# Chemed Corp: Form 10-Q for the period ended Mar 31, 2016

- Company: [Chemed Corp](/companies/che.md) (CIK 19584)
- Form: 10-Q
- Filed: 2016-05-02
- Accepted by EDGAR: May 2, 2016, 11:15 ET
- Period: 2016-03-31
- Accession: 0001157523-16-005358
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/19584/000115752316005358/a51329686.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/19584/000115752316005358/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $390.4m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-01-01 to 2016-03-31 | $278.4m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2016-01-01 to 2016-03-31 | $59.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | $44.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-01-01 to 2016-03-31 | $842.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | $15.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | $24.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | $1.45 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-01-01 to 2016-03-31 | $1.49 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-01-01 to 2016-03-31 | 17,170,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | $7.2m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $11.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2016-01-01 to 2016-03-31 | $4.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2016-01-01 to 2016-03-31 | $52.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-03-31 | $15.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $179.9m | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $882.9m | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $191.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $398.1m | us-gaap:Liabilities |
| Long-term debt | at 2016-03-31 | $126.9m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-03-31 | $18.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-03-31 | $484.8m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2016-03-31 | 16,557,177 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 33,116 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 March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Service revenues and sales | **$390,389** | $376,652 |
| Net income | **$24,840** | $24,537 |
| Diluted EPS | **$1.45** | $1.40 |
| Adjusted net income | **$27,754** | $26,831 |
| Adjusted diluted EPS | **$1.62** | $1.54 |
| Adjusted EBITDA | **$54,480** | $52,849 |
| Adjusted EBITDA as a % of revenue | **14.0%** | 14.0% |

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”) and Adjusted EBITDA are not measures derived in accordance with GAAP. We provide non-GAAP measures to help readers evaluate our operating results, compare our operating performance with that of similar companies that have different capital structures and help evaluate our ability to meet future debt service, capital expenditure and working capital requirements. Our 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 22-23.

For the three months ended March 31, 2016, the increase in consolidated service revenues and sales was driven by a 5.4% increase at Roto-Rooter and a 2.9% 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 was primarily a result of Medicare reimbursement rates increasing 0.6%, a 6.8% increase in days of care, offset by acuity mix shift which negatively impacted revenue 1.8% and changes in Medicare hospice reimbursement which negatively impacted revenue 2.1%. Consolidated net income increased 1.2% due to higher revenues at both VITAS and Roto-Rooter. Diluted EPS increased 3.6% as a result of the increase in net income as well as a lower number of shares outstanding. Adjusted EBITDA as a percent of revenue was essentially flat when compared to the prior year quarter. See page 24 for additional VITAS operating metrics.

On January 1, 2016, CMS implemented a refinement to the Medicare hospice reimbursement per diem. This rebasing eliminated the single tier per diem for routine home care (RHC) and replaced it with a two-tiered rate, with a higher rate for the first 60 days of a hospice patient’s care, and a lower rate for days 61 and after. In addition, CMS added for a Service Intensity Add-on (SIA) payment which provides for reimbursement of care provided by a registered nurse or social worker for RHC patients within seven days prior to death. The reimbursement for continuous care, inpatient care and respite care are not impacted by this rebasing.

The two tiered national per diem rate for RHC is $186.84 for the first 60 days and $146.83 for RHC beyond 60 days. An individual hospice’s actual per diem rate is adjusted for differences in geographic cost of living. We estimate rebasing in 2016 would be revenue neutral to a hospice if it has 37.6% of total RHC days-of-care provided to patients in their first 60 days of admission and 62.4% of total RHC days-of-care provided to patients after the 60 days.

Historically, VITAS had a 32/68 aggregate Days-of-Care ratio. High acuity care historically has represented 6% to 7% of VITAS’ total days-of-care. VITAS high acuity days-of-care provided to patients within the first 60 days of admission represented approximately 15% of days-of-care provided to patients in the first 60 days of admission. This results in a VITAS RHC Days-of-Care ratio of approximately 29/71.

-14-

In the first quarter of 2016, VITAS had a 25/75 RHC Days-of-Care ratio and generated approximately $1.0 million in SIA payments. This resulted in 2.1% less revenue than under the previous Medicare reimbursement methodology.

VITAS expects its full-year 2016 revenue growth, prior to Medicare cap, to be in the range of 2.5% to 3.5%. Admissions in 2016 are estimated to increase 3.0%. Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 14.0% to 15.0%. Medicare cap billing limitations are estimated to be $3.8 million in 2016. Roto-Rooter expects full-year 2016 revenue growth of 3.5% to 4.5%. The revenue estimate is a based upon increased job pricing of approximately 1.0% and continued growth in water restoration services. Adjusted EBITDA margin for 2016 is estimated in the range of 20.0% to 21.0%. We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.

### Financial Condition

### Liquidity and Capital Resources

Material changes in the balance sheet accounts from December 31, 2015 to March 31, 2016 include the following:

- A $36.8 million increase in accounts receivable due to timing of Medicare and Medicaid payments.
- A $7.4 million decrease in prepaid income taxes due to timing of payments.
- A $7.0 million increase in accounts payable due to timing of payments.
- A $11.1 million decrease in income taxes due to timing of payments.
- An $9.0 million decrease in accrued compensation due primarily to the payment of 2015 incentive compensation during the quarter.
- A $53.6 million increase in long-term debt due primarily to borrowings on our revolving line of credit used mainly to purchase treasury shares during the quarter.

Net cash provided by operating activities decreased $5.2 million primarily as a result of an increase in accounts receivable offset by an increase in income taxes due to the timing of payments. Management continually evaluates cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of available capital resources.

We have issued $37.8 million in standby letters of credit as of March 31, 2016, for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of March 31, 2016, we have approximately $256.7 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.

Significant changes in our accounts receivable balances are typically driven mainly by the timing of payments received from the Federal government at our VITAS subsidiary. We typically receive a payment in excess of $35.0 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.

### Commitments and Contingencies

Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly. We are in compliance with all financial and other debt covenants as of March 31, 2016 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. 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 estimable.

On May 2, 2013, the government filed a False Claims Act complaint against the Company and certain of its hospice-related subsidiaries in the U.S. District Court for the Western District of Missouri, *United States v. VITAS Hospice Services, LLC, et al.*, No. 4:13-cv-00449-BCW (the “2013 Action”). Prior to that date, the Company received various qui tam lawsuits and subpoenas from the U.S. Department of Justice and OIG that have been previously disclosed. The 2013 Action alleges that, since at least 2002, VITAS, and since 2004, the Company, submitted or caused the submission of false claims to the Medicare program by (a) billing Medicare for continuous home care services when the patients were not eligible, the services were not provided, or the medical care was inappropriate, and (b) billing Medicare for patients who were not eligible for the Medicare hospice benefit because they did not have a life expectancy of six months or less if their illnesses ran their normal course. This complaint seeks treble damages, statutory penalties, and the costs of the action, plus interest. The defendants filed a motion to dismiss on September 24, 2013. On September 30, 2014, the Court denied the motion, except to the extent that claims were filed before July 24, 2002. On November 13, 2014, the government filed a Second Amended Complaint. The Second Amended Complaint changed and supplemented some of the allegations, but did not otherwise expand the causes of action or the nature of the relief sought against VITAS. VITAS filed its Answer to the Second Amended Complaint on August 11, 2015. The Company is not able to reasonably estimate the probability of loss or range of loss at this time.

-15-

For additional procedural history of this litigation, please refer to our prior quarterly and annual filings. The net costs incurred related to U.S. v. Vitas and related regulatory matters were $2.3 million and $1.3 million for March 31, 2016 and 2015, respectively.

In November 2013, two shareholder derivative lawsuits were filed against the Company’s current and former directors, as well as certain of its officers, both of which are covered by the Company’s commercial insurance. On November 6, 2013, KBC Asset Management NV filed suit in the United States District Court for the District of Delaware, *KBC Asset Management NV, derivatively on behalf of Chemed Corp. v. McNamara, et al.*, No. 13 Civ. 1854 (LPS) (D. Del.). It sued Kevin McNamara, Joel Gemunder, Patrick Grace, Thomas Hutton, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, Arthur Tucker, Jr., George Walsh III, Frank Wood, Timothy O’Toole, David Williams and Ernest Mrozek, together with the Company as nominal defendant. Plaintiff alleges that since at least 2004, Chemed, through VITAS, has submitted or caused the submission of false claims to Medicare. The suit alleges a claim for breach of fiduciary duty against the individual defendants, and seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.

On November 14, 2013, Mildred A. North filed suit in the United States District Court for the Southern District of Ohio, *North, derivatively on behalf of Chemed Corp. v. Kevin McNamara, et al.*, No. 13 Civ. 833 (MDB) (S.D. Ohio). She sued Kevin McNamara, David Williams, Timothy O’Toole, Joel Gemunder, Patrick Grace, Walter Krebs, Andrea Lindell, Thomas Rice, Donald Saunders, George Walsh III, Frank Wood and Thomas Hutton, together with the Company as nominal defendant. Plaintiff alleges that, between February 2010 and the present, the individual defendants breached their fiduciary duties as officers and directors of Chemed by, among other things, (a) allegedly causing VITAS to submit improper and ineligible claims to Medicare and Medicaid; and (b) allegedly misrepresenting the state of Chemed’s internal controls. The suit alleges claims for breach of fiduciary duty, abuse of control and gross mismanagement against the individual defendants. The complaint also alleges unjust enrichment and insider trading against Messrs. McNamara, Williams and O’Toole. Plaintiff seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.

On January 29, 2014 defendants in *North* filed a motion to transfer that case to Delaware under 28 U.S.C § 1404(a). On February 12, 2014, defendants in *KBC* filed a motion to dismiss that case pursuant to Federal Rules of Civil Procedure 23.1 and 12(b)(6). On September 19, 2014, the Ohio court granted defendants’ motion to transfer *North* to Delaware. Following that decision and in light of that transfer, on September 29, 2014, the Delaware court denied without prejudice defendants’ motion to dismiss *KBC,* and referred both cases to Magistrate Judge Burke.

On October 15, 2014, Plaintiff KBC filed a motion to consolidate *KBC* with *North.* On February 2, 2015 the court granted the motion for consolidation in full, appointing Plaintiff KBC the sole lead plaintiff and its counsel, the sole lead and liaison counsel. The court ordered that both cases will proceed under the caption *In re Chemed Corp. Shareholder and Derivative Litigation*, No. 13 Civ. 1854 (LPS) (CJB) (D. Del.). Plaintiff KBC has designated its pending complaint as the operative complaint in the consolidated proceedings. Defendants subsequently renewed their motion to dismiss those claims and allegations. On December 23, 2015, Magistrate Judge Burke issued a Report & Recommendation recommending that (1) defendants’ motion to dismiss be granted; (2) plaintiff be given 14 days from the date of affirmance by the district court to file an amended complaint addressing deficiencies with regard to their duty of loyalty claim; and (3) failure to do so should give rise to dismissal with prejudice. The Report and Recommendation remains subject to review and affirmance by the district court judge overseeing the matter. On January 11, 2016, Lead Plaintiff KBC filed Objections to the Report and Recommendations. Defendants’ responses to those Objections were filed on January 28, 2016.

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, responding to the subpoenas and 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.

