# Chemed Corp: Form 10-Q for the period ended Jun 30, 2017

- Company: [Chemed Corp](/companies/che.md) (CIK 19584)
- Form: 10-Q
- Filed: 2017-07-31
- Accepted by EDGAR: Jul 31, 2017, 14:57 ET
- Period: 2017-06-30
- Accession: 0001157523-17-002178
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/19584/000115752317002178/a51597047.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/19584/000115752317002178/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-04-01 to 2017-06-30 | $415.1m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2017-01-01 to 2017-06-30 | $820.9m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2017-04-01 to 2017-06-30 | $285.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $571.0m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2017-04-01 to 2017-06-30 | $68.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-01-01 to 2017-06-30 | $138.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | −$38.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | $2.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-04-01 to 2017-06-30 | $1.1m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-01-01 to 2017-06-30 | $2.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | −$16.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | −$3.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | −$21.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | $8.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | −$1.35 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.49 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | −$1.35 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.51 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 16,010,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 16,758,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $28.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2017-01-01 to 2017-06-30 | $8.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2017-01-01 to 2017-06-30 | $85.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-06-30 | $13.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $156.5m | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $910.3m | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $268.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-06-30 | $457.2m | us-gaap:Liabilities |
| Long-term debt | at 2017-06-30 | $115.0m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-06-30 | $10.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-06-30 | $453.1m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2017-06-30 | 15,991,878 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 56,714 characters.

### Executive Summary

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

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

|  | Three months ended June 30, 2017 | 2016 | Six months ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | **$415,059** | $390,409 | **$820,923** | $$780,798 |
| Net income/(loss) | **$(21,656)** | $24,885 | **$8,188** | $$49,725 |
| Diluted EPS/(LPS) | **$(1.35)** | $1.48 | **$0.49** | $$2.93 |
| Adjusted net income | **$35,907** | $30,228 | **$66,402** | $$57,982 |
| Adjusted diluted EPS | **$2.15** | $1.80 | **$3.96** | $$3.41 |
| Adjusted EBITDA | **$68,497** | $58,523 | **$128,316** | $$113,003 |
| Adjusted EBITDA as a % of revenue | **16.5%** | 15.0% | **15.6%** | 14.5% |

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and Adjusted EBITDA as a % of revenue 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 29-31.

Net income/(loss) for the three and six months ended June 30, 2017 includes $55.8 million ($3.49 per share) of after-tax expense ($90 million pre-tax) for the accrual of a potential litigation settlement related to the May 2, 2013 complaint filed against the Company by the U.S. Department of Justice. As required by U.S. Generally Accepted Accounting Principles, the Company accrues for contingent loss claims in its financial statements when it is probable that a liability has been incurred and the amount can be reasonably estimated. Based on recent case developments, including recent mediation discussions with the U.S. Department of Justice, the Company believes that it probable that this matter will be settled, and that such settlement will include settlement payments and relator attorney fees, by the Company of approximately the accrued amount. However, the achievement of a final, definitive settlement will require the parties to resolve several outstanding issues (and draft and negotiate related definitive documentation), and there can be no assurance that such a final, definitive settlement will be reached and agreed on these or other terms.

For the three months ended June 30, 2017, the increase in consolidated service revenues and sales was driven by a 16.7% increase at Roto-Rooter and a 2.1% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines, of Roto-Rooter’s total revenue increase 46.9% is related to water restoration. The increase in service revenues at VITAS was primarily a result of Medicare reimbursement rates increasing 1.7%, a 2.8% increase in average daily census, offset by acuity mix shift which negatively impacted revenue 2.5% when compared to the prior year period. Adjusted EBITDA as a percent of revenue increased 150 basis points when compared to the prior year quarter mainly as a result of the increase in adjusted net income. See page 32 for additional VITAS operating metrics.

For the six months ended June 30, 2017, the increase in consolidated service revenues and sales was driven by a 13.1% increase at Roto-Rooter and a 1.9% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines, of Roto-Rooter’s total revenue increase 49.0% was related to water restoration. The increase in service revenues at VITAS was primarily a result of Medicare reimbursement rates increasing 1.7%, a 3.2% increase in average daily census, offset by acuity mix shift which negatively impacted revenue when compared to the prior year period. Adjusted EBITDA as a percent of revenue increased 110 basis points when compared to the prior year quarter mainly as a result of the increase in adjusted net income. See page 32 for additional VITAS operating metrics.

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VITