# Chemed Corp: Form 10-Q for the period ended Sep 30, 2016

- Company: [Chemed Corp](/companies/che.md) (CIK 19584)
- Form: 10-Q
- Filed: 2016-11-01
- Accepted by EDGAR: Nov 1, 2016, 08:01 ET
- Period: 2016-09-30
- Accession: 0001157523-16-007144
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/19584/000115752316007144/a51447844.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/19584/000115752316007144/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $392.6m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2016-01-01 to 2016-09-30 | $1.17bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-07-01 to 2016-09-30 | $281.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2016-01-01 to 2016-09-30 | $836.3m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2016-07-01 to 2016-09-30 | $59.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2016-01-01 to 2016-09-30 | $181.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | $42.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-01 to 2016-09-30 | $125.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $1.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $2.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | $16.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-01 to 2016-09-30 | $48.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | $26.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2016-01-01 to 2016-09-30 | $76.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | $1.62 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | $4.54 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | $1.66 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | $4.66 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 16,559,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 16,851,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2016-01-01 to 2016-09-30 | $128.4m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $29.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2016-01-01 to 2016-09-30 | $12.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2016-01-01 to 2016-09-30 | $102.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-09-30 | $21.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-09-30 | $133.0m | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $842.5m | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $167.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-09-30 | $355.3m | us-gaap:Liabilities |
| Long-term debt | at 2016-09-30 | $102.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-09-30 | $8.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-09-30 | $487.2m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2016-09-30 | 16,223,927 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 50,053 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 September 30, 2016 | 2015 | Nine months ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | **$392,607** | $386,226 | **$1,173,405** | $1,144,799 |
| Net income | **$26,829** | $28,833 | **$76,554** | $80,345 |
| Diluted EPS | **$1.62** | $1.65 | **$4.54** | $4.61 |
| Adjusted net income | **$28,643** | $30,934 | **$86,625** | $87,481 |
| Adjusted diluted EPS | **$1.73** | $1.78 | **$5.14** | $5.02 |
| Adjusted EBITDA | **$57,387** | $59,410 | **$170,391** | $169,948 |
| Adjusted EBITDA as a % of revenue | **14.6%** | 15.4% | **14.5%** | 14.8% |

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 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 27-29.

For the three months ended September 30, 2016, the increase in consolidated service revenues and sales was driven by an 8.4% increase at Roto-Rooter and a 0.8% decrease at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines. The decrease in service revenues at VITAS was primarily a result of Medicare reimbursement rates increasing 0.6%, a 3.0% increase in days of care, offset by acuity mix shift which negatively impacted revenue 1.7% and changes in Medicare hospice reimbursement which negatively impacted revenue 2.1%. Consolidated net income decreased 7.0% mainly due to decreased revenue and gross profit margin at VITAS. Diluted EPS decreased 1.5% as a result of the decrease in net income offset by a lower number of shares outstanding. Adjusted EBITDA as a percent of revenue decreased 0.8% when compared to the prior year quarter mainly as a result of the decrease in net income. See page 30 for additional VITAS operating metrics.

For the nine months ended September 30, 2016, the increase in consolidated service revenues and sales was driven by a 6.6% increase at Roto-Rooter and a 1.0% 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 4.7% 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 decreased 4.7% mainly due to other operating expenses related to the early retirement of VITAS’ Chief Executive Officer. Diluted EPS decreased 1.8% as a result of the decrease in net income offset by a lower number of shares outstanding. Adjusted EBITDA as a percent of revenue decreased 0.3% when compared to the prior year. See page 30 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 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.

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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.

For the three and nine months ended September 30, 2016, VITAS had a 25/75 RHC Days-of-Care ratio and generated approximately $1.3 million and $3.3 million in SIA payments, respectively. This resulted in 2.0% 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 1.0% to 2.0%. Average Daily Census in 2016 is estimated to expand approximately 4.5% to 5.0%. Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 14.0% to 14.5%. This guidance includes $1.25 million for Medicare cap billing limitations. Roto-Rooter expects full-year 2016 revenue growth of 5.0% to 5.5%. 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 21.0% to 21.3%. 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 September 30, 2016 include the following:

- A $20.3 million decrease in accounts receivable due mainly to timing of Medicare and Medicaid payments.
- A $5.6 million decrease in prepaid income taxes due to timing of payments.
- A $5.7 million increase in investments of deferred compensation plans related to participant contributions and market valuation gains.
- A $2.3 million increase in accrued insurance due to timing of insurance payments.
- A $4.4 million decrease in accrued compensation due to timing of payments of incentive compensation.
- A $5.5 million decrease in deferred income taxes due to changes in various temporary differences including accrued expenses.
- A $5.0 million increase in deferred compensation liabilities related to market valuation gains, participant contributions reduced by payouts to participants.
- A $19.4 million increase in long-term debt due to borrowings on our revolving line of credit.

Net cash provided by operating activities increased $15.3 million mainly as a result of a decrease in accounts receivable 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 $37.4 million in standby letters of credit as of September 30, 2016, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of September 30, 2016, we have approximately $287.6 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 September 30, 2016 and anticipate remaining in compliance throughout the foreseeable future.

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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.

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 $599,000 and $1.2 million for the quarters ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, the net costs were $4.1 million and $3.8 million 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.). 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 (MRB) (S.D. Ohio). Those proceedings were subsequently consolidated in the District of Delaware under the caption *In re Chemed Corp. Shareholder and Derivative Litigation*, No. 13 Civ. 1854 (LPS) (CJB) (D. Del.), by Order of the United States District Court for the District of Delaware dated February 2, 2015. Also on February 2, 2015, the Court appointed Plaintiff KBC the sole lead plaintiff and its counsel, the sole lead and liaison counsel.

On March 3, 2015, Lead Plaintiff KBC designated its Complaint as the operative complaint in the consolidated proceedings. The consolidated Complaint named 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 as individual defendants, together with the Company as nominal defendant. The Complaint 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. Also on March 3, 2015, defendants renewed their previously-filed motion to dismiss those claims and allegations, which motion the court referred to Magistrate Judge Burke.

On December 23, 2015, Magistrate Judge Burke issued a Report and 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. On January 11, 2016, Lead Plaintiff KBC filed Objections to the Report and Recommendation. Defendants’ responses to those Objections were filed on January 28, 2016. On May 12, 2016, the court issued a Memorandum Order (1) overruling Lead Plaintiff KBC’s Objections to the Report and Recommendation; (2) adopting the Report and Recommendation; (3) granting Chemed’s motion to dismiss; and (4) dismissing Lead Plaintiff KBC’s Complaint, without prejudice to KBC’s opportunity to file within 30 days of the date of the court’s Order an amended Complaint addressing the deficiencies in its duty of loyalty claim. Lead Plaintiff KBC did not file an amended Complaint within the time specified by the court—i.e., on or before June 13, 2016.

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However, on that date (June 13, 2016), counsel for Chemed shareholder Michael Kvint filed a letter with the court requesting a two-week extension (1) to file a motion to substitute Mr. Kvint as Lead Plaintiff, in place of Lead Plaintiff KBC; and (2) in that capacity, to file an amended Complaint. Alternatively, counsel for Mr. Kvint requested that any dismissal of the action be with prejudice to KBC only. On June 14, 2016, Chemed filed a reply letter with the court, reserving its rights to oppose any motion filed by Mr. Kvint and, if warranted, to oppose any other actions taken by Mr. Kvint to proceed with the action (including by filing an untimely amended Complaint). On June 21, 2016, the court entered an Oral Order providing Mr. Kvint until June 30, 2016 to file a Motion to Substitute and Motion for Leave to File an Amended Complaint. On that date, Mr. Kvint filed, under seal, a Motion to Substitute Plaintiff and File Amended Complaint, and attached a Proposed Amended Complaint. Chemed filed an Answering Brief in Opposition to Mr. Kvint’s motion on July 18, 2016. Mr. Kvint filed a Reply Brief in Support of his motion on July 27, 2016. On August 2, 2016, Chemed filed a Request for Oral Argument. The parties await a response from the Court.

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.

### Results of Operations

### Three months ended September 30, 2016 versus 2015 - Consolidated Results

Our service revenues and sales for the third quarter of 2016 increased 1.7% versus services and sales revenues for the third quarter of 2015. Of this increase, a $2.1 million decrease was attributable to VITAS and $8.5 million increase was attributable to Roto-Rooter. The following chart shows the components of those changes (in thousands):

| VITAS | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| Routine homecare | $2,396 | 1.1 |
| Continuous care | (3,890) | (10.3) |
| General inpatient | (421) | (1.7) |
| Medicare cap | (228) | - |
| Roto-Rooter |  |  |
| Plumbing | 2,916 | 6.5 |
| Drain cleaning | 1,389 | 4.1 |
| Water restoration | 3,773 | 46.3 |
| Contractor operations | 704 | 7.7 |
| Other | (258) | (5.0) |
| Total | $6,381 | 1.7 |

The decrease in VITAS’ revenues for the third quarter of 2016 versus the third quarter of 2015 was a primarily a result of Medicare reimbursement rates increasing approximately 0.6%, a 3.0% increase in days of care offset by acuity mix shift which negatively impacted revenue 1.7% and changes in Medicare hospice reimbursement which negatively impacted revenue 2.1%.

