf of the U.S. Federal government review certain patient files for compliance with Medicare regulations.  During the time the patient file is under review, we are unable to bill for care provided to those patients.  We make appropriate provisions to reduce our accounts receivable balance for potential denials of patient service revenue due to FMR activity.
 
We actively monitor each of our hospice programs, by provider number, as to their specific admission, discharge rate and median length of stay data in an attempt to determine whether they are likely to exceed the annual per-beneficiary Medicare cap (“Medicare cap”).  Should we determine that revenues for a program are likely to exceed the Medicare cap based on projected trends, we attempt to institute corrective action to influence the patient mix or to increase patient admissions.  However, should we project our corrective action will not prevent that program from exceeding its Medicare cap, we estimate the amount of revenue recognized during the period that will require repayment to the Federal government under the Medicare cap and record the amount as a reduction to patient revenue.  The Medicare cap measurement period is from September 29 through September 28 of the following year for admissions and from November 1 through October 31 of the following year for revenue.

During the three-month period ended March 31, 2012, we reversed Medicare cap liability for amounts recorded in the fourth quarter of 2011 for three programs’ projected 2012 measurement period liability.  We reversed these amounts as improving admissions trends in these programs indicate that the liability had been eliminated.

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

   
March 31,
 
   
2012
   
2011
 
Beginning balance January 1,
  $ 2,965     $ 1,371  
Reversal - 2012 measurement period
    (2,577 )     -  
Reversal - 2011 measurement period
    -       (812 )
Other
    -       (198 )
Ending balance March 31,
  $ 388     $ 361  
 
 
-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,
 
2012
   
2011
 
$ 2,250     $ 1,760  

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

     
Three months ended
 
     
March 31,
 
     
2012
   
2011
 
Service Revenues and Sales
       
 
 
VITAS
    $ 260,847     $ 235,673  
Roto-Rooter
      92,096       95,245  
 
Total
  $ 352,943     $ 330,918  
                   
After-tax Earnings
               
VITAS
    $ 19,627     $ 18,125  
Roto-Rooter
      7,496       8,511  
 
Total
    27,123       26,636  
Corporate
      (6,678 )     (8,535 )
 
Net income
  $ 20,445     $ 18,101  

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
 
2012
                 
Earnings
  $ 20,445       18,958     $ 1.08  
Dilutive stock options
    -       304          
Nonvested stock awards
    -       91          
     Diluted earnings
  $ 20,445       19,353     $ 1.06  
                         
2011
                       
Earnings
  $ 18,101       21,055     $ 0.86  
Dilutive stock options
    -       430          
Nonvested stock awards
    -       83          
     Diluted earnings
  $ 18,101       21,568     $ 0.84  
 
For the three-month period ended March 31, 2012, 1.4 million stock options were excluded from the computation of diluted earnings per share as their exercise prices were greater than the average market price for most of the period. For the three month period ended March 31, 2011, 979,000 stock options were excluded from the computation of diluted earnings per share.

 
-7-

 
 
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, 2012.  It also shows the impact on the number of shares issuable upon conversion of the Notes and settlement of the purchased call options and sold warrants:

   
 Shares
     
 Total Treasury
 
 Shares Due
 
 Incremental
   
 Underlying 1.875%
     
 Method
 
 to the Company
 
 Shares Issued/
 Share
 
 Convertible
 
 Warrant
 
 Incremental
 
 under Notes
 
 Received by the Company
 Price
 
 Notes
 
 Shares
 
 Shares (a)
 
 Hedges
 
 upon Conversion (b)
 $         80.73
 
                            35,902
 
                  -
 
                   35,902
 
                 (38,407)
 
                                      (2,505)
 $         90.73
 
                          291,145
 
                  -
 
                 291,145
 
               (311,458)
 
                                    (20,313)
 $       100.73
 
                          495,709
 
                  -
 
                 495,709
 
               (530,295)
 
                                    (34,586)
 $       110.73
 
                          663,325
 
      120,190
 
                 783,515
 
               (709,606)
 
                                     73,909
 $       120.73
 
                          803,174
 
      318,617
 
              1,121,791
 
               (859,212)
 
