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CHEMED CORP - Quarter Report: 2009 September (Form 10-Q)

a6087067.htm


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

(Mark One)
 
 
  X
 
Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2009

 
     
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
   
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
 
22,557,524 Shares
 
September 30, 2009
         

 
 
 


 
-1-


CHEMED CORPORATION AND
SUBSIDIARY COMPANIES



Index
 
 
 
           
Page No.
     
       
       
     
             
       
     
             
       
     
             
     
             
    17
             
   
             
     
             
       
     
             
       
             
   
             
     
             
   
             
     
             
       
 
    EX – 10.1
 
    EX – 10.2
 
    EX – 10.3
 
    EX – 10.4
 
    EX – 10.5
 
    EX – 31.1
 
    EX – 31.2
 
    EX – 31.3
 
    EX – 32.1
 
    EX – 32.2
 
    EX – 32.3
 
 
-2-

 
 
 
 CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
 UNAUDITED CONSOLIDATED BALANCE SHEET
 
 (in thousands, except share and per share data)
 
             
             
   
September 30,
   
December 31,
 
   
2009
   
2008
 
 ASSETS
           
Current assets
           
 Cash and cash equivalents
  $ 42,047     $ 3,628  
Accounts receivable less allowances of $12,352 (2008 - $10,320)
    106,667       98,076  
 Inventories
    8,071       7,569  
 Current deferred income taxes
    16,648       15,392  
Prepaid expenses and other current assets
    8,579       11,268  
 Total current assets
    182,012       135,933  
 Investments of deferred compensation plans held in trust
    22,441       22,628  
 Properties and equipment, at cost, less accumulated
               
 depreciation of $111,625 (2008 - $101,689)
    73,918       76,962  
 Identifiable intangible assets less accumulated
               
 amortization of $24,326 (2008 - $21,272)
    58,853       61,303  
 Goodwill
    450,130       448,721  
 Other assets
    14,049       14,075  
 Total Assets
  $ 801,403     $ 759,622  
                 
 LIABILITIES
               
 Current liabilities
               
 Accounts payable
  $ 47,788     $ 52,810  
 Current portion of long-term debt
    70       10,169  
 Income taxes
    8,022       2,181  
 Accrued insurance
    34,955       35,994  
 Accrued compensation
    41,383       40,741  
 Other current liabilities
    12,992       12,180  
 Total current liabilities
    145,210       154,075  
 Deferred income taxes
    22,389       22,477  
 Long-term debt
    150,431       158,210  
 Deferred compensation liabilities
    21,962       22,417  
 Other liabilities
    4,435       5,612  
 Total Liabilities
    344,427       362,791  
                 
 STOCKHOLDERS' EQUITY
               
 Capital stock - authorized 80,000,000 shares $1 par; issued
               
 29,762,595 shares (2008 - 29,514,877 shares)
    29,763       29,515  
 Paid-in capital
    327,918       313,516  
 Retained earnings
    388,109       337,739  
 Treasury stock - 7,205,071 shares (2008 - 7,100,475 shares), at cost
    (290,748 )     (285,977 )
Deferred compensation payable in Company stock
    1,934       2,038  
  Total Stockholders' Equity
    456,976       396,831  
  Total Liabilities and Stockholders' Equity
  $ 801,403     $ 759,622  
                 
                 
 See accompanying notes to unaudited financial statements.
 

 
-3-

 
 
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
 
 (in thousands, except per share data)
 
                         
                         
                         
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
 Service revenues and sales
  $ 296,794     $ 288,312     $ 886,987     $ 856,736  
 Cost of services provided and goods sold (excluding depreciation)
    208,888       202,446       623,238       609,397  
 Selling, general and administrative expenses
    48,148       44,022       143,521       133,070  
 Depreciation
    5,361       5,441       16,024       16,249  
 Amortization
    1,611       1,494       4,765       4,433  
 Other operating expense
    -       -       3,989       -  
 Total costs and expenses
    264,008       253,403       791,537       763,149  
 Income from operations
    32,786       34,909       95,450       93,587  
 Interest expense
    (2,853 )     (3,140 )     (8,839 )     (9,213 )
 Other income/(expense)--net
    1,733       (1,908 )     4,815       (2,211 )
 Income before income taxes
    31,666       29,861       91,426       82,163  
 Income taxes
    (12,456 )     (12,910 )     (35,627 )     (33,081 )
 Net income
  $ 19,210     $ 16,951     $ 55,799     $ 49,082  
                                 
                                 
 Earnings Per Share
                               
 Net income
  $ 0.86     $ 0.75     $ 2.49     $ 2.11  
  Average number of shares outstanding
    22,461       22,503       22,425       23,285  
                                 
 Diluted Earnings Per Share
                               
 Net income
  $ 0.84     $ 0.74     $ 2.46     $ 2.08  
  Average number of shares outstanding
    22,744       22,818       22,679       23,620  
                                 
 Cash Dividends Per Share
  $ 0.12     $ 0.06     $ 0.24     $ 0.18  
                                 
                                 
See accompanying notes to unaudited financial statements.
 
 
 
-4-

 
 
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
 
 (in thousands)
 
 
Nine Months Ended
 
 
September 30,
 
 
2009
   
2008
 
 Cash Flows from Operating Activities
           
   Net income
  $ 55,799     $ 49,082  
 Adjustments to reconcile net income to net cash provided
               
 by operating activities:
               
 Depreciation and amortization
    20,789       20,682  
 Provision for uncollectible accounts receivable
    8,297       7,101  
 Stock option expense
    6,699       5,084  
 Amortization of discount on convertible notes
    4,921       4,920  
 Provision for deferred income taxes
    (1,336 )     (3,945 )
 Amortization of debt issuance costs
    480       464  
 Changes in operating assets and liabilities, excluding
               
 amounts acquired in business combinations:
               
 Decrease/(increase) in accounts receivable
    (16,936 )     5,846  
 Increase in inventories
    (499 )     (851 )
 Decrease in prepaid expenses and other current assets
    1,406       2,804  
Decrease in accounts payable and other current liabilities
    (4,584 )     (875 )
 Increase/(decrease) in income taxes
    8,657       (329 )
 Increase in other assets
    (103 )     (547 )
 Increase/(decrease) in other liabilities
    (1,632 )     674  
 Excess tax benefit on share-based compensation
    (1,519 )     (1,234 )
 Other sources
    108       654  
 Net cash provided by operating activities
    80,547       89,530  
 Cash Flows from Investing Activities
               
  Capital expenditures
    (14,471 )     (13,103 )
 Business combinations, net of cash acquired
    (1,859 )     (1,578 )
 Proceeds from sales of property and equipment
    1,519       200  
 Net proceeds/(uses) from the sale of discontinued operations
    (558 )     8,980  
   Other uses
    (392 )     (421 )
 Net cash used by investing activities
    (15,761 )     (5,922 )
 Cash Flows from Financing Activities
               
 Repayment of long-term debt
    (14,599 )     (7,595 )
 Net decrease in revolving line of credit
    (8,200 )     -  
   Dividends paid
    (5,429 )     (4,352 )
 Purchases of treasury stock
    (1,684 )     (69,136 )
 Excess tax benefit on share-based compensation
    1,519       1,234  
 Increase/(decrease) in cash overdraft payable
    943       (1,913 )
  Other sources/(uses)
    1,083       (30 )
 Net cash used by financing activities
    (26,367 )     (81,792 )
 Increase in Cash and Cash Equivalents
    38,419       1,816  
 Cash and cash equivalents at beginning of year
    3,628       4,988  
 Cash and cash equivalents at end of period
  $ 42,047     $ 6,804  
                 
                 
 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, 2008 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, 2008.  Certain 2008 amounts have been restated to conform with current period presentation related to adoption of new accounting guidance for our convertible debt, as described in Note 5.

In June 2009, the FASB established the Accounting Standards Codification, “Codification”, which established the Codification as the single source of authoritative nongovernmental U.S. GAAP.  The Codification was effective for interim or annual financial periods ending after September 15, 2009.  We have adopted the Codification and all references in our financial statements to authoritative U.S. GAAP have been changed.


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 September 30, 2009, VITAS has approximately $12.1 million in unbilled revenue (December 31, 2008 - $13.9 million).  The unbilled revenue at VITAS relates to hospice programs currently undergoing focused medical reviews (“FMR”).  During FMR, surveyors working on behalf of the U.S. Federal government review certain patient files for compliance with Medicare regulations.  During the time the patient file is under review, we are unable to bill for care provided to those patients.  We make appropriate provisions to reduce our accounts receivable balance for potential denials of patient service revenue due to FMR activity.

The U.S. government revises hospice reimbursement rates on an annual basis using the Hospice Wage Index (HWI) and the Budget Neutrality Adjustment Factor (BNAF).  The HWI is used to adjust reimbursement rates to reflect local differences in wages.  The BNAF is an estimated inflation factor applied to the HWI.  In August 2008, the U.S. government announced a 25% reduction in the BNAF for its fiscal 2009 (October 2008 through September 2009) pursuant to a three year phase-out of the BNAF.  The February 2009 American Recovery and Reinvestment Act mandated a one year delay in the BNAF phase-out.  As a result, included in the nine months ended September 30, 2009 results, is $1.95 million of revenue for the retroactive price increase related to services provided by VITAS in the fourth quarter of 2008.  Revenue for service provided in fiscal 2009 includes a reimbursement rate with the full BNAF increase.

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.  For the three-month period ended September 30, 2009, we recorded $43,000 in Medicare cap liability related to a retroactive billing for 2006.  During the nine-month period ended September 30, 2009, we reversed our estimated liability of $235,000 due to improved admission trends.  This relates to one program’s projected liability that was recorded during the fourth quarter of 2008 and the first quarter of 2009.  Finally, we paid $302,000 for a retroactive billing related to our discontinued Phoenix operation during the third quarter of 2009.  This amount was previously accrued and had no impact on our income statement.  No revenue reduction for Medicare cap liability was recorded for the three or nine-month periods ended September 30, 2008.

 
-6-


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

     
Three months ended
   
Nine months ended
 
     
September 30,
   
September 30,
 
     
2009
   
2008
   
2009
   
2008
 
Service Revenues and Sales
       
 
         
 
 
VITAS
    $ 217,067     $ 204,956     $ 636,787     $ 602,589  
Roto-Rooter
      79,727       83,356       250,200       254,147  
 
Total
  $ 296,794     $ 288,312     $ 886,987     $ 856,736  
                                   
After-tax Earnings
                               
VITAS
    $ 18,267     $ 17,561     $ 52,794     $ 45,180  
Roto-Rooter
      7,988       7,957       25,115       25,445  
 
Total
    26,255       25,518       77,909       70,625  
Corporate
      (7,045 )     (8,567 )     (22,110 )     (21,543 )
 
Net income
  $ 19,210     $ 16,951     $ 55,799     $ 49,082  


4.      Earnings per Share
 
Earnings per share are computed using the weighted average number of shares of capital stock outstanding.  Earnings and diluted earnings per share for 2009 and 2008 are computed as follows (in thousands, except per share data):

For the Three Months Ended  September 30,
 
Net Income
   
Shares
   
Earnings
per Share
 
2009
                 
Earnings
  $ 19,210       22,461     $ 0.86  
Dilutive stock options
    -       227          
Nonvested stock awards
    -       56          
     Diluted earnings
  $ 19,210       22,744     $ 0.84  
                         
2008
                       
Earnings
  $ 16,951       22,503     $ 0.75  
Dilutive stock options
    -       287          
Nonvested stock awards
    -       28          
     Diluted earnings
  $ 16,951       22,818     $ 0.74  
 
 
-7-

 
                   
For the Nine Months Ended
September 30,
 
Net Income
   
Shares
   
Earnings per Share
 
2009
                 
Earnings
  $ 55,799       22,425     $ 2.49  
Dilutive stock options
    -       212          
Nonvested stock awards
    -       42          
     Diluted earnings
  $ 55,799       22,679     $ 2.46  
                         
2008
                       
Earnings
  $ 49,082       23,285     $ 2.11  
Dilutive stock options
    -       305          
Nonvested stock awards
    -       30          
     Diluted earnings
  $ 49,082       23,620     $ 2.08  

For the three and nine-month periods ended September 30, 2009, 1,325,417 and 1,655,418, respectively, 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 both the three and nine-month periods ended September 30, 2008, 829,000 stock options were excluded, respectively, from the computation of diluted earnings per share.

Diluted earnings per share may be impacted in future periods 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 conversion price of $80.73.  We would then include in our diluted earnings per share calculation those shares issuable using the treasury stock method.  The amount of shares issuable is based upon the amount by which the average stock price for the quarter exceeds the conversion price.  The purchased call option does not impact the calculation of diluted earnings per share as it is always anti-dilutive. The sold warrants become dilutive when our average stock price for a quarter exceeds the strike price of the warrant.

The following table provides examples of how changes in our stock price impact the number of shares that would be included in our diluted earnings per share calculation.  It also shows the impact on the number of shares issuable upon conversion of the Notes and settlement of the purchased call options and sold warrants:

   
 Shares
     
 Total Treasury
 
 Shares Due
 
 Incremental
   
 Underlying 1.875%
     
 Method
 
 to the Company
 
 Shares Issued/
 Share
 
 Convertible
 
 Warrant
 
 Incremental
 
 under Notes
 
 (Received) by the Company
 Price
 
 Notes
 
 Shares
 
 Shares (a)
 
 Hedges
 
 upon Conversion (b)
 $             80.73
 
                               -
 
                 -
 
                            -
 
                            -
 
                               -
 $             90.73
 
                    255,243
 
                 -
 
                 255,243
 
               (273,061)
 
                    (17,818)
 $           100.73
 
                    459,807
 
                 -
 
                 459,807
 
               (491,905)
 
                    (32,098)
 $           110.73
 
                    627,423
 
      118,359
 
                 745,782
 
               (671,222)
 
                      74,560
 $           120.73
 
                    767,272
 
      313,764
 
              1,081,036
 
               (820,833)
 
                    260,203
 $           130.73
 
                    885,726
 
      479,274
 
              1,365,000
 
               (947,556)
 
                    417,444
                     
      (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 Notes, assuming concurrent settlement of the note hedges and warrants.


-8-


5.      Long-Term Debt
  We are in compliance with all debt covenants as of September 30, 2009.  We have issued $27.9 million in standby letters of credit as of September 30, 2009 for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of September 30, 2009, we have approximately $147.1 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the expansion feature.

