# Chemed Corp: Form 10-Q for the period ended Jun 30, 2019

- Company: [Chemed Corp](/companies/che.md) (CIK 19584)
- Form: 10-Q
- Filed: 2019-07-31
- Accepted by EDGAR: Jul 31, 2019, 08:28 ET
- Period: 2019-06-30
- Accession: 0000019584-19-000003
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/19584/000001958419000003/che-20190630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/19584/000001958419000003/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $473.6m | us-gaap:Revenues |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $935.6m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2019-04-01 to 2019-06-30 | $323.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2019-01-01 to 2019-06-30 | $645.6m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2019-04-01 to 2019-06-30 | $71.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2019-01-01 to 2019-06-30 | $145.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | $65.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-01-01 to 2019-06-30 | $115.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $1.2m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-01-01 to 2019-06-30 | $2.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-04-01 to 2019-06-30 | $13.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-01-01 to 2019-06-30 | $19.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | $50.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | $95.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | $3.08 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | $5.79 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-04-01 to 2019-06-30 | $3.18 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-01-01 to 2019-06-30 | $5.98 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-04-01 to 2019-06-30 | 16,449,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-01-01 to 2019-06-30 | 16,489,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2019-01-01 to 2019-06-30 | $108.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $28.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2019-01-01 to 2019-06-30 | $9.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2019-01-01 to 2019-06-30 | $71.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-06-30 | $3.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $180.2m | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $1.09bn | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $223.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-06-30 | $475.5m | us-gaap:Liabilities |
| Long-term debt | at 2019-06-30 | $85.0m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2019-06-30 | $618.6m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2019-06-30 | 15,921,808 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 56,391 characters.

### 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, drain cleaning, water restoration and other related services to both residential and commercial customers. Through its network of company-owned branches, independent contractors and franchisees, Roto-Rooter offers plumbing and drain cleaning service to over 90% of the U.S. population.

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

|  | Three months ended June 30, 2019 | 2018 | Six months ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | **$473,584** | $441,813 | **$935,618** | $880,989 |
| Net income | **$50,729** | $54,971 | **$95,396** | $99,967 |
| Diluted EPS | **$3.08** | $3.27 | **$5.79** | $5.93 |
| Adjusted net income | **$55,215** | $47,158 | **$103,390** | $93,009 |
| Adjusted diluted EPS | **$3.36** | $2.81 | **$6.27** | $5.52 |
| Adjusted EBITDA | **$85,089** | $73,682 | **$159,888** | $146,449 |
| Adjusted EBITDA as a % of revenue | **18.0%** | 16.7% | **17.1%** | 16.6% |

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and Adjusted EBITDA as a percent of revenue are not measures derived in accordance with US GAAP. We provide non-GAAP measures to help readers evaluate our operating results and to compare our operating performance with that of similar companies that have different capital structures. Our non-GAAP measures should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP. A reconciliation of our non-GAAP measures is presented on pages 37-39.

For the three months ended June 30, 2019, the increase in consolidated service revenues and sales was driven by a 10.9% increase at Roto-Rooter and a 5.4% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all service lines. The increase in service revenues at VITAS is comprised primarily of a 0.5% geographically weighted average Medicare reimbursement rate increase, a 5.9% increase in days of care, offset by $3.2 million in Medicare cap revenue reduction. See page 40 for additional VITAS operating metrics.

For the six months ended June 30, 2019, the increase in consolidated service revenues and sales was driven by an 8.2% increase at Roto-Rooter and a 5.2% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines. The increase in service revenues at VITAS is comprised primarily of a 0.5% geographically weighted average Medicare reimbursement rate increase, a 6.2% increase in days of care, offset by $6.6 million in Medicare cap revenue reduction. The first six months of 2018 included a reversal of prior Medicare cap expense of $1.3 million. See page 40 for additional VITAS operating metrics.

In February 2016, the FASB issued Accounting Standards Update “ASU No. 2016-02 Leases” which introduced a lessee model that brings most leases on to the balance sheets and updates lessor accounting to align with changes in the lessee model and the revenue recognition standard. This standard is also referred to as Accountings Standards Codification No.842 (“ASC 842”). We adopted ASC 842 effective January 1, 2019, using the optional transition method requiring leases existing at, or entered into after, January 1, 2019 to be recognized and measured. The transition method selected does not require adjustments to prior period amounts, which continue to be reflected in accordance with historical accounting. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which among other things, allowed us to carry forward the historical lease classification.

Chemed and each of its operating subsidiaries are service companies. As such, real estate leases comprise the largest lease obligation (and conversely, right of use asset) in our lease portfolio. VITAS has leased office space, as well as space for inpatient units (“IPUs”) and/or contract beds within hospitals. Roto-Rooter mainly has leased office space.

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Roto-Rooter purchases equipment and leases it to certain of its independent contractors. We analyzed these leases in accordance with ASC 842 and determined they are operating leases. As a result, Roto-Rooter will continue to capitalize the equipment underlying these leases, depreciate the equipment and recognize rental income.

Adoption of the new standard resulted in right of use assets and lease liabilities of $87.8 million and $98.7 million, respectively, as of March 31, 2019. In determining the liability, we used our incremental borrowing rate based on the information available at the time of adoption, since the rate implicit in the leases cannot be readily determined. At January 1, 2019, the weighted average rate was 3.47%. The standard did not materially impact our consolidated net income or cash flows. We did not book a cumulative effect adjustment upon adoption of the standard.

### Financial Condition

### Liquidity and Capital Resources

Material changes in the balance sheet accounts from December 31, 2018 to June 30, 2019 include the following:

A $16.6 million increase in accounts receivable due to timing of receipts.

A $90.8 million increase in lease right of use assets due to the adoption of ASC 842.

A $15.8 million increase in assets held for sale as a result of an agreement to trade-in certain transportation

equipment to offset replacement equipment expected to be delivered in 2020.

A $13.2 decrease in accrued compensation due to the payments of cash bonuses in 2019 accrued in 2018.

A $6.6 million increase in accrued legal primarily due to a $6.0 million litigation settlement at VITAS.

A $31.6 million and $70.0 million increase in short-term and long-term lease liability, respectively, due to

the adoption of ASC 842.

A $101.8 million increase in treasury stock due mainly to stock repurchases.

