CHEMED CORP - Quarter Report: 2011 September (Form 10-Q)

a50048755.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, 2011

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

Commission File Number: 1-8351

CHEMED CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		31-0791746
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio		45202
(Address of principal executive offices)		(Zip code)

(513) 762-6900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

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

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

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

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	19,881,497 Shares	September 30, 2011

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CHEMED CORPORATION AND

SUBSIDIARY COMPANIES

Index

		Page No.
PART I. FINANCIAL INFORMATION:
	Item 1. Financial Statements
	Unaudited Consolidated Balance Sheet -
	September 30, 2011 and December 31, 2010	3

	Unaudited Consolidated Statement of Income -
	Three and nine months ended September 30, 2011 and 2010	4

	Unaudited Consolidated Statement of Cash Flows -
	Nine months ended September 30, 2011 and 2010	5

	Notes to Unaudited Financial Statements	6

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	17

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	31

	Item 4. Controls and Procedures	31

PART II. OTHER INFORMATION
	Item 1. Legal Proceedings	31

	Item 1A. Risk Factors	31

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32

	Item 3. Defaults Upon Senior Securities	32

	Item 4. Removed and Reserved	32

	Item 5. Other Information	32

	Item 6. Exhibits	33
	EX – 31.1
	EX – 31.2
	EX – 31.3
	EX – 32.1
	EX – 32.2
	EX – 32.3
	EX – 101.INS
	EX – 101.SCH
	EX – 101.CAL
	EX – 101.LAB
	EX – 101.PRE

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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)


	September 30,			December 31,
	2011			2010
ASSETS
Current assets
Cash and cash equivalents	$	21,342		$	49,917
Accounts receivable less allowances of $12,033 (2010 - $13,332)		112,721			112,999
Inventories		8,888			7,728
Current deferred income taxes		14,850			15,098
Prepaid income taxes		764			770
Prepaid expenses		10,031			10,285
Total current assets		168,596			196,797
Investments of deferred compensation plans		31,339			28,304
Properties and equipment, at cost, less accumulated depreciation of $142,067 (2010 - $132,696)		83,484			79,292
Identifiable intangible assets less accumulated amortization of $28,530 (2010 - $27,438)		55,983			56,410
Goodwill		460,747			458,343
Other assets		14,907			11,015
Total Assets	$	815,056		$	830,161

LIABILITIES
Current liabilities
Accounts payable	$	59,186		$	55,829
Income taxes		8,267			1,161
Accrued insurance		35,655			36,492
Accrued compensation		40,376			39,719
Other current liabilities		17,308			16,141
Total current liabilities		160,792			149,342
Deferred income taxes		23,262			25,085
Long-term debt		164,841			159,208
Deferred compensation liabilities		30,267			27,851
Other liabilities		9,559			6,626
Total Liabilities		388,721			368,112

STOCKHOLDERS' EQUITY
Capital stock - authorized 80,000,000 shares $1 par; issued 30,913,424 shares (2010 - 30,381,863 shares)		30,913			30,382
Paid-in capital		394,822			365,007
Retained earnings		524,197			473,316
Treasury stock - 11,128,851 shares (2010 - 9,103,185 shares), at cost		(525,555	)		(408,615	)
Deferred compensation payable in Company stock		1,958			1,959
Total Stockholders' Equity		426,335			462,049
Total Liabilities and Stockholders' Equity	$	815,056		$	830,161

See accompanying notes to unaudited financial statements.

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CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Service revenues and sales	$	341,439		$	320,451		$	1,005,717		$	944,259
Cost of services provided and goods sold (excluding depreciation)		245,063			227,915			722,118			670,754
Selling, general and administrative expenses		47,618			48,200			153,696			146,694
Depreciation		6,313			6,385			18,959			18,048
Amortization		1,134			1,196			3,243			3,707
Total costs and expenses		300,128			283,696			898,016			839,203
Income from operations		41,311			36,755			107,701			105,056
Interest expense		(3,555	)		(2,995	)		(10,260	)		(8,946	)
Other income/(expense) - net		(1,935	)		222			881			418
Income before income taxes		35,821			33,982			98,322			96,528
Income taxes		(13,934	)		(12,994	)		(38,048	)		(37,327	)
Net income	$	21,887		$	20,988		$	60,274		$	59,201


Earnings Per Share
Net income	$	1.06		$	0.93		$	2.88		$	2.62
Average number of shares outstanding		20,674			22,597			20,934			22,604

Diluted Earnings Per Share
Net income	$	1.04		$	0.91		$	2.82		$	2.57
Average number of shares outstanding		21,055			22,996			21,400			23,006

Cash Dividends Per Share	$	0.16		$	0.14		$	0.44		$	0.38

See accompanying notes to unaudited financial statements.

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CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

	Nine Months Ended
	September 30,
	2011			2010
Cash Flows from Operating Activities
Net income	$	60,274		$	59,201
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization		22,202			21,755
Stock option expense		6,903			6,365
Provision for uncollectible accounts receivable		6,640			7,248
Amortization of discount on convertible notes		5,633			5,265
Noncash long-term incentive compensation		2,595			1,580
Provision for deferred income taxes		(1,608	)		(3,886	)
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations:
Increase in accounts receivable		(5,991	)		(59,528	)
Increase in inventories		(1,160	)		(408	)
Decrease in prepaid expenses		254			463
Increase in accounts payable and other current liabilities		2,654			12,479
Increase in income taxes		12,253			6,729
Increase in other assets		(3,811	)		(2,180	)
Increase in other liabilities		3,567			3,960
Excess tax benefit on share-based compensation		(3,368	)		(1,823	)
Other sources		899			770
Net cash provided by operating activities		107,936			57,990
Cash Flows from Investing Activities
Capital expenditures		(23,459	)		(19,107	)
Business combinations, net of cash acquired		(3,689	)		(30	)
Other uses		(829	)		(448	)
Net cash used by investing activities		(27,977	)		(19,585	)
Cash Flows from Financing Activities
Purchases of treasury stock		(110,288	)		(10,175	)
Dividends paid		(9,393	)		(8,682	)
Proceeds from issuance of capital stock		7,979			3,632
Excess tax benefit on share-based compensation		3,368			1,823
Debt issuance costs		(2,723	)		-
Increase/(decrease) in cash overdrafts payable		2,297			(184	)
Other sources		226			222
Net cash used by financing activities		(108,534	)		(13,364	)
Increase/(Decrease) in Cash and Cash Equivalents		(28,575	)		25,041
Cash and cash equivalents at beginning of year		49,917			112,416
Cash and cash equivalents at end of period	$	21,342		$	137,457

See accompanying notes to unaudited financial statements.

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CHEMED CORPORATION AND SUBSIDIARY COMPANIES

Notes to Unaudited Financial Statements

1. Basis of Presentation

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

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

2. Revenue Recognition

Both the VITAS segment and the Roto-Rooter segment recognize service revenues and sales when the earnings process has been completed. Generally, this occurs when services are provided or products are delivered. VITAS recognizes revenue at the estimated realizable amount due from third-party payers. Medicare payments are subject to certain limitations, as described below.

As of September 30, 2011, VITAS has approximately $1.1 million in unbilled revenue included in accounts receivable (December 31, 2010 - $2.8 million). The unbilled revenue at VITAS relates to hospice programs currently undergoing focused medical reviews (“FMR”). During FMR, surveyors working on behalf of the U.S. Federal government review certain patient files for compliance with Medicare regulations. During the time the patient file is under review, we are unable to bill for care provided to those patients. We make appropriate provisions to reduce our accounts receivable balance for potential denials of patient service revenue due to FMR activity.

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 September 30, 2011 we recorded a reversal of $384,000 in Medicare cap liability for one small program for the 2011 measurement period. During the nine-month period ended September 30, 2011, we had a net Medicare cap liability reversal for amounts recorded in the fourth quarter of 2010. We reversed these amounts as improving admissions trends in these programs indicate that the liability had been eliminated. We also reversed the remaining Medicare cap liability for our Phoenix program due to expiration for the period under review.

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

	September 30,
	2011			2010
Beginning balance January 1,	$	1,371		$	1,981
Reversal - 2011 measurement period		(829	)		-
Reversal - 2010 measurement period		-			(1,783	)
Accrual - 2010 measurement period		-			117
Other		(198	)		-
Ending balance September 30,	$	344		$	315

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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 for the three and nine month periods ended September 30, 2011 and 2010 is as follows (in thousands):

Three months ended				Nine months ended
September 30,				September 30,
2011		2010		2011		2010
$	1,775	$	2,012	$	5,298	$	5,386

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,
	2011			2010			2011			2010
Service Revenues and Sales
VITAS	$	252,944		$	233,964		$	731,712		$	683,542
Roto-Rooter		88,495			86,487			274,005			260,717
Total	$	341,439		$	320,451		$	1,005,717		$	944,259

After-tax Earnings
VITAS	$	20,970		$	19,803		$	57,684		$	56,523
Roto-Rooter		8,016			7,747			25,618			24,420
Total		28,986			27,550			83,302			80,943
Corporate		(7,099	)		(6,562	)		(23,028	)		(21,742	)
Net income	$	21,887		$	20,988		$	60,274		$	59,201

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

4. Earnings per Share

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

	Net Income
For the Three Months Ended September 30,	Income		Shares		Earnings per Share
2011
Earnings	$	21,887		20,674	$	1.06
Dilutive stock options		-		293
Nonvested stock awards		-		88
Diluted earnings	$	21,887		21,055	$	1.04

2010
Earnings	$	20,988		22,597	$	0.93
Dilutive stock options		-		304
Nonvested stock awards		-		95
Diluted earnings	$	20,988		22,996	$	0.91

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	Net Income
For the Nine Months Ended September 30,	Income		Shares		Earnings per Share
2011
Earnings	$	60,274		20,934	$	2.88
Dilutive stock options		-		379
Nonvested stock awards		-		87
Diluted earnings	$	60,274		21,400	$	2.82

2010
Earnings	$	59,201		22,604	$	2.62
Dilutive stock options		-		314
Nonvested stock awards		-		88
Diluted earnings	$	59,201		23,006	$	2.57

For the three and nine-month periods ended September 30, 2011, 1.5 million and 980,000 stock options, respectively, were excluded from the computation of diluted earnings per share as their exercise prices were greater than the average market price for most of the period. For the three and nine-month periods ended September 30, 2010, 990,000 and 986,000 stock options, respectively, were excluded from the computation of diluted earnings per share.

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

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

		Shares				Total Treasury		Shares Due			Incremental
		Underlying 1.875%				Method		to the Company			Shares Issued/
Share		Convertible		Warrant		Incremental		under Notes			Received by the Company
Price		Notes		Shares		Shares (a)		Hedges			upon Conversion (b)
$	80.73		28,058		-		28,058		(30,015	)		(1,957	)
$	90.73		283,300		-		283,300		(303,066	)		(19,766	)
$	100.73		487,865		-		487,865		(521,903	)		(34,038	)
$	110.73		655,480		119,789		775,269		(701,214	)		74,055
$	120.73		795,329		317,554		1,112,883		(850,820	)		262,063
$	130.73		913,783		485,064		1,398,847		(977,538	)		421,309

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.

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5. Long-Term Debt

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

Description		Requirement

Leverage Ratio (Consolidated Indebtedness/Consolidated Adj. EBITDA)		< 3.50 to 1.00

Fixed Charge Coverage Ratio (Consolidated Free Cash Flow/Consolidated Fixed Charges)		> 1.50 to 1.00

Annual Operating Lease Commitment		< $30.0 million

We are in compliance with all debt covenants as of September 30, 2011. We have issued $29.5 million in standby letters of credit as of September 30, 2011 for insurance purposes. Issued letters of credit reduce our available credit under the 2011 Credit Agreement. As of September 30, 2011, we have approximately $320.5 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $150 million expansion feature.

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

	September 30, 2011			December 31, 2010
Principal amount of convertible debentures	$	186,956		$	186,956
Unamortized debt discount		(22,115	)		(27,748	)
Carrying amount of convertible debentures	$	164,841		$	159,208
Additional paid in capital (net of tax)	$	31,310		$	31,310

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

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Cash interest expense	$	1,345	$	1,044	$	3,786	$	3,198
Non-cash amortization of debt discount		1,910		1,785		5,633		5,265
Amortization of debt costs		300		166		841		483
Total interest expense	$	3,555	$	2,995	$	10,260	$	8,946

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%.

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6. Other Income/(Expense) -- Net

Other income/(expense) -- net comprises the following (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Market value gains/(losses) on assets held in
deferred compensation trust	$	(2,011	)	$	243		$	796		$	348
Loss on disposal of property and equipment		(79	)		(141	)		(68	)		(293	)
Interest income		74			109			197			334
Other – net		81			11			(44	)		29
Other income/(expense) - net	$	(1,935	)	$	222		$	881		$	418

7. Stock-Based Compensation Plans

In January 2011, we met a stock price target of $62.00 under our Long-Term Incentive Plan. On January 14, 2011, the Compensation/Incentive Committee of the Board of Directors (“CIC”) approved a stock grant of 41,100 shares (including 7,350 shares from the discretionary pool) and the related allocation to participants. The cumulative compensation expense related to the stock grant was $3.0 million.

On February 18, 2011, the CIC approved a time-based LTIP award of 42,000 shares of restricted stock to certain key employees. The restricted shares cliff vest four years from the date of issuance. The cumulative compensation expense related to the restricted award is $2.7 million and will be recognized ratably over the 4 year vesting period. We assumed no forfeitures in determining the cumulative compensation expense of the grant.

On February 18, 2011, the CIC approved a grant of 35,713 shares of restricted stock to certain key employees. The restricted shares cliff vest four years from the date of issuance. The cumulative compensation expense related to the restricted stock award is $2.3 million and will be recognized ratably over the 4 year vesting period. We assumed no forfeitures in determining the cumulative compensation expense of the grant.

On February 18, 2011, the CIC approved a grant of 513,100 stock options to certain employees. The stock options vest ratably over three years from the date of issuance. The cumulative compensation expense related to the stock option grant is $9.8 million and will be recognized over the 3 year vesting period. We used the Black-Scholes option valuation method to determine the cumulative compensation expense of the grant.

8. Independent Contractor Operations

The Roto-Rooter segment sublicenses with 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 September 30, 2011 totaling $1.2 million (December 31, 2010 - $1.1 million). In most cases these loans are fully or partially secured by equipment owned by the contractor. The interest rates on the loans range from 0% to 8% per annum and the remaining terms of the loans range from 2 months to 5 years at September 30, 2011. We recorded the following from our independent contractors (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010

Revenues	$	6,575	$	5,507	$	19,614	$	16,724
Pretax profits		3,236		2,530		9,625		7,634

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9. Pension and Retirement Plans

All of the Company’s plans that provide retirement and similar benefits are defined contribution plans. These expenses include the impact of market gains and losses on assets held in deferred compensation plans. Expenses for the Company’s pension and profit-sharing plans, excess benefit plans and other similar plans for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands):

Three months ended				Nine months ended
September 30,				September 30,
2011		2010		2011		2010
$	105	$	2,271	$	7,058	$	7,017

10. Legal and Regulatory Matters

Litigation

On March 1, 2010 Anthony Morangelli and Frank Ercole filed a class action lawsuit in federal district court for the Eastern District of New York seeking unpaid minimum wages and overtime service technician compensation from Roto-Rooter and Chemed. They also seek payment of penalties, interest and plaintiffs’ attorney fees. We contest these allegations. In September 2010, the Court conditionally certified a class of service technicians, excluding those who signed dispute resolution agreements in which they agreed to arbitrate claims arising out of their employment. In June 2011, the Court granted certification of a class of technicians in 14 states on certain claims. We are unable to estimate our potential liability or range of potential loss, if any, with respect to this case.

VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White. This case alleges failure to pay overtime and failure to provide meal and rest periods to California admissions nurses, chaplains and sales representatives. The case seeks payment of penalties, interest and Plaintiffs’ attorney fees. VITAS contests these allegations. In December 2009, the trial court denied Plaintiffs’ motion for class certification. In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims. Plaintiffs have filed an appeal of this decision. We are unable to estimate our potential liability or range of potential loss, if any, with respect to this case.

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

Regulatory Matters

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

In April 2005, the OIG served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services. As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review. It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges. During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us. The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florida with prejudice in July 2007. The plaintiffs appealed this dismissal, which the Court of Appeals affirmed. The government continues to investigate the complaint’s allegations. In March 2009, we received a letter from the government reiterating the basis of their investigation. We are unable to estimate our potential liability or range of potential loss, if any, with respect to this matter. We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.

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

11. Related Party Agreement

VITAS has pharmacy services agreements ("Agreements") with Omnicare, Inc. and its subsidiaries (“OCR”) whereby OCR provides specified pharmacy services for VITAS and its hospice patients in geographical areas served by both VITAS and OCR. The Agreements renew automatically for one-year terms. Either party may cancel the Agreements at the end of any term by giving 90 days prior written notice. VITAS made purchases from OCR of $10.0 million and $9.0 million for the three months ended September 30, 2011 and 2010, respectively. VITAS made purchases from OCR of $29.2 million and $26.5 million for the nine months ended September 30, 2011 and 2010, respectively.

Mr. Joel Gemunder retired as President and CEO of OCR during the third quarter of 2010 and is a director of the Company. Ms. Andrea Lindell is a director of both OCR and the Company. We believe that the terms of the Agreements are no less favorable to VITAS than we could negotiate with an unrelated party.

12. Cash Overdrafts and Cash Equivalents

Included in accounts payable at September 30, 2011 is cash overdrafts payable of $13.4 million (December 31, 2010 - $11.1 million).

From time to time throughout the year, we invest excess cash in money market funds or repurchase agreements directly with major commercial banks. We do not physically hold the collateral for repurchase agreements, but the term is less than 10 days. We closely monitor the creditworthiness of the institutions with which we invest our overnight funds and the quality of the collateral underlying those investments. We had $16.0 million in cash equivalents as of September 30, 2011. There was $45.5 million in cash equivalents as of December 31, 2010. The weighted average rate of return for our cash equivalents was 0.2% for September 30, 2011 and 0.1% for December 31, 2010.

13. Financial Instruments

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

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of September 30, 2011 (in thousands):

			Fair Value Measure
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mutual fund investments of deferred
compensation plans held in trust	$	31,339	$	31,339	$	-	$	-
Long-term debt		164,841		186,021		-		-

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.

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14. Capital Stock Transactions

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

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010

Shares repurchased		1,530,030		-		1,871,543		146,275
Weighted average price per share	$	55.39	$	-	$	60.30	$	53.32

15. Business Combinations

On April 29, 2011, our VITAS segment completed an acquisition of the operating assets of Family Comfort Hospice which is based in Alabama. This acquisition adds three Central-Alabama locations serving ten counties to VITAS’ network of hospice programs. We made no acquisitions within the Roto-Rooter segment. The purchase price of this acquisition is allocated as follows (in thousands):

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

The operating results of Family Comfort Hospice have been included in our results of operations since the acquisition date and are not material for either the three or nine-month period ended September 30, 2011.

16. Recent Accounting Statements

In September 2011, the FASB issued Accounting Standards Update “ASU” No. 2011-08 – Goodwill Impairment Testing which provides additional guidance related to the impairment testing of goodwill. ASU No. 2011-08 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The revised guidance is effective for fiscal years beginning after December 15, 2011 but early adoption is permitted. Our impairment testing date is October 1 of each year and we adopted the new guidelines in the fourth quarter of 2011. There was no impact as a result of the adoption.

In July 2011, the FASB issued ASU No. 2011-07 – Health Care Entities which provides additional guidance to health care entities related to the recognition of patient service revenue and related disclosures. The additional guidance is effective for fiscal years beginning after December 15, 2011 but early adoption is permitted. Management is still evaluating the impact of this guidance.

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17. 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, 2011 and December 31, 2010 for the balance sheet, the three and nine months ended September 30, 2011 and September 30, 2010 for the income statement and the nine months ended September 30, 2011 and September 30, 2010 for the statement of cash flows (dollars in thousands):

September 30, 2011				Guarantor			Non-Guarantor			Consolidating
	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
ASSETS
Cash and cash equivalents	$	15,950		$	(1,449	)	$	6,841		$	-		$	21,342
Accounts receivable, less allowances		641			111,650			430			-			112,721
Intercompany receivables		-			214,413			-			(214,413	)		-
Inventories		-			8,137			751			-			8,888
Current deferred income taxes		(1,435	)		16,104			181			-			14,850
Prepaid income taxes		4,606			(3,432	)		(410	)		-			764
Prepaid expenses		671			9,181			179			-			10,031
Total current assets		20,433			354,604			7,972			(214,413	)		168,596
Investments of deferred compensation plans		-			-			31,339			-			31,339
Properties and equipment, at cost, less accumulated depreciation		11,825			69,197			2,462			-			83,484
Identifiable intangible assets less accumulated amortization		-			55,983			-			-			55,983
Goodwill		-			456,208			4,539			-			460,747
Other assets		7,957			4,352			2,598			-			14,907
Investments in subsidiaries		771,709			21,404			-			(793,113	)		-
Total assets	$	811,924		$	961,748		$	48,910		$	(1,007,526	)	$	815,056
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	7,715		$	51,056		$	415		$	-		$	59,186
Intercompany payables		209,680			-			4,733			(214,413	)		-
Income taxes		6,800			1,575			(108	)		-			8,267
Accrued insurance		352			35,303			-			-			35,655
Accrued compensation		2,946			36,899			531			-			40,376
Other current liabilities		2,900			14,238			170			-			17,308
Total current liabilities		230,393			139,071			5,741			(214,413	)		160,792
Deferred income taxes		(12,629	)		45,661			(9,770	)		-			23,262
Long-term debt		164,841			-			-			-			164,841
Deferred compensation liabilities		-			-			30,267			-			30,267
Other liabilities		2,984			4,176			2,399			-			9,559
Stockholders' equity		426,335			772,840			20,273			(793,113	)		426,335
Total liabilities and stockholders' equity	$	811,924		$	961,748		$	48,910		$	(1,007,526	)	$	815,056

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

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For the three months ended September 30, 2011				Guarantor			Non-Guarantor			Consolidating
	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Continuing Operations
Service revenues and sales	$	-		$	334,937		$	6,502		$	-		$	341,439
Cost of services provided and goods sold		-			241,604			3,459			-			245,063
Selling, general and administrative expenses		5,678			42,595			(655	)		-			47,618
Depreciation		235			5,870			208			-			6,313
Amortization		467			667			-			-			1,134
Total costs and expenses		6,380			290,736			3,012			-			300,128
Income/ (loss) from operations		(6,380	)		44,201			3,490			-			41,311
Interest expense		(3,361	)		(194	)		-			-			(3,555	)
Other (expense)/income - net		4,379			(4,301	)		(2,013	)		-			(1,935	)
Income/ (loss) before income taxes		(5,362	)		39,706			1,477			-			35,821
Income tax (provision)/ benefit		1,677			(15,029	)		(582	)		-			(13,934	)
Equity in net income of subsidiaries		25,572			953			-			(26,525	)		-
Net income	$	21,887		$	25,630		$	895		$	(26,525	)	$	21,887

For the three months ended September 30, 2010				Guarantor			Non-Guarantor			Consolidating
	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Continuing Operations
Service revenues and sales	$	-		$	313,787		$	6,664		$	-		$	320,451
Cost of services provided and goods sold		-			224,316			3,599			-			227,915
Selling, general and administrative expenses		5,134			41,648			1,418			-			48,200
Depreciation		241			5,945			199			-			6,385
Amortization		370			826			-			-			1,196
Total costs and expenses		5,745			272,735			5,216			-			283,696
Income/ (loss) from operations		(5,745	)		41,052			1,448			-			36,755
Interest expense		(2,893	)		(102	)		-			-			(2,995	)
Other (expense)/income - net		3,889			(3,902	)		235			-			222
Income/ (loss) before income taxes		(4,749	)		37,048			1,683			-			33,982
Income tax (provision)/ benefit		1,498			(13,859	)		(633	)		-			(12,994	)
Equity in net income of subsidiaries		24,239			1,005			-			(25,244	)		-
Net income	$	20,988		$	24,194		$	1,050		$	(25,244	)	$	20,988

For the nine months ended September 30, 2011				Guarantor			Non-Guarantor			Consolidating
	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Continuing Operations
Service revenues and sales	$	-		$	985,500		$	20,217		$	-		$	1,005,717
Cost of services provided and goods sold		-			711,335			10,783			-			722,118
Selling, general and administrative expenses		17,936			130,617			5,143			-			153,696
Depreciation		711			17,651			597			-			18,959
Amortization		1,287			1,956			-			-			3,243
Total costs and expenses		19,934			861,559			16,523			-			898,016
Income/ (loss) from operations		(19,934	)		123,941			3,694			-			107,701
Interest expense		(9,814	)		(446	)		-			-			(10,260	)
Other (expense)/income - net		12,011			(11,918	)		788			-			881
Income/ (loss) before income taxes		(17,737	)		111,577			4,482			-			98,322
Income tax (provision)/ benefit		5,863			(42,164	)		(1,747	)		-			(38,048	)
Equity in net income of subsidiaries		72,148			2,861			-			(75,009	)		-
Net income	$	60,274		$	72,274		$	2,735		$	(75,009	)	$	60,274

For the nine months ended September 30, 2010				Guarantor			Non-Guarantor			Consolidating
	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Continuing Operations
Service revenues and sales	$	-		$	925,614		$	18,645		$	-		$	944,259
Cost of services provided and goods sold		-			660,971			9,783			-			670,754
Selling, general and administrative expenses		17,340			125,267			4,087			-			146,694
Depreciation		621			16,827			600			-			18,048
Amortization		1,066			2,641			-			-			3,707
Total costs and expenses		19,027			805,706			14,470			-			839,203
Income/ (loss) from operations		(19,027	)		119,908			4,175			-			105,056
Interest expense		(8,632	)		(314	)		-			-			(8,946	)
Other (expense)/income - net		11,180			(11,101	)		339			-			418
Income/ (loss) before income taxes		(16,479	)		108,493			4,514			-			96,528
Income tax (provision)/ benefit		5,392			(40,965	)		(1,754	)		-			(37,327	)
Equity in net income of subsidiaries		70,288			2,825			-			(73,113	)		-
Net income	$	59,201		$	70,353		$	2,760		$	(73,113	)	$	59,201

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For the nine months ended September 30, 2011				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Consolidated
Cash Flow from Operating Activities:
Net cash provided by operating activities	$	21,558		$	83,903		$	2,475		$	107,936
Cash Flow from Investing Activities:
Capital expenditures		(23	)		(22,378	)		(1,058	)		(23,459	)
Business combinations, net of cash acquired		-			(3,689	)		-			(3,689	)
Other sources/(uses) - net		(150	)		(713	)		34			(829	)
Net cash used by investing activities		(173	)		(26,780	)		(1,024	)		(27,977	)
Cash Flow from Financing Activities:
Change in cash overdrafts payable		208			2,089			-			2,297
Change in intercompany accounts		60,028			(59,090	)		(938	)		-
Dividends paid to shareholders		(9,393	)		-			-			(9,393	)
Purchases of treasury stock		(110,221	)		-			(67	)		(110,288	)
Proceeds from exercise of stock options		7,979			-			-			7,979
Realized excess tax benefit on share based compensation		3,368			-			-			3,368
Debt issuance cost		(2,723	)		-			-			(2,723	)
Other sources/(uses) - net		(5	)		-			231			226
Net cash used by financing activities		(50,759	)		(57,001	)		(774	)		(108,534	)
Net increase/(decrease) in cash and cash equivalents		(29,374	)		122			677			(28,575	)
Cash and cash equivalents at beginning of year		45,324			(1,571	)		6,164			49,917
Cash and cash equivalents at end of period	$	15,950		$	(1,449	)	$	6,841		$	21,342

For the nine months ended September 30, 2010				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Consolidated
Cash Flow from Operating Activities:
Net cash provided/(used) by operating activities	$	(4,364	)	$	61,703		$	651		$	57,990
Cash Flow from Investing Activities:
Capital expenditures		(14	)		(18,399	)		(694	)		(19,107	)
Business combinations, net of cash acquired		-			(30	)		-			(30	)
Other uses - net		(116	)		(313	)		(19	)		(448	)
Net cash used by investing activities		(130	)		(18,742	)		(713	)		(19,585	)
Cash Flow from Financing Activities:
Change in cash overdrafts payable		508			(692	)		-			(184	)
Change in intercompany accounts		40,895			(41,841	)		946			-
Dividends paid to shareholders		(8,682	)		-			-			(8,682	)
Purchases of treasury stock		(10,164	)		-			(11	)		(10,175	)
Proceeds from exercise of stock options		3,632			-			-			3,632
Realized excess tax benefit on share based compensation		716			1,107			-			1,823
Other sources - net		34			-			188			222
Net cash provided/(used) by financing activities		26,939			(41,426	)		1,123			(13,364	)
Net increase in cash and cash equivalents		22,445			1,535			1,061			25,041
Cash and cash equivalents at beginning of year		109,331			(1,221	)		4,306			112,416
Cash and cash equivalents at end of period	$	131,776		$	314		$	5,367		$	137,457

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

Executive Summary

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

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

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Service revenues and sales	$	341,439		$	320,451		$	1,005,717		$	944,259
Net income	$	21,887		$	20,988		$	60,274		$	59,201
Diluted EPS	$	1.04		$	0.91		$	2.82		$	2.57
Adjusted EBITDA	$	49,556		$	46,280		$	141,831		$	134,237
Adjusted EBITDA as a % of revenue		14.5	%		14.4	%		14.1	%		14.2	%

EBITDA and Adjusted EBITDA are not measures derived in accordance with GAAP. We use Adjusted EBITDA as a measure of earnings for our LTIP awards. We provide EBITDA and Adjusted EBITDA to help readers evaluate our operating results, compare our operating performance with that of similar companies that have different capital structures and help evaluate our ability to meet future debt service, capital expenditure and working capital requirements. Our EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP. A reconciliation of our net income to our EBITDA and Adjusted EBITDA is presented on pages 28 and 29.

For the three months ended September 30, 2011, the increase in consolidated service revenues and sales was driven by a 8.1% increase at VITAS and a 2.3% increase at Roto-Rooter. The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 6.2%, driven by an increase in admissions of 2.7% and a 2.4% increase in average length of stay, combined with Medicare price increases of approximately 2.1%. Roto-Rooter was driven by a 0.2% price and mix shift increase and a 1.5% increase in job count. The remaining Roto-Rooter revenue increase is related mainly to our independent contractor operations. Consolidated net income increased 4.3% driven mainly by the increase in revenue. Diluted EPS increased 14.3% as a result of the increase in net income and a lower number of shares outstanding. Adjusted EBITDA as a percent of revenue was virtually flat when compared with the prior year. See page 30 for additional operating metrics.