-16-

### Results of Operations

### Three months ended March 31, 2016 versus 2015 - Consolidated Results

Our service revenues and sales for the first quarter of 2016 increased 3.6% versus services and sales revenues for the first quarter of 2015. Of this increase, $7.9 million was attributable to VITAS and $5.8 million was attributable to Roto-Rooter. The following chart shows the components of those changes (in thousands):

| VITAS | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| Routine homecare | $10,309 | 5.0 |
| Continuous care | (1,030) | (2.7) |
| General inpatient | (1,199) | (4.5) |
| Medicare cap | (165) | (100.0) |
| Roto-Rooter |  |  |
| Plumbing | 1,988 | 4.3 |
| Drain cleaning | 1,357 | 3.8 |
| Water restoration | 2,007 | 19.2 |
| Contractor operations | 394 | 4.2 |
| Other | 76 | 1.5 |
| Total | $13,737 | 3.6 |

The increase in VITAS’ revenues for the first quarter of 2016 versus the first quarter of 2015 was a primarily a result of Medicare reimbursement rates increasing approximately 0.6%, a 6.8% increase in days of care offset by acuity mix shift which negatively impacted revenue 1.8% and changes in Medicare hospice reimbursement which negatively impacted revenue 2.1%.

Days of care during the quarter ended March 31 were as follows:

|  | Days of Care 2016 | 2015 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **1,335,167** | 1,241,733 | 7.5 |
| Continuous care | **50,970** | 52,840 | (3.5) |
| General inpatient | **38,249** | 39,573 | (3.3) |
| Total days of care | **1,424,386** | 1,334,146 | 6.8 |

Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the first quarter of 2016 versus 2015 is attributable to a 0.4% increase in job count and a 3.9% increase in a combination of price and service mix shift. Drain cleaning revenues for the first quarter of 2016 versus 2015 reflect a 0.3% increase in the number of jobs performed combined with a price and service mix shift of 3.5%. Water restoration for the first quarter of 2016 versus 2015 increased 19.2% as a result of continued expansion of this service offering into other Roto-Rooter locations. Contractor operations increased 4.2% and Other Roto-Rooter revenue increased 1.5%.

The consolidated gross margin was 28.7% in the first quarter of 2016 as compared with 28.6% in the first quarter of 2015. On a segment basis, VITAS’ gross margin was 21.0% in the first quarter of 2016 as compared with 21.2%, in the first quarter of 2015. The Roto-Rooter segment’s gross margin was 47.6% for the first quarter of 2016 compared with 47.3% in the first quarter of 2015.

-17-

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

| SG&A expenses before market value adjustments of deferred compensation | Three months ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| plans, long-term incentive compensation, and OIG investigation expenses | **$59,937** | $55,879 |
| Long-term incentive compensation | **(241)** | 934 |
| Expenses related to OIG investigation | **2,336** | 1,274 |
| Impact of market value adjustments related to assets held in deferred |  |  |
| compensation trusts | **(2,987)** | 950 |
| Total SG&A expenses | **$59,045** | $59,037 |

SG&A expenses before long-term incentive compensation, expenses related to OIG investigation and the impact of market gains/(losses) of deferred compensation plans for the first quarter of 2016 were up 7.3% when compared to the first quarter of 2015. The increase was mainly a result of the increase in variable expenses caused by increased revenue as well as normal salary increases, higher incentive compensation costs and higher bad debt expense in 2016.

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

| Market value adjustment on assets held in | Three months ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| deferred compensation trusts | **$(2,987)** | $950 |
| Gain/(loss) on disposal of property and equipment | **(33)** | 48 |
| Interest income - net | **97** | 44 |
| Other | **(1)** | (479) |
| Total other income/(expense) - net | **$(2,924)** | $563 |

Our effective income tax rate was 38.9% in the first quarter of 2016 essentially equal to the first quarter of 2015.