In May 2008, the FASB issued authoritative guidance for accounting for convertible debt instruments that may be settled in cash upon conversion including partial cash settlement.  This guidance requires all convertible debentures classified as Instruments B or C to separately account for the debt and equity pieces of the instrument.   Convertible debentures classified as Instruments B may be settled in either stock or cash equivalent to the conversion value and convertible debentures classified as Instruments C must settle the accreted value of the obligation in cash and may satisfy the excess conversion value in either cash or stock.  At inception of the convertible instrument, cash flows related to the convertible instrument are to be discounted using a market rate of interest.  We adopted the provisions of the guidance on January 1, 2009 and applied the guidance retrospectively.  Upon adoption, the Notes had a discount of approximately $54.9 million.  Retained earnings as of January 1, 2008 decreased $2.3 million as a result of the cumulative effect of adoption.

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

   
September 30,
2009
   
December 31,
2008
 
Principal amount of convertible debentures
  $ 186,956     $ 186,956  
Unamortized debt discount
    (36,525 )     (41,446 )
Carrying amount of convertible debentures
  $ 150,431     $ 145,510  
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
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Cash interest expense
  $ 1,014     $ 1,319     $ 3,438     $ 3,829  
Non-cash amortization of debt discount
    1,668       1,668       4,921       4,920  
Amortization of debt costs
    171       153       480       464  
Total interest expense
  $ 2,853     $ 3,140     $ 8,839     $ 9,213  


The unamortized debt discount will be amortized using the effective interest method over the remaining life of the Notes.  The effective rate on the Notes after adoption of the standard is approximately 6.875%.  The gain on extinguishment of debt recognized in 2008 upon our repurchase of a portion of the Notes decreased by approximately $802,000 upon adoption, due to a portion of the extinguishment being attributed to the equity component of our Notes.

6.      Other Operating Expenses
For the nine-month period ended September 30, 2009 we recorded pretax expenses of $4.0 million related to the costs of a contested proxy solicitation.

 
-9-

 
7.      Other Income/ (Expense) -- Net
Other income/ (expense) -- net comprises the following (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Market value gains/(losses) on assets held in
                       
    deferred compensation trust
  $ 1,789     $ (1,944 )   $ 3,374     $ (2,625 )
Loss on disposal of property and equipment
    (159 )     (147 )     (213 )     (260 )
Interest income
    86       159       375       602  
Gain on settlement of company owned life insurance
    -       -       1,211       -  
Other - net
    17       24       68       72  
     Total other income
  $ 1,733     $ (1,908 )   $ 4,815     $ (2,211 )
 
                         
8.      Other Current Liabilities
Other current liabilities as of September 30, 2009 and December 31, 2008 consist of the following (in thousands):

   
2009
   
2008
 
Accrued legal settlements
  $ 312     $ 410  
Accrued divestiture expenses
    849       837  
Accrued Medicare cap estimate
    241       735  
Other
    11,590       10,198  
     Total other current liabilities
  $ 12,992     $ 12,180  

 9.      Stock-Based Compensation Plans
On February 19, 2009, the Compensation/Incentive Committee of the Board of Directors (“CIC”) approved a grant of 53,199 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 four-year vesting period.  We assumed no forfeitures in determining the cumulative compensation expense of the grant.

On February 19, 2009, the CIC approved a grant of 508,600 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 three-year vesting period.  We used the Black-Scholes option valuation method to determine the cumulative compensation expense of the grant.

On May 29, 2009, the Compensation/Incentive Committee (“CIC”) approved a new stock-price target portion of the Company’s Executive Long-Term Incentive Plan (“LTIP”), which covers our officers and key employees.  The new stock price hurdles are as follows:

Stock Price
 
Shares to be
Hurdle
 
Issued
 $   54.00
 
    22,500
 $   58.00
 
    33,750
 $   62.00
 
    33,750
      Total
 
    90,000

The stock price hurdles must be achieved during 30 trading days out of any 60 trading day period between May 29, 2009 and February 28, 2012.

 
-10-



10.    Loans Receivable from Independent Contractors
The Roto-Rooter segment sublicenses with sixty-three 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 September 30, 2009 totaling $1.6 million (December 31, 2008 -$1.6 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 zero to 8% per annum and the remaining terms of the loans range from two months to 5 years at September 30, 2009.  During the three months ended September 30, 2009, we recorded revenues of $5.3 million (2008 - $5.3 million) and pretax profits of $2.4 million (2008 - $2.5 million) from our independent contractors.  During the nine months ended September 30, 2009, we recorded revenues of $16.0 million (2008 - $16.5 million) and pretax profits of $7.1 million (2008 - $7.6 million) from our independent contractors

We have adopted the provisions of the FASB’s authoritative guidance on the consolidation of variable interest entities relative to our contractual relationships with the independent contractors.  The guidance requires the primary beneficiary of a Variable Interest Entity ("VIE") to consolidate the accounts of the VIE.  We have evaluated our relationships with our independent contractors based upon the guidance provided by the FASB and have concluded that some of the contractors who have loans payable to us may be VIE’s.  We believe consolidation, if required, of the accounts of any VIE’s for which we might be the primary beneficiary would not materially impact our financial position, results of operations or cash flows.

11.    Pension and Retirement Plans
All of the Company’s plans that provide retirement and similar benefits are defined contribution plans.  Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans were $4.3 million and $838,000 for the three months ended September 30, 2009 and 2008, respectively.  Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans were $11.3 million and $6.3 million for the nine months ended September 30, 2009 and 2008, respectively.

12.    Litigation
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 (“Santos”).  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.  VITAS contests these allegations.  The lawsuit is in its early stages and we are unable to estimate our potential liability, if any, with respect to these allegations.

Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.  In the normal course of business, we are a party to various claims and legal proceedings.  We record a reserve for these matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable.

13.    Regulatory Matters
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.

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. Based on the early stage of the investigation and the limited information we have at this time, we cannot predict the outcome of this investigation.  We believe that we are in material compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.
 
 
-11-

 
We are unable to predict the outcome of these matters or the impact, if any, that the investigation may have on our business, results of operations, liquidity or capital resources.  Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

14.    Related Party Agreement
VITAS has two 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 written notice at least 90 days prior to the end of said term.  VITAS made purchases from OCR of $8.5 million and $8.3 million for the three months ended September 30, 2009 and 2008, respectively.  VITAS made purchases of $24.6 million and $24.8 million for the nine months ended September 30, 2009 and 2008, respectively.  VITAS has accounts payable to OCR of $417,000 at September 30, 2009.

 Mr. Joel F. Gemunder, President and Chief Executive Officer of OCR and Ms. Andrea Lindell are directors of both OCR and the Company. Mr. Kevin J. McNamara, President, Chief Executive Officer and a director of the Company, is a director emeritus of OCR.  We believe that the terms of these agreements are no less favorable to VITAS than we could negotiate with an unrelated party.

15.    Cash Overdrafts Payable
Included in accounts payable at September 30, 2009 is cash overdrafts payable of $9.8 million (December 31, 2008 - $8.8 million).

16.    Financial Instruments
On January 1, 2008, we partially adopted the provisions of the authoritative guidance on fair value measurements.  This statement 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.  There was no impact on our financial position or results of operations upon partial adoption of this authoritative guidance.