Net cash provided by operating activities decreased $12.1 million from June 30, 2018 to June 30, 2019. Significant changes in our accounts receivable balances are typically driven by the timing of payments received from the Federal government at our VITAS subsidiary. We typically receive a payment in excess of $40.0 million from the Federal government from hospice services every other Friday. The timing of period end will have a significant impact on the accounts receivable at VITAS. These changes generally normalize over a two year period, as cash flow variations in one year are offset in the following year.

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.

On June 20, 2018, we replaced our existing credit agreement with the Fourth Amended and Restated Credit Agreement (“2018 Credit Agreement”). Terms of the 2018 Credit Agreement consist of a five year, $450 million revolving credit facility and a $150 million expansion feature, which may consist of term loans or additional revolving commitments. The revolving credit facility has a five year maturity with principal payments due at maturity. The interest rate at the inception of the agreement is LIBOR plus 100 basis points. The 2018 Credit Agreement has a floating interest rate that is generally LIBOR plus a tiered additional rate which varies based on our current leverage ratio.

We have issued $38.0 million in standby letters of credit as of June 30, 2019, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of June 30, 2019, we have approximately $327.0 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

### Commitments and Contingencies

Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly. We are in compliance with all financial and other debt covenants as of June 30, 2019 and anticipate remaining in compliance throughout the foreseeable future.

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

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On October 30, 2017, the Company entered into a settlement agreement (the “Settlement Agreement”) to resolve civil litigation under the False Claims Act brought by the United States Department of Justice (“DOJ”) on behalf of the OIG and various relators concerning VITAS, filed in the U.S. District Court of the Western District of Missouri (the “2013 Action”). The Company denied any violation of law and agreed to settlement without admission of wrongdoing.

In connection with the settlement VITAS and certain of its subsidiaries entered into a corporate integrity agreement (“CIA”) on October 30, 2017. The CIA formalizes various aspects of VITAS’ already existing Compliance Program and contains requirements designed to document compliance with federal healthcare program requirements. It has a term of five years during which it imposes monitoring, reporting, certification, oversight, screening and training obligations, certain of which had previously been implemented by VITAS. It also requires VITAS to engage an Independent Review Organization to perform audit and review functions and to prepare reports regarding compliance with federal healthcare programs. In the event of breach of the CIA, VITAS could become liable for payment of stipulated penalties or could be excluded from participation in federal healthcare programs.

Jordan Seper (“Seper”), a Registered Nurse at VITAS’ Inland Empire program from May 12, 2014 to March 21, 2015, filed a lawsuit in San Francisco Superior Court on September 26, 2016. She alleged VITAS Healthcare Corp of CA (“VITAS CA”) (1) failed to provide minimum wage for all hours worked; (2) failed to provide overtime for all hours worked; (3) failed to provide a second meal period; (4) failed to provide rest breaks; (5) failed to indemnify for necessary expenditures; (6) failed to timely pay wages due at time of separation; and (7) engaged in unfair business practices. Seper sought a state-wide class action of current and former non-exempt employees employed with VITAS in California within the four years preceding the filing of the lawsuit. She sought court determination that this action may be maintained as a class action for the entire California class and subclasses, designation as class representative, declaratory relief, injunctive relief, damages (including wages for regular or overtime hours allegedly worked but not paid, premium payments for missed meal or rest periods, and unreimbursed expenses), all applicable penalties associated with each claim, pre and post-judgment interest, and attorneys’ fees and costs. Seper served VITAS CA with the lawsuit, *Jordan A. Seper on behalf of herself and others similarly situated v. VITAS Healthcare Corporation of California, a Delaware corporation; VITAS Healthcare Corp of CA, a business entity unknown; and DOES 1 to 100, inclusive*; Los Angeles Superior Court Case Number BC 642857 on October 13, 2016 (“Jordan Seper case”).

The Los Angeles Superior Court Complex Division accepted transfer of the case on December 6, 2016 and stayed the case. On December 16, 2016, VITAS CA filed its Answer and served written discovery on Seper.

Jiwann Chhina (“Chhina”), hired by VITAS as a Home Health Aide on February 5, 2002, is currently a Licensed Vocational Nurse for VITAS’ San Diego program. On September 27, 2016, Chhina filed a lawsuit in San Diego Superior Court, alleging (1) failure to pay minimum wage for all hours worked; (2) failure to provide overtime for all hours worked; (3) failure to pay wages for all hours at the regular rate; (4) failure to provide meal periods; (5) failure to provide rest breaks; (6) failure to provide complete and accurate wage statements; (7) failure to pay for all reimbursement expenses; (8) unfair business practices; and (9) violation of the California Private Attorneys General Act. Chhina sought to pursue these claims in the form of a state-wide class action of current and former non-exempt employees employed with VITAS in California within the four years preceding the filing of the lawsuit. He sought court determination that this action may be maintained as a class action for the entire California class and subclasses, designation as class representative, declaratory relief, injunctive relief, damages (including wages for regular or overtime hours allegedly worked but not paid, premium payments for missed meal or rest period, and unreimbursed expenses), all applicable penalties associated with each claim, pre-judgment interest, and attorneys’ fees and costs. Chhina served VITAS CA with the lawsuit, *Jiwan Chhina v. VITAS Health Services of California, Inc., a California corporation; VITAS Healthcare Corporation of California, a Delaware corporation; VITAS Healthcare Corporation of California, a Delaware corporation dba VITAS Healthcare Inc.; and DOES 1 to 100, inclusive*; San Diego Superior Court Case Number 37-2015-00033978-CU-OE-CTL on November 3, 2016 (“Jiwann Chhina case”). On December 1, 2016, VITAS CA filed its Answer and served written discovery on Chhina.

On May 19, 2017, Chere Phillips (a Home Health Aide in Sacramento) and Lady Moore (a former Social Worker in Sacramento) filed a lawsuit against VITAS CA in Sacramento County Superior Court, alleging claims for (1) failure to pay all wages due; (2) failure to authorize and permit rest periods; (3) failure to provide off-duty meal periods; (4) failure to furnish accurate wage statements; (5) unreimbursed business expenses; (6) waiting time penalties; (7) violations of unfair competition law; and (8) violation of the Private Attorneys General Act. The case is captioned: *Chere Phillips and Lady Moore v. VITAS Healthcare Corporation of California*, Sacramento County Superior Court, Case No. 34-2017-0021-2755. Plaintiffs sought to pursue these claims in the form of a state-wide class action of current and former non-exempt employees employed with VITAS CA in California within the four years preceding the filing of the lawsuit. Plaintiffs served VITAS with the lawsuit on June 5, 2017. VITAS CA timely answered the Complaint generally denying the Plaintiffs’ allegations. The Court has stayed all class discovery in this case pending resolution of the Jordan Seper and Jiwann Chhina cases.

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There are currently three other lawsuits against VITAS pending in the superior courts of other California counties that contain claims and class periods that substantially overlap with Phillips’ and Moore’s claims: the Jordan Seper and Jiwann Chhina cases, and *Williams v. VITAS Healthcare Corporation of California*, filed on May 22, 2017 in Alameda County Superior Court, RG 17853886.

Jazzina Williams’ (a Home Health Aide in Sacramento) lawsuit alleges claims for (1) failure to pay all wages due; (2) failure to authorize and permit rest periods; (3) failure to provide off-duty meal periods; (4) failure to furnish accurate wage statements; (5) unreimbursed business expenses; (6) waiting time penalties; and (7) violations of the Private Attorneys General Act (“PAGA”). Williams seeks to pursue these claims both individually and as a representative action under the PAGA on behalf of current and former California non-exempt employees. Plaintiff served VITAS with the lawsuit on May 31, 2017. VITAS CA timely answered the Complaint generally denying Plaintiff’s allegations. Williams is pursing discovery of her individual claim and has agreed to a stay of class discovery pending possible resolution through ongoing mediation in the Jordan Seper and Jiwann Chhina cases. Defendant filed and served each of Plaintiffs Williams, Phillips, and Moore with a Notice of Related Cases on July 19, 2017.

The *Seper* and *Chhina* cases were consolidated in Los Angeles County Superior Court; *Chhina* was dismissed as a separate action and joined with *Seper* in the filing of amended complaint on August 28, 2018, in which both *Chhina* and *Seper* were identified as named plaintiffs. The parties engaged in a mediation process beginning in October 2018 and concluded with an agreement in March 2019. The agreement has been incorporated into a long-form agreement to be presented to the court for preliminary approval, notice to class members, and eventual final approval and payment. The settlement amount, subject to court approval is $5.75 million plus employment taxes. The definition of the class to participate in the settlement is intended to cover claims raised in the consolidated *Seper/Chhina* matter, claims raised in *Phillips and Moore*, as well as any class claims in *William*s.

Alfred Lax (“Lax”), a current employee of Roto-Rooter Services Company (“RRSC”), was hired in the RRSC’s Menlo Park branch in 2007. On November 30, 2018, Lax filed a class action lawsuit in Santa Clara County Superior Court alleging (1) failure to provide or compensate for required rest breaks; (2) failure to properly pay for all hours worked; (3) failure to provide accurate wage statements; (4) failure to reimburse for work-related expenses; and (5) unfair business practices. Lax has stated these claims as a representative of a class defined as all service technicians employed by RRSC in California during the four years preceding the filing of the complaint. He seeks a determination that the action may proceed and be maintained as a class action and for compensatory and statutory damages (premium payments for missed rest periods, uncompensated rest periods, wages for time allegedly not paid such as travel time, repair time, and vehicle maintenance time, and unreimbursed expenses), penalties and restitutions, pre- and post-judgement interest and attorneys’ fees and costs. The lawsuit, *Alfred Lax, on behalf of himself and all others similarly situated v. Roto-Rooter Services Company, and Does 1 through 50 inclusive;* Santa Clara County Superior Court Case Number 18CV338652, was received by RRSC on December 11, 2018 and RRSC timely filed its answer denying the claims.

The Company is not able to reasonably estimate the probability of loss or range of loss for any of these lawsuits at this time, with the exception of *Seper/Chhina, Phillips and Moore*, and the class claims in *Williams.*

The Company intends to defend vigorously against the allegations in each of the above lawsuits. Regardless of the outcome of any of the preceding matters, dealing with the various regulatory agencies and opposing parties can adversely affect us through defense costs, potential payments, diversion of management time, and related publicity. Although the Company intends to defend them vigorously, there can be no assurance that those suits will not have a material adverse effect on the Company.

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### Results of Operations

### Three months ended June 30, 2019 versus 2018 - Consolidated Results

Our service revenues and sales for the second quarter of 2019 increased 7.2% versus services and sales revenues for the second quarter of 2018. Of this increase, a $16.0 million increase was attributable to VITAS and $15.8 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

| VITAS | Three months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Routine homecare | **$266,461** | $250,381 |
| Continuous care | **30,786** | 30,513 |
| General inpatient | **22,894** | 20,077 |
| Other | **2,237** | 1,998 |
| Medicare cap adjustment | **(3,198)** | (536) |
| Room and board - net | **(2,710)** | (2,675) |
| Implicit price concessions | **(3,720)** | (2,959) |
| Roto-Rooter |  |  |
| Drain cleaning - short term core | **45,558** | 41,959 |
| Plumbing - short term core | **33,837** | 30,538 |
| Subtotal | **79,395** | 72,497 |
| Excavation - short term core | **35,172** | 32,014 |
| Water restoration | **28,239** | 24,765 |
| Contractor operations | **14,580** | 12,366 |
| Outside franchisee fees | **1,623** | 1,574 |
| Other - short term core | **576** | 575 |
| Other | **2,974** | 2,835 |
| Implicit price concessions | **(1,725)** | (1,612) |
| Total | **$473,584** | $441,813 |

Days of care at VITAS during the quarter ended June 30 were as follows:

|  | Days of Care 2019 | 2018 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **1,621,837** | 1,534,162 | 5.7 |
| Continuous care | **41,804** | 42,488 | (1.6) |
| General inpatient | **36,332** | 28,971 | 25.4 |
| Total days of care | **1,699,973** | 1,605,621 | 5.9 |

The remaining increase in VITAS’ revenues for the second quarter of 2019 versus the second quarter of 2018 was primarily comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 0.5% offset by $3.2 million in Medicare cap revenue reductions compared to a Medicare cap revenue reduction of $536,000 in 2018. Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the second quarter of 2019 versus 2018 is attributable to a 6.6% increase in price and service mix shift and a 4.2% increase in job count. The increase in excavation revenues for the second quarter of 2019 versus 2018 is attributable to a 5.5% increase in price and service mix shift and a 4.4% increase in job count. Drain cleaning revenues for the second quarter of 2019 versus 2018 reflect a 6.3% increase in price and service mix shift and a 2.3% increase in job count. Water restoration revenue for the second quarter of 2019 versus 2018 is attributable to a 7.1% increase in price and service mix shift and a 6.9% increase in job count. Contractor operations increased 17.9% mainly due to their expansion into water restoration.

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The consolidated gross margin was 31.7% in the second quarter of 2019 as compared with 30.8% in the second quarter of 2018. On a segment basis, VITAS’ gross margin was 22.9% in the second quarter of 2019 as compared with 21.5%, in the second quarter of 2018 primarily due to improved labor management and reduced ancillary costs. The Roto-Rooter segment’s gross margin was 48.7% for the second quarter of 2019 compared with 49.9% in the second quarter of 2018 primarily due to higher labor costs and medical insurance claims in the second quarter of 2019.

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

| SG&A expenses before long-term incentive compensation and the impact of | Three months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| market value adjustments related to deferred compensation trusts | **$70,300** | $66,296 |
| Impact of market value adjustments related to assets held in deferred |  |  |
| compensation trusts | **1,386** | 1,222 |
| Long-term incentive compensation | **(130)** | 779 |
| Total SG&A expenses | **$71,556** | $68,297 |

Other operating expenses increased $2.7 million from the second quarter of 2018 primarily as a result of a $2.3 million impairment of transportation equipment held for sale recorded in the second quarter of 2019.

Other income - net comprise (in thousands):

| Market value adjustment on assets held in | Three months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| deferred compensation trusts | **$(130)** | $779 |
| Interest income | **112** | 259 |
| Other | **31** | - |
| Total other income - net | **$13** | $1,038 |

Our effective tax rate reconciliation is as follows:

|  | Three months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Income tax provision calculated at the statutory federal rate | **$13,504** | $12,108 |
| Stock compensation tax benefits | **(2,867)** | (10,448) |
| State and local income taxes | **1,868** | 186 |
| Other--net | **1,070** | 838 |
| Income tax provision | **$13,575** | $2,684 |
| Effective tax rate | 21.1% | 4.7% |

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

| VITAS | Three months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Litigation settlement | **$-** | $152 |
| Medicare cap sequestration adjustment | **(1,253)** | (138) |
| Non cash ASC 842 benefit | **(1)** | - |
| Roto-Rooter |  |  |
| Amortization of acquired and cancelled franchise agreements | **(244)** | - |
| Acquisition expenses | **(71)** | - |
| Corporate |  |  |
| Excess tax benefits on stock compensation | **3,212** | 11,702 |
| Stock option expense | **(3,197)** | (2,900) |
| Impairment loss on transportation equipment | **(1,733)** | - |
| Long-term incentive compensation | **(1,199)** | (1,003) |
| Total | **$(4,486)** | $7,813 |

### Three months ended June 30, 2019 versus 2018 - Segment Results

Net income/(loss) for the second quarter of 2019 versus the second quarter of 2018 by segment (in thousands):

|  | Three months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| VITAS | **$37,339** | $31,785 |
| Roto-Rooter | **27,175** | 25,298 |
| Corporate | **(13,785)** | (2,112) |
|  | **$50,729** | $54,971 |

VITAS’ after-tax earnings were positively impacted in 2019 compared to 2018 due to higher revenue and improved labor management and ancillary costs. After-tax earnings as a percent of revenue at VITAS in the second quarter of 2019 was 11.9% as compared to 10.7% in the second quarter of 2018.

Roto-Rooter’s net income was positively impacted in 2019 compared to 2018 primarily by higher revenue. After-tax earnings as a percent of revenue at Roto-Rooter in the second quarter of 2019 was 16.9% as compared to 17.4% in the second quarter of 2018.

After-tax Corporate expenses for 2019 increased 552.7% when compared to 2018 due mainly to a $8.5 million decrease in the excess tax benefits on stock compensation and a $2.3 million ($1.7 million after-tax) impairment of transportation equipment held for sale.

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### Results of Operations

### Six months ended June 30, 2019 versus 2018 - Consolidated Results

Our service revenues and sales for the first six months of 2019 increased 6.2% versus services and sales revenues for the first six months of 2018. Of this increase, a $30.7 million increase was attributable to VITAS and $23.9 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

| VITAS | Six months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Routine homecare | **$525,312** | $491,412 |
| Continuous care | **63,030** | 61,279 |
| General inpatient | **45,464** | 42,186 |
| Other | **4,242** | 3,740 |
| Medicare cap adjustment | **(6,598)** | 1,282 |
| Room and board - net | **(5,252)** | (5,294) |
| Implicit price concessions | **(6,667)** | (5,792) |
| Roto-Rooter |  |  |
| Drain cleaning - short term core | **89,700** | 83,289 |
| Plumbing - short term core | **65,892** | 61,349 |
| Subtotal | **155,592** | 144,638 |
| Excavation - short term core | **69,457** | 63,335 |
| Water restoration | **55,891** | 52,502 |
| Contractor operations | **28,589** | 24,731 |
| Outside franchisee fees | **3,245** | 3,165 |
| Other - short term core | **1,153** | 1,199 |
| Other | **5,981** | 6,155 |
| Implicit price concessions | **(3,821)** | (3,549) |
| Total | **$935,618** | $880,989 |

Days of care at VITAS during the six months ended June 30 were as follows:

|  | Days of Care 2019 | 2018 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **3,193,505** | 3,008,130 | 6.2 |
| Continuous care | **85,727** | 85,685 | 0.0 |
| General inpatient | **71,783** | 60,641 | 18.4 |
| Total days of care | **3,351,015** | 3,154,456 | 6.2 |

The remaining increase in VITAS’ revenues for the first six months of 2019 versus the first six months of 2018 was primarily comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 0.5% offset by $6.6 million in Medicare cap revenue reductions compared to Medicare cap reversal of $1.3 million in 2018. Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the first six months of 2019 versus 2018 is attributable to a 6.0% increase in price and service mix shift and by a 1.4% increase in job count. The increase in excavation revenues for the first six months of 2019 versus 2018 is attributable to a 11.0% increase in price and service mix shift offset by a 1.3% decrease in job count. Drain cleaning revenues for the first six months of 2019 versus 2018 reflect a 5.6% increase in price and service mix shift and a 2.1% increase in job count. The increase in water restoration revenue for the first six months of 2019 versus 2018 is attributable to a 3.2% increase in price and service mix shift and a 3.3% increase in job count. Contractor operations increased 15.6% mainly due to their expansion into water restoration.

The consolidated gross margin was 31.0% in the first six months of 2019 as compared with 30.7% in the first six months of 2018 primarily. On a segment basis, VITAS’ gross margin was 22.4% in the first six months of 2019 as compared

- 30-

with 21.8%, in the first six months of 2018 primarily due to improved labor management and ancillary costs. The Roto-Rooter segment’s gross margin was 47.9% for the first six months of 2019 compared with 48.7% in the first six months of 2018 primarily due to higher labor costs.

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

| SG&A expenses before long-term incentive compensation and the impact of | Six months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| market value adjustments related to deferred compensation trusts | **$140,504** | $132,517 |
| Long-term incentive compensation | **2,874** | 3,142 |
| Impact of market value adjustments related to assets held in deferred |  |  |
| compensation trusts | **2,207** | 1,638 |
| Total SG&A expenses | **$145,585** | $137,297 |

Other operating expenses increased $9.1 million from the first six months of 2018 primarily as a result of a $6.0 million litigation settlement at VITAS and a $2.3 million impairment of transportation equipment held for sale recorded in the first six months of 2019.

Other income - net comprise (in thousands):

| Market value adjustment on assets held in | Six months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| deferred compensation trusts | **$2,207** | $1,638 |
| Interest income | **214** | 417 |
| Other | **31** | 1 |
| Total other income - net | **$2,452** | $2,056 |

Our effective tax rate reconciliation is as follows:

|  | Six months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Income tax provision calculated at the statutory federal rate | **$24,169** | $23,911 |
| Stock compensation tax benefits | **(8,876)** | (13,839) |
| State and local income taxes | **3,470** | 2,790 |
| Other--net | **932** | 1,034 |
| Income tax provision | **$19,695** | $13,896 |
| Effective tax rate | 17.1% | 12.2% |

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

| VITAS | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Litigation settlement | **$(4,476)** | $152 |
| Medicare cap sequestration adjustment | **(1,640)** | (401) |
| Acquisition expenses | **(490)** | - |
| Roto-Rooter |  |  |
| Amortization of acquired and cancelled franchise agreements | **(568)** | - |
| Acquisition expenses | **(71)** | - |
| Expenses related to litigation settlements | **(40)** | - |
| Corporate |  |  |
| Excess tax benefits on stock compensation | **9,944** | 15,500 |
| Stock option expense | **(6,524)** | (5,791) |
| Long-term incentive compensation | **(2,429)** | (2,502) |
| Impairment loss on transportation equipment | **(1,733)** | - |
| Non cash ASC 842 benefit | **124** | - |
| Acquisition expenses | **(91)** | - |
| Total | **$(7,994)** | $6,958 |

### Six months ended June 30, 2019 versus 2018 - Segment Results

Net income/(loss) for the first six months of 2019 versus the first six months of 2018 by segment (in thousands):

|  | Six months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| VITAS | **$66,626** | $63,800 |
| Roto-Rooter | **50,162** | 48,236 |
| Corporate | **(21,392)** | (12,069) |
|  | **$95,396** | $99,967 |

VITAS’ after-tax earnings were positively impacted in 2019 compared to 2018 due to higher revenue offset by the impact of a litigation settlement of approximately $6.0 million ($4.5 million after-tax). After-tax earnings as a percent of revenue at VITAS in the first six months of 2019 and 2018 was 10.8%.

Roto-Rooter’s net income was positively impacted in 2019 compared to 2018 primarily by higher revenue. After-tax earnings as a percent of revenue at Roto-Rooter in the first six months of 2019 was 15.9% as compared to 16.5% in the first six months of 2018.

After-tax Corporate expenses for 2019 decreased 77.2% when compared to 2018 due mainly to a $5.6 million decrease in the excess tax benefits on stock compensation and a $2.3 million ($1.7 million after-tax) impairment of transportation equipment held for sale.

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*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENTS OF INCOME*

*FOR THE THREE MONTHS ENDED JUNE 30, 2019*

*(in thousands)(unaudited)*

| 2019 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Service revenues and sales** | **$312,750** | **$160,834** | **$-** | **$473,584** |
| **Cost of services provided and goods sold** | **241,104** | **82,533** | **-** | **323,637** |
| **Selling, general and administrative expenses** | **21,682** | **39,377** | **10,497** | **71,556** |
| **Depreciation** | **4,831** | **5,017** | **39** | **9,887** |
| **Amortization** | **18** | **388** | **-** | **406** |
| **Other operating expense** | **69** | **235** | **2,266** | **2,570** |
| **Total costs and expenses** | **267,704** | **127,550** | **12,802** | **408,056** |
| **Income/(loss) from operations** | **45,046** | **33,284** | **(12,802)** | **65,528** |
| **Interest expense** | **(53)** | **(100)** | **(1,084)** | **(1,237)** |
| **Intercompany interest income/(expense)** | **4,382** | **2,180** | **(6,562)** | **-** |
| **Other income—net** | **101** | **42** | **(130)** | **13** |
| **Income/(expense) before income taxes** | **49,476** | **35,406** | **(20,578)** | **64,304** |
| **Income taxes** | **(12,137)** | **(8,231)** | **6,793** | **(13,575)** |
| **Net income/(loss)** | **$37,339** | **$27,175** | **$(13,785)** | **$50,729** |
| **(a) The following amounts are included in net income (in thousands):** |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Pretax benefit/(cost):** |  |  |  |  |
| **Stock option expense** | **$-** | **$-** | **$(3,929)** | **$(3,929)** |
| **Impairment loss on transportation equipment** | **-** | **-** | **(2,266)** | **(2,266)** |
| **Medicare cap sequestration** | **(1,689)** | **-** | **-** | **(1,689)** |
| **Long-term incentive compensation** | **-** | **-** | **(1,386)** | **(1,386)** |
| **Amortization of acquired and cancelled franchise agreements** | **-** | **(331)** | **-** | **(331)** |
| **Acquisition expenses** | **-** | **(97)** | **-** | **(97)** |
| **Total** | **$(1,689)** | **$(428)** | **$(7,581)** | **$(9,698)** |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **After-tax benefit/(cost):** |  |  |  |  |
| **Stock option expense** | **$-** | **$-** | **$(3,197)** | **$(3,197)** |
| **Impairment loss on transportation equipment** | **-** | **-** | **(1,733)** | **(1,733)** |
| **Medicare cap sequestration** | **(1,253)** | **$-** | **-** | **(1,253)** |
| **Long-term incentive compensation** | **-** | **-** | **(1,199)** | **(1,199)** |
| **Amortization of acquired and cancelled franchise agreements** | **-** | **(244)** | **-** | **(244)** |
| **Acquisition expenses** | **-** | **(71)** | **-** | **(71)** |
| **Non cash ASC 842 expenses** | **(1)** | **-** | **-** | **(1)** |
| **Excess tax benefits on stock compensation** | **-** | **-** | **3,212** | **3,212** |
| **Total** | **$(1,254)** | **$(315)** | **$(2,917)** | **$(4,486)** |