Days of care during the quarter ended September 30 were as follows:

|  | Days of Care 2016 | 2015 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **1,407,623** | 1,357,688 | 3.7 |
| Continuous care | **46,582** | 51,652 | (9.8) |
| General inpatient | **36,241** | 37,121 | (2.4) |
| Total days of care | **1,490,446** | 1,446,461 | 3.0 |

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

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The increase in plumbing revenues for the third quarter of 2016 versus 2015 is attributable to a 0.1% increase in job count and a 6.4% increase in a combination of price and service mix shift. Drain cleaning revenues for the third quarter of 2016 versus 2015 reflect a 1.0% decrease in the number of jobs performed combined with an increase in price and service mix shift of 5.1%. Water restoration for the third quarter of 2016 versus 2015 increased 46.3% as a result of continued expansion of this service offering into all Roto-Rooter locations. Contractor operations increased 7.7% and Other Roto-Rooter revenue decreased 5.0%.

The consolidated gross margin was 28.3% in the third quarter of 2016 as compared with 29.6% in the third quarter of 2015. On a segment basis, VITAS’ gross margin was 20.7% in the third quarter of 2016 as compared with 23.3%, in the third quarter of 2015. The decline in VITAS gross margin is mainly the result of lower revenues in the high acuity service-lines. There are generally higher fixed costs associated with high-acuity care. The Roto-Rooter segment’s gross margin was 47.8% for the third quarter of 2016 compared with 47.1% in the third quarter of 2015.

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

| SG&A expenses before market value adjustments of deferred compensation | Three months ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| plans, long-term incentive compensation, and OIG investigation expenses | **$56,475** | $55,601 |
| Long-term incentive compensation | **643** | 1,364 |
| Expenses related to OIG investigation | **599** | 1,151 |
| Impact of market value adjustments related to assets held in deferred |  |  |
| compensation trusts | **1,656** | (2,328) |
| Total SG&A expenses | **$59,373** | $55,788 |

SG&A expenses before long-term incentive compensation, expenses related to OIG investigation and the impact of market value adjustments related to assets held in deferred compensation trusts for the third quarter of 2016 were up 1.6% when compared to the third quarter of 2015.

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

| Market value adjustment on assets held in | Three months ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| deferred compensation trusts | **$1,656** | $(2,328) |
| Loss on disposal of property and equipment | **(134)** | (116) |
| Interest income - net | **119** | 77 |
| Other | **(1)** | 12 |
| Total other income/(expense) - net | **$1,640** | $(2,355) |

Our effective income tax rate was 38.3% in the third quarter of 2016 compared to 38.5% during the third quarter of 2015.

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

| VITAS | Three months ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Expenses related to OIG investigation | **$(370)** | $(711) |
| Medicare cap sequestration adjustment | **(141)** | - |
| Roto-Rooter |  |  |
| Acquisition expenses | **-** | (18) |
| Corporate |  |  |
| Stock option expense | **(897)** | (509) |
| Long-term incentive compensation | **(406)** | (863) |
| Total | **$(1,814)** | $(2,101) |

### Three months ended September 30, 2016 versus 2015 - Segment Results

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

|  | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| VITAS | $(4,820) | (18.7) |
| Roto-Rooter | 1,894 | 17.3 |
| Corporate | 922 | 11.7 |
|  | $(2,004) | (7.0) |

VITAS’ after-tax earnings were negatively impacted in 2016 compared to 2015 by a $2.1 million decrease in revenue, and a $5.9 million increase in cost of services provided and goods sold. After-tax earnings as a percent of revenue in the third quarter of 2016 were 7.4%, a decrease of 1.6% over the third quarter of 2015.

Roto-Rooter’s after-tax earnings were positively impacted in 2016 compared to 2015 primarily by a $3.7 million revenue increase in Roto-Rooter’s water restoration line of business, a $2.9 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 11.7% as compared to 10.8% in 2015.

### Results of Operations

### Nine months ended September 30, 2016 versus 2015 - Consolidated Results

Our service revenues and sales for the first nine months of 2016 increased 2.5% versus services and sales revenues for the first nine months of 2015. Of this increase, $8.1 million was attributable to VITAS and $20.6 million was attributable to Roto-Rooter. The following chart shows the components of those changes (in thousands):

| VITAS | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| Routine homecare | $18,610 | 2.9 |
| Continuous care | (7,538) | (6.6) |
| General inpatient | (2,629) | (3.4) |
| Medicare cap | (393) | (238.2) |
| Roto-Rooter |  |  |
| Plumbing | 6,997 | 5.1 |
| Drain cleaning | 3,822 | 3.7 |
| Water restoration | 8,770 | 31.6 |
| Contractor operations | 1,342 | 4.8 |
| Other | (375) | (2.4) |
| Total | $28,606 | 2.5 |