On January 1, 2009, the deferral period granted relative to the fair value measurement of our goodwill and indefinite lived intangible assets expired.  There was no impact on our financial position or results of operations as a result of the expiration of the deferral.

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of
September 30, 2009 (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
  $ 22,441     $ 22,441     $ -     $ -  
Long-term debt
    150,501       153,916       -       -  

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.

17.    Subsequent Events

In May 2009, the FASB issued authoritative guidance on subsequent events which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  It requires the disclosure of the date through which subsequent events have been evaluated as well as the basis for that date. The guidance was effective prospectively for interim or annual financial periods ending after June 15, 2009.  We have evaluated all subsequent events through October 30, 2009, the date of this filing, and determined there are no material recognized or unrecognized subsequent events.

 
-12-


 
18.    Recent Accounting Statements

In June 2009, the FASB issued additional guidance related to the consolidation of variable interest entities, which makes significant changes to the model for determining who should consolidate an entity and also addresses how often this assessment should be performed. The determination of who should consolidate a variable interest entity will be based on both quantitative and qualitative factors relating to control, as well as risks and benefits of ownership.  This guidance is effective in 2010 for calendar-year companies and is to be adopted through a cumulative-effect adjustment.  We are currently evaluating the impact of adoption of these provisions on our existing accounting methods.






-13-


19.  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 September 30, 2009 and December 31, 2008 for the balance sheet, the three and nine months ended September 30, 2009 and September 30, 2008 for the income statement and the nine months ended September 30, 2009 and September 30, 2008 for the statement of cash flows (dollars in thousands):
 
                               
As of September 30, 2009
       
Guarantor
   
Non-Guarantor 
 
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                             
Cash and cash equivalents
  $ 39,411     $ (1,176 )   $ 3,812     $ -     $ 42,047  
Accounts receivable, less allowances
    671       105,442       554       -       106,667  
Intercompany receivables
    -       85,970       -       (85,970 )     -  
Inventories
    -       7,378       693       -       8,071  
Current deferred income taxes
    (1,303 )     17,831       120       -       16,648  
Prepaid expenses and other current assets
    936       7,514       129       -       8,579  
     Total current assets
    39,715       222,959       5,308       (85,970 )     182,012  
Investments of deferred compensation plans held in trust
    -       -       22,441       -       22,441  
Properties and equipment, at cost, less accumulated depreciation
    10,041       61,782       2,095       -       73,918  
Identifiable intangible assets less accumulated amortization
    -       58,853       -       -       58,853  
Goodwill
    -       445,771       4,359       -       450,130  
Other assets
    11,247       2,462       340       -       14,049  
Investments in subsidiaries
    628,285       15,311       -       (643,596 )     -  
          Total assets
  $ 689,288     $ 807,138     $ 34,543     $ (729,566 )   $ 801,403  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                 
Accounts payable
  $ (2,786 )   $ 50,259     $ 315     $ -     $ 47,788  
Intercompany payables
    83,982       -       1,988       (85,970 )     -  
Current portion of long-term debt
    -       70       -       -       70  
Income taxes
    773       6,057       1,192       -       8,022  
Accrued insurance
    491       34,464       -       -       34,955  
Accrued salaries and wages
    2,882       38,095       406       -       41,383  
Other current liabilities
    2,619       10,224       149       -       12,992  
     Total current liabilities
    87,961       139,169       4,050       (85,970 )     145,210  
Deferred income taxes
    (9,039 )     37,951       (6,523 )     -       22,389  
Long-term debt
    150,431       -       -       -       150,431  
Deferred compensation liabilities
    -       -       21,962       -       21,962  
Other liabilities
    2,959       1,476       -       -       4,435  
Stockholders' equity
    456,976       628,542       15,054       (643,596 )     456,976  
     Total liabilities and stockholders' equity
  $ 689,288     $ 807,138     $ 34,543     $ (729,566 )   $ 801,403  
                                         
As of December 31, 2008
         
Guarantor
   
Non-Guarantor
 
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
ASSETS
                                       
Cash and cash equivalents
  $ 65     $ 202     $ 3,361     $ -     $ 3,628  
Accounts receivable, less allowances
    1,261       96,112       703       -       98,076  
Intercompany receivables
    -       37,105       -       (37,105 )     -  
Inventories
    -       7,021       548       -       7,569  
Current deferred income taxes
    (229 )     15,511       110       -       15,392  
Prepaid expenses and other current assets
    2,296       7,982       990       -       11,268  
     Total current assets
    3,393       163,933       5,712       (37,105 )     135,933  
Investments of deferred compensation plans held in trust
    -       -       22,628       -       22,628  
Properties and equipment, at cost, less accumulated depreciation
    11,665       63,179       2,118       -       76,962  
Identifiable intangible assets less accumulated amortization
    -       61,303       -       -       61,303  
Goodwill
    -       444,433       4,288       -       448,721  
Other assets
    11,312       2,455       308       -       14,075  
Investments in subsidiaries
    568,038       11,196       -       (579,234 )     -  
          Total assets
  $ 594,408     $ 746,499     $ 35,054     $ (616,339 )   $ 759,622  
LIABILITIES AND STOCKHOLDERS' EQUITY
                                 
Accounts payable
  $ (1,688 )   $ 54,175     $ 323     $ -     $ 52,810  
Intercompany payables
    29,513       -       7,592       (37,105 )     -  
Current portion of long-term debt
    10,000       169       -       -       10,169  
Income taxes
    (1,940 )     3,909       212       -       2,181  
Accrued insurance
    1,425       34,569       -       -       35,994  
Accrued salaries and wages
    3,817       36,523       401       -       40,741  
Other current liabilities
    2,022       8,979       1,179       -       12,180  
     Total current liabilities
    43,149       138,324       9,707       (37,105 )     154,075  
Deferred income taxes
    (7,801 )     38,310       (8,032 )     -       22,477  
Long-term debt
    158,210       -       -       -       158,210  
Deferred compensation liabilities
    -       -       22,417       -       22,417  
Other liabilities
    4,019       1,593       -       -       5,612  
Stockholders' equity
    396,831       568,272       10,962       (579,234 )     396,831  
     Total liabilities and stockholders' equity
  $ 594,408     $ 746,499     $ 35,054     $ (616,339 )   $ 759,622  

-14-


For the three months ended September 30, 2009
   
Guarantor
   
Non-Guarantor
   
Consolidating
       
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
 Continuing Operations
                             
 Net sales and service revenues
  $ -     $ 291,121     $ 5,673     $ -     $ 296,794  
 Cost of services provided and goods sold
    -       205,940       2,948       -       208,888  
 Selling, general and administrative expenses
    5,295       39,994       2,859       -       48,148  
 Depreciation
    166       5,016       179       -       5,361  
 Amortization
    588       1,023       -       -       1,611  
      Total costs and expenses
    6,049       251,973       5,986       -       264,008  
      Income/ (loss) from operations
    (6,049 )     39,148       (313 )     -       32,786  
 Interest expense
    (2,759 )     (94 )     -       -       (2,853 )
 Other income - net
    1,188       (1,271 )     1,816       -       1,733  
      Income/ (loss) before income taxes
    (7,620 )     37,783       1,503       -       31,666  
 Income tax (provision)/ benefit
    2,452       (14,317 )     (591 )     -       (12,456 )
 Equity in net income of subsidiaries
    24,378       903       -       (25,281 )     -  
 Net income
  $ 19,210     $ 24,369     $ 912     $ (25,281 )   $ 19,210  
                                         
For the three months ended September 30, 2008
   
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
 Continuing Operations
                                       
 Net sales and service revenues
  $ -     $ 282,103     $ 6,209     $ -     $ 288,312  
 Cost of services provided and goods sold
    -       199,308       3,138       -       202,446  
 Selling, general and administrative expenses
    5,015       39,725       (718 )     -       44,022  
 Depreciation
    130       5,122       189       -       5,441  
 Amortization
    487       1,007       -       -       1,494  
      Total costs and expenses
    5,632       245,162       2,609       -       253,403  
      Income/ (loss) from operations
    (5,632 )     36,941       3,600       -       34,909  
 Interest expense
    (3,050 )     (89 )     (1 )     -       (3,140 )
 Other (expense)/income - net
    1,151       (1,138 )     (1,921 )     -       (1,908 )
      Income/ (loss) before income taxes
    (7,531 )     35,714       1,678       -       29,861  
 Income tax (provision)/ benefit
    2,024       (13,533 )     (1,401 )     -       (12,910 )
 Equity in net income of subsidiaries
    22,458       581       -       (23,039 )     -  
 Net income
  $ 16,951     $ 22,762     $ 277     $ (23,039 )   $ 16,951  
                                         
For the nine months ended September 30, 2009
   
Guarantor
   
Non-Guarantor
 
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
 Continuing Operations
                                       
 Net sales and service revenues
  $ -     $ 869,642     $ 17,345     $ -     $ 886,987  
 Cost of services provided and goods sold
    -       614,385       8,853       -       623,238  
 Selling, general and administrative expenses
    16,026       120,509       6,986       -       143,521  
 Depreciation
    465       15,039       520       -       16,024  
 Amortization
    1,715       3,050       -       -       4,765  
 Other operating expense
    3,989       -       -       -       3,989  
      Total costs and expenses
    22,195       752,983       16,359       -       791,537  
      Income/ (loss) from operations
    (22,195 )     116,659       986       -       95,450  
 Interest expense
    (8,286 )     (559 )     6       -       (8,839 )
 Other (expense)/income - net
    1,678       (1,510 )     4,647       -       4,815  
      Income/ (loss) before income taxes
    (28,803 )     114,590       5,639       -       91,426  
 Income tax (provision)/ benefit
    9,870       (43,533 )     (1,964 )     -       (35,627 )
 Equity in net income of subsidiaries
    74,732       3,803       -       (78,535 )     -  
 Net income
  $ 55,799     $ 74,860     $ 3,675     $ (78,535 )   $ 55,799  
                                         
For the nine months ended September 30, 2008
   
Guarantor
   
Non-Guarantor
   
Consolidating
         
 
 
Parent
   
Subsidiaries
   
Subsidiaries
   
Adjustments
   
Consolidated
 
 Continuing Operations
                                       
 Net sales and service revenues
  $ -     $ 837,938     $ 18,798     $ -     $ 856,736  
 Cost of services provided and goods sold
    -       600,110       9,287       -       609,397  
 Selling, general and administrative expenses
    13,544       118,255       1,271       -       133,070  
 Depreciation
    372       15,355       522       -       16,249  
 Amortization
    1,409       3,024       -       -       4,433  
      Total costs and expenses
    15,325       736,744       11,080       -       763,149  
      Income/ (loss) from operations
    (15,325 )     101,194       7,718       -       93,587  
 Interest expense
    (8,880 )     (331 )     (2 )     -       (9,213 )
 Other (expense)/income - net
    4,025       (3,683 )     (2,553 )     -       (2,211 )
      Income/ (loss) before income taxes
    (20,180 )     97,180       5,163       -       82,163  
 Income tax (provision)/ benefit
    6,499       (36,492 )     (3,088 )     -       (33,081 )
 Equity in net income of subsidiaries
    62,763       2,582       -       (65,345 )     -  
 Net income
  $ 49,082     $ 63,270     $ 2,075     $ (65,345 )   $ 49,082  

 
-15-



For the nine months ended September 30, 2009
       
Guarantor
   
Non-Guarantor
       
   
Parent
   
Subsidiaries
 
Subsidiaries
   
Consolidated
 
 Cash Flow from Operating Activities:
                       
 Net cash (used)/provided by operating activities
  $ (2,579 )   $ 77,254     $ 5,872     $ 80,547  
 Cash Flow from Investing Activities:
                               
  Capital expenditures
    (44 )     (14,007 )     (420 )     (14,471 )
  Business combinations, net of cash acquired
    -       (1,859 )     -       (1,859 )
  Proceeds from sale of property and equipment
    1,286       233       -       1,519  
  Net payments on sale of discontinued operations
    (256 )     (302 )     -       (558 )
  Other sources and uses - net
    (202 )     (374 )     184       (392 )
       Net cash provided/ (used) by investing activities
    784       (16,309 )     (236 )     (15,761 )
 Cash Flow from Financing Activities:
                               
  Change in cash overdrafts payable
    (602 )     1,545       -       943  
  Change in intercompany accounts
    69,635       (64,031 )     (5,604 )     -  
  Dividends paid to shareholders
    (5,429 )     -       -       (5,429 )
  Purchases of treasury stock
    (1,684 )     -       -       (1,684 )
  Realized excess tax benefit on share based compensation
    1,519       -       -       1,519  
  Net decrease in  revolving credit facility
    (8,200 )     -       -       (8,200 )
  Repayment of long-term debt
    (14,500 )     (99 )     -       (14,599 )
  Other sources and uses - net
    402       262       419       1,083  
       Net cash provided/(used) by financing activities
    41,141       (62,323 )     (5,185 )     (26,367 )
 Net increase/(decrease) in cash and cash equivalents
    39,346       (1,378 )     451       38,419  
 Cash and cash equivalents at beginning of year
    65       202       3,361       3,628  
 Cash and cash equivalents at end of period
  $ 39,411     $ (1,176 )   $ 3,812     $ 42,047  
                                 
                                 
For the nine months ended September 30, 2008
         
Guarantor
   
Non-Guarantor
         
   
Parent
   
Subsidiaries
 
Subsidiaries
   
Consolidated
 
 Cash Flow from Operating Activities:
                               
 Net cash (used)/provided by operating activities
  $ (6,959 )   $ 94,811     $ 1,678     $ 89,530  
 Cash Flow from Investing Activities:
                               
  Capital expenditures
    (429 )     (11,685 )     (989 )     (13,103 )
  Business combinations, net of cash acquired
    -       (1,578 )     -       (1,578 )
  Net proceeds from sale of discontinued operations
    8,980       -       -       8,980  
  Proceeds from sale of property and equipment
    10       162       28       200  
  Other sources and uses - net
    (495 )     84       (10 )     (421 )
       Net cash provided/ (used) by investing activities
    8,066       (13,017 )     (971 )     (5,922 )
 Cash Flow from Financing Activities:
                               