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*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENTS OF INCOME*

*FOR THE THREE MONTHS ENDED JUNE 30, 2018*

*(in thousands)(unaudited)*

| 2018 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $296,799 | $145,014 | $- | $441,813 |
| Cost of services provided and goods sold | 233,073 | 72,668 | - | 305,741 |
| Selling, general and administrative expenses | 20,702 | 35,909 | 11,686 | 68,297 |
| Depreciation | 5,050 | 4,628 | 40 | 9,718 |
| Amortization | - | 34 | - | 34 |
| Other operating expenses | (67) | (51) | - | (118) |
| Total costs and expenses | 258,758 | 113,188 | 11,726 | 383,672 |
| Income/(loss) from operations | 38,041 | 31,826 | (11,726) | 58,141 |
| Interest expense | (53) | (92) | (1,379) | (1,524) |
| Intercompany interest income/(expense) | 3,124 | 1,739 | (4,863) | - |
| Other income—net | 238 | 21 | 779 | 1,038 |
| Income/(expense) before income taxes | 41,350 | 33,494 | (17,189) | 57,655 |
| Income taxes | (9,565) | (8,196) | 15,077 | (2,684) |
| Net income/(loss) | $31,785 | $25,298 | $(2,112) | $54,971 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(3,652) | $(3,652) |
| Long-term incentive compensation | - | - | (1,222) | (1,222) |
| Litigation settlement | 204 | - | - | 204 |
| Medicare cap sequestration adjustment | (185) | - | - | (185) |
| Total | $19 | $- | $(4,874) | $(4,855) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(2,900) | $(2,900) |
| Long-term incentive compensation | - | - | (1,003) | (1,003) |
| Litigation settlement | 152 | - | - | 152 |
| Medicare cap sequestration adjustment | (138) | - | - | (138) |
| Excess tax benefits on stock compensation | - | - | 11,702 | 11,702 |
| Total | $14 | $- | $7,799 | $7,813 |

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*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENTS OF INCOME*

*FOR THE SIX MONTHS ENDED JUNE 30, 2019*

*(in thousands)(unaudited)*

| 2019 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Service revenues and sales** | **$619,531** | **$316,087** | **$-** | **$935,618** |
| **Cost of services provided and goods sold** | **480,847** | **164,741** | **-** | **645,588** |
| **Selling, general and administrative expenses** | **43,218** | **78,978** | **23,389** | **145,585** |
| **Depreciation** | **9,539** | **9,980** | **78** | **19,597** |
| **Amortization** | **35** | **890** | **-** | **925** |
| **Other operating expenses** | **6,423** | **234** | **2,266** | **8,923** |
| **Total costs and expenses** | **540,062** | **254,823** | **25,733** | **820,618** |
| **Income/(loss) from operations** | **79,469** | **61,264** | **(25,733)** | **115,000** |
| **Interest expense** | **(101)** | **(194)** | **(2,066)** | **(2,361)** |
| **Intercompany interest income/(expense)** | **8,777** | **4,375** | **(13,152)** | **-** |
| **Other income/(expense)—net** | **188** | **56** | **2,208** | **2,452** |
| **Income/(expense) before income taxes** | **88,333** | **65,501** | **(38,743)** | **115,091** |
| **Income taxes** | **(21,707)** | **(15,339)** | **17,351** | **(19,695)** |
| **Net income/(loss)** | **$66,626** | **$50,162** | **$(21,392)** | **$95,396** |
| **(a) The following amounts are included in net income (in thousands):** |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Pretax benefit/(cost):** |  |  |  |  |
| **Stock option expense** | **$-** | **$-** | **$(8,018)** | **$(8,018)** |
| **Litigation settlement** | **(6,000)** | **-** | **-** | **(6,000)** |
| **Long-term incentive compensation** | **-** | **-** | **(2,874)** | **(2,874)** |
| **Impairment loss on transportation equipment** | **-** | **-** | **(2,266)** | **(2,266)** |
| **Medicare cap sequestration adjustment** | **(2,204)** | **-** | **-** | **(2,204)** |
| **Amortization of acquired and cancelled franchise agreements** | **-** | **(772)** | **-** | **(772)** |
| **Non cash ASC 842 (expenses)/benefit** | **(656)** | **(55)** | **163** | **(548)** |
| **Acquisition expenses** | **-** | **(97)** | **(120)** | **(217)** |
| **Total** | **$(8,860)** | **$(924)** | **$(13,115)** | **$(22,899)** |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **After-tax benefit/(cost):** |  |  |  |  |
| **Stock option expense** | **$-** | **$-** | **$(6,524)** | **$(6,524)** |
| **Litigation settlement** | **(4,476)** | **-** | **-** | **(4,476)** |
| **Long-term incentive compensation** | **-** | **-** | **(2,429)** | **(2,429)** |
| **Impairment loss on transportation equipment** | **-** | **-** | **(1,733)** | **(1,733)** |
| **Medicare cap sequestration adjustment** | **(1,640)** | **-** | **-** | **(1,640)** |
| **Amortization of acquired and cancelled franchise agreements** | **-** | **(568)** | **-** | **(568)** |
| **Non cash ASC 842 (expenses)/benefit** | **(490)** | **(40)** | **124** | **(406)** |
| **Acquisition expenses** | **-** | **(71)** | **(91)** | **(162)** |
| **Excess tax benefits on stock compensation** | **-** | **-** | **9,944** | **9,944** |
| **Total** | **$(6,606)** | **$(679)** | **$(709)** | **$(7,994)** |

- 35-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENTS OF INCOME*

*FOR THE SIX MONTHS ENDED JUNE 30, 2018*

*(in thousands)(unaudited)*

| 2018 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $588,813 | $292,176 | $- | $880,989 |
| Cost of services provided and goods sold | 460,329 | 149,948 | - | 610,277 |
| Selling, general and administrative expenses | 41,213 | 72,006 | 24,078 | 137,297 |
| Depreciation | 9,846 | 9,072 | 67 | 18,985 |
| Amortization | - | 61 | - | 61 |
| Other operating expenses | (84) | (85) | - | (169) |
| Total costs and expenses | 511,304 | 231,002 | 24,145 | 766,451 |
| Income/(loss) from operations | 77,509 | 61,174 | (24,145) | 114,538 |
| Interest expense | (104) | (184) | (2,443) | (2,731) |
| Intercompany interest income/(expense) | 6,218 | 3,417 | (9,635) | - |
| Other income—net | 380 | 37 | 1,639 | 2,056 |
| Income/(expense) before income taxes | 84,003 | 64,444 | (34,584) | 113,863 |
| Income taxes | (20,203) | (16,208) | 22,515 | (13,896) |
| Net income/(loss) | $63,800 | $48,236 | $(12,069) | $99,967 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(7,305) | $(7,305) |
| Long-term incentive compensation | - | - | (3,142) | (3,142) |
| Medicare cap sequestration adjustment | (537) | - | - | (537) |
| Litigation settlement | 204 | - | - | 204 |
| Total | $(333) | $- | $(10,447) | $(10,780) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(5,791) | $(5,791) |
| Long-term incentive compensation | - | - | (2,502) | (2,502) |
| Medicare cap sequestration adjustment | (401) | - | - | (401) |
| Litigation settlement | 152 | - | - | 152 |
| Excess tax benefits on stock compensation | - | - | 15,500 | 15,500 |
| Total | $(249) | $- | $7,207 | $6,958 |

- 36-

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the three months ended June 30, 2019 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $37,339 | **$27,175** | **$(13,785)** | **$50,729** |
| **Add/(deduct):** |  |  |  |  |
| **Interest expense** | **53** | **100** | **1,084** | **1,237** |
| **Income taxes** | **12,137** | **8,231** | **(6,793)** | **13,575** |
| **Depreciation** | **4,831** | **5,017** | **39** | **9,887** |
| **Amortization** | **18** | **388** | **-** | **406** |
| **EBITDA** | **54,378** | **40,911** | **(19,455)** | **75,834** |
| **Add/(deduct):** |  |  |  |  |
| **Intercompany interest expense/(income)** | **(4,382)** | **(2,180)** | **6,562** | **-** |
| **Interest income** | **(69)** | **(43)** | **-** | **(112)** |
| **Stock option expense** | **-** | **-** | **3,929** | **3,929** |
| **Impairment loss on transportation equipment** | **-** | **-** | **2,266** | **2,266** |
| **Medicare cap sequestration adjustment** | **1,689** | **-** | **-** | **1,689** |
| **Long-term incentive compensation** | **-** | **-** | **1,386** | **1,386** |
| **Acquisition expense** | **-** | **97** | **-** | **97** |
| **Adjusted EBITDA** | **$51,616** | **$38,785** | **$(5,312)** | **$85,089** |
|  |  |  |  | Chemed |
| For the three months ended June 30, 2018 | VITAS | Roto-Rooter | Corporate | Consolidated |
| Net income/(loss) | $31,785 | $25,298 | $(2,112) | $54,971 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 53 | 92 | 1,379 | 1,524 |
| Income taxes | 9,565 | 8,196 | (15,077) | 2,684 |
| Depreciation | 5,050 | 4,628 | 40 | 9,718 |
| Amortization | - | 34 | - | 34 |
| EBITDA | 46,453 | 38,248 | (15,770) | 68,931 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (3,124) | (1,739) | 4,863 | - |
| Interest income | (237) | (22) | - | (259) |
| Stock option expense | - | - | 3,652 | 3,652 |
| Long-term incentive compensation | - | - | 1,222 | 1,222 |
| Litigation settlement | (204) | - | - | (204) |
| Medicare cap sequestration adjustment | 185 | - | - | 185 |
| Amortization of stock awards | 37 | 35 | 83 | 155 |
| Adjusted EBITDA | $43,110 | $36,522 | $(5,950) | $73,682 |

- 37-

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the six months ended June 30, 2019 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $66,626 | $50,162 | $(21,392) | $95,396 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 101 | 194 | 2,066 | 2,361 |
| Income taxes | 21,707 | 15,339 | (17,351) | 19,695 |
| Depreciation | 9,539 | 9,980 | 78 | 19,597 |
| Amortization | 35 | 890 | - | 925 |
| **EBITDA** | 98,008 | 76,565 | (36,599) | 137,974 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (8,777) | (4,375) | 13,152 | - |
| Interest income | (157) | (56) | - | (213) |
| Stock option expense | - | - | 8,018 | 8,018 |
| Litigation settlement | 6,000 | - | - | 6,000 |
| Long-term incentive compensation | - | - | 2,874 | 2,874 |
| Impairment loss on transportation equipment | - | - | 2,266 | 2,266 |
| Medicare cap sequestration adjustment | 2,204 | - | - | 2,204 |
| Non cash ASC 842 expenses/(benefit) | 656 | 55 | (163) | 548 |
| Acquisition expenses | - | 97 | 120 | 217 |
| **Adjusted EBITDA** | $97,934 | $72,286 | $(10,332) | $159,888 |
|  |  |  |  | **Chemed** |
| **For the six months ended June 30, 2018** | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Net income/(loss)** | $63,800 | $48,236 | $(12,069) | $99,967 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 104 | 184 | 2,443 | 2,731 |
| Income taxes | 20,203 | 16,208 | (22,515) | 13,896 |
| Depreciation | 9,846 | 9,072 | 67 | 18,985 |
| Amortization | - | 61 | - | 61 |
| **EBITDA** | 93,953 | 73,761 | (32,074) | 135,640 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (6,218) | (3,417) | 9,635 | - |
| Interest income | (380) | (37) | - | (417) |
| Stock option expense | - | - | 7,305 | 7,305 |
| Long-term incentive compensation | - | - | 3,142 | 3,142 |
| Medicare cap sequestration adjustment | 537 | - | - | 537 |
| Stock award amortization | 107 | 100 | 239 | 446 |
| Litigation settlement | (204) | - | - | (204) |
| **Adjusted EBITDA** | $87,795 | $70,407 | $(11,753) | $146,449 |