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 March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Expenses related to OIG investigation | **$(1,443)** | $(790) |
| Roto-Rooter |  |  |
| Expenses related to litigation settlements | **-** | (3) |
| Corporate |  |  |
| Stock option expense | **(1,621)** | (910) |
| Long-term incentive compensation | **152** | (591) |
| Expenses related to securities litigation | **(2)** | - |
| Total | **$(2,914)** | $(2,294) |

-18-

### Three months ended March 31, 2016 versus 2015 - Segment Results

The change in after-tax earnings for the first quarter of 2016 versus the first quarter of 2015 is due to (in thousands):

|  | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| VITAS | $(228) | (1.2) |
| Roto-Rooter | 1,012 | 8.4 |
| Corporate | (481) | (7.1) |
|  | $303 | 1.2 |

VITAS’ after-tax earnings were negatively impacted in 2016 compared to 2015 by a $2.7 million increase in SG&A expenses driven mainly by $653,000 in additional OIG expenses and approximately $585,000 after-tax increase in bad debt expense. After-tax earnings as a percent of revenue in the first quarter of 2016 were 6.9%, a decrease of 0.3% over the first quarter of 2015.

Roto-Rooter’s after-tax earnings were positively impacted in 2016 compared to 2015 primarily by a $2.0 million revenue increase in Roto-Rooter’s water restoration line of business, a $2.0 million increase in plumbing revenue and a $1.4 million increase in sewer and drain cleaning revenue. After-tax earnings as a percent of revenue at Roto-Rooter in 2016 were 11.5% as compared to 11.2% in 2015.

-19-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE THREE MONTHS ENDED MARCH 31, 2016*

*(in thousands)(unaudited)*

| 2016 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $277,528 | $112,861 | $- | $390,389 |
| Cost of services provided and goods sold | 219,266 | 59,169 | - | 278,435 |
| Selling, general and administrative expenses | 24,783 | 29,807 | 4,455 | 59,045 |
| Depreciation | 4,781 | 3,501 | 142 | 8,424 |
| Amortization | 14 | 78 | - | 92 |
| Total costs and expenses | 248,844 | 92,555 | 4,597 | 345,996 |
| Income/(loss) from operations | 28,684 | 20,306 | (4,597) | 44,393 |
| Interest expense | (59) | (93) | (690) | (842) |
| Intercompany interest income/(expense) | 2,103 | 948 | (3,051) | - |
| Other income/(expense)—net | 41 | 23 | (2,988) | (2,924) |
| Income/(expense) before income taxes | 30,769 | 21,184 | (11,326) | 40,627 |
| Income taxes | (11,682) | (8,164) | 4,059 | (15,787) |
| Net income/(loss) | $19,087 | $13,020 | $(7,267) | $24,840 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(2,563) | $(2,563) |
| Long-term incentive compensation | - | - | 241 | 241 |
| Expenses related to securities litigation | - | - | (3) | (3) |
| Expenses related to OIG investigation | (2,336) | - | - | (2,336) |
| Total | $(2,336) | $- | $(2,325) | $(4,661) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(1,621) | $(1,621) |
| Long-term incentive compensation | - | - | 152 | 152 |
| Expenses related to securities litigation | - | - | (2) | (2) |
| Expenses related to OIG investigation | (1,443) | - | - | (1,443) |
| Total | $(1,443) | $- | $(1,471) | $(2,914) |

-20-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE THREE MONTHS ENDED MARCH 31, 2015*

*(in thousands)(unaudited)*

| 2015 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $269,613 | $107,039 | $- | $376,652 |
| Cost of services provided and goods sold | 212,495 | 56,390 | - | 268,885 |
| Selling, general and administrative expenses | 22,078 | 28,802 | 8,157 | 59,037 |
| Depreciation | 4,785 | 3,094 | 153 | 8,032 |
| Amortization | 60 | 67 | - | 127 |
| Total costs and expenses | 239,418 | 88,353 | 8,310 | 336,081 |
| Income/(loss) from operations | 30,195 | 18,686 | (8,310) | 40,571 |
| Interest expense | (57) | (96) | (816) | (969) |
| Intercompany interest income/(expense) | 1,726 | 838 | (2,564) | - |
| Other income/(expense)—net | (433) | 46 | 950 | 563 |
| Income/(expense) before income taxes | 31,431 | 19,474 | (10,740) | 40,165 |
| Income taxes | (12,116) | (7,466) | 3,954 | (15,628) |
| Net income/(loss) | $19,315 | $12,008 | $(6,786) | $24,537 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(1,444) | $(1,444) |
| Long-term incentive compensation | - | - | (934) | (934) |
| Expenses related to litigation settlements | - | (5) | - | (5) |
| Expenses related to OIG investigation | (1,274) | - | - | (1,274) |
| Total | $(1,274) | $(5) | $(2,378) | $(3,657) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(910) | $(910) |
| Long-term incentive compensation | - | - | (591) | (591) |
| Expenses related to litigation settlements | - | (3) | - | (3) |
| Expenses related to OIG investigation | (790) | - | - | (790) |
| Total | $(790) | $(3) | $(1,501) | $(2,294) |

-21-

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the three months ended March 31, 2016 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $19,087 | $13,020 | $(7,267) | $24,840 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 59 | 93 | 690 | 842 |
| Income taxes | 11,682 | 8,164 | (4,059) | 15,787 |
| Depreciation | 4,781 | 3,501 | 142 | 8,424 |
| Amortization | 14 | 78 | - | 92 |
| **EBITDA** | 35,623 | 24,856 | (10,494) | 49,985 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (2,103) | (948) | 3,051 | - |
| Interest income | (79) | (17) | (1) | (97) |
| Expenses related to OIG investigation | 2,336 | - | - | 2,336 |
| Amortization of stock awards | 131 | 81 | 327 | 539 |
| Expenses related to securities litigation | - | - | 3 | 3 |
| Advertising cost adjustment | - | (608) | - | (608) |
| Stock option expense | - | - | 2,563 | 2,563 |
| Long-term incentive compensation | - | - | (241) | (241) |
| **Adjusted EBITDA** | $35,908 | $23,364 | $(4,792) | $54,480 |
|  |  |  |  | **Chemed** |
| **For the three months ended March 31, 2015** | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Net income/(loss)** | $19,315 | $12,008 | $(6,786) | $24,537 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 57 | 96 | 816 | 969 |
| Income taxes | 12,116 | 7,466 | (3,954) | 15,628 |
| Depreciation | 4,785 | 3,094 | 153 | 8,032 |
| Amortization | 60 | 67 | - | 127 |
| **EBITDA** | 36,333 | 22,731 | (9,771) | 49,293 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (1,726) | (838) | 2,564 | - |
| Interest income | (34) | (10) | - | (44) |
| Expenses related to OIG investigation | 1,274 | - | - | 1,274 |
| Amortization of stock awards | 107 | 41 | 301 | 449 |
| Advertising cost adjustment | - | (506) | - | (506) |
| Expenses related to litigation settlements | - | 5 | - | 5 |
| Long-term incentive compensation | - | - | 934 | 934 |
| Stock option expense | - | - | 1,444 | 1,444 |
| **Adjusted EBITDA** | $35,954 | $21,423 | $(4,528) | $52,849 |

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*RECONCILIATION OF ADJUSTED NET INCOME*

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

|  | Three Months Ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Net income as reported | **$24,840** | $24,537 |
| Add/(deduct) after-tax cost of: |  |  |
| Stock option expense | **1,621** | 910 |
| Expenses of OIG investigation | **1,443** | 790 |
| Long-term incentive compensation | **(152)** | 591 |
| Expenses related to securities settlements | **2** | - |
| Expenses related to litigation settlements | **-** | 3 |
| Adjusted net income | **$27,754** | $26,831 |
| Diluted Earnings Per Share As Reported |  |  |
| Net income | **$1.45** | $1.40 |
| Average number of shares outstanding | **17,170** | 17,466 |
| Adjusted Diluted Earnings Per Share |  |  |
| Adjusted net income | **$1.62** | $1.54 |
| Adjusted average number of shares outstanding | **17,170** | 17,466 |

-23-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*OPERATING STATISTICS FOR VITAS SEGMENT*

*(unaudited)*

| OPERATING STATISTICS Net revenue ($000) | Three Months Ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Homecare | **$214,850** | $204,541 |
| Inpatient | **25,517** | 26,716 |
| Continuous care | **37,161** | 38,191 |
| Total before Medicare cap allowance | **$277,528** | $269,448 |
| Medicare cap allowance | **-** | 165 |
| Total | **$277,528** | $269,613 |
| Net revenue as a percent of total before Medicare cap allowances |  |  |
| Homecare | **77.4%** | 75.9% |
| Inpatient | **9.2** | 9.9 |
| Continuous care | **13.4** | 14.2 |
| Total before Medicare cap allowance | **100.0** | 100.0 |
| Medicare cap allowance | **-** | 0.1 |
| Total | **100.0%** | 100.1% |
| Average daily census (days) |  |  |
| Homecare | **11,681** | 10,877 |
| Nursing home | **2,991** | 2,920 |
| Routine homecare | **14,672** | 13,797 |
| Inpatient | **421** | 440 |
| Continuous care | **560** | 587 |
| Total | **15,653** | 14,824 |
| Total Admissions | **16,868** | 17,268 |
| Total Discharges | **16,743** | 16,990 |
| Average length of stay (days) | **83.7** | 79.0 |
| Median length of stay (days) | **15.0** | 13.0 |
| ADC by major diagnosis |  |  |
| Cerebro | **22.1%** | 23.7% |
| Neurological | **31.2** | 28.0 |
| Cancer | **15.3** | 16.9 |
| Cardio | **17.3** | 17.8 |
| Respiratory | **7.9** | 7.8 |
| Other | **6.2** | 5.8 |
| Total | **100.0%** | 100.0% |
| Admissions by major diagnosis |  |  |
| Cerebro | **11.3** | 12.9% |
| Neurological | **20.9** | 18.6 |
| Cancer | **30.5** | 30.6 |
| Cardio | **15.5** | 15.8 |
| Respiratory | **10.9** | 10.8 |
| Other | **10.9** | 11.3 |
| Total | **100.0%** | 100.0% |
| Direct patient care margins |  |  |
| Routine homecare | **52.1%** | 52.7% |
| Inpatient | **5.7** | 8.4 |
| Continuous care | **15.1** | 15.9 |
| Homecare margin drivers (dollars per patient day) |  |  |
| Labor costs | **$56.72** | $57.21 |
| Drug costs | **5.93** | 6.50 |
| Home medical equipment | **6.68** | 6.41 |
| Medical supplies | **2.85** | 2.92 |
| Inpatient margin drivers (dollars per patient day) |  |  |
| Labor costs | **$338.73** | $339.37 |
| Continuous care margin drivers (dollars per patient day) |  |  |
| Labor costs | **$599.38** | $587.63 |
| Bad debt expense as a percent of revenues | **1.3%** | 1.0% |
| Accounts receivable -- Days of revenue outstanding- excluding unapplied Medicare payments | **38.3** | 41.3 |
| Accounts receivable -- Days of revenue outstanding- including unapplied Medicare payments | **36.8** | 39.1 |

-24-

### 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, 601 characters.

The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At March 31, 2016, the Company had $144.9 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, 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, 141 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.

-25-

Filed May 2, 2016.
Source: SEC EDGAR, the filing index for accession 0001157523-16-005358. Last ingested by Listed: Nov 3, 2026, 17:32 ET. No prices; not investment advice.