For the nine months ended September 30, 2011, the increase in consolidated service revenues and sales was driven by a 7.0% increase at VITAS and a 5.1% increase at Roto-Rooter. The increase in service revenues at VITAS was a result of increased average daily census (“ADC”) of 5.6%, driven by an increase in admissions of 5.1%, combined with Medicare price increases of approximately 2.1%. Roto-Rooter was driven by a 2.4% price and mix shift increase and a 2.5% increase in job count. Consolidated net income increased 1.8% driven mainly by the increase in revenue. Diluted EPS increased 9.7% as a result of the increase in net income and a lower number of shares outstanding. Adjusted EBITDA as a percent of revenue was virtually flat when compared with the prior year.

VITAS expects to achieve full-year 2011 revenue growth, prior to Medicare cap, of 7.5% to 8.0%. Admissions are estimated to increase approximately 5.0% to 5.5%. Adjusted EBITDA margin prior to Medicare cap is estimated to be 15.2% to 15.7%. Roto-Rooter expects full-year 2011 revenue growth of 4.5% to 5.5%. The revenue estimate is a result of increased pricing of 2.0% to 3.0%, a favorable mix shift to higher revenue jobs, with job count growth estimated at 0.0% to 1.0%. Adjusted EBITDA margin for 2011 is estimated to be in the range of 17.0% to 18.0%. We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.

-17-

Financial Condition

Liquidity and Capital Resources

Material changes in the balance sheet accounts from December 31, 2010 to September 30, 2011 include the following:

•	A $3.8 million increase in other long-term assets related to an increase in deferred long-term debt costs due to our debt refinancing as well an increase in licensure expenses at Vitas.

•	A $3.4 million increase in accounts payable related to timing of payments.

•	A $7.1 million increase in income taxes payable related to timing of payments.

Net cash provided by operating activities increased $49.9 million due primarily to the change in accounts receivable. Management continually evaluates cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of available capital resources.

We have issued $29.5 million in standby letters of credit as of September 30, 2011, for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of September 30, 2011, we have approximately $320.5 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility, excluding the $150 million expansion feature. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

Commitments and Contingencies

Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly. We are in compliance with all financial and other debt covenants as of September 30, 2011 and anticipate remaining in compliance throughout 2011.

VITAS is party to a class action lawsuit filed in the Superior Court of California, Los Angeles County, in September 2006 by Bernadette Santos, Keith Knoche and Joyce White. This case alleges failure to pay overtime and failure to provide meal and rest periods to California admissions nurses, chaplains and sales representatives. The case seeks payment of penalties, interest and Plaintiffs’ attorney fees. VITAS contests these allegations. In December 2009, the trial court denied Plaintiffs’ motion for class certification. In July 2011, the Court of Appeals affirmed denial of class certification on the travel time, meal and rest period claims, and reversed the trial court’s denial on the off-the-clock and sales representation exemption claims. 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.

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

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

-18-

In April 2005, the OIG served VITAS with civil subpoenas relating to VITAS’ alleged failure to appropriately bill Medicare and Medicaid for hospice services. As part of this investigation, the OIG selected medical records for 320 past and current patients from VITAS’ three largest programs for review. It also sought policies and procedures dating back to 1998 covering admissions, certifications, recertifications and discharges. During the third quarter of 2005 and again in May 2006, the OIG requested additional information from us. The Court dismissed a related qui tam complaint filed in U.S. District Court for the Southern District of Florida with prejudice in July 2007. The plaintiffs appealed this dismissal, which the Court of Appeals affirmed. The government continues to investigate the complaint’s allegations. In March 2009, we received a letter from the government reiterating the basis of their investigation. We are unable to estimate our potential liability or potential range of loss, if any, with respect to this matter. We believe that we are in compliance with Medicare and Medicaid rules and regulations applicable to hospice providers.

Results of Operations

Three months ended September 30, 2011 versus 2010 - Consolidated Results

Our service revenues and sales for the third quarter of 2011 increased 6.5% versus services and sales revenues for the third quarter of 2010. Of this increase, $19.0 million was attributable to VITAS and $2.0 million was attributable to Roto-Rooter. The following chart shows the components of those changes (dollar amounts in thousands):

	Increase/(Decrease)
	Amount			Percent
VITAS
Routine homecare	$	14,849			8.8
Continuous care		1,301			3.4
General inpatient		2,329			9.0
Medicare cap		501			428.2
Roto-Rooter
Plumbing		502			1.2
Drain cleaning		785			2.5
Contractor operations		1,068			19.4
Other		(347	)		-5.0
Total	$	20,988			6.5

The increase in VITAS’ revenues for the third quarter of 2011 versus the third quarter of 2010 was a result of increased ADC of 6.2% driven by an increase in admissions of 2.7% and a 2.4% increase in average length of stay, combined with Medicare reimbursement rate increases of approximately 2.1%. The ADC increase was driven by a 6.5% increase in routine homecare, an increase of 7.3% in general inpatient and an increase of a 0.5% in continuous care. In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the third quarter of 2011 versus 2010 is attributable to a 4.1% increase in the number of jobs performed offset by a 2.9% decrease in the average price per job. Our excavation job count increased by 13.6% compared to 2010. Drain cleaning revenues for the third quarter of 2011 versus 2010 reflect a 2.3% increase in price per job and a 0.2% increase in the number of jobs performed. Contractor operations revenue increased 19.4% for the first nine months of 2011, as a result of acquisitions and higher job count.

The consolidated gross margin was 28.2% in the third quarter of 2011 as compared with 28.9% in the third quarter of 2010. On a segment basis, VITAS’ gross margin was 22.4% in the third quarter of 2011 and 23.1% in the third quarter of 2010. 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 45.0% for the third quarter of 2011 as compared with 44.6% for the third quarter of 2010.

-19-

Selling, general and administrative expenses (“SG&A”) for the third quarter of 2011 and 2010 comprise (in thousands):

	Three months ended September 30,
	2011			2010
SG&A expenses before long-term incentive
compensation and the impact of market gains and
losses of deferred compensation plans	$	49,629		$	47,957
Impact of market value gains/(losses) on liabilities held in
deferred compensation trusts		(2,011	)		243
Total SG&A expenses	$	47,618		$	48,200

Normal salary increases and revenue related expense increases between periods accounts for the 3.5% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans.

Interest expense increased 18.7% between periods as a result of the debt refinancing that took place in the first quarter of 2011.

Other income/(expense) for the third quarter of 2011 and 2010 comprise (in thousands):

	Three months ended September 30,
	2011			2010
Market value gains/(losses) on assets held in deferred
compensation trusts	$	(2,011	)	$	243
Loss on disposal of property and equipment		(79	)		(141	)
Interest income		74			109
Other		81			11
Total other income/(expense)-net	$	(1,935	)	$	222

Our effective income tax rate increased to 38.9% in the third quarter of 2011 from 38.2% when compared with the third quarter of 2010.

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

	Three months ended September 30,
	2011			2010
VITAS
Legal expenses of OIG investigation	$	(131	)	$	(69	)
Acquisition expenses		(2	)		-
Roto-Rooter
Expenses of class action litigation		(467	)		(194	)
Corporate
Stock option expense		(1,523	)		(1,244	)
Noncash impact of change in accounting for convertible debt		(1,177	)		(1,088	)
Total	$	(3,300	)	$	(2,595	)

-20-

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

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

	Increase/(Decrease)
	Amount			Percent
VITAS	$	1,167			5.9
Roto-Rooter		269			3.5
Corporate		(537	)		-8.2
	$	899			4.3

Nine months ended September 30, 2011 versus 2010 - Consolidated Results

Our service revenues and sales for the first nine months of 2011 increased 6.5% versus services and sales revenues for the first nine months of 2010. Of this increase, $48.2 million was attributable to VITAS and $13.3 million was attributable to Roto-Rooter. The following chart shows the components of those changes (dollar amounts in thousands):

	Increase/(Decrease)
	Amount			Percent
VITAS
Routine homecare	$	39,830			8.1
Continuous care		4,362			3.8
General inpatient		4,617			5.9
Medicare cap		(639	)		-38.4
Roto-Rooter
Plumbing		7,481			6.1
Drain cleaning		3,303			3.3
Contractor operations		2,890			17.3
Other		(386	)		-1.9
Total	$	61,458			6.5

The increase in VITAS’ revenues for the first nine months of 2011 versus the first nine months of 2010 was a result of increased ADC of 5.6% driven by an increase in admissions of 5.1%, combined with Medicare reimbursement rate increases of approximately 2.1%. The ADC increase was driven by a 5.9% increase in routine homecare, an increase of 4.2% in general inpatient and an increase of 1.0% in continuous care. In excess of 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the first nine months of 2011 versus 2010 is attributable to a 2.6% increase in the average price per job and a 3.6% increase in the number of jobs performed. The increase in the plumbing price per job was a result of favorable job mix shift to more expensive jobs such as excavation. Our excavation job count increased by 17.1% compared to 2010. On average, the price per job for our excavation jobs is approximately 5 times greater than the price per job of other plumbing jobs. Drain cleaning revenues for the first nine months of 2011 versus 2010 reflect a 2.0% increase in job count and a 1.3% increase in the average price per job. Contractor operation revenues increased 17.3%, due to acquisitions and higher job count.

The consolidated gross margin was 28.2% in the first nine months of 2011 as compared with 29.0% in the first nine months of 2010. On a segment basis, VITAS’ gross margin was 22.0% in the first nine months of 2011 and 22.9% in the first nine months of 2010. The decrease in VITAS’ gross margin is attributable to a smaller Medicare cap reversal in 2011, higher labor costs for admissions and Medicare compliance personnel and the opening of new operations, both new locations and inpatient units, which carry significant time start-up costs as capacity begins to ramp-up. The Roto-Rooter segment’s gross margin was 44.7% for the first nine months of 2011 as compared with 45.0% for the first nine months of 2010.

-21-

Selling, general and administrative expenses (“SG&A”) for the first nine months of 2011 and 2010 comprise (in thousands):

	Nine months ended September 30,
	2011		2010
SG&A expenses before long-term incentive
compensation and the impact of market gains and
losses of deferred compensation plans	$	149,888	$	144,547
Long-term incentive compensation		3,012		1,799
Impact of market value gains on liabilities held in
deferred compensation trusts		796		348
Total SG&A expenses	$	153,696	$	146,694

Normal salary increases and revenue related expense increases between periods accounts for the 3.7% increase in SG&A expenses before long-term incentive compensation and the impact of market gains of deferred compensation plans.

Depreciation expense increased 5.0% to $19.0 million for the first nine months of 2011 due mainly to the installation of patient capture software at our VITAS segment in the second quarter of 2010.

Interest expense increased 14.7% between periods as a result of the debt refinancing that took place in the first quarter of 2011.

Other income for the third quarter of 2011 and 2010 comprise (in thousands):

	Nine months ended September 30,
	2011			2010
Market value gains on assets held in deferred
compensation trusts	$	796		$	348
Loss on disposal of property and equipment		(68	)		(293	)
Interest Income		197			334
Other		(44	)		29
Total other income	$	881		$	418

Our effective income tax rate was 38.7% in the first nine months of 2011 which was essentially flat when compared with the first nine months of 2010.

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

	Nine months ended September 30,
	2011			2010
VITAS
Legal expenses of OIG investigation	$	(749	)	$	(242	)
Acquisition expenses		(73	)		-
Roto-Rooter
Expenses of class action litigation		(881	)		(257	)
Acquisition expenses		4			-
Corporate
Stock option expense		(4,366	)		(4,026	)
Noncash impact of change in accounting for convertible debt		(3,464	)		(3,203	)
Long-term incentive compensation		(1,880	)		(1,124	)
Total	$	(11,409	)	$	(8,852	)

-22-

Nine months ended September 30, 2011 versus 2010 - Segment Results

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

	Increase/(Decrease)
	Amount			Percent
VITAS	$	1,161			2.1
Roto-Rooter		1,198			4.9
Corporate		(1,286	)		-5.9
	$	1,073			1.8

-23-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(in thousands)(unaudited)

										Chemed
	VITAS			Roto-Rooter			Corporate			Consolidated
2011 (a)
Service revenues and sales	$	252,944		$	88,495		$	-		$	341,439
Cost of services provided and goods sold		196,407			48,656			-			245,063
Selling, general and administrative expenses		18,945			25,057			3,616			47,618
Depreciation		4,123			2,058			132			6,313
Amortization		510			156			468			1,134
Total costs and expenses		219,985			75,927			4,216			300,128
Income/(loss) from operations		32,959			12,568			(4,216	)		41,311
Interest expense		(62	)		(132	)		(3,361	)		(3,555	)
Intercompany interest income/(expense)		834			451			(1,285	)		-
Other income/(expense)—net		62			(7	)		(1,990	)		(1,935	)
Income/(expense) before income taxes		33,793			12,880			(10,852	)		35,821
Income taxes		(12,823	)		(4,864	)		3,753			(13,934	)
Net income/(loss)	$	20,970		$	8,016		$	(7,099	)	$	21,887


(a) The following amounts are included in net income (in thousands):

										Chemed
	VITAS			Roto-Rooter			Corporate			Consolidated
Pretax benefit/(cost):
Stock option expense	$	-		$	-		$	(2,408	)	$	(2,408	)
Noncash impact of accounting for convertible debt		-			-			(1,861	)		(1,861	)
Expenses of class action litigation		-			(770	)		-			(770	)
Acquisition expenses		(2	)		-			-			(2	)
Legal expenses of OIG investigation		(212	)		-			-			(212	)
Total	$	(214	)	$	(770	)	$	(4,269	)	$	(5,253	)


	VITAS			Roto-Rooter			Corporate			Consolidated
After-tax benefit/(cost):
Stock option expense	$	-		$	-		$	(1,523	)	$	(1,523	)
Noncash impact of accounting for convertible debt		-			-			(1,177	)		(1,177	)
Expenses of class action litigation		-			(467	)		-			(467	)
Acquisition expenses		(2	)		-			-			(2	)
Legal expenses of OIG investigation		(131	)		-			-			(131	)
Total	$	(133	)	$	(467	)	$	(2,700	)	$	(3,300	)

-24-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010
(in thousands)(unaudited)

										Chemed
	VITAS			Roto-Rooter			Corporate			Consolidated
2010 (a)
Service revenues and sales	$	233,964		$	86,487		$	-		$	320,451
Cost of services provided and goods sold		179,997			47,918			-			227,915
Selling, general and administrative expenses		18,370			24,573			5,257			48,200
Depreciation		4,321			1,925			139			6,385
Amortization		694			133			369			1,196
Total costs and expenses		203,382			74,549			5,765			283,696
Income/(loss) from operations		30,582			11,938			(5,765	)		36,755
Interest expense		(48	)		(55	)		(2,892	)		(2,995	)
Intercompany interest income/(expense)		1,139			651			(1,790	)		-
Other income/(expense)—net		(92	)		11			303			222
Income/(expense) before income taxes		31,581			12,545			(10,144	)		33,982
Income taxes		(11,778	)		(4,798	)		3,582			(12,994	)
Net income/(loss)	$	19,803		$	7,747		$	(6,562	)	$	20,988


(a) The following amounts are included in net income (in thousands):

										Chemed
	VITAS			Roto-Rooter			Corporate			Consolidated
Pretax benefit/(cost):
Stock option expense	$	-		$	-		$	(1,968	)	$	(1,968	)
Noncash impact of accounting for convertible debt		-			-			(1,721	)		(1,721	)
Expenses of class action litigation		-			(322	)		-			(322	)
Legal expenses of OIG investigation		(112	)		-			-			(112	)
Total	$	(112	)	$	(322	)	$	(3,689	)	$	(4,123	)