- 38-

*RECONCILIATION OF ADJUSTED NET INCOME*

*(in thousands, except per share data)(unaudited)*

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net income as reported | **$50,729** | $54,971 | **$95,396** | $99,967 |
| Add/(deduct) pre-tax cost of: |  |  |  |  |
| Stock option expense | **3,929** | 3,652 | **8,018** | 7,305 |
| Litigation settlement | **-** | (204) | **6,000** | (204) |
| Long-term incentive compensation | **1,386** | 1,222 | **2,874** | 3,142 |
| Impairment loss on transportation equipment | **2,266** | - | **2,266** | - |
| Medicare cap sequestration adjustment | **1,689** | 185 | **2,204** | 537 |
| Amortization of acquired and cancelled franchise agreements | **331** | - | **772** | - |
| Non cash ASC 842 expenses | **-** | - | **548** | - |
| Acquisition expenses | **97** | - | **217** | - |
| Add/(deduct) tax impacts: |  |  |  |  |
| Tax impact of the above pre-tax adjustments (1) | **(2,000)** | (966) | **(4,961)** | (2,238) |
| Excess tax benefits on stock compensation | **(3,212)** | (11,702) | **(9,944)** | (15,500) |
| Adjusted net income | **$55,215** | $47,158 | **$103,390** | $93,009 |
| Diluted Earnings Per Share As Reported |  |  |  |  |
| Net income | **$3.08** | $3.27 | **$5.79** | $5.93 |
| Average number of shares outstanding | **16,449** | 16,811 | **16,489** | 16,854 |
| Adjusted Diluted Earnings Per Share |  |  |  |  |
| Adjusted net income | **$3.36** | $2.81 | **$6.27** | $5.52 |
| Adjusted average number of shares outstanding | **16,449** | 16,811 | **16,489** | 16,854 |
| (1) The tax impact of pre-tax adjustments was calculated using the effective tax rate of the operating unit for which each adjustment is associated. |  |  |  |  |

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*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*OPERATING STATISTICS FOR VITAS SEGMENT*

*(unaudited)*

| OPERATING STATISTICS Net revenue ($000) | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Homecare | **$266,461** | $250,381 | **$525,312** | $491,412 |
| Inpatient | **22,894** | 20,077 | **45,464** | 42,186 |
| Continuous care | **30,786** | 30,513 | **63,030** | 61,279 |
| Other | **2,237** | 1,998 | **4,242** | 3,740 |
| Subtotal | **$322,378** | $302,969 | **$638,048** | $598,617 |
| Room and board, net | **(2,710)** | (2,675) | **(5,252)** | (5,294) |
| Contractual allowances | **(3,720)** | (2,959) | **(6,667)** | (5,792) |
| Medicare cap allowance | **(3,198)** | (536) | **(6,598)** | 1,282 |
| Total | **$312,750** | $296,799 | **$619,531** | $588,813 |
| Net revenue as a percent of total before Medicare cap allowances |  |  |  |  |
| Homecare | **82.7%** | 82.6% | **82.3%** | 82.1% |
| Inpatient | **7.1** | 6.6 | **7.1** | 7.0 |
| Continuous care | **9.5** | 10.1 | **9.9** | 10.2 |
| Other | **0.7** | 0.7 | **0.7** | 0.7 |
| Subtotal | **100.0** | 100.0 | **100.0** | 100.0 |
| Room and board, net | **(0.8)** | (0.9) | **(0.8)** | (0.9) |
| Contractual allowances | **(1.2)** | (1.0) | **(1.0)** | (1.0) |
| Medicare cap allowance | **(1.0)** | (0.1) | **(1.0)** | 0.3 |
| Total | **97.0%** | 98.0% | **97.2%** | 98.4% |
| Average daily census (days) |  |  |  |  |
| Homecare | **14,482** | 13,583 | **14,364** | 13,375 |
| Nursing home | **3,382** | 3,275 | **3,318** | 3,245 |
| Routine homecare | **17,864** | 16,858 | **17,682** | 16,620 |
| Inpatient | **358** | 318 | **359** | 335 |
| Continuous care | **459** | 467 | **474** | 473 |
| Total | **18,681** | 17,643 | **18,515** | 17,428 |
| Total Admissions | **17,491** | 16,658 | **35,249** | 35,137 |
| Total Discharges | **17,008** | 16,474 | **34,350** | 34,054 |
| Average length of stay (days) | **91.1** | 89.0 | **91.2** | 88.4 |
| Median length of stay (days) | **16.0** | 17.0 | **15.0** | 16.0 |
| ADC by major diagnosis |  |  |  |  |
| Cerebro | **35.7%** | 36.2% | **35.8%** | 36.4% |
| Neurological | **20.4** | 18.6 | **20.2** | 18.6 |
| Cancer | **12.7** | 13.9 | **12.7** | 13.9 |
| Cardio | **17.0** | 16.6 | **16.9** | 16.4 |
| Respiratory | **8.2** | 8.3 | **8.2** | 8.2 |
| Other | **6.0** | 6.4 | **6.2** | 6.5 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Admissions by major diagnosis |  |  |  |  |
| Cerebro | **20.6** | 21.7% | **20.7%** | 22.2% |
| Neurological | **12.2** | 11.1 | **12.5** | 11.2 |
| Cancer | **29.2** | 30.5 | **28.6** | 29.2 |
| Cardio | **16.0** | 15.6 | **16.1** | 15.6 |
| Respiratory | **11.7** | 10.8 | **11.8** | 11.3 |
| Other | **10.3** | 10.3 | **10.3** | 10.5 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Estimated uncollectible accounts as a percent of revenues | **1.2%** | 1.0% | **1.1%** | 1.0% |
| Accounts receivable -- |  |  |  |  |
| Days of revenue outstanding- excluding unapplied Medicare payments | **32.7** | 31.9 | **N.A.** | N.A. |
| Days of revenue outstanding- including unapplied Medicare payments | **27.7** | 25.6 | **N.A.** | N.A. |

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### 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.

## Market risk

As filed, 599 characters.

The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At June 30, 2019, the Company had $85.0 million of variable rate debt outstanding. For each $10 million dollars borrowed under the credit facility, an increase or decrease of 100 basis points (1% point), increases or decreases the Company’s annual interest expense by $100,000.

The Company continually evaluates this interest rate exposure and periodically weighs the cost versus the benefit of fixing the variable interest rates through a variety of hedging techniques.

## Controls and procedures

As filed, 1,188 characters.

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. Except as discussed below, 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.

In the first quarter of 2019, we implemented a new lease accounting system and process in response to the adoption of ASC 842, effective January 1, 2019. These implementations resulted in changes to components of our internal control over financial reporting.

## Risk factors

As filed, 142 characters.

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

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Filed Jul 31, 2019.
Source: SEC EDGAR, the filing index for accession 0000019584-19-000003. Last ingested by Listed: Nov 5, 2026, 15:55 ET. No prices; not investment advice.