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The increase in VITAS’ revenues for the first nine months of 2016 versus the first nine months of 2015 was a primarily a result of Medicare reimbursement rates increasing approximately 0.6%, a 4.7% 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 first nine months ended September 30 were as follows:

|  | Days of Care 2016 | 2015 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **4,109,775** | 3,899,900 | 5.4 |
| Continuous care | **145,327** | 155,742 | (6.7) |
| General inpatient | **111,323** | 115,700 | (3.8) |
| Total days of care | **4,366,425** | 4,171,342 | 4.7 |

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

The increase in plumbing revenues for the first nine months of 2016 versus 2015 is attributable to a 0.3% decrease in job count and a 5.4% increase in a combination of price and service mix shift. Drain cleaning revenues for the first nine months of 2016 versus 2015 reflect a 0.1% decrease in the number of jobs performed offset by an increase in price and service mix shift of 3.8%. Water restoration for the first nine months of 2016 versus 2015 increased 31.6% as a result of continued expansion of this service offering into other Roto-Rooter locations. Contractor operations increased 4.8% and Other Roto-Rooter revenue decreased 2.4%.

The consolidated gross margin was 28.7% in the first nine months of 2016 as compared with 29.1% in the first nine months of 2015. On a segment basis, VITAS’ gross margin was 21.1% in the first nine months of 2016 as compared with 22.2%, in the first nine months of 2015. The decline in VITAS gross margin is mainly the result of lower revenues in the high acuity service-lines. There are generally higher fixed costs associated with high acuity care. The Roto-Rooter segment’s gross margin was 48.0% for the first nine months of 2016 compared with 47.5% in the first nine months of 2015.

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

| SG&A expenses before market value adjustments of deferred compensation | Nine months ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| plans, long-term incentive compensation, and OIG investigation expenses | **$174,183** | $166,555 |
| Long-term incentive compensation | **901** | 3,755 |
| Expenses related to OIG investigation | **4,105** | 3,837 |
| Impact of market value adjustments related to assets held in deferred |  |  |
| compensation trusts | **1,857** | (880) |
| Total SG&A expenses | **$181,046** | $173,267 |

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 nine months of 2016 were up 4.6% when compared to the first nine months of 2015. The increase was mainly a result of the increase in variable expenses caused by increased revenue as well as normal salary increases and higher bad debt expense in our VITAS segment in 2016.

-21-

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

| Market value adjustment on assets held in | Nine months ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| deferred compensation trusts | **$1,857** | $(880) |
| Loss on disposal of property and equipment | **(224)** | (131) |
| Interest income - net | **301** | 207 |
| Other | **(1)** | (452) |
| Total other income/(expense) - net | **$1,933** | $(1,256) |

Our effective income tax rate was 38.6% in the first nine months of 2016 compared to 38.8% for the first nine months of 2015.

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

| VITAS | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Legal expenses of OIG investigation | **$(2,535)** | $(2,369) |
| Early retirement expenses | **(2,840)** | - |
| Medicare cap sequestration adjustment | **(141)** | - |
| Roto-Rooter |  |  |
| Expenses related to litigation settlements | **(27)** | (3) |
| Acquisition expenses | **-** | (98) |
| Corporate |  |  |
| Stock option expense | **(3,958)** | (2,268) |
| Long-term incentive compensation | **(570)** | (2,375) |
| Expenses of securities litigation | **-** | (23) |
| Total | **$(10,071)** | $(7,136) |

### Nine months ended September 30, 2016 versus 2015 - Segment Results

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

|  | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| VITAS | $(8,301) | (12.4) |
| Roto-Rooter | 4,094 | 11.7 |
| Corporate | 416 | 1.9 |
|  | $(3,791) | (4.7) |

VITAS’ after-tax earnings were negatively impacted in 2016 compared to 2015 by a $2.8 million increase in other operating expense related to the early retirement of the Chief Executive Officer of Vitas and a $15.6 million increase in cost of services provided and goods sold. Gross margin decreased mainly as a result of lower revenues in the high acuity service lines. After-tax earnings as a percent of revenue in the first nine months of 2016 were 7.0%, a decrease of 1.0% over the first nine months of 2015.

Roto-Rooter’s after-tax earnings were positively impacted in 2016 compared to 2015 primarily by an $8.8 million revenue increase in Roto-Rooter’s water restoration line of business, a $7.0 million increase in plumbing revenue and a $3.8 million increase in sewer and drain cleaning revenue. Gross margin improved mainly as a result of mix shift in Roto-Rooter’s lines of business. SG&A decreased as a percent of sales due mainly to leveraging fixed costs. After-tax earnings as a percent of revenue at Roto-Rooter in the first nine months of 2016 were 11.7% as compared to 11.2% in the first nine months of 2015.