                                   262,579
 $       130.73
 
                          921,628
 
      486,687
 
              1,408,315
 
               (985,930)
 
                                   422,385
                     
      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 March 1, 2011, we replaced our existing credit agreement with our Revolving Credit Facility (“2011 Credit Agreement”).  Terms of the 2011 Credit Agreement consist of a five-year, $350 million revolving credit facility.  This 2011 Credit Agreement has a floating interest rate that is currently LIBOR plus 175 basis points.  The 2011 Credit Agreement also includes a $150 million expansion feature.  The 2011 Credit Agreement contains the following quarterly financial covenants:

Description
 
Requirement
     
Leverage Ratio (Consolidated Indebtedness/Consolidated  Adj. EBITDA)
 
< 3.50 to 1.00
     
Fixed Charge Coverage Ratio (Consolidated Free Cash Flow/Consolidated Fixed Charges)
 
> 1.50 to 1.00
     
Annual Operating Lease Commitment
 
< $30.0 million
 
We are in compliance with all debt covenants as of March 31, 2012.  We have issued $29.4 million in standby letters of credit as of March 31, 2012 for insurance purposes.  Issued letters of credit reduce our available credit under the 2011 Credit Agreement.  As of March 31, 2012, we have approximately $320.6 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $150 million expansion feature.

 
-8-

 
 
The following amounts are included in our consolidated balance sheet related to the Notes:

   
March 31,
2012
   
December 31,
2011
 
Principal amount of convertible debentures
  $ 186,956     $ 186,956  
Unamortized debt discount
    (18,197 )     (20,172 )
Carrying amount of convertible debentures
  $ 168,759     $ 166,784  
Additional paid in capital (net of tax)
  $ 31,310     $ 31,310  

The following amounts comprise interest expense included in our consolidated income statement (in thousands):

   
Three months ended 
March 31,
 
   
2012
   
2011
 
Cash interest expense
  $ 1,334     $ 1,152  
Non-cash amortization of debt discount
    1,975       1,846  
Amortization of debt costs
    308       246  
Total interest expense
  $ 3,617     $ 3,244  
 
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%.

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

   
Three months ended 
March 31,
 
   
2012
   
2011
 
Market value gains on assets held in
           
    deferred compensation trust
  $ 2,133     $ 2,064  
Loss on disposal of property and equipment
    (81 )     (21 )
Interest income
    51       61  
Other -- net
    (8 )     (2 )
     Other income -- net
  $ 2,095     $ 2,102  

 7.      Stock-Based Compensation Plans
On February 17, 2012, the Compensation/Incentive Committee of the Board of Directors (CIC) approved a grant of 35,969 shares of restricted stock to certain key employees.  The restricted shares cliff vest four years from the date of issuance.  The cumulative compensation expense related to the restricted stock award is $2.3 million and will be recognized ratably over the 4 year vesting period.  We assumed no forfeitures in determining the cumulative compensation expense of the grant.
 
On February 17, 2012, the CIC approved a grant of 442,350 stock options to certain employees.  The stock options vest ratably over three years from the date of issuance.  The cumulative compensation expense related to the stock option grant is $7.1 million and will be recognized over the 3 year vesting period.  We used the Black-Scholes option valuation method to determine the cumulative compensation expense of the grant.

 
-9-

 
 
8.    Independent Contractor Operations
The Roto-Rooter segment sublicenses with 64 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, 2012 totaling $1.1 million (December 31, 2011 - $1.1 million).  In most cases these loans are fully or partially secured by equipment owned by the contractor.  The interest rates on the loans range from 0% to 8% per annum and the remaining terms of the loans range from 2 months to 5 years at March 31, 2012.  We recorded the following from our independent contractors (in thousands):

   
Three months ended 
March 31,
 
   
2012
   
2011
 
Revenues
  $ 6,682     $ 6,512  
Pretax profits
    3,082       2,987  

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

Three months ended
 
March 31,
 
2012
   
2011
 
$ 4,695     $ 4,082  

10.      Legal and Regulatory Matters
Litigation
On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from Roto-Rooter and Chemed.  They also seek payment of penalties, interest and plaintiffs’ attorney fees.  We contest these allegations.  In September 2010, the Court conditionally certified a nationwide class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  We are unable to estimate our potential liability, if any, with respect to this case.
 
VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White.  This case alleges failure to pay overtime and failure to provide meal and rest periods to a purported class of California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  We contest these allegations.  In December 2009, the trial court denied Plaintiffs’ motion for class certification.  In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims.  Plaintiffs have filed an appeal of this decision.  We are unable to estimate our potential liability or potential range of loss, if any, with respect to this case.
 
On November 14, 2011 Luann and Michael Cosgrove and Dawn Mills filed a class action lawsuit against Roto-Rooter in Minnesota state district court for the 4th Judicial District alleging unnecessary excavation work in Minnesota.  We removed the case to federal court.  Plaintiffs seek damages, injunctive relief, attorney fees and interest.  We contest these allegations.  This lawsuit is in its early stage and we are unable to estimate our potential liability, if any, with respect to these allegations.
 
On January 12, 2012, the Greater Pennsylvania Carpenters Pension Fund filed a putative class action lawsuit in the United States District Court for the Southern District of Ohio against the Company, Kevin McNamara, David Williams, and Tim O’Toole.  It alleges 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 the individual defendants. The suit, Greater Pennsylvania Carpenters Pension Fund v. Chemed Corp., et al., Civil Action No. 1:12-cv-28 (S.D. Ohio), concerns the VITAS hospice segment of the Company's business.   Plaintiff seeks, 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 believe the allegations are without merit, and intend to defend vigorously against them.

 
-10-

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

Regulatory Matters
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the OIG documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review.   In February 2010, VITAS received a companion civil investigative demand (“CID”) from the State of Texas Attorney General’s Office, seeking related documents. In September 2010, it received a second CID and a second administrative subpoena seeking related documents.  In April 2011, the U.S. Attorney provided the Company with a copy of qui tam complaint filed under seal in the U.S. District Court for the Northern District of Texas.  The Court unsealed this complaint in November 2011.  The U.S. Attorney and the Attorney General for the State of Texas filed a notice in November 2011 that they had decided not to intervene at that time in the case.  They continue to investigate its allegations.  It was brought by Michael Rehfelt, a former Vitas San Antonio program general manager, against Vitas, the program’s former Regional Vice President Keith Becker, its former Medical Director Justos Cisneros, and their current employers:  Wellmed Medical Management, Care Level Management LLC, and Inspiris Inc.  Plaintiff dismissed his case against their current employers in March of 2012.  The case alleges admission and recertification of inappropriate patients, backdating revocations, and conspiring to admit inappropriate patients to hospice.  In June 2011, the U.S. Attorney provided the Company with a partially unsealed second qui tam complaint filed under seal in the U.S. District court for the Western District of Texas.  In June 2011, the U.S. Attorney also provided the Company with a partially unsealed third qui tam complaint filed under seal in the Northern District of Illinois, Eastern Division.  We are conferring with the U.S. Attorney regarding the Company’s defenses to each complaint’s allegations.  We can neither predict the outcome of this investigation nor estimate our potential liability, if any.  We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
 
In April 2005, the Office of Inspector General (“OIG”) for the Department of Health and Human Services served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services.  As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review.  It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges.  During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us.  The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florida with prejudice in July 2007.  The plaintiffs appealed this dismissal, which the Court of Appeals affirmed.  The government continues to investigate the complaint’s allegations.  In March 2009, we received a letter from the government reiterating the basis of their investigation.  We are unable to estimate our potential liability, if any, with respect to this matter.
 
The costs to comply with either of these investigations were not material for any period presented.  Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

11.      Concentration of Risk
VITAS has pharmacy services agreements ("Agreements") with Omnicare, Inc. and its subsidiaries (“OCR”) whereby OCR provides specified pharmacy services for VITAS and its hospice patients in geographical areas served by both VITAS and OCR.  The Agreements renew automatically for one-year terms.  Either party may cancel the Agreements at the end of any term by giving 90 days prior written notice.  VITAS made purchases from OCR of $10.0 million and $9.3 million for the three months ended March 31, 2012 and 2011, respectively.  For March 31, 2012 and 2011, respectively, purchases from this vendor represent over 90% of all pharmacy services used by VITAS.