  Change in cash overdrafts payable
    (629 )     (1,284 )     -       (1,913 )
  Change in intercompany accounts
    79,010       (79,144 )     134       -  
  Dividends paid to shareholders
    (4,352 )     -       -       (4,352 )
  Purchases of treasury stock
    (69,136 )     -       -       (69,136 )
  Realized excess tax benefit on share based compensation
    1,234       -       -       1,234  
  Repayment of long-term debt
    (7,500 )     (95 )     -       (7,595 )
  Other sources and uses - net
    267       221       (518 )     (30 )
       Net cash provided/(used) by financing activities
    (1,106 )     (80,302 )     (384 )     (81,792 )
 Net increase/(decrease) in cash and cash equivalents
    1       1,492       323       1,816  
 Cash and cash equivalents at beginning of year
    3,877       (1,584 )     2,695       4,988  
 Cash and cash equivalents at end of period
  $ 3,878     $ (92 )   $ 3,018     $ 6,804  
 
 
-16-

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

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

The following is a summary of the key operating results for the three and nine months ended September 30, 2009 and 2008 (in thousands except per share amounts):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Consolidated service revenues and sales
  $ 296,794     $ 288,312     $ 886,987     $ 856,736  
Consolidated net income
  $ 19,210     $ 16,951     $ 55,799     $ 49,082  
Diluted EPS
  $ 0.84     $ 0.74     $ 2.46     $ 2.08  
 

For the three months ended September 30, 2009 and 2008, the increase in consolidated service revenues and sales was driven by a 6% increase at VITAS while Roto-Rooter revenues decreased by 4%.  The increase in service revenues at VITAS was a result of increased admissions of 3.1%, the October 1, 2008 Medicare reimbursement rate increase of approximately 3.5%, partially offset by a 1.2% increase in the number of discharged patients.  The remaining difference is related to the timing within the quarter of admissions and discharges as well as a mix shift to higher acuity days of care. Roto-Rooter was driven by an 8% decrease in job count offset by an approximate 5% price and mix shift increase. The Roto-Rooter changes include the impact of acquisitions in 2008 and 2009, offset by the conversion of one company-owned branch to an independent contractor in 2009.  The impact of these transactions is not material.  Consolidated net income increased mainly as a result of the increase in revenues.  Diluted EPS increased as the result of increased earnings.

For the nine months ended September 30, 2009 and 2008, the increase in consolidated service revenues and sales was driven by a 6% increase in service revenues at VITAS while Roto-Rooter revenues decreased approximately 2%.  The increase in service revenues at VITAS was driven by a 0.5% increase in ADC, the October 1, 2008 Medicare reimbursement rate increase of approximately 3.5%, a reversal of Medicare cap billing limitations recorded in previous periods, an $1.95 million increase related to the retroactive price increase for services in the fourth quarter of 2008 and a mix shift to higher acuity days of care.  ADC was flat between periods.  Roto-Rooter was driven by an 8% decrease in job count offset by an approximate 7% price and mix shift increase.  The Roto-Rooter changes include the impact of acquisitions in 2008 and 2009, offset by the conversion of one company-owned branch to an independent contractor in 2009.  Consolidated net income increased mainly as a result of the increase in revenues.  Diluted EPS increased as the result of increased earnings and a reduction in the average shares outstanding due to our stock repurchase program.

VITAS expects to achieve full-year 2009 revenue growth, prior to Medicare cap, of 5.7% to 6.2%.  Admissions are estimated to be in the range of 98% to 100% of total 2008 admissions.  Medicare contractual billing limitations are estimated at $1.25 million in the fourth quarter of 2009.  Roto-Rooter expects full-year 2009 revenue to range from 98% to 101% of 2008 full year revenue.  This expected revenue growth is a result of increased pricing of 5.0% and a favorable mix shift to higher revenue jobs, partially offset by a job count decline estimated at 7.0% to 8.0%.  We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.
 

-17-

 
Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2008 to September 30, 2009 include the following:

•          
A $8.6 million increase in accounts receivable which results primarily from a $10.3 million increase at VITAS resulting from Medicare related administrative delays in processing payments at certain of our programs offset by a decrease at Roto-Rooter  related to a decrease in days sales outstanding.
•          
A $17.9 million decrease in long-term debt which results primarily from an $8.2 million net reduction in our revolving line of credit and a $14.6 million payment on our term loan, offset by $4.9 million amortization of bond discount.

 Net cash provided by operating activities decreased $9.0 million due primarily to the increase in accounts receivable, partially offset by the increase in net income and current tax liabilities.

We have issued $27.9 million in standby letters of credit as of September 30, 2009, for insurance purposes.  Issued letters of credit reduce our available credit under the revolving credit agreement.  As of September 30, 2009, we have approximately $147.1 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the 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.  In connection therewith, we are in compliance with all financial and other debt covenants as of September 30, 2009 and anticipate remaining in compliance throughout 2009.

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 (“Santos”).  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.  VITAS contests these allegations.  The lawsuit is in its early stages and we are unable to estimate our potential liability, if any, with respect to these allegations.

Regardless of outcome, defense of litigation adversely affects us through defense costs, diversion of our time and related publicity.  In the normal course of business, we are a party to various claims and legal proceedings.  We record a reserve for these matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable.

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.

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.  Based on the early stage of the investigation and the limited information we have at this time, we cannot predict the outcome of this investigation.  We believe that we are in material compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.

We are unable to predict the outcome of these matters or the impact, if any, that the investigation may have on our business, results of operations, liquidity or capital resources.  Regardless of outcome, responding to the subpoenas can adversely affect us through defense costs, diversion of our time and related publicity.

 
-18-


Results of Operations
Three months ended September 30, 2009 versus  2008 - Consolidated Results
Our service revenues and sales for the third quarter of 2009 increased 2.9% versus services and sales revenues for the third quarter of 2008.  Of this increase, $12.1 million was attributable to VITAS offset by a $3.6 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
  $ 7,347       4.9%  
 
Continuous care
    4,905       15.8%  
 
General inpatient
    (98 )     -0.4%  
 
Medicare cap
    (43 )       -  
Roto-Rooter
                 
 
Plumbing
      (721 )     -2.0%  
 
Drain cleaning
    (2,865 )     -8.3%  
 
Other
      (43 )     -0.4%  
   
Total
  $ 8,482       2.9%  

The increase in VITAS’ revenues for the third quarter of 2009 versus the third quarter of 2008 was a result of increased admissions of 3.1%, the October 1, 2008 Medicare reimbursement rate increase of approximately 3.5%, partially offset by a 1.2% increase in the number of discharged patients.  The remaining difference is related to the timing within the quarter of admissions and discharges as well as a mix shift to higher acuity days of care.  In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The decrease in the plumbing revenues for the third quarter of 2009 versus 2008 is attributable to a 9.8% increase in the average price per job and a 9.4% decrease in the number of jobs performed.  The average price per job for plumbing is attributable to an increase in the number of jobs requiring excavation work.  Drain cleaning revenues for the third quarter of 2009 versus 2008 reflect a 7.9% decline in the number of jobs, while the average price per job increased 0.1%.  The decrease in other revenues is attributable primarily to lower sales of drain cleaning products.
 
The consolidated gross margin was 29.6% in the third quarter of 2009 as compared with 29.8% in the third quarter of 2008.  On a segment basis, VITAS’ gross margin was 23.4% in the third quarter of 2009 and 23.6% in the third quarter of 2008.  The Roto-Rooter segment’s gross margin was 46.4% in the third quarter of 2009 and 45.1% in the third quarter of 2008.  The increase in Roto-Rooter’s gross margin was primarily the result of a $646,000 decrease in health insurance expense over the prior year quarter, lower fuel costs due to lower gas prices and fewer technicians in training which improves the overall efficiency of our workforce.
 