	VITAS			Roto-Rooter			Corporate			Consolidated
After-tax benefit/(cost):
Stock option expense	$	-		$	-		$	(1,244	)	$	(1,244	)
Noncash impact of accounting for convertible debt		-			-			(1,088	)		(1,088	)
Expenses of class action litigation		-			(194	)		-			(194	)
Legal expenses of OIG investigation		(69	)		-			-			(69	)
Total	$	(69	)	$	(194	)	$	(2,332	)	$	(2,595	)

-25-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(in thousands)(unaudited)

										Chemed
	VITAS			Roto-Rooter			Corporate			Consolidated
2011 (a)
Service revenues and sales	$	731,712		$	274,005		$	-		$	1,005,717
Cost of services provided and goods sold		570,648			151,470			-			722,118
Selling, general and administrative expenses		57,392			76,181			20,123			153,696
Depreciation		12,489			6,067			403			18,959
Amortization		1,513			443			1,287			3,243
Total costs and expenses		642,042			234,161			21,813			898,016
Income/(loss) from operations		89,670			39,844			(21,813	)		107,701
Interest expense		(172	)		(274	)		(9,814	)		(10,260	)
Intercompany interest income/(expense)		3,263			1,742			(5,005	)		-
Other income/(expense)—net		3			(2	)		880			881
Income/(expense) before income taxes		92,764			41,310			(35,752	)		98,322
Income taxes		(35,080	)		(15,692	)		12,724			(38,048	)
Net income/(loss)	$	57,684		$	25,618		$	(23,028	)	$	60,274


(a) The following amounts are included in net income (in thousands):

										Chemed
	VITAS			Roto-Rooter			Corporate			Consolidated
Pretax benefit/(cost):
Stock option expense	$	-		$	-		$	(6,903	)	$	(6,903	)
Long-term incentive compensation		-			-			(3,012	)		(3,012	)
Noncash impact of accounting for convertible debt		-			-			(5,476	)		(5,476	)
Expenses of class action litigation		-			(1,451	)		-			(1,451	)
Acquisition expenses		(117	)		6			-			(111	)
Legal expenses of OIG investigation		(1,209	)		-			-			(1,209	)
Total	$	(1,326	)	$	(1,445	)	$	(15,391	)	$	(18,162	)


	VITAS			Roto-Rooter			Corporate			Consolidated
After-tax benefit/(cost):
Stock option expense	$	-		$	-		$	(4,366	)	$	(4,366	)
Long-term incentive compensation		-			-			(1,880	)		(1,880	)
Noncash impact of accounting for convertible debt		-			-			(3,464	)		(3,464	)
Expenses of class action litigation		-			(881	)		-			(881	)
Acquisition expenses		(73	)		4			-			(69	)
Legal expenses of OIG investigation		(749	)		-			-			(749	)
Total	$	(822	)	$	(877	)	$	(9,710	)	$	(11,409	)

-26-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
(in thousands)(unaudited)

										Chemed
	VITAS			Roto-Rooter			Corporate			Consolidated
2010 (a)
Service revenues and sales	$	683,542		$	260,717		$	-		$	944,259
Cost of services provided and goods sold		527,347			143,407			-			670,754
Selling, general and administrative expenses		54,920			73,523			18,251			146,694
Depreciation		11,909			5,826			313			18,048
Amortization		2,253			388			1,066			3,707
Total costs and expenses		596,429			223,144			19,630			839,203
Income/(loss) from operations		87,113			37,573			(19,630	)		105,056
Interest expense		(127	)		(187	)		(8,632	)		(8,946	)
Intercompany interest income/(expense)		3,778			2,126			(5,904	)		-
Other income/(expense)—net		(85	)		35			468			418
Income/(expense) before income taxes		90,679			39,547			(33,698	)		96,528
Income taxes		(34,156	)		(15,127	)		11,956			(37,327	)
Net income/(loss)	$	56,523		$	24,420		$	(21,742	)	$	59,201


(a) The following amounts are included in net income (in thousands):

										Chemed
	VITAS			Roto-Rooter			Corporate			Consolidated
Pretax benefit/(cost):
Stock option expense	$	-		$	-		$	(6,365	)	$	(6,365	)
Long-term incentive compensation		-			-			(1,799	)		(1,799	)
Noncash impact of accounting for convertible debt		-			-			(5,064	)		(5,064	)
Expenses of class action litigation		-			(427	)		-			(427	)
Legal expenses of OIG investigation		(390	)		-			-			(390	)
Total	$	(390	)	$	(427	)	$	(13,228	)	$	(14,045	)


	VITAS			Roto-Rooter			Corporate			Consolidated
After-tax benefit/(cost):
Stock option expense	$	-		$	-		$	(4,026	)	$	(4,026	)
Long-term incentive compensation		-			-			(1,124	)		(1,124	)
Noncash impact of accounting for convertible debt		-			-			(3,203	)		(3,203	)
Expenses of class action litigation		-			(257	)		-			(257	)
Legal expenses of OIG investigation		(242	)		-			-			(242	)
Total	$	(242	)	$	(257	)	$	(8,353	)	$	(8,852	)

-27-

Consolidating Summary and Reconciliation of Adjusted EBITDA

Chemed Corporation and Subsidiary Companies
(in thousands)										Chemed
For the three months ended September 30, 2011	VITAS			Roto-Rooter			Corporate			Consolidated

Net income/(loss)	$	20,970		$	8,016		$	(7,099	)	$	21,887
Add/(deduct):
Interest expense		62			132			3,361			3,555
Income taxes		12,823			4,864			(3,753	)		13,934
Depreciation		4,123			2,058			132			6,313
Amortization		510			156			468			1,134
EBITDA		38,488			15,226			(6,891	)		46,823
Add/(deduct):
Legal expenses of OIG investigation		212			-			-			212
Acquisition expenses		2			-			-			2
Expenses of class action litigation		-			770			-			770
Stock option expense		-			-			2,408			2,408
Advertising cost adjustment		-			(585	)		-			(585	)
Interest income		(43	)		(12	)		(19	)		(74	)
Intercompany interest income/(expense)		(834	)		(451	)		1,285			-
Adjusted EBITDA	$	37,825		$	14,948		$	(3,217	)	$	49,556

										Chemed
For the three months ended September 30, 2010	VITAS			Roto-Rooter			Corporate			Consolidated

Net income/(loss)	$	19,803		$	7,747		$	(6,562	)	$	20,988
Add/(deduct):
Interest expense		48			55			2,892			2,995
Income taxes		11,778			4,798			(3,582	)		12,994
Depreciation		4,321			1,925			139			6,385
Amortization		694			133			369			1,196
EBITDA		36,644			14,658			(6,744	)		44,558
Add/(deduct):
Legal expenses of OIG investigation…		112			-			-			112
Expenses of class action litigation		-			322			-			322
Stock option expense		-			-			1,968			1,968
Advertising cost adjustment		-			(571	)		-			(571	)
Interest income		(37	)		(10	)		(62	)		(109	)
Intercompany interest income/(expense)		(1,139	)		(651	)		1,790			-
Adjusted EBITDA	$	35,580		$	13,748		$	(3,048	)	$	46,280

-28-

Consolidating Summary and Reconciliation of Adjusted EBITDA

Chemed Corporation and Subsidiary Companies
(in thousands)										Chemed
For the nine months ended September 30, 2011	VITAS			Roto-Rooter			Corporate			Consolidated

Net income/(loss)	$	57,684		$	25,618		$	(23,028	)	$	60,274
Add/(deduct):
Interest expense		172			274			9,814			10,260
Income taxes		35,080			15,692			(12,724	)		38,048
Depreciation		12,489			6,067			403			18,959
Amortization		1,513			443			1,287			3,243
EBITDA		106,938			48,094			(24,248	)		130,784
Add/(deduct):
Legal expenses of OIG investigation		1,209			-			-			1,209
Acquisition expenses		117			(6	)		-			111
Expenses of class action litigation		-			1,451			-			1,451
Long-term incentive compensation		-			-			3,012			3,012
Stock option expense		-			-			6,903			6,903
Advertising cost adjustment		-			(1,442	)		-			(1,442	)
Interest income		(86	)		(28	)		(83	)		(197	)
Intercompany interest income/(expense)		(3,263	)		(1,742	)		5,005			-
Adjusted EBITDA	$	104,915		$	46,327		$	(9,411	)	$	141,831