 
-11-

 
 
12.  Cash Overdrafts and Cash Equivalents
Included in accounts payable at March 31, 2012 is cash overdrafts payable of $10.5 million (December 31, 2011 - $10.3 million).
 
From time to time throughout the year, we invest excess cash in money market funds or repurchase agreements directly with major commercial banks.  We do not physically hold the collateral for repurchase agreements, but the term is less than 10 days.  We closely monitor the creditworthiness of the institutions with which we invest our overnight funds and the quality of the collateral underlying those investments.  We had $26.3 million in cash equivalents as of   March 31, 2012.  There was $32.5 million in cash equivalents as of December 31, 2011.  The weighted average rate of return for our cash equivalents was 0.2% for March 31, 2012 and 0.1% for December 31, 2011.

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

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of March 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
  $ 35,055     $ 35,055     $ -     $ -  
Long-term debt
    168,759       191,370       -       -  

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

14.  Capital Stock Transactions
We repurchased the following capital stock for the three months ended March 31, 2012 and 2011:
 
   
Three months ended
March 31,
 
   
2012
   
2011
 
             
Shares repurchased
    -       341,513  
Weighted average price per share
  $ -     $ 63.79  

15.  Business Combinations
On January 31, 2012, we completed one business combination within our Roto-Rooter segment for $415,000 in cash to increase our market penetration in Bend, Oregon.  The purchase price of this acquisition is allocated as follows (in thousands):

Goodwill
  $ 340  
Identifiable intangible assets
    52  
Other assets
    23  
    $ 415  
 
The operating results of this business combination have been included in our results of operations since the acquisition date and are not material for the three-month period ended March 31, 2012.

 
-12-

 
 
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, 2012 and December 31, 2011 for the balance sheet, the three months ended March 31, 2012 and March 31, 2011 for the income statement and the three months ended March 31, 2012  and  March 31, 2011 for the statement of cash flows (dollars in thousands):
 
March 31 2012
       
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                             
Cash and cash equivalents
  $ 26,204     $ 668     $ 7,342     $ -     $ 34,214  
Accounts receivable, less allowances
    1,126       109,059       471       -       110,656  
Intercompany receivables
    -       270,012       -       (270,012 )     -  
Inventories
    -       7,732       736       -       8,468  
Current deferred income taxes
    (568 )     14,099       194       -       13,725  
Prepaid income taxes
    2,669       (1,686 )     (346 )     -       637  
Prepaid expenses
    363       9,091       122       -       9,576  
     Total current assets
    29,794       408,975       8,519       (270,012 )     177,276  
Investments of deferred compensation plans
    -       -       35,055       -       35,055  
Properties and equipment, at cost, less accumulated depreciation
    11,422       74,458       2,699       -       88,579  
Identifiable intangible assets less accumulated amortization
    -       57,941       -       -       57,941  
Goodwill
    -       456,523       4,541       -       461,064  
Other assets
    7,329       1,721       2,518       -       11,568  
Investments in subsidiaries
    813,062       22,366       -       (835,428 )     -  
          Total assets
  $ 861,607     $ 1,021,984     $ 53,332     $ (1,105,440 )   $ 831,483  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                       
Accounts payable
  $ (823 )   $ 53,481     $ 341     $ -     $ 52,999  
Intercompany payables
    266,329       -       3,683       (270,012 )     -  
Income taxes
    (2,016 )     14,094       1,256       -       13,334  
Accrued insurance
    805       36,500       -       -       37,305  
Accrued compensation
    981       34,326       527       -       35,834  
Other current liabilities
    2,993       12,413       318       -       15,724  
      Total current liabilities
    268,269       150,814       6,125       (270,012 )     155,196  
Deferred income taxes
    (12,755 )     50,599       (10,588 )     -       27,256  
Long-term debt
    168,759       -       -       -       168,759  
Deferred compensation liabilities
    -       -       34,186       -       34,186  
Other liabilities
    2,877       6,282       2,470       -       11,629  
Stockholders' equity
    434,457       814,289       21,139       (835,428 )     434,457  
     Total liabilities and stockholders' equity
  $ 861,607     $ 1,021,984     $ 53,332     $ (1,105,440 )   $ 831,483  
                                         
                                         
                                         