Selling, general and administrative expenses (“SG&A”) for the third quarter of 2009 were $48.1 million, an increase of $4.1 million (9.4%) versus the third quarter of 2008.  The increase is primarily related to the impact of stock market gains which increase the liabilities of deferred compensation plans held in trust and an increase in stock-based compensation expense over the comparable prior-year period.   Other income increased $3.6 million in the third quarter of 2008 to $1.7 million in the third quarter of 2009 due to the gain in the investments of deferred compensation plans held in trust which offsets the related expense in SG&A.

Our effective income tax rate decreased from 43.2% in the third quarter of 2008 to 39.3% in the third quarter of 2009.  This decrease is due to the impact of non-deductible market losses on investments in our deferred compensation benefit trusts that occurred during the third quarter of 2008 but did not recur during the third quarter of 2009.
 
 
-19-

 
Net income for both periods included the following after-tax special items/adjustments that increased/ (reduced) after-tax earnings (in thousands):

   
Three Months Ended
September 30,
 
   
2009
   
2008
 
VITAS
           
Costs associated with the OIG investigations
  $ (213 )   $ (1 )
Corporate
               
  Stock option expense
    (1,401 )     (1,334 )
Noncash interest expense related to change in accounting
               
for conversion feature of the convertible notes
    (1,006 )     (997 )
Impact of non-deductible losses and non-taxable gains on
               
investments held in deferred compensation trusts
    -       (1,237 )
Total
  $ (2,620 )   $ (3,569 )

Three months ended September 30, 2009 versus 2008 - Segment Results
The change in after-tax earnings for the third quarter of 2009 versus the third quarter of 2008 is due to (in thousands):

   
Net Income
 
   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
  $ 706       4.0%  
Roto-Rooter
    31       0.4%  
Corporate
    1,522       17.8%  
    $ 2,259       13.3%  

Nine months ended September 30, 2009 versus 2008 - Consolidated Results
Our service revenues and sales for the first nine months of 2009 increased 3.5% versus services and sales revenues for the first nine months of 2008.  Of this increase, $34.2 million was attributable to VITAS offset by a $3.9 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
  $ 20,085       4.6%  
 
Continuous care
    13,662       14.8%  
 
General inpatient
    (1,691 )     -2.3%  
 
Medicare cap
    192         -  
 
BNAF adjustment
    1,950         -  
Roto-Rooter
                 
 
Plumbing
      4,052       3.8%  
 
Drain cleaning
    (7,370 )     -6.7%  
 
Other
      (629 )     -1.7%  
   
Total
  $ 30,251       3.5%  

The increase in VITAS’ service revenues for the first nine months of 2009 versus the first nine months of 2008 is primarily the result of the 2008 Medicare reimbursement rate increase of approximately 3.5%, a $1.95 million increase for the BNAF related to the fourth quarter of 2008, a net reversal of Medicare cap reserves of $192,000, as well as favorable mix shift to higher acuity days of care and an ADC increase of 0.5% compared with the prior year period.  The increase in ADC is a result of a 0.4% increase in routine homecare, an increase of 8.4% in continuous care and a 5.4% decrease in general inpatient.  In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.
 
 
-20-

 
The increase in the plumbing revenues for the first nine months of 2009 versus 2008 is attributable to a 14.6% increase in the average price per job offset by an 8.9% decrease in the number of jobs performed. The average price per job for plumbing is attributable to an increase in the number of jobs requiring excavation work. Drain cleaning revenues for the first nine months of 2009 versus 2008 reflect a 7.4% decline in the number of jobs offset by a 0.9% increase in the average price per job.  The decrease in other revenues is attributable primarily to lower sales of drain cleaning products and decreased revenue from independent contractor operations.
 
The consolidated gross margin was 29.7% for the first nine months of 2009 as compared with 28.9% for the first nine months of 2008.  On a segment basis, VITAS’ gross margin was 23.4% for the first nine months of 2009 and 21.8% for the first nine months of 2008.  VITAS’ gross margin increased as the result of the $1.95 million BNAF adjustment related to fourth quarter of 2008, the net reversal of $192,000 in the Medicare cap accrual and refinements to scheduled field labor. The Roto-Rooter segment’s gross margin was 45.9% for the first nine months of 2009 and 45.6% for the first nine months of 2008.
 
Selling, general and administrative expenses (“SG&A”) for the first nine months of 2009 were $143.5 million, an increase of $10.5 million (7.9%) versus the first nine months of 2008.  The increase is due mainly to the impact of stock market gains which increase the liabilities of deferred compensation plans held in trust, an increase in stock-based compensation expense over the comparable period of 2008 as well as an increase in bad debt expense at VITAS.  The expense associated with the increase in the liabilities of deferred compensation plans held in trust is essentially offset with gains recognized in other income/(expense).   Also included in the first nine months of 2009 is a $1.6 million increase in stock option expense.

Other operating expenses for the first nine months of 2009 of $4.0 million are related to the expenses of a contested proxy solicitation.

 Other income/(expense) increased from an expense of $2.2 million for the first nine months of 2008 to income of $4.8 million for the first nine months of  2009 due to the gain in the investments of deferred compensation plans held in trust.

Our effective income tax rate decreased from 40.3% for the first nine months of 2008 to 39.0% for the first nine months of 2009.

Net income for both periods included the following after-tax special items/adjustments that increased/ (reduced) after-tax earnings (in thousands):

   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
VITAS
           
Costs associated with the OIG investigations
  $ (274 )   $ (27 )
Income tax credit related to prior years
    -       322  
Roto-Rooter
               
Unreserved prior year's insurance claims
    -       (358 )
Corporate
               
Costs related to contested proxy solicitation
    (2,525 )     -  
Stock option expense
    (4,237 )     (3,228 )
Noncash interest expense related to change in accounting
               
for conversion feature of the convertible notes
    (2,961 )     (2,936 )
Impact of non-deductible losses and non-taxable gains on
               
investments held in deferred compensation trusts
    756       (1,237 )
Total
  $ (9,241 )   $ (7,464 )

 
-21-

 
Nine months ended September 30, 2009 versus 2008 - Segment Results
The change in after-tax earnings for the first nine months of 2009 versus the first nine months of 2008 is due to (in thousands):
   
Net Income
 
   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
  $ 7,614       16.9%  
Roto-Rooter
    (330 )     -1.3%  
Corporate
    (567 )     -2.6%  
    $ 6,717       13.7%  


The following chart updates historical unaudited financial and operating data of VITAS (dollars in thousands, except dollars per patient day):
 
 
-22-

 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
OPERATING STATISTICS
   2009     2008     2009     2008  
Net revenue
                       