-22-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016*

*(in thousands)(unaudited)*

| 2016 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $282,865 | $109,742 | $- | $392,607 |
| Cost of services provided and goods sold | 224,410 | 57,248 | - | 281,658 |
| Selling, general and administrative expenses | 21,775 | 28,635 | 8,963 | 59,373 |
| Depreciation | 4,751 | 3,731 | 132 | 8,614 |
| Amortization | 14 | 77 | - | 91 |
| Total costs and expenses | 250,950 | 89,691 | 9,095 | 349,736 |
| Income/(loss) from operations | 31,915 | 20,051 | (9,095) | 42,871 |
| Interest expense | (59) | (78) | (881) | (1,018) |
| Intercompany interest income/(expense) | 1,810 | 800 | (2,610) | - |
| Other income/(expense)—net | (1) | (14) | 1,655 | 1,640 |
| Income/(expense) before income taxes | 33,665 | 20,759 | (10,931) | 43,493 |
| Income taxes | (12,762) | (7,904) | 4,002 | (16,664) |
| Net income/(loss) | $20,903 | $12,855 | $(6,929) | $26,829 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |

| Pretax benefit/(cost): | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Stock option expense | $- | $- | $(1,419) | $(1,419) |
| Long-term incentive compensation | - | - | (643) | (643) |
| Medicare cap sequestration adjustment | (228) | - | - | (228) |
| Expenses related to OIG investigation | (599) | - | - | (599) |
| Total | $(827) | $- | $(2,062) | $(2,889) |

| After-tax benefit/(cost): | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Stock option expense | $- | $- | $(897) | $(897) |
| Long-term incentive compensation | - | - | (406) | (406) |
| Medicare cap sequestration adjustment | (141) | - | - | (141) |
| Expenses related to OIG investigation | (370) | - | - | (370) |
| Total | $(511) | $- | $(1,303) | $(1,814) |

-23-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015*

*(in thousands)(unaudited)*

| 2015 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $285,008 | $101,218 | $- | $386,226 |
| Cost of services provided and goods sold | 218,528 | 53,561 | - | 272,089 |
| Selling, general and administrative expenses | 22,367 | 27,523 | 5,898 | 55,788 |
| Depreciation | 4,631 | 3,300 | 144 | 8,075 |
| Amortization | 60 | 86 | - | 146 |
| Total costs and expenses | 245,586 | 84,470 | 6,042 | 336,098 |
| Income/(loss) from operations | 39,422 | 16,748 | (6,042) | 50,128 |
| Interest expense | (54) | (80) | (774) | (908) |
| Intercompany interest income/(expense) | 1,979 | 858 | (2,837) | - |
| Other income/(expense)—net | (11) | (15) | (2,329) | (2,355) |
| Income/(expense) before income taxes | 41,336 | 17,511 | (11,982) | 46,865 |
| Income taxes | (15,613) | (6,550) | 4,131 | (18,032) |
| Net income/(loss) | $25,723 | $10,961 | $(7,851) | $28,833 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |

| Pretax benefit/(cost): | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Stock option expense | $- | $- | $(813) | $(813) |
| Long-term incentive compensation | - | - | (1,364) | (1,364) |
| Acquisition expenses | - | (30) | - | (30) |
| Expenses related to OIG investigation | (1,151) | - | - | (1,151) |
| Total | $(1,151) | $(30) | $(2,177) | $(3,358) |

| After-tax benefit/(cost): | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Stock option expense | $- | $- | $(509) | $(509) |
| Long-term incentive compensation | - | - | (863) | (863) |
| Acquisition expenses | - | (18) | - | (18) |
| Expenses related to OIG investigation | (711) | - | - | (711) |
| Total | $(711) | $(18) | $(1,372) | $(2,101) |

-24-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016*

*(in thousands)(unaudited)*

| 2016 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $839,131 | $334,274 | $- | $1,173,405 |
| Cost of services provided and goods sold | 662,371 | 173,977 | - | 836,348 |
| Selling, general and administrative expenses | 69,197 | 87,890 | 23,959 | 181,046 |
| Depreciation | 14,346 | 10,860 | 413 | 25,619 |
| Amortization | 41 | 233 | - | 274 |
| Other operating expenses | 4,491 | - | - | 4,491 |
| Total costs and expenses | 750,446 | 272,960 | 24,372 | 1,047,778 |
| Income/(loss) from operations | 88,685 | 61,314 | (24,372) | 125,627 |
| Interest expense | (176) | (264) | (2,391) | (2,831) |
| Intercompany interest income/(expense) | 5,840 | 2,614 | (8,454) | - |
| Other income/(expense)—net | 76 | (2) | 1,859 | 1,933 |
| Income/(expense) before income taxes | 94,425 | 63,662 | (33,358) | 124,729 |
| Income taxes | (35,887) | (24,446) | 12,158 | (48,175) |
| Net income/(loss) | $58,538 | $39,216 | $(21,200) | $76,554 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |

| Pretax benefit/(cost): | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Stock option expense | $- | $- | $(6,259) | $(6,259) |
| Medicare cap sequestration adjustment | (228) | - | - | (228) |
| Long-term incentive compensation | - | - | (901) | (901) |
| Early retirement expenses | (4,491) | - | - | (4,491) |
| Expenses related to litigation settlements | - | (44) | - | (44) |
| Expenses related to OIG investigation | (4,105) | - | - | (4,105) |
| Total | $(8,824) | $(44) | $(7,160) | $(16,028) |

| After-tax benefit/(cost): | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Stock option expense | $- | $- | $(3,958) | $(3,958) |
| Medicare cap sequestration adjustment | (141) | - | - | (141) |
| Long-term incentive compensation | - | - | (570) | (570) |
| Early retirement expenses | (2,840) | - | - | (2,840) |
| Expenses related to litigation settlements | - | (27) | - | (27) |
| Expenses related to OIG investigation | (2,535) | - | - | (2,535) |
| Total | $(5,516) | $(27) | $(4,528) | $(10,071) |

-25-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015*

*(in thousands)(unaudited)*

| 2015 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $831,081 | $313,718 | $- | $1,144,799 |
| Cost of services provided and goods sold | 646,801 | 164,836 | - | 811,637 |
| Selling, general and administrative expenses | 66,792 | 84,620 | 21,855 | 173,267 |
| Depreciation | 14,141 | 9,598 | 450 | 24,189 |
| Amortization | 180 | 227 | - | 407 |
| Total costs and expenses | 727,914 | 259,281 | 22,305 | 1,009,500 |
| Income/(loss) from operations | 103,167 | 54,437 | (22,305) | 135,299 |
| Interest expense | (164) | (274) | (2,408) | (2,846) |
| Intercompany interest income/(expense) | 5,461 | 2,501 | (7,962) | - |
| Other income/(expense)—net | (395) | 19 | (880) | (1,256) |
| Income/(expense) before income taxes | 108,069 | 56,683 | (33,555) | 131,197 |
| Income taxes | (41,230) | (21,561) | 11,939 | (50,852) |
| Net income/(loss) | $66,839 | $35,122 | $(21,616) | $80,345 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |

| Pretax benefit/(cost): | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Stock option expense | $- | $- | $(3,600) | $(3,600) |
| Long-term incentive compensation | - | - | (3,755) | (3,755) |
| Expenses related to litigation settlements | - | (5) | - | (5) |
| Expenses related to securities litigation | - | - | (37) | (37) |
| Acquisition expenses | - | (161) | - | (161) |
| Expenses related to OIG investigation | (3,837) | - | - | (3,837) |
| Total | $(3,837) | $(166) | $(7,392) | $(11,395) |

| After-tax benefit/(cost): | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Stock option expense | $- | $- | $(2,268) | $(2,268) |
| Long-term incentive compensation | - | - | (2,375) | (2,375) |
| Expenses related to litigation settlements | - | (3) | - | (3) |
| Expenses related to securities litigation | - | - | (23) | (23) |
| Acquisition expenses | - | (98) | - | (98) |
| Expenses related to OIG investigation | (2,369) | - | - | (2,369) |
| Total | $(2,369) | $(101) | $(4,666) | $(7,136) |

-26-

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the three months ended September 30, 2016 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $20,903 | $12,855 | $(6,929) | $26,829 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 59 | 78 | 881 | 1,018 |
| Income taxes | 12,762 | 7,904 | (4,002) | 16,664 |
| Depreciation | 4,751 | 3,731 | 132 | 8,614 |
| Amortization | 14 | 77 | - | 91 |
| **EBITDA** | 38,489 | 24,645 | (9,918) | 53,216 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (1,810) | (800) | 2,610 | - |
| Interest income | (108) | (11) | - | (119) |
| Expenses related to litigation settlements | 1,149 | - | - | 1,149 |
| Expenses related to OIG investigation | 599 | - | - | 599 |
| Medicare cap sequestration adjustment | 228 | - | - | 228 |
| Amortization of stock awards | 85 | 76 | 279 | 440 |
| Advertising cost adjustment | - | (188) | - | (188) |
| Stock option expense | - | - | 1,419 | 1,419 |
| Long-term incentive compensation | - | - | 643 | 643 |
| **Adjusted EBITDA** | $38,632 | $23,722 | $(4,967) | $57,387 |
|  |  |  |  | **Chemed** |
| **For the three months ended September 30, 2015** | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Net income/(loss)** | $25,723 | $10,961 | $(7,851) | $28,833 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 54 | 80 | 774 | 908 |
| Income taxes | 15,613 | 6,550 | (4,131) | 18,032 |
| Depreciation | 4,631 | 3,300 | 144 | 8,075 |
| Amortization | 60 | 86 | - | 146 |
| **EBITDA** | 46,081 | 20,977 | (11,064) | 55,994 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (1,979) | (858) | 2,837 | - |
| Interest income | (68) | (9) | - | (77) |
| Amortization of stock awards | 126 | 86 | 379 | 591 |
| Expenses related to OIG investigation | 1,151 | - | - | 1,151 |
| Advertising cost adjustment | - | (456) | - | (456) |
| Acquisition Expenses | - | 30 | - | 30 |
| Long-term incentive compensation | - | - | 1,364 | 1,364 |
| Stock option expense | - | - | 813 | 813 |
| **Adjusted EBITDA** | $45,311 | $19,770 | $(5,671) | $59,410 |

-27-

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the nine months ended September 30, 2016 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $58,538 | $39,216 | $(21,200) | $76,554 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 176 | 264 | 2,391 | 2,831 |
| Income taxes | 35,887 | 24,446 | (12,158) | 48,175 |
| Depreciation | 14,346 | 10,860 | 413 | 25,619 |
| Amortization | 41 | 233 | - | 274 |
| **EBITDA** | 108,988 | 75,019 | (30,554) | 153,453 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (5,840) | (2,614) | 8,454 | - |
| Interest income | (256) | (45) | - | (301) |
| Early retirement expenses | 4,491 | - | - | 4,491 |
| Expenses related to OIG investigation | 4,105 | - | - | 4,105 |
| Stock award amortization | 302 | 230 | 883 | 1,415 |
| Medicare cap sequestration adjustment | 228 | - | - | 228 |
| Expenses related to litigation settlements | 1,149 | 44 | - | 1,193 |
| Advertising cost adjustment | - | (1,353) | - | (1,353) |
| Stock option expense | - | - | 6,259 | 6,259 |
| Long-term incentive compensation | - | - | 901 | 901 |
| **Adjusted EBITDA** | $113,167 | $71,281 | $(14,057) | $170,391 |
|  |  |  |  | **Chemed** |
| **For the nine months ended September 30, 2015** | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Net income/(loss)** | $66,839 | $35,122 | $(21,616) | $80,345 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 164 | 274 | 2,408 | 2,846 |
| Income taxes | 41,230 | 21,561 | (11,939) | 50,852 |
| Depreciation | 14,141 | 9,598 | 450 | 24,189 |
| Amortization | 180 | 227 | - | 407 |
| **EBITDA** | 122,554 | 66,782 | (30,697) | 158,639 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (5,461) | (2,501) | 7,962 | - |
| Interest income | (179) | (27) | (1) | (207) |
| Expenses related to OIG investigation | 3,837 | - | - | 3,837 |
| Acquisition expenses | - | 161 | - | 161 |
| Advertising cost adjustment | - | (1,367) | - | (1,367) |
| Stock award amortization | 343 | 181 | 964 | 1,488 |
| Expenses related to litigation settlements | - | 5 | - | 5 |
| Long-term incentive compensation | - | - | 3,755 | 3,755 |
| Stock option expense | - | - | 3,600 | 3,600 |
| Expenses related to securities litigation | - | - | 37 | 37 |
| **Adjusted EBITDA** | $121,094 | $63,234 | $(14,380) | $169,948 |

-28-

*RECONCILIATION OF ADJUSTED NET INCOME*

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

|  | Three Months Ended September 30, 2016 | 2015 | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Net income as reported | **$26,829** | $28,833 | **$76,554** | $80,345 |
| Add/(deduct) after-tax cost of: |  |  |  |  |
| Stock option expense | **897** | 509 | **3,958** | 2,268 |
| Long-term incentive compensation | **406** | 863 | **570** | 2,375 |
| Expenses of OIG investigation | **370** | 711 | **2,535** | 2,369 |
| Medicare cap sequestration adjustment | **141** | - | **141** | - |
| Early retirement expenses | **-** | - | **2,840** | - |
| Expenses related to litigation settlements | **-** | - | **27** | 3 |
| Expenses related to securities settlements | **-** | - | **-** | 23 |
| Acquisition expenses | **-** | 18 | **-** | 98 |
| Adjusted net income | **$28,643** | $30,934 | **$86,625** | $87,481 |
| Diluted Earnings Per Share As Reported |  |  |  |  |
| Net income | **$1.62** | $1.65 | **$4.54** | $4.61 |
| Average number of shares outstanding | **16,559** | 17,422 | **16,851** | 17,430 |
| Adjusted Diluted Earnings Per Share |  |  |  |  |
| Adjusted net income | **$1.73** | $1.78 | **$5.14** | $5.02 |
| Adjusted average number of shares outstanding | **16,559** | 17,422 | **16,851** | 17,430 |

-29-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*OPERATING STATISTICS FOR VITAS SEGMENT*

*(unaudited)*

| OPERATING STATISTICS Net revenue ($000) | Three Months Ended September 30, 2016 | 2015 | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Homecare | **$225,348** | $222,952 | **$659,477** | $640,867 |
| Inpatient | **23,850** | 24,271 | **73,856** | 76,485 |
| Continuous care | **33,895** | 37,785 | **106,026** | 113,564 |
| Total before Medicare cap allowance | **$283,093** | $285,008 | **$839,359** | $830,916 |
| Medicare cap allowance | **(228)** | - | **(228)** | 165 |
| Total | **$282,865** | $285,008 | **$839,131** | $831,081 |
| Net revenue as a percent of total before Medicare cap allowances |  |  |  |  |
| Homecare | **79.6%** | 78.2% | **78.6%** | 77.1% |
| Inpatient | **8.4** | 8.5 | **8.8** | 9.2 |
| Continuous care | **12.0** | 13.3 | **12.6** | 13.7 |
| Total before Medicare cap allowance | **100.0** | 100.0 | **100.0** | 100.0 |
| Medicare cap allowance | **(0.1)** | - | **-** | - |
| Total | **99.9%** | 100.0% | **100.0%** | 100.0% |
| Average daily census (days) |  |  |  |  |
| Homecare | **12,223** | 11,607 | **11,972** | 11,259 |
| Nursing home | **3,077** | 3,150 | **3,028** | 3,026 |
| Routine homecare | **15,300** | 14,757 | **15,000** | 14,285 |
| Inpatient | **394** | 404 | **406** | 424 |
| Continuous care | **507** | 561 | **530** | 571 |
| Total | **16,201** | 15,722 | **15,936** | 15,280 |
| Total Admissions | **16,157** | 16,131 | **49,205** | 50,082 |
| Total Discharges | **15,690** | 15,949 | **48,403** | 48,979 |
| Average length of stay (days) | **87.7** | 78.6 | **85.2** | 78.9 |
| Median length of stay (days) | **16.0** | 16.0 | **16.0** | 15.0 |
| ADC by major diagnosis |  |  |  |  |
| Cerebro | **32.9%** | 28.8% | **32.2%** | 28.6% |
| Neurological | **20.7** | 22.9 | **21.3** | 23.3 |
| Cancer | **15.5** | 16.6 | **15.3** | 16.7 |
| Cardio | **17.1** | 17.4 | **17.3** | 17.5 |
| Respiratory | **7.8** | 7.9 | **7.8** | 7.9 |
| Other | **6.0** | 6.4 | **6.1** | 6.0 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Admissions by major diagnosis |  |  |  |  |
| Cerebro | **21.2** | 18.7% | **20.9%** | 18.8% |
| Neurological | **11.0** | 12.5 | **11.0** | 12.3 |
| Cancer | **33.3** | 33.3 | **31.9** | 32.1 |
| Cardio | **14.4** | 14.5 | **15.3** | 15.3 |
| Respiratory | **9.0** | 9.2 | **10.1** | 10.0 |
| Other | **11.1** | 11.8 | **10.8** | 11.5 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Direct patient care margins |  |  |  |  |
| Routine homecare | **51.4%** | 53.7% | **51.8%** | 52.9% |
| Inpatient | **(2.4)** | 3.8 | **2.7** | 6.1 |
| Continuous care | **12.2** | 15.7 | **13.7** | 16.1 |
| Homecare margin drivers (dollars per patient day) |  |  |  |  |
| Labor costs | **$56.53** | $54.92 | **$56.51** | $56.14 |
| Combined drug, HME and medical supplies | **16.30** | 16.12 | **15.90** | 16.18 |
| Inpatient margin drivers (dollars per patient day) |  |  |  |  |
| Labor costs | **$360.35** | $355.30 | **$346.61** | $347.52 |
| Continuous care margin drivers (dollars per patient day) |  |  |  |  |
| Labor costs | **$618.15** | $596.39 | **$609.08** | $591.26 |
| Bad debt expense as a percent of revenues | **1.2%** | 1.0% | **1.2%** | 1.0% |
| Accounts receivable -- Days of revenue outstanding- excluding unapplied Medicare payments | **38.4** | 38.1 | **n.a.** | n.a. |
| Accounts receivable -- Days of revenue outstanding- including unapplied Medicare payments | **20.7** | 32.3 | **n.a.** | n.a. |

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### Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information

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

## Market risk

As filed, 605 characters.

The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At September 30, 2016, the Company had $110.6 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.

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Filed Nov 1, 2016.
Source: SEC EDGAR, the filing index for accession 0001157523-16-007144. Last ingested by Listed: Nov 5, 2026, 15:55 ET. No prices; not investment advice.