										Chemed
For the nine months ended September 30, 2010	VITAS			Roto-Rooter			Corporate			Consolidated

Net income/(loss)	$	56,523		$	24,420		$	(21,742	)	$	59,201
Add/(deduct):
Interest expense		127			187			8,632			8,946
Income taxes		34,156			15,127			(11,956	)		37,327
Depreciation		11,909			5,826			313			18,048
Amortization		2,253			388			1,066			3,707
EBITDA		104,968			45,948			(23,687	)		127,229
Add/(deduct):
Legal expenses of OIG investigation		390			-			-			390
Expenses of class action litigation		-			427			-			427
Long-term incentive compensation		-			-			1,799			1,799
Stock option expense		-			-			6,365			6,365
Advertising cost adjustment		-			(1,639	)		-			(1,639	)
Interest income		(172	)		(37	)		(125	)		(334	)
Intercompany interest income/(expense)		(3,778	)		(2,126	)		5,904			-
Adjusted EBITDA	$	101,408		$	42,573		$	(9,744	)	$	134,237

-29-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
OPERATING STATISTICS FOR VITAS SEGMENT
(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
OPERATING STATISTICS	2011			2010			2011			2010
Net revenue ($000)
Homecare	$	184,155		$	169,306		$	529,874		$	490,044
Inpatient		28,292			25,963			82,861			78,244
Continuous care		40,113			38,812			117,950			113,588
Total before Medicare cap allowance	$	252,560		$	234,081		$	730,685		$	681,876
Medicare cap allowance		384			(117	)		1,027			1,666
Total	$	252,944		$	233,964		$	731,712		$	683,542
Net revenue as a percent of total
before Medicare cap allowance
Homecare		72.9	%		72.3	%		72.5	%		71.8	%
Inpatient		11.2			11.1			11.3			11.5
Continuous care		15.9			16.6			16.2			16.7
Total before Medicare cap allowance		100.0			100.0			100.0			100.0
Medicare cap allowance		0.2			(0.1	)		0.1			0.2
Total		100.2	%		99.9	%		100.1	%		100.2	%
Average daily census (days)
Homecare		9,485			8,586			9,185			8,350
Nursing home		3,118			3,250			3,062			3,212
Routine homecare		12,603			11,836			12,247			11,562
Inpatient		456			425			451			433
Continuous care		599			596			601			595
Total		13,658			12,857			13,299			12,590

Total Admissions		14,879			14,483			45,971			43,750
Total Discharges		14,682			14,076			45,104			42,767
Average length of stay (days)		80.1			78.2			78.7			77.1
Median length of stay (days)		15.0			15.0			14.0			14.0
ADC by major diagnosis
Neurological		34.3	%		33.4	%		34.4	%		33.2	%
Cancer		17.5			18.5			17.7			18.4
Cardio		11.3			11.9			11.6			11.9
Respiratory		6.6			6.5			6.8			6.6
Other		30.3			29.7			29.5			29.9
Total		100.0	%		100.0	%		100.0	%		100.0	%
Admissions by major diagnosis
Neurological		19.0	%		18.4	%		19.3	%		18.6	%
Cancer		34.7			35.8			33.1			34.6
Cardio		10.4			11.1			10.9			11.3
Respiratory		7.8			7.5			8.5			8.1
Other		28.1			27.2			28.2			27.4
Total		100.0	%		100.0	%		100.0	%		100.0	%
Direct patient care margins
Routine homecare		52.4	%		52.7	%		52.0	%		52.2	%
Inpatient		12.4			12.3			12.9			13.3
Continuous care		20.7			21.1			20.5			21.0
Homecare margin drivers (dollars per patient day)
Labor costs	$	53.13		$	51.97		$	53.88		$	52.79
Drug costs		8.26			7.89			8.14			7.78
Home medical equipment		6.64			6.54			6.65			6.71
Medical supplies		2.81			2.66			2.80			2.53
Inpatient margin drivers (dollars per patient day)
Labor costs	$	312.72		$	304.42		$	310.25		$	297.63
Continuous care margin drivers (dollars per patient day)
Labor costs	$	555.63		$	536.83		$	550.09		$	531.14
Bad debt expense as a percent of revenues		0.8	%		0.9	%		0.7	%		0.9	%
Accounts receivable --
Days of revenue outstanding- excluding unapplied Medicare payments		38.9			39.7		n.a.			n.a.
Days of revenue outstanding- including unapplied Medicare payments		34.6			34.9		n.a.			n.a.

-30-

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, 2011, we had no variable rate debt outstanding. At September 30, 2011, the fair value of the Notes approximates $186.0 million which have a face value of $187.0 million.

Item 4. Controls and Procedures

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

PART II OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding the Company’s legal proceedings, see note 11, Legal and Regulatory Matters, under Part I, Item I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

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

-31-

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

Item 2(c). Purchases of Equity Securities by Issuer and Affiliated Purchasers

The following table shows the activity related to our share repurchase programs for the first nine months of 2011:

			Weighted
	Total Number		Average		Cumulative Shares		Dollar Amount
	of Shares		Price Paid Per		Repurchased Under		Remaining Under
	Repurchased		Share		the Program		The Program

April 2007 Program
January 1 through January 31, 2011		300,513	$	63.62		3,654,157	$	24,543
February 1 through February 28, 2011		377		65.03		3,654,534		-
March 1 through March 31, 2011		-		-		3,654,534	$	-

First Quarter Total - April 2007 Program		300,890	$	63.62

February 2011 Program
January 1 through January 31, 2011		-	$	-		-	$	-
February 22, 2011 Authorization		-		-		-		100,000,000
February 1 through February 28, 2011		40,623		65.03		40,623		97,358,313
March 1 through March 31, 2011		-		-		40,623	$	97,358,313

First Quarter Total - February 2011 Program		40,623	$	65.03

April 1 through April 30, 2011		-	$	-		40,623	$	97,358,313
May 1 through May 31, 2011		-		-		40,623		97,358,313
June 1 through June 30, 2011		-		-		40,623	$	97,358,313

Second Quarter Total - February 2011 Program		-	$	-

July 1 through July 31, 2011		41,112	$	60.15		81,735	$	94,885,576
August 1 through August 31, 2011		710,172		55.51		791,907		55,460,568
September 1 through September 30, 2011		778,746		55.02		1,570,653	$	12,615,182

Third Quarter Total - February 2011 Program		1,530,030	$	55.39

On February 22, 2011 our Board of Directors authorized $100 million under the newly established February 2011 Repurchase Program.

Item 3. Defaults Upon Senior Securities

None

Item 4. Removed and reserved

Item 5. Other Information

None

-32-

Item 6. Exhibits

Exhibit No.		Description

31.1		Certification by Kevin J. McNamara pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.

31.2		Certification by David P. Williams pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.

31.3		Certification by Arthur V. Tucker, Jr. pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.

32.1		Certification by Kevin J. McNamara pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by David P. Williams pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.3		Certification by Arthur V. Tucker, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

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

			Chemed Corporation
			(Registrant)


Dated:	November 4, 2011	By:	Kevin J. McNamara
			Kevin J. McNamara
			(President and Chief Executive Officer)


Dated:	November 4, 2011	By:	David P. Williams
			David P. Williams
			(Executive Vice President and Chief Financial Officer)


Dated:	November 4, 2011	By:	Arthur V. Tucker, Jr.
			Arthur V. Tucker, Jr.
			(Vice President and Controller)

-33-