Homecare
  $ 157,079     $ 149,732     $ 456,160     $ 436,075  
Inpatient
    24,057       24,155       72,806       74,497  
Continuous care
    35,974       31,069       105,679       92,017  
                         Total before Medicare cap allowance and 2008 BNAF   $ 217,110     $ 204,956     $ 634,645     $ 602,589  
Estimated BNAF
    -       -       1,950       -  
Medicare cap allowance
    (43 )     -       192       -  
                         Total   $ 217,067     $ 204,956     $ 636,787     $ 602,589  
Net revenue as a percent of total
                               
     before Medicare cap allowance
                               
Homecare
    72.3 %     73.0 %     71.8 %     72.4 %
Inpatient
    11.1       11.8       11.5       12.3  
Continuous care
    16.6       15.2       16.7       15.3  
                         Total before Medicare cap allowance and 2008 BNAF     100.0       100.0       100.0       100.0  
Estimated BNAF
    -       -       0.3       -  
Medicare cap allowance
    -       -       -       -  
                         Total     100.0 %     100.0 %     100.3 %     100.0 %
Average daily census (days)
                               
Homecare
    7,835       7,534       7,661       7,346  
Nursing home
    3,316       3,570       3,291       3,562  
                         Routine homecare     11,151       11,104       10,952       10,908  
Inpatient
    404       410       406       429  
Continuous care
    562       519       565       521  
                         Total     12,117       12,033       11,923       11,858  
                                 
Total Admissions
    13,735       13,317       41,743       42,485  
Total Discharges
    13,441       13,279       41,064       41,992  
Average length of stay (days)
    78.0       74.1       75.0       72.9  
Median length of stay (days)
    14.0       15.0       14.0       14.0  
ADC by major diagnosis
                               
Neurological
    33.1 %     32.5 %     33.0 %     32.5 %
Cancer
    19.1       19.9       19.2       19.9  
Cardio
    12.2       12.8       12.2       12.9  
Respiratory
    6.2       6.5       6.5       6.7  
Other
    29.4       28.3       29.1       28.0  
                         Total     100.0 %     100.0 %     100.0 %     100.0 %
Admissions by major diagnosis
                               
Neurological
    17.8 %     18.2 %     17.9 %     18.4 %
Cancer
    36.8       37.6       35.6       35.6  
Cardio
    11.1       11.3       11.8       11.8  
Respiratory
    6.8       7.0       7.5       7.8  
Other
    27.5       25.9       27.2       26.4  
                         Total     100.0 %     100.0 %     100.0 %     100.0 %
Direct patient care margins
                               
Routine homecare
    51.7 %     52.4 %     51.8 %     51.2 %
Inpatient
    12.8       16.6       15.7       17.9  
Continuous care
    20.6       18.0       20.3       17.4  
Homecare margin drivers (dollars per patient day)
                               
Labor costs
  $ 52.56     $ 48.59     $ 52.40     $ 50.16  
Drug costs
    7.59       7.85       7.65       7.70  
Home medical equipment
    7.03       6.28       6.85       6.22  
Medical supplies
    2.48       2.17       2.37       2.35  
Inpatient margin drivers (dollars per patient day)
                               
Labor costs
  $ 294.24     $ 262.98     $ 282.74     $ 263.71  
Continuous care margin drivers (dollars per patient day)
                               
Labor costs
  $ 530.88     $ 512.04     $ 524.84     $ 511.81  
Bad debt expense as a percent of revenues
    1.1 %     1.0 %     1.1       1.0 %
 Accounts receivable --
                               
  days of revenue outstanding- excluding unapplied Medicare payments
    52.8       46.9    
N.A.
   
N.A.
 
  days of revenue outstanding- including unapplied Medicare payments
    37.0       30.4    
N.A.
   
N.A.
 
                                 
VITAS has 4 large (greater than 450 ADC), 19 medium (greater than 200 but less than 450 ADC) and 21 small (less than 200 ADC) hospice programs. There are three continuing programs as of September 30, 2009, with Medicare cap cushion of less than 10% for the 2009 Medicare cap period.
 
                                 
Direct patient care margins exclude indirect patient care and administrative costs, as well as Medicare cap billing limitation.
 
 
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Recent Accounting Statements
In June 2009, the FASB issued additional authoritative guidance related to the consolidation of variable interest entities, which makes significant changes to the model for determining who should consolidate an entity and also addresses how often this assessment should be performed. The determination of who should consolidate a variable interest entity will be based on both quantitative and qualitative factors relating to control, as well as risks and benefits of ownership.  This guidance is effective in 2010 for calendar-year companies and is to be adopted through a cumulative-effect adjustment.  We are currently evaluating the impact of adoption of these provisions on our existing accounting methods.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information
Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The words “believe”, “expect”, “hope”, “anticipate”, “plan” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made.  These forward-looking statements are based on current expectations and assumptions and involve various known and unknown risks, uncertainties, contingencies and other factors, which could cause Chemed’s actual results to differ from those expressed in such forward-looking statements.  Variances in any or all of the risks, uncertainties, contingencies, and other factors from our assumptions could cause actual results to differ materially from these forward-looking statements and trends.  In addition, our ability to deal with the unknown outcomes of these events, many of which are beyond our control, may affect the reliability of projections and other financial matters.  Investors are cautioned that such forward-looking statements are subject to inherent risk and there are no assurances that the matters contained in such statements will be achieved.  Chemed does not undertake and specifically disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of a new information, future events or otherwise.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposure relates to interest rate risk exposure through variable interest rate borrowings.  At September 30, 2009, we had no variable rate debt outstanding.  At September 30, 2009, the fair value of the Notes approximates $153.8 million which have a face value of $187.0 million.

Item 4.  Controls and Procedures
We carried out an evaluation, under the supervision of our President and Chief Executive Officer and with the participation of the Executive Vice President and Chief Financial Officer and the Vice President and Controller, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the President and Chief Executive Officer, Executive Vice President and Chief Financial Officer and Vice President and Controller have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.  There has been no change in our internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II OTHER INFORMATION
Item 1.                      Legal Proceedings

For information regarding the Company’s legal proceedings, see note 12, Litigation, and note 13, Regulatory Matters, under Part I, Item I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K,

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.    Defaults Upon Senior Securities

None

Item 4.    Submission of Matters to a Vote of Security Holders

None

Item 5.    Other Information

None

Item 6.    Exhibits

Exhibit No.
 
Description
     
10.1
 
First Amendment to Employment Agreement dated July 9, 2009 - Kevin J. McNamara.
     
10.2
 
First Amendment to Employment Agreement dated July 9, 2009 - David P. Williams.
     
10.3
 
First Amendment to Employment Agreement dated July 9, 2009 - Timothy S. O'Toole.
     
10.4
 
Chemed Corporation Senior Executive Severance Policy As Amended July 9, 2009.
     
10.5
 
Chemed Corporation Change In Control Severance Plan As Amended July 9, 2009.
     
31.1
 
Certification by Kevin J. McNamara pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.
     
31.2
 
Certification by David P. Williams pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange  Act of 1934.
     
31.3
 
Certification by Arthur V. Tucker, Jr. pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.
     
32.1
 
Certification by Kevin J. McNamara pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification by David P. Williams pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.3
 
Certification by Arthur V. Tucker, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


           
Chemed Corporation
           
(Registrant)
             
             
Dated:
 
October 30, 2009
 
By:
 
Kevin J. McNamara
           
Kevin J. McNamara
           
(President and Chief Executive Officer)
             
             
Dated:
 
October 30, 2009
 
By:
 
David P. Williams
           
David P. Williams
           
(Executive Vice President and Chief Financial Officer)
             
             
Dated:
 
October 30, 2009
 
By:
 
Arthur V. Tucker, Jr.
           
Arthur V. Tucker, Jr.
           
(Vice President and Controller)

 
 
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