December 31, 2011
         
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                                       
Cash and cash equivalents
  $ 32,470     $ (1,422 )   $ 7,033     $ -     $ 38,081  
Accounts receivable, less allowances
    606       76,816       502       -       77,924  
Intercompany receivables
    -       273,413       -       (273,413 )     -  
Inventories
    -       8,032       636       -       8,668  
Current deferred income taxes
    (650 )     13,059       131       -       12,540  
Prepaid income taxes
    (114 )     1,689       556       -       2,131  
Prepaid expenses
    503       10,757       149       -       11,409  
     Total current assets
    32,815       382,344       9,007       (273,413 )     150,753  
Investments of deferred compensation plans
    -       -       31,629       -       31,629  
Properties and equipment, at cost, less accumulated depreciation
    11,641       68,755       2,555       -       82,951  
Identifiable intangible assets less accumulated amortization
    -       58,262       -       -       58,262  
Goodwill
    -       456,183       4,450       -       460,633  
Other assets
    7,616       1,552       2,509       -       11,677  
Investments in subsidiaries
    793,277       21,148       -       (814,425 )     -  
          Total assets
  $ 845,349     $ 988,244     $ 50,150     $ (1,087,838 )   $ 795,905  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                       
Accounts payable
  $ (683 )   $ 48,490     $ 418     $ -     $ 48,225  
Intercompany payables
    269,042       -       4,371       (273,413 )     -  
Income taxes
    -       -       90       -       90  
Accrued insurance
    489       36,658       -       -       37,147  
Accrued compensation
    3,828       36,655       604       -       41,087  
Other current liabilities
    1,719       15,728       1,404       -       18,851  
      Total current liabilities
    274,395       137,531       6,887       (273,413 )     145,400  
Deferred income taxes
    (12,330 )     51,601       (9,808 )     -       29,463  
Long-term debt
    166,784       -       -       -       166,784  
Deferred compensation liabilities
    -       -       30,693       -       30,693  
Other liabilities
    2,816       4,630       2,435       -       9,881  
Stockholders' equity
    413,684       794,482       19,943       (814,425 )     413,684  
     Total liabilities and stockholders' equity
  $ 845,349     $ 988,244     $ 50,150     $ (1,087,838 )   $ 795,905  

 
-13-

 
 
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  
                                         
                                         
For the three months ended March 31, 2011
         
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
Continuing Operations
                                       
Service revenues and sales
  $ -     $ 324,157     $ 6,761     $ -     $ 330,918  
Cost of services provided and goods sold
    -       233,876       3,582       -       237,458  
Selling, general and administrative expenses
    6,684       45,581       3,389       -       55,654  
Depreciation
    239       5,862       187       -       6,288  
Amortization
    355       615       -       -       970  
      Total costs and expenses
    7,278       285,934       7,158       -       300,370  
      Income/ (loss) from operations
    (7,278 )     38,223       (397 )     -       30,548  
Interest expense
    (3,132 )     (112 )     -       -       (3,244 )
Other (expense)/income - net
    3,770       (3,729 )     2,061       -       2,102  
      Income/ (loss) before income taxes
    (6,640 )     34,382       1,664       -       29,406  
Income tax (provision)/ benefit
    2,403       (13,052 )     (656 )     -       (11,305 )
Equity in net income of subsidiaries
    22,338       1,033       -       (23,371 )     -  
Net income
  $ 18,101     $ 22,363     $ 1,008     $ (23,371 )   $ 18,101  

 
-14-

 
 
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:
                               
Change in cash overdrafts payable
    (46 )     272       -       226  
Change in intercompany accounts
    1,607       (841 )     (766 )     -  
Dividends paid to shareholders
    (3,072 )     -       -       (3,072 )
Purchases of treasury stock
    (1,431 )     -       -       (1,431 )
Proceeds from exercise of stock options
    1,042       -       -       1,042  
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  
                                 
For the three months ended March 31, 2011
         
Guarantor
   
Non-Guarantor
         
   
Parent
   
Subsidiaries
   
Subsidiaries
   
Consolidated
 
Cash Flow from Operating Activities:
                               
Net cash provided/(used) by operating activities
  $ (1,095 )   $ 48,715     $ 921     $ 48,541  
Cash Flow from Investing Activities:
                               
Capital expenditures
    (1 )     (5,649 )     (523 )     (6,173 )
Other uses - net
    (48 )     (75 )     14       (109 )
      Net cash used by investing activities
    (49 )     (5,724 )     (509 )     (6,282 )
Cash Flow from Financing Activities:
                               
Purchases of treasury stock
    (24,238 )     -       (22 )     (24,260 )
Change in cash overdrafts payable
    668       (8,978 )     -       (8,310 )
Change in intercompany accounts
    40,963       (40,314 )     (649 )     -  
Proceeds from exercise of stock options
    3,647       -       -       3,647  
Dividends paid to shareholders
    (2,977 )     -       -       (2,977 )
Debt issuance costs
    (2,708 )     -       -       (2,708 )
Realized excess tax benefit on share based compensation
    1,895       -       -       1,895  
Other sources - net
    13       -       269       282  
      Net cash provided/(used) by financing activities
    17,263       (49,292 )     (402 )     (32,431 )
Net increase in cash and cash equivalents
    16,119       (6,301 )     10       9,828  
Cash and cash equivalents at beginning of year
    45,324       (1,571 )     6,164       49,917  
Cash and cash equivalents at end of period
  $ 61,443     $ (7,872 )   $ 6,174     $ 59,745  

 
-15-

 
 
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,
 
   
2012
   
2011
 
Service revenues and sales
  $ 352,943     $ 330,918  
Net income
  $ 20,445     $ 18,101  
Diluted EPS
  $ 1.06     $ 0.84  
Adjusted EBITDA
  $ 46,340     $ 45,618  
Adjusted EBITDA as a % of revenue
    13.1 %     13.8 %
 
Earnings before interest, taxes, 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 23.
 
For the three months ended March 31, 2012, the increase in consolidated service revenues and sales was driven by a 10.7% increase at VITAS partially offset by a 3.3% decrease at Roto-Rooter.  The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 6.1%, driven by an increase in admissions of 3.3% and a 4.4% increase in average length of stay, combined with Medicare price increases of approximately 2.5%.  The decrease in service revenues at Roto-Rooter was driven by a 6.1% decrease in job count partially offset by a 2.5% price and mix shift increase.  The remaining change in Roto-Rooter revenue is related mainly to our independent contractor operations. Consolidated net income increased 12.9%.  Diluted EPS increased 26.2% as a result of the increase in net income and a lower number of shares outstanding.  Adjusted EBITDA as a percent of revenue decreased 0.7% as a result of the decrease in service revenues at Roto-Rooter.  See page 24 for additional VITAS operating metrics.
 
VITAS expects to achieve full-year 2012 revenue growth, prior to Medicare cap, of 5.0% to 8.0%.  Admissions are estimated to increase approximately 2.5% to 4.0%.  Adjusted EBITDA margin prior to Medicare cap is estimated to be 15.0% to 15.5%.  Roto-Rooter expects full-year 2012 revenue growth of 2.0% to 4.0%.  The revenue estimate is a result of increased pricing of approximately 2.0%, a favorable mix shift to higher revenue jobs, with job count estimated to range between down 1.0% to up 1.0%.  Adjusted EBITDA margin for 2012 is estimated to be in the range of 16.5% to 17.5%.  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, 2011 to March 31, 2012 include the following:

 
A $32.7 million increase in accounts receivable related to the timing of payments.
 
A $4.8 million increase in accounts payable related to timing of payments.
 
A $13.2 million increase in income taxes payable related to timing of payments.
 
A $5.3 million decrease in accrued compensation related to the timing of payments of incentive compensation.

 
-16-

 
 
Net cash provided by operating activities decreased by $38.2 million due primarily to the change in accounts receivable partially offset by the change in income taxes.  Management continually evaluates cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of available capital resources.
 
We have issued $29.4 million in standby letters of credit as of March 31, 2012, for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of March 31, 2012, we have approximately $320.6 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $150 million expansion feature. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

Commitments and Contingencies
Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly.  We are in compliance with all financial and other debt covenants as of March 31, 2012 and anticipate remaining in compliance throughout 2012.
 
On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from Roto-Rooter and Chemed.  They also seek payment of penalties, interest and plaintiffs’ attorney fees.  We contest these allegations.  In September 2010, the Court conditionally certified a nationwide class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment.  We are unable to estimate our potential liability, if any, with respect to this case.
 
VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White.  This case alleges failure to pay overtime and failure to provide meal and rest periods to a purported class of California admissions nurses, chaplains and sales representatives.  The case seeks payment of penalties, interest and Plaintiffs’ attorney fees.  We contest these allegations.  In December 2009, the trial court denied Plaintiffs’ motion for class certification.  In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims.  Plaintiffs have filed an appeal of this decision.  We are unable to estimate our potential liability or potential range of loss, if any, with respect to this case.
 
On November 14, 2011 Luann and Michael Cosgrove and Dawn Mills filed a class action lawsuit against Roto-Rooter in Minnesota state district court for the 4th Judicial District alleging unnecessary excavation work in Minnesota.  We removed the case to federal court.  Plaintiffs seek damages, injunctive relief, attorney fees and interest.  We contest these allegations.  This lawsuit is in its early stage and we are unable to estimate our potential liability, if any, with respect to these allegations.
 
On January 12, 2012, the Greater Pennsylvania Carpenters Pension Fund filed a putative class action lawsuit in the United States District Court for the Southern District of Ohio against the Company, Kevin McNamara, David Williams, and Tim O’Toole.  It alleges 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 the individual defendants. The suit, Greater Pennsylvania Carpenters Pension Fund v. Chemed Corp., et al., Civil Action No. 1:12-cv-28 (S.D. Ohio), concerns the VITAS hospice segment of the Company's business.   Plaintiff seeks, 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 believe the allegations are without merit, and intend to defend vigorously against them.

Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.
 
 
-17-

 
 
In May 2009, VITAS received an administrative subpoena from the U.S. Department of Justice requesting VITAS deliver to the OIG documents, patient records, and policy and procedure manuals for headquarters and its Texas programs concerning hospice services provided for the period January 1, 2003 to the date of the letter.  In August 2009, the OIG selected medical records for 59 past and current patients from a Texas program for review.   In February 2010, VITAS received a companion civil investigative demand (“CID”) from the State of Texas Attorney General’s Office, seeking related documents. In September 2010, it received a second CID and a second administrative subpoena seeking related documents.  In April 2011, the U.S. Attorney provided the Company with a copy of qui tam complaint filed under seal in the U.S. District Court for the Northern District of Texas.  The Court unsealed this complaint in November 2011.  The U.S. Attorney and the Attorney General for the State of Texas filed a notice in November 2011 that they had decided not to intervene at that time in the case.  They continue to investigate its allegations.  It was brought by Michael Rehfelt, a former Vitas San Antonio program general manager, against Vitas, the program’s former Regional Vice President Keith Becker, its former Medical Director Justos Cisneros, and their current employers:  Wellmed Medical Management, Care Level Management LLC, and Inspiris Inc.  Plaintiff dismissed his case against their current employers in March of 2012.  The case alleges admission and recertification of inappropriate patients, backdating revocations, and conspiring to admit inappropriate patients to hospice.  In June 2011, the U.S. Attorney provided the Company with a partially unsealed second qui tam complaint filed under seal in the U.S. District court for the Western District of Texas.  In June 2011, the U.S. Attorney also provided the Company with a partially unsealed third qui tam complaint filed under seal in the Northern District of Illinois, Eastern Division.  We are conferring with the U.S. Attorney regarding the Company’s defenses to each complaint’s allegations.  We can neither predict the outcome of this investigation nor estimate our potential liability, if any.  We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
 
In April 2005, the Office of Inspector General (“OIG”) for the Department of Health and Human Services served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services.  As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review.  It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges.  During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us.  The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florida with prejudice in July 2007.  The plaintiffs appealed this dismissal, which the Court of Appeals affirmed.  The government continues to investigate the complaint’s allegations.  In March 2009, we received a letter from the government reiterating the basis of their investigation.  We are unable to estimate our potential liability, if any, with respect to this matter.
 
The costs to comply with either of these investigations were not material for any period presented.  Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

Results of Operations
Three months ended March 31, 2012 versus  2011 - Consolidated Results
Our service revenues and sales for the first quarter of 2012 increased 6.7% versus services and sales revenues for the first quarter of 2011.  Of this increase, $25.2 million was attributable to VITAS partially offset by a $3.1 million decrease at Roto-Rooter.  The following chart shows the components of those changes (dollar amounts in thousands):

       
Increase/(Decrease)
 
       
Amount
   
Percent
 
VITAS
               
 
Routine homecare
  $ 17,945       10.6  
 
Continuous care
    3,896       10.1  
 
General inpatient
    1,766       6.4  
 
Medicare cap
    1,567       155.1  
Roto-Rooter
                 
 
Plumbing
      (1,364 )     -3.0  
 
Drain cleaning
    (1,581 )     -4.3  
 
Contractor operations
    170       2.6  
 
Other
      (374 )     -5.4  
   
Total
  $ 22,025       6.7  
 
The increase in VITAS’ revenues for the first quarter of 2012 versus the first quarter of 2011 was a result of increased ADC of 6.1% driven by an increase in admissions of 3.3% and a 4.4% increase in average length of stay, combined with Medicare reimbursement rate increases of approximately 2.5%.  The ADC increase was driven by a 6.2% increase in routine homecare, an increase of 4.9% in general inpatient and an increase of a 4.8% in continuous care. In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

 
-18-

 
 
The decrease in plumbing revenues for the first quarter of 2012 versus 2011 is attributable to a 2.1% decrease in the number of jobs performed as well as a 1.2% decrease in the average price per job.  Our excavation job count increased by 6.3% compared to 2011.  Drain cleaning revenues for the first quarter of 2012 versus 2011 reflect a 8.0% decrease in the number of jobs perfomed partially offset by a 4.0% increase in the price per job.  Contractor operations revenue increased 2.6% for the first quarter of 2012.
 
The consolidated gross margin was 27.1% in the first quarter of 2012 as compared with 28.2% in the first quarter of 2011.  On a segment basis, VITAS’ gross margin was 21.2% in the first quarter of 2012 and 21.8% in the first quarter of 2011.  The decrease in VITAS’ gross margin is attributable to higher labor costs for admissions and Medicare compliance personnel and the opening of new operations, both new locations and new inpatient units, which carry significant start-up costs as capacity begins to ramp-up.  The Roto-Rooter segment’s gross margin was 43.7% for the first quarter of 2012 as compared with 44.2% for the first quarter of 2011.  The decrease in Roto-Rooter’s gross margin is mainly the result of the decrease in revenue.
 
Selling, general and administrative expenses (“SG&A”) comprise (in thousands):
 
   
Three months ended 
March 31,
 
   
2012
   
2011
 
SG&A expenses before long-term incentive
           
    compensation and the impact of market gains and
           
    losses of deferred compensation plans
  $ 51,034     $ 50,578  
Long-term incentive compensation
    -       3,012  
Impact of market value gains on liabilities held in
               
    deferred compensation trusts
    2,133       2,064  
     Total SG&A expenses
  $ 53,167     $ 55,654  
 
Normal salary increases and revenue related expense increases between periods accounts for the 0.9% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans.

Interest expense increased 11.5% between periods as a result of the debt refinancing that took place in the first quarter of 2011.

Other income/(expense) comprise (in thousands):
 
   
Three months ended
March 31,
 
   
2012
   
2011
 
Market value gains on assets held in deferred
           
   compensation trusts
  $ 2,133     $ 2,064  
Loss on disposal of property and equipment
    (81 )     (21 )
Interest income
    51       61  
Other
    (8 )     (2 )
     Total other income
  $ 2,095     $ 2,102  

Our effective income tax rate increased to 38.9% in the first quarter of 2012 from 38.4% when compared with the first quarter of 2011.

 
-19-

 
 
Net income for both periods included the following after-tax items/adjustments that reduced after-tax earnings (in thousands):
 
   
Three months ended March 31,
 
   
2012
   
2011
 
VITAS
           
Legal expenses of OIG investigation
  $ (44 )   $ (317 )
Acquisition expenses
    -       (40 )
Roto-Rooter
               
Expenses of class action litigation
    (393 )