# Chemed Corp: Form 10-Q for the period ended Jun 30, 2020

- Company: [Chemed Corp](/companies/che.md) (CIK 19584)
- Form: 10-Q
- Filed: 2020-07-31
- Accepted by EDGAR: Jul 31, 2020, 09:24 ET
- Period: 2020-06-30
- Accession: 0000019584-20-000033
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/19584/000001958420000033/che-20200630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/19584/000001958420000033/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $502.2m | us-gaap:Revenues |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $1.02bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $352.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $703.9m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2020-04-01 to 2020-06-30 | $84.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2020-01-01 to 2020-06-30 | $155.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | $92.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | $172.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-04-01 to 2020-06-30 | $651.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-01-01 to 2020-06-30 | $1.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | $17.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | $30.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $82.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $138.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $5.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $8.39 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $5.16 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $8.65 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 16,373,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 16,445,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $277.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $32.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2020-01-01 to 2020-06-30 | $10.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2020-01-01 to 2020-06-30 | $122.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-06-30 | $20.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $189.3m | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $1.29bn | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $318.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $540.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2020-06-30 | $750.7m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2020-06-30 | 15,919,194 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 68,200 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, 2020 | 2019 | Six months ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | **$502,199** | $473,584 | **$1,017,997** | $935,618 |
| Net income | **$82,101** | $50,729 | **$137,992** | $95,396 |
| Diluted EPS | **$5.01** | $3.08 | **$8.39** | $5.79 |
| Adjusted net income | **$72,223** | $55,215 | **$132,938** | $103,390 |
| Adjusted diluted EPS | **$4.41** | $3.36 | **$8.08** | $6.27 |
| Adjusted EBITDA | **$108,741** | $85,089 | **$201,770** | $159,888 |
| Adjusted EBITDA as a % of revenue | **21.7%** | 18.0% | **19.8%** | 17.1% |

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 39-41.

For the three months ended June 30, 2020, the increase in consolidated service revenues and sales was driven by an 8.6% increase at Roto-Rooter and a 4.7% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase mainly in excavation, water restoration, and drain cleaning as well as a result of acquisitions completed in 2019. The increase in service revenues at VITAS is comprised primarily of a 2.8% increase in days-of-care, a geographically weighted average Medicare reimbursement rate increase of approximately 5.4%, and acuity mix shift which reduced the blended average Medicare rate increase approximately 3.0%. See page 42 for additional VITAS operating metrics.

For the six months ended June 30, 2020, the increase in consolidated service revenues and sales was driven by a 11.6% increase at Roto-Rooter and a 7.4% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in almost all major service lines as well as a result of acquisitions completed in 2019. The increase in service revenues at VITAS is comprised primarily of a 4.3% increase in days-of-care, a geographically weighted average Medicare reimbursement rate increase of approximately 5.2%, and acuity mix shift which reduced the blended Medicare rate increase by approximately 2.0%. See page 42 for additional VITAS operating metrics.

The current COVID-19 pandemic did have a material impact on our business operations, results of operations, cash flow and financial position as of and for the three and six months ended June 30, 2020. We are closely monitoring the impact of the pandemic on all aspects of our business including impacts to employees, customers, patients, suppliers and vendors. The Company’s two operating subsidiaries have been categorized as critical infrastructure businesses and are not currently materially limited by federal, state or local regulations that restrict movement or operating ability.

The continued health of our workforce cannot be predicted during the pandemic. Significant shortages of labor could inhibit the ability of both VITAS and Roto-Rooter to perform services. The inability to procure personal-protective equipment, and to protect worker health and customer safety, could negatively impact the health of our workforce. A portion of our workforce is currently working from remote locations on a regular basis which increases both operational and cybersecurity risks.

VITAS is working closely with hospitals, doctors and other healthcare providers. The response of these healthcare providers to the pandemic may limit VITAS’ ability to provide care and may result in fewer referrals. A prolonged or severe economic downturn may significantly impact Roto-Rooter’s service revenue. A significant disruption in the supply chain for critical items needed by either VITAS or Roto-Rooter could inhibit our ability to provide services or significantly increase the cost of providing those services.

The length and severity of the pandemic, coupled with related governmental actions including relief acts and actions relating to our workforce at federal, state and local levels, and underlying economic disruption will determine the ultimate short-term and long-term impact to our business operations and financial results. We are unable to predict the myriad of possible issues that could arise or the ultimate effect to our businesses as a result of the unknown short, medium and long-term impacts that the pandemic will have on the United States economy and society as a whole.

On March 27, 2020, the CARES Act was passed. It is intended to provide economic relief to individuals and businesses affected by the coronavirus pandemic. It also contains provisions related to healthcare providers’ operations and the issues caused by the coronavirus pandemic. The following are significant economic impacts for Chemed and its subsidiaries as a result of specific provisions of the CARES Act:

A portion of the CARES Act provides $100 billion from the Public Health and Social Services Emergency Fund (“Relief Fund”) to healthcare providers on the front lines of the coronavirus response. Of this distribution, $30 billion was designated to be automatically distributed to facilities and healthcare providers based upon their 2019 Medicare fee-for-service revenue.

On April 10, 2020 VITAS automatically received $80.2 million from the Relief Fund based upon VITAS’s 2019 Medicare fee-for-service Medicare revenue. The main condition that is attached to the grant is that the money will be used “only for health care related expenses or lost revenues that are attributable to coronavirus”. HHS guidance does not specifically designate what healthcare expenses are related to COVID-19. The guidance to date is general and broad but does provide some examples such as equipment and supplies, workforce training, reporting COVID-19 test results, securing separate facilities for COVID-19 patients and acquiring additional resources to expand or preserve care delivery. VITAS has cared for approximately 1,500 COVID positive patients through June 30, 2020.

The additional conditions to the Relief Fund payment are specific in nature, such as the money cannot be used for gun control advocacy purposes, abortions, embryo research, etc. The Company is in compliance, and intends to maintain compliance, with these specific conditions. Based on this analysis, management believes that there is reasonable assurance that VITAS will comply with the conditions.

Chemed deferred its first and second quarter 2020 income tax payments totaling $19.0 million to the Federal government until July 15, 2020, as permitted by the CARES Act. In addition, Chemed and its subsidiaries deferred $10.7 million of certain employer payroll taxes and $2.9 million of certain state tax payments, as permitted by the CARES Act.

During the period from May 1, 2020 through December 31, 2020, the 2% Medicare sequestration reimbursement cut is suspended. For the three and six month period ended June 30, 2020 approximately $4.2 million was recognized as revenue due to the suspension of sequestration.

There is no U.S. GAAP that covers such accounting for government “grants” to for-profit entities. As a result, the Company analogized to International Accounting Standard 20 – *Accounting for Government Grants and Disclosures (“*IAS 20”). Under IAS 20, once it is reasonably assured that the entity will comply with the conditions of the grant, the grant money should be recognized on a systematic basis over the periods in which the entity recognizes the related expenses or losses.

For the three and six months ended June 30, 2020, the Company recognized $41.0 million in other operating income. The components of the amount recognized are as follows, (in thousands):

|  |  |
| --- | ---: |
| Hard costs | **$3,814** |
| Incremental Medicare Cap | **2,250** |
| Incremental PTO | **21,425** |
| Lost revenue | **13,500** |
| Other operating income | **$40,989** |

Hard costs are primarily expenses paid to outside vendors for personal protection equipment and deep cleaning of in-patient facilities. The incremental Medicare Cap is the result of lower admissions in certain programs combined with the additional 2% sequestration revenue. In April, VITAS provided an extra two weeks of paid time off to all frontline workers. Lost revenue was calculated based on a comparison of historical Average Daily Census (“ADC”) growth rates by service-line to actual growth rates experienced between April and June of 2020 reduced for uncertainties related to the ultimate affect the pandemic will have on our business.

The situation surrounding COVID-19 remains fluid. We evaluate our cash flow, liquidity and capital resources on a daily basis. VITAS and Roto-Rooter continue to operate and have positive net income and operating cash flow. We have $412.1 million available for borrowing under our $450 million revolving line-of-credit.

On August 6, 2019, the Centers for Medicare and Medicaid Services released the fiscal year 2020 hospice wage index and payment rate update (“FY 2020 update”). The FY 2020 update includes the normal yearly inflationary increase by level of care plus a rebasing of the continuous care, inpatient care and respite care rates. The rebasing of these levels of care was to reflect non-inflationary changes in providers’ costs over time. The rebasing increased the national average reimbursement rate for continuous care by 39.9% and inpatient care by 34.7%. Respite care is not material to our operations. The rebasing of these levels of care was effective on October 1, 2019.

On August 2, 2019, we entered into an Asset Purchase Agreement (the “Agreement”) to purchase substantially all of the assets of HSW RR, Inc., a Delaware corporation (“HSW”) and certain related assets of its affiliates, for $120 million, subject to a working capital adjustment. HSW owned and operated fourteen Roto-Rooter franchises mainly in the southwestern section of the United States, including Los Angeles, Dallas and Phoenix. Included in the assets purchased were the assets of Western Drain Supply, Inc., a plumbing supply company. The purchase was made using a combination of cash on-hand and borrowings under Chemed’s existing $450 million revolving credit facility. On September 16, 2019, we completed the acquisition.

On July 1, 2019, we completed the acquisition of a Roto-Rooter franchise and the related assets in Oakland, CA for $18.0 million in cash.

Reacquired franchise rights, included in identifiable intangibles on the Consolidated Balance Sheets, are amortized over the period remaining in each individual franchise agreement. The average amortization period for reacquired franchise rights for the acquisitions made in the third quarter of 2019 is 7.4 years.

The franchise fee revenue, the valuation of reacquired franchise rights and amortization for the acquired franchises are as follows:

|  | 2018 Franchise Revenue | Valuation of Reacquired Franchise Rights | Multiple of Annual Franchise Fees to Reacquired Franchise Rights |  | Annualized Amortization of Reacquired Franchise Rights |
| --- | ---: | ---: | ---: | --- | ---: |
| HSW | $1,782 | $52,980 | 29.7 | yrs | $7,258 |
| Oakland | 95 | 6,190 | 65.2 |  | 825 |
| Subtotal | 1,877 | $59,170 | 31.5 | yrs | $8,083 |
| All other franchise territories | 4,505 |  |  |  |  |
|  | $6,382 |  |  |  |  |

Amortization of reacquired franchise agreements comprises the following (in thousands):

| Three months ended June 30, 2020 | 2019 | Six months ended June 30, 2020 | 2019 |
| ---: | ---: | ---: | ---: |
| **$2,352** | $331 | **$4,704** | $772 |

Historically, Chemed earnings guidance has been developed using previous years’ key operating metrics which are then modeled and projected out for the calendar year. Critical within these projections is the understanding of traditional patterned correlations among key operating metrics. Once we complete this phase of our projected operating results, we would then modify the projections for the timing of price increases, changes in commission structure, wages, marketing programs and a variety of continuous improvement initiatives that our business segments plan on executing over the coming year. This modeling exercise also takes into consideration anticipated industry and macro-economic issues outside of management’s control but are somewhat predictable in terms of timing and impact on our business segments’ operating results.

The 2020 pandemic has made accurate modeling and providing meaningful earnings guidance for Chemed exceptionally challenging. Federal, state and local government authorities are forced to make swift decisions affecting our healthcare system, labor pools and general economy. These governmental decisions have the potential for immediate and material impact on VITAS and Roto-Rooter operating results.

Over the past four months, Chemed has been able to successfully navigate within this rapidly changing environment and produce operating results that we believe provide us with the ability to provide guidance for the remainder of the calendar year. However, this guidance should be taken with the recognition the pandemic will continue to materially disrupt all aspects of our healthcare system and general economy and thus materially impact our ability to achieve this guidance.

Revenue growth for VITAS in 2020, prior to Medicare cap, is estimated to be in the range of 5% to 7%. Average Daily Census in 2020 is estimated to expand approximately 2% to 4%. Full-year Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 19% to 20%. We are currently estimating $17 million for Medicare cap billing limitations for calendar year 2020. We also anticipate the $80.2 million of CARES Act funds, formulaically calculated by the federal government based upon our 2019 Medicare fee-for-service revenue, will be adequate to cover increased costs specifically related to operating VITAS during the pandemic as well as any incremental Medicare cap billing limitations triggered from declines in Medicare admissions. Chemed’s full year adjusted earnings per share guidance eliminates any financial benefit from the CARES Act funds that relate to lost revenue. We anticipate returning any unused CARES Act funds to the federal government at the end of the pandemic measurement period. Roto-Rooter is forecasted to achieve full-year 2020 revenue growth of 9% to 10%. Roto-Rooter’s Adjusted EBITDA margin for 2020 is estimated to be in the range of 23% to 25%. We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.

### Financial Condition

### Liquidity and Capital Resources

Material changes in the balance sheet accounts from December 31, 2019 to June 30, 2020 include the following:

A $11.3 million decrease in accounts receivable due to timing of receipts.

A $14.4 million decrease in accounts payable due to timing of payments.

A $19.6 million increase in income taxes mainly due to the deferral of the first and second quarter federal payments as permitted by the CARES Act.

A $9.7 million increase in accrued compensation due to accrual of additional paid time off for VITAS front line works offset by the payments of cash bonuses in the first quarter of 2020.

A $39.2 million increase in the unutilized portion of the CARES Act grant received in the second quarter of 2020.

A $90.0 million decrease in long-term debt due to payments made in the second quarter of 2020.

A $10.9 million increase in other liabilities mainly due to the deferral of certain payroll taxes as permitted by the CARES Act.

A $147.4 million increase in treasury stock due mainly to stock repurchases.

Net cash provided by operating activities increased $168.9 million from June 30, 2019 to June 30, 2020. The main drivers of the increase relate to the receipt of $80.2 million in CARES Act grant funds and the deferral of certain income and payroll tax payments as permitted by the CARES Act. Additionally, 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 for hospice services every other Friday. The timing of a 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 was 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 $37.9 million in standby letters of credit as of June 30, 2020, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of June 30, 2020, we have approximately $412.1 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, 2020 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, which can result in penalties including repayment obligations, funding withholding, or debarment, 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.

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 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.

The Company entered into a settlement agreement in March 2019 that will resolve state-wide wage and hour class action claims raised in four separate cases: (1) *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 (“*Seper”*); (2) *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 (“*Chhina”*) (which was subsequently merged with *Seper*); (3) *Chere Phillips and Lady Moore v. VITAS Healthcare Corporation of California*, Sacramento County Superior Court, Case No. 34-2017-0021-2755 (“*Phillips and Moore”)*; and (4) *Williams v. VITAS Healthcare Corporation of California*, Alameda County Superior Court Case No. RG 17853886 (“*Williams’).* These actions were brought by both current and former employees including a registered nurse, a licensed vocational nurse (LVN), home health aides and a social worker. Each action stated multiple claims generally including (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. The cases generally asserted claims on behalf of classes defined to include all current and former non-exempt employees employed with VITAS in California within the four years preceding the filing of each lawsuit. For additional procedural history of these cases, please refer to our prior quarterly and annual filings.

The settlement amount of $5.75 million plus employment taxes was recorded in the first quarter of 2019. As of December 31, 2019, $6.0 million was accrued in the accompanying Consolidated Balance Sheet. 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. On January 28, 2020, the court granted preliminary approval of the settlement. A notice of the proposed settlement has been sent to the members of the class by the class claims administrator. The court has re-set the date for the final approval of the settlement hearing for December 8, 2020.

Alfred Lax (“Lax”), a current employee of Roto-Rooter Services Company (“RRSC”), was hired in 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 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 is, *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. The Company intends to defend vigorously against the allegations in the *Lax* lawsuit.

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, withholding of governmental funding, 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

### Results of Operations

### Three months ended June 30, 2020 versus 2019 - Consolidated Results

Our service revenues and sales for the second quarter of 2020 increased 6.0% versus services and sales revenues for the second quarter of 2019. Of this increase, a $14.7 million increase was attributable to VITAS and $13.9 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, 2020 | 2019 |
| --- | ---: | ---: |
| Routine homecare | **$276,345** | $266,461 |
| Continuous care | **34,582** | 30,786 |
| General inpatient | **25,868** | 22,894 |
| Other | **2,109** | 2,237 |
| Medicare cap adjustment | **(5,750)** | (3,198) |
| Room and board - net | **(2,647)** | (2,710) |
| Implicit price concessions | **(3,042)** | (3,720) |
| Roto-Rooter |  |  |
| Drain cleaning - short term core | **49,455** | 46,039 |
| Plumbing - short term core | **32,022** | 34,171 |
| Subtotal | **81,477** | 80,210 |
| Excavation - short term core | **44,678** | 35,422 |
| Water restoration | **31,426** | 29,955 |
| Contractor operations | **15,193** | 14,595 |
| Outside franchisee fees | **1,210** | 1,623 |
| Other - short term core | **386** | 579 |
| Other | **2,971** | 2,973 |
| Implicit price concessions | **(2,607)** | (4,523) |
| Total | **$502,199** | $473,584 |

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

|  | Days of Care 2020 | 2019 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **1,401,744** | 1,317,854 | 6.4 |
| Nursing home | **279,462** | 303,983 | (8.1) |
| Respite | **4,158** | 6,669 | (37.7) |
| Subtotal routine homecare and respite | **1,685,364** | 1,628,506 | 3.5 |
| Continuous care | **35,814** | 41,804 | (14.3) |
| General inpatient | **25,542** | 29,663 | (13.9) |
| Total days of care | **1,746,720** | 1,699,973 | 2.8 |

This increase in service revenues at VITAS is comprised primarily of a 2.8% increase in days-of-care, a geographically weighted average Medicare reimbursement rate increase of approximately 5.4%, and acuity mix shift which reduced the blended average Medicare rate increase by approximately 3.1%.

During the quarter ended June 30, 2020, we recorded $5.8 million in net Medicare cap revenue reduction related to five programs for the 2020 government fiscal year. During the quarter ended June 30, 2019, we recorded $2.4 million in net Medicare cap revenue reduction related to three programs for the 2019 government fiscal year. Additionally, we recorded $847,000 related to adjustments to prior year cap liabilities.

The decrease in plumbing revenues for the second quarter of 2020 versus 2019 is attributable to a 4.7% decrease in price and service mix shift and a 1.6% decrease in job count. The increase in excavation revenues for the second quarter of 2020 versus 2019 is attributable to a 10.1% increase in price and service mix shift and a 16.0% increase in job count. Drain cleaning revenues for the second quarter of 2020 versus 2019 reflect a 1.7% increase in price and service mix shift and a 5.7% increase in job count. Water restoration revenue increased for the second quarter of 2020 versus 2019 due to a 4.1% increase in job count and an 0.8% increase in price. Contractor operations increased 4.1% mainly due to their continued expansion into water restoration.

The consolidated gross margin was 29.9% in the second quarter of 2020 as compared with 31.7% in the second quarter of 2019. On a segment basis, VITAS’ gross margin was 18.5% in the second quarter of 2020 as compared with 22.9%, in the second quarter of

2019\. The decline in gross margin is attributable mainly to increased costs related to COVID-19. The CARES Act grant amount that offsets these higher costs is recorded in other operating income. The Roto-Rooter segment’s gross margin was 51.2% for the second quarter of 2020 as compared with 48.7% in the second quarter of 2019 primarily due to increased revenue and expense management.

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

|  | Three months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts | **$75,176** | $70,300 |
| Impact of market value adjustments related to assets held in deferred compensation trusts | **7,408** | (130) |
| Long-term incentive compensation | **1,929** | 1,386 |
| Total SG&A expenses | **$84,513** | $71,556 |

SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts for the second quarter of 2020 were up 6.9% when compared to the second quarter of 2019. This increase was mainly a result of the increase in variable selling and general administrative expenses caused by increased revenue.

Depreciation for the second quarter of 2020, increased 17.9% when compared to the second quarter of 2019, primarily due to new equipment purchased at Roto-Rooter related to the acquisitions completed in the second half of 2019.

Amortization for the second quarter of 2020, increased 512.8% when compared to the second quarter of 2019 due to the amortization of reacquired franchise rights related to acquisitions completed in the second half of 2019.

Other operating (income)/expenses comprise the following:

|  | Three months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| CARES Act grant | **$(40,989)** | $- |
| (Gain)/loss on disposal of fixed assets | **(395)** | 304 |
| Transportation equipment held for sale | **-** | 2,266 |
| Total other operating (income)/expenses | **$(41,384)** | $2,570 |

Other (expense)/income – net comprise (in thousands):

|  | Three months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Market value adjustment on assets held in deferred compensation trusts | **$7,408** | $(130) |
| Interest income | **116** | 112 |
| Other | **(10)** | 31 |
| Total other income - net | **$7,514** | $13 |

Our effective tax rate reconciliation is as follows:

|  | Three months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Income tax provision calculated at the statutory federal rate | **$20,921** | $13,504 |
| Stock compensation tax benefits | **(8,203)** | (3,212) |
| State and local income taxes | **3,604** | 2,212 |
| Other--net | **1,200** | 1,071 |
| Income tax provision | **$17,522** | $13,575 |
| Effective tax rate | 17.6% | 21.1% |

- 30-

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, 2020 | 2019 |
| --- | ---: | ---: |
| CARES Act grant | **$30,537** | $- |
| Direct costs related to COVID-19 | **(18,101)** | - |
| COVID-19 Medicare cap | **(1,679)** | - |
| Medicare cap sequestration adjustment | **(594)** | (1,253) |
| Non cash ASC 842 expenses | **-** | (1) |
| Roto-Rooter |  |  |
| Amortization of reacquired franchise agreements | **(1,729)** | (244) |
| Direct costs related to COVID-19 | **(822)** | - |
| Acquisition expenses | **-** | (71) |
| Corporate |  |  |
| Excess tax benefits on stock compensation | **8,203** | 3,212 |
| Stock option expense | **(4,209)** | (3,197) |
| Long-term incentive compensation | **(1,728)** | (1,199) |
| Impairment loss on transportation equipment | **-** | (1,733) |
| Acquisition expense | **-** | - |
| Total | **$9,878** | $(4,486) |

### Three months ended June 30, 2020 versus 2019 - Segment Results

Net income/(loss) for the second quarter of 2020 versus the second quarter of 2019 by segment (in thousands):

|  | Three months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| VITAS | **$60,245** | $37,339 |
| Roto-Rooter | **29,468** | 27,175 |
| Corporate | **(7,612)** | (13,785) |
|  | **$82,101** | $50,729 |

VITAS’ after-tax earnings were positively impacted in 2020 compared to 2019 due to the recognition of $30.5 million of the CARES Act (offset by higher expenses due to COVID-19), higher revenue and improved labor management and ancillary costs. After-tax earnings as a percent of revenue at VITAS in the second quarter of 2020 was 18.4% as compared to 11.9% in the second quarter of 2019.

Roto-Rooter’s net income was impacted in 2020 compared to 2019 primarily by higher revenue offset by increased depreciation and amortization expense. After-tax earnings as a percent of revenue at Roto-Rooter in the second quarter of 2020 was 16.9%, essentially equal to the second quarter of 2019.

After-tax Corporate expenses for 2020 decreased 44.8% when compared to 2019 due mainly to a $5.0 million increase in the excess tax benefits on stock compensation and a $1.7 million decrease in impairment loss on transportation equipment that occurred in the second quarter of 2019.

### Results of Operations

### Six months ended June 30, 2020 versus 2019 - Consolidated Results

Our service revenues and sales for the first six months of 2020 increased 8.8% versus services and sales revenues for the first six months of 2019. Of this increase, a $45.9 million increase was attributable to VITAS and $36.5 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, 2020 | 2019 |
| --- | ---: | ---: |
| Routine homecare | **$548,098** | $525,312 |
| Continuous care | **75,137** | 63,030 |
| General inpatient | **58,350** | 45,464 |
| Other | **5,265** | 4,242 |
| Medicare cap adjustment | **(8,250)** | (6,598) |
| Room and board - net | **(7,192)** | (5,252) |
| Implicit price concessions | **(6,028)** | (6,667) |
| Roto-Rooter |  |  |
| Drain cleaning - short term core | **103,475** | 90,692 |
| Plumbing - short term core | **68,816** | 66,589 |
| Subtotal | **172,291** | 157,281 |
| Excavation - short term core | **87,738** | 69,960 |
| Water restoration | **60,672** | 59,163 |
| Contractor operations | **31,421** | 28,627 |
| Outside franchisee fees | **2,400** | 3,245 |
| Other - short term core | **936** | 1,155 |
| Other | **6,505** | 5,980 |
| Implicit price concessions | **(9,346)** | (9,324) |
| Total | **$1,017,997** | $935,618 |

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

|  | Days of Care 2020 | 2019 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **2,766,490** | 2,599,753 | 6.4 |
| Nursing home | **582,836** | 593,752 | (1.8) |
| Respite | **10,850** | 12,970 | (16.3) |
| Subtotal routine homecare and respite | **3,360,176** | 3,206,475 | 4.8 |
| Continuous care | **77,187** | 85,727 | (10.0) |
| General inpatient | **57,890** | 58,813 | (1.6) |
| Total days of care | **3,495,253** | 3,351,015 | 4.3 |

The revenue increase at VITAS is comprised primarily of the 4.3% increase in days-of-care, a geographically weighted average Medicare reimbursement rate increase of approximately 5.2%, and acuity mix shift which then decreased the blended Medicare rate increase by approximately 2.0%.

During the first six months ended June 30, 2020, we recorded $8.3 million in net Medicare cap revenue reduction related to five programs for the 2020 government fiscal year. During the first six months ended June 30, 2019, we recorded $5.8 million in net Medicare cap revenue reduction related to four programs for the 2019 government fiscal year. Additionally, we recorded $847,000 related to adjustments of prior year cap liabilities.

The increase in plumbing revenues for the first six months of 2020 versus 2019 is attributable to a 3.9% increase in price and service mix shift and an 0.6% decrease in job count. The increase in excavation revenues for the first six months of 2020 versus 2019 is attributable to a 7.9% increase in price and service mix shift and a 17.5% increase in job count. Drain cleaning revenues for the first six months of 2020 versus 2019 reflect a 5.0% increase in price and service mix shift and a 9.1% increase in job count. The increase in water restoration revenue for the first six months of 2020 versus 2019 is attributable to a 4.2% increase in job count offset by a 1.6% decrease in price. Contractor operations increased 9.8% mainly due to their continued expansion into water restoration.

The consolidated gross margin was 30.9% in the first six months of 2020 as compared with 31.0% in the first six months of 2019. On a segment basis, VITAS’ gross margin was 20.9% in the first six months of 2020 as compared with 22.4%, in the first six months of 2019. The decline in VITAS gross margin is attributable mainly to increased costs related to COVID-19. The CARES Act grant amount that offsets these higher costs is recorded in other operating income. The Roto-Rooter segment’s gross margin was 49.6% for the first six months of 2020 as compared with 47.9% in the first six months of 2019 primarily due to increased revenue and expense management.

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

|  | Six months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts | **$153,511** | $140,504 |
| Long-term incentive compensation | **3,749** | 2,874 |
| Impact of market value adjustments related to assets held in deferred compensation trusts | **(2,164)** | 2,207 |
| Total SG&A expenses | **$155,096** | $145,585 |

SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts for the first six months of 2020 were up 9.3% when compared to the first six months of 2019. This increase was mainly a result of the increase in variable selling and general administrative expenses caused by increased revenue.

Depreciation for the first six months of 2020, increased 17.6% when compared to the first six months of 2019, primarily due to new equipment purchased at Roto-Rooter related to the acquisitions completed in the second half of 2019.

Amortization for the first six months of 2020, increased 436.8% when compared to the first six months of 2019 due to the amortization of reacquired franchise rights related to acquisitions completed in the second half of 2019.

Other operating (income)/expenses comprise the following:

|  | Six months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| CARES Act grant | **$(40,989)** | $- |
| (Gain)/loss on disposal of fixed assets | **(153)** | 657 |
| Transportation equipment held for sale | **-** | 2,266 |
| Other | **-** | 6,000 |
| Total other operating (income)/expenses | **$(41,142)** | $8,923 |

Other (expense)/income – net comprise (in thousands):

|  | Six months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Market value adjustment on assets held in deferred compensation trusts | **$(2,164)** | $2,207 |
| Interest income | **225** | 214 |
| Other | **(13)** | 31 |
| Total other income - net | **$(1,952)** | $2,452 |

Our effective tax rate reconciliation is as follows:

|  | Six months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Income tax provision calculated at the statutory federal rate | **$35,394** | $24,169 |
| Stock compensation tax benefits | **(12,756)** | (9,944) |
| State and local income taxes | **6,182** | 4,538 |
| Other--net | **1,733** | 932 |
| Income tax provision | **$30,553** | $19,695 |
| Effective tax rate | 18.1% | 17.1% |

- 33-

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, 2020 | 2019 |
| --- | ---: | ---: |
| CARES Act grant | **$30,537** | $- |
| Direct costs related to COVID-19 | **(18,828)** | - |
| COVID-19 Medicare cap | **(1,679)** | - |
| Medicare cap sequestration adjustment | **(1,097)** | (1,640) |
| Litigation settlement | **-** | (4,476) |
| Non cash ASC 842 benefit | **-** | (490) |
| Roto-Rooter |  |  |
| Amortization of acquired and cancelled franchise agreements | **(3,457)** | (568) |
| Direct costs related to COVID-19 | **(1,455)** | - |
| Acquisition expenses | **-** | (71) |
| Non cash ASC 842 benefit | **-** | (40) |
| Corporate |  |  |
| Excess tax benefits on stock compensation | **12,756** | 9,944 |
| Stock option expense | **(8,399)** | (6,524) |
| Long-term incentive compensation | **(3,324)** | (2,429) |
| Impairment loss on transportation equipment | **-** | (1,733) |
| Non cash ASC 842 benefit | **-** | 124 |
| Acquisition expenses | **-** | (91) |
| Total | **$5,054** | $(7,994) |

### Six months ended June 30, 2020 versus 2019 - Segment Results

Net income/(loss) for the first six months of 2020 versus the first six months of 2019 by segment (in thousands):

|  | Six months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| VITAS | **$101,524** | $66,626 |
| Roto-Rooter | **53,790** | 50,162 |
| Corporate | **(17,322)** | (21,392) |
|  | **$137,992** | $95,396 |

VITAS’ after-tax earnings were positively impacted in 2020 compared to 2019 due to the recognition of $30.5 million of the CARES Act (offset by COVID-19 costs) and to higher revenue and improved labor management and ancillary costs. After-tax earnings as a percent of revenue at VITAS in the first six months of 2020 was 15.3% as compared to 10.7% in the first six months of 2019.

Roto-Rooter’s net income was impacted in 2020 compared to 2019 primarily by higher revenue offset by increased depreciation and amortization expense. After-tax earnings as a percent of revenue at Roto-Rooter in the first six months of 2020 was 15.3% as compared to 15.9% in the first six months of 2019.

After-tax Corporate expenses for 2020 decreased 19.0% when compared to 2019 due mainly to a $2.8 million increase in the excess tax benefits on stock compensation.

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENTS OF INCOME*

*FOR THE THREE MONTHS ENDED JUNE 30, 2020*

*(in thousands)(unaudited)*

| 2020 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Service revenues and sales** | **$327,465** | **$174,734** | **$-** | **$502,199** |
| **Cost of services provided and goods sold** | **266,815** | **85,348** | **-** | **352,163** |
| **Selling, general and administrative expenses** | **21,072** | **44,231** | **19,210** | **84,513** |
| **Depreciation** | **5,556** | **6,069** | **34** | **11,659** |
| **Amortization** | **18** | **2,470** | **-** | **2,488** |
| **Other operating income** | **(40,826)** | **(558)** | **-** | **(41,384)** |
| **Total costs and expenses** | **252,635** | **137,560** | **19,244** | **409,439** |
| **Income/(loss) from operations** | **74,830** | **37,174** | **(19,244)** | **92,760** |
| **Interest expense** | **(45)** | **(90)** | **(516)** | **(651)** |
| **Intercompany interest income/(expense)** | **4,739** | **1,422** | **(6,161)** | **-** |
| **Other (expense)/income—net** | **104** | **(10)** | **7,420** | **7,514** |
| **Income/(expense) before income taxes** | **79,628** | **38,496** | **(18,501)** | **99,623** |
| **Income taxes** | **(19,383)** | **(9,028)** | **10,889** | **(17,522)** |
| **Net income/(loss)** | **$60,245** | **$29,468** | **$(7,612)** | **$82,101** |
| **(a) The following amounts are included in net income (in thousands):** |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Pretax benefit/(cost):** |  |  |  |  |
| **CARES Act grant** | **$40,989** | **$-** | **$-** | **$40,989** |
| **Direct costs related to COVID-19** | **(24,265)** | **(1,117)** | **-** | **(25,382)** |
| **Stock option expense** | **-** | **-** | **(5,068)** | **(5,068)** |
| **Amortization of reacquired franchise agreements** | **-** | **(2,352)** | **-** | **(2,352)** |
| **COVID-19 Medicare cap** | **(2,250)** | **-** | **-** | **(2,250)** |
| **Long-term incentive compensation** | **-** | **-** | **(1,929)** | **(1,929)** |
| **Medicare cap sequestration** | **(796)** | **-** | **-** | **(796)** |
| **Total** | **$13,678** | **$(3,469)** | **$(6,997)** | **$3,212** |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **After-tax benefit/(cost):** |  |  |  |  |
| **CARES Act grant** | **$30,537** | **$-** | **$-** | **$30,537** |
| **Direct costs related to COVID-19** | **(18,101)** | **(822)** | **-** | **(18,923)** |
| **Stock option expense** | **-** | **-** | **(4,209)** | **(4,209)** |
| **Amortization of reacquired franchise agreements** | **-** | **(1,729)** | **-** | **(1,729)** |
| **Long-term incentive compensation** | **-** | **-** | **(1,728)** | **(1,728)** |
| **COVID-19 Medicare cap** | **(1,679)** | **-** | **-** | **(1,679)** |
| **Medicare cap sequestration** | **(594)** | **-** | **-** | **(594)** |
| **Excess tax benefits on stock compensation** | **-** | **-** | **8,203** | **8,203** |
| **Total** | **$10,163** | **$(2,551)** | **$2,266** | **$9,878** |

*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 expenses | 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 adjustment | (1,689) | - | - | (1,689) |
| Long-term incentive compensation | - | - | (1,386) | (1,386) |
| Amortization of reacquired 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 adjustment | (1,253) | - | - | (1,253) |
| Long-term incentive compensation | - | - | (1,199) | (1,199) |
| Amortization of reacquired 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) |

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENTS OF INCOME*

*FOR THE SIX MONTHS ENDED JUNE 30, 2020*

*(in thousands)(unaudited)*

| 2020 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Service revenues and sales** | **$665,380** | **$352,617** | **$-** | **$1,017,997** |
| **Cost of services provided and goods sold** | **526,244** | **177,664** | **-** | **703,908** |
| **Selling, general and administrative expenses** | **43,341** | **90,513** | **21,242** | **155,096** |
| **Depreciation** | **11,030** | **11,947** | **70** | **23,047** |
| **Amortization** | **36** | **4,929** | **-** | **4,965** |
| **Other operating income** | **(40,712)** | **(430)** | **-** | **(41,142)** |
| **Total costs and expenses** | **539,939** | **284,623** | **21,312** | **845,874** |
| **Income/(loss) from operations** | **125,441** | **67,994** | **(21,312)** | **172,123** |
| **Interest expense** | **(90)** | **(192)** | **(1,344)** | **(1,626)** |
| **Intercompany interest income/(expense)** | **9,125** | **2,771** | **(11,896)** | **-** |
| **Other (expense)/income—net** | **169** | **30** | **(2,151)** | **(1,952)** |
| **Income/(expense) before income taxes** | **134,645** | **70,603** | **(36,703)** | **168,545** |
| **Income taxes** | **(33,121)** | **(16,813)** | **19,381** | **(30,553)** |
| **Net income/(loss)** | **$101,524** | **$53,790** | **$(17,322)** | **$137,992** |
| **(a) The following amounts are included in net income (in thousands):** |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Pretax benefit/(cost):** |  |  |  |  |
| **CARES Act grant** | **$40,989** | **$-** | **$-** | **$40,989** |
| **Direct costs related to COVID-19** | **(25,238)** | **(1,978)** | **-** | **(27,216)** |
| **Stock option expense** | **-** | **-** | **(10,114)** | **(10,114)** |
| **Amortization of reacquired franchise agreements** | **-** | **(4,704)** | **-** | **(4,704)** |
| **Long-term incentive compensation** | **-** | **-** | **(3,749)** | **(3,749)** |
| **COVID-19 Medicare cap** | **(2,250)** | **-** | **-** | **(2,250)** |
| **Medicare cap sequestration adjustment** | **(1,472)** | **-** | **-** | **(1,472)** |
| **Total** | **$12,029** | **$(6,682)** | **$(13,863)** | **$(8,516)** |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **After-tax benefit/(cost):** |  |  |  |  |
| **CARES Act grant** | **$30,537** | **$-** | **$-** | **$30,537** |
| **Direct costs related to COVID-19** | **(18,828)** | **(1,455)** | **-** | **(20,283)** |
| **Stock option expense** | **-** | **-** | **(8,399)** | **(8,399)** |
| **Amortization of reacquired franchise agreements** | **-** | **(3,457)** | **-** | **(3,457)** |
| **Long-term incentive compensation** | **-** | **-** | **(3,324)** | **(3,324)** |
| **COVID-19 Medicare cap** | **(1,679)** | **-** | **-** | **(1,679)** |
| **Medicare cap sequestration adjustment** | **(1,097)** | **-** | **-** | **(1,097)** |
| **Excess tax benefits on stock compensation** | **-** | **-** | **12,756** | **12,756** |
| **Total** | **$8,933** | **$(4,912)** | **$1,033** | **$5,054** |

*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—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 reacquired franchise agreements | - | (772) | - | (772) |
| Non cash ASC 842 (expenses)/benefit | (656) | (55) | 163 | (548) |
| Acquisition expense | - | (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 reacquired franchise agreements | - | (568) | - | (568) |
| Non cash ASC 842 (expenses)/benefit | (490) | (40) | 124 | (406) |
| Acquisition expense | - | (71) | (91) | (162) |
| Excess tax benefits on stock compensation | - | - | 9,944 | 9,944 |
| Total | $(6,606) | $(679) | $(709) | $(7,994) |

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the three months ended June 30, 2020 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $60,245 | **$29,468** | **$(7,612)** | **$82,101** |
| **Add/(deduct):** |  |  |  |  |
| **Interest expense** | **45** | **90** | **516** | **651** |
| **Income taxes** | **19,383** | **9,028** | **(10,889)** | **17,522** |
| **Depreciation** | **5,556** | **6,069** | **34** | **11,659** |
| **Amortization** | **18** | **2,470** | **-** | **2,488** |
| **EBITDA** | **85,247** | **47,125** | **(17,951)** | **114,421** |
| **Add/(deduct):** |  |  |  |  |
| **Intercompany interest expense/(income)** | **(4,739)** | **(1,422)** | **6,161** | **-** |
| **Interest income** | **(113)** | **10** | **(13)** | **(116)** |
| **CARES Act grant** | **(40,989)** | **-** | **-** | **(40,989)** |
| **Direct costs related to COVID-19** | **24,265** | **1,117** | **-** | **25,382** |
| **Stock option expense** | **-** | **-** | **5,068** | **5,068** |
| **COVID-19 related Medicare cap** | **2,250** | **-** | **-** | **2,250** |
| **Long-term incentive compensation** | **-** | **-** | **1,929** | **1,929** |
| **Medicare cap sequestration adjustment** | **796** | **-** | **-** | **796** |
| **Adjusted EBITDA** | **$66,717** | **$46,830** | **$(4,806)** | **$108,741** |
|  |  |  |  | Chemed |
| For the three months ended June 30, 2019 | VITAS | Roto-Rooter | Corporate | 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 expenses | - | 97 | - | 97 |
| Adjusted EBITDA | $51,616 | $38,785 | $(5,312) | $85,089 |

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the six months ended June 30, 2020 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | **$101,524** | **$53,790** | **$(17,322)** | **$137,992** |
| **Add/(deduct):** |  |  |  |  |
| **Interest expense** | **90** | **192** | **1,344** | **1,626** |
| **Income taxes** | **33,121** | **16,813** | **(19,381)** | **30,553** |
| **Depreciation** | **11,030** | **11,947** | **70** | **23,047** |
| **Amortization** | **36** | **4,929** | **-** | **4,965** |
| **EBITDA** | **145,801** | **87,671** | **(35,289)** | **198,183** |
| **Add/(deduct):** |  |  |  |  |
| **Intercompany interest expense/(income)** | **(9,125)** | **(2,771)** | **11,896** | **-** |
| **Interest income** | **(181)** | **(31)** | **(13)** | **(225)** |
| **CARES Act grant** | **(40,989)** | **-** | **-** | **(40,989)** |
| **Direct costs related to COVID-19** | **25,238** | **1,978** | **-** | **27,216** |
| **Stock option expense** | **-** | **-** | **10,114** | **10,114** |
| **Long-term incentive compensation** | **-** | **-** | **3,749** | **3,749** |
| **COVID-19 related Medicare cap** | **2,250** | **-** | **-** | **2,250** |
| **Medicare cap sequestration adjustment** | **1,472** | **-** | **-** | **1,472** |
| **Adjusted EBITDA** | **$124,466** | **$86,847** | **$(9,543)** | **$201,770** |
|  |  |  |  | **Chemed** |
| **For the six months ended June 30, 2019** | **VITAS** | **Roto-Rooter** | **Corporate** | **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 expense | - | 97 | 120 | 217 |
| **Adjusted EBITDA** | $97,934 | $72,286 | $(10,332) | $159,888 |

*RECONCILIATION OF ADJUSTED NET INCOME*

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

|  | Three Months Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net income as reported | **$82,101** | $50,729 | **$137,992** | $95,396 |
| Add/(deduct) pre-tax cost of: |  |  |  |  |
| CARES Act grant | **(40,989)** | - | **(40,989)** | - |
| Direct costs related to COVID-19 | **25,382** | - | **27,216** | - |
| Stock option expense | **5,068** | 3,929 | **10,114** | 8,018 |
| Amortization of reacquired franchise agreements | **2,352** | 331 | **4,704** | 772 |
| COVID-19 related Medicare cap | **2,250** | - | **2,250** | - |
| Long-term incentive compensation | **1,929** | 1,386 | **3,749** | 2,874 |
| Medicare cap sequestration adjustment | **796** | 1,689 | **1,472** | 2,204 |
| Impairment loss on transportation equipment | **-** | 2,266 | **-** | 2,266 |
| Litigation settlement | **-** | - | **-** | 6,000 |
| Acquisition expense | **-** | 97 | **-** | 217 |
| Non cash ASC 842 expense | **-** | - | **-** | 548 |
| Add/(deduct) tax impacts: |  |  |  |  |
| Tax impact of the above pre-tax adjustments (1) | **1,537** | (2,000) | **(814)** | (4,961) |
| Excess tax benefits on stock compensation | **(8,203)** | (3,212) | **(12,756)** | (9,944) |
| Adjusted net income | **$72,223** | $55,215 | **$132,938** | $103,390 |
| Diluted Earnings Per Share As Reported |  |  |  |  |
| Net income | **$5.01** | $3.08 | **$8.39** | $5.79 |
| Average number of shares outstanding | **16,373** | 16,449 | **16,445** | 16,489 |
| Adjusted Diluted Earnings Per Share |  |  |  |  |
| Adjusted net income | **$4.41** | $3.36 | **$8.08** | $6.27 |
| Adjusted average number of shares outstanding | **16,373** | 16,449 | **16,445** | 16,489 |
| (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. |  |  |  |  |

- 41-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*OPERATING STATISTICS FOR VITAS SEGMENT*

*(unaudited)*

| OPERATING STATISTICS Net revenue ($000) | Three Months Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Homecare | **$276,345** | $266,461 | **$548,098** | $525,312 |
| Inpatient | **25,868** | 22,894 | **58,350** | 45,464 |
| Continuous care | **34,582** | 30,786 | **75,137** | 63,030 |
| Other | **2,109** | 2,237 | **5,265** | 4,242 |
| Subtotal | **$338,904** | $322,378 | **$686,850** | $638,048 |
| Room and board, net | **(2,647)** | (3,710) | **(6,028)** | (5,252) |
| Contractual allowances | **(3,042)** | (3,720) | **(7,192)** | (6,667) |
| Medicare cap allowance | **(5,750)** | (3,198) | **(8,250)** | (6,598) |
| Total | **$327,465** | $311,750 | **$665,380** | $619,531 |
| Net revenue as a percent of total before Medicare cap allowances |  |  |  |  |
| Homecare | **81.5%** | 82.7% | **79.8%** | 82.3% |
| Inpatient | **7.6** | 7.1 | **8.5** | 7.1 |
| Continuous care | **10.2** | 9.5 | **10.9** | 9.9 |
| Other | **0.7** | 0.7 | **0.8** | 0.7 |
| Subtotal | **100.0** | 100.0 | **100.0** | 100.0 |
| Room and board, net | **(0.8)** | (0.8) | **(0.9)** | (0.8) |
| Contractual allowances | **(0.9)** | (1.2) | **(1.0)** | (1.0) |
| Medicare cap allowance | **(1.7)** | (1.0) | **(1.2)** | (1.0) |
| Total | **96.6%** | 97.0% | **96.9%** | 97.2% |
| Days of care |  |  |  |  |
| Homecare | **1,401,744** | 1,317,854 | **2,766,490** | 2,599,753 |
| Nursing home | **279,462** | 303,983 | **582,836** | 593,752 |
| Respite | **4,158** | 6,669 | **10,850** | 12,970 |
| Subtotal routine homecare and respite | **1,685,364** | 1,628,506 | **3,360,176** | 3,206,475 |
| Inpatient | **25,542** | 29,663 | **57,890** | 58,813 |
| Continuous care | **35,814** | 41,804 | **77,187** | 85,727 |
| Total | **1,746,720** | 1,699,973 | **3,495,253** | 3,351,015 |
| Number of days in relevant time period | **91** | 91 | **182** | 181 |
| Average daily census (days) |  |  |  |  |
| Homecare | **15,404** | 14,482 | **15,201** | 14,363 |
| Nursing home | **3,071** | 3,340 | **3,202** | 3,280 |
| Respite | **46** | 73 | **60** | 72 |
| Subtotal routine homecare and respite | **18,521** | 17,895 | **18,463** | 17,715 |
| Inpatient | **281** | 327 | **318** | 325 |
| Continuous care | **394** | 459 | **424** | 474 |
| Total | **19,196** | 18,681 | **19,205** | 18,514 |
| Total Admissions | **16,822** | 17,491 | **35,425** | 35,249 |
| Total Discharges | **17,000** | 17,008 | **35,208** | 34,350 |
| Average length of stay (days) | **90.9** | 91.1 | **90.8** | 91.2 |
| Median length of stay (days) | **14.0** | 16.0 | **14.0** | 15.0 |
| ADC by major diagnosis |  |  |  |  |
| Cerebro | **35.2%** | 35.7% | **35.7%** | 35.8% |
| Neurological | **21.7** | 20.4 | **21.6** | 20.2 |
| Cancer | **12.8** | 12.7 | **12.7** | 12.7 |
| Cardio | **16.1** | 17.0 | **15.9** | 16.9 |
| Respiratory | **8.2** | 8.2 | **8.3** | 8.2 |
| Other | **6.0** | 6.0 | **5.8** | 6.2 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Admissions by major diagnosis |  |  |  |  |
| Cerebro | **20.9** | 20.6% | **21.0%** | 20.7% |
| Neurological | **13.4** | 12.2 | **12.9** | 12.5 |
| Cancer | **27.6** | 29.2 | **28.0** | 28.6 |
| Cardio | **14.6** | 16.0 | **14.9** | 16.1 |
| Respiratory | **9.8** | 11.7 | **10.9** | 11.8 |
| Other | **13.7** | 10.3 | **12.3** | 10.3 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Estimated uncollectible accounts as a percent of revenues | **0.9%** | 1.2% | **1.1%** | 1.1% |
| Accounts receivable -- |  |  |  |  |
| Days of revenue outstanding- excluding unapplied Medicare payments | **31.9** | 32.7 | **n.a.** | n.a. |
| Days of revenue outstanding- including unapplied Medicare payments | **26.7** | 27.7 | **n.a.** | n.a. |

### 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, 585 characters.

The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At June 30, 2020, the Company had no 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, 900 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. 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.

## Risk factors

As filed, 1,024 characters.

**The recent COVID-19 pandemic could have a material adverse effect on our business operations, results of operations, cash flows and financial position.**

We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it will impact our customers, team members, suppliers, vendors, business partners and distribution channels. The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which will adversely affect our business operations and may materially and adversely affect our results of operations, cash flows and financial position.

For additional information regarding specific risk factors related to the COVID-19 pandemic, see Management’s Discussion and Analysis of Financial Condition and Results of Operation under Part I., Item 2 of this Quarterly Report on Form 10-Q. There have been no other material changes from the risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K.

Filed Jul 31, 2020.
Source: SEC EDGAR, the filing index for accession 0000019584-20-000033. Last ingested by Listed: Nov 5, 2026, 15:55 ET. No prices; not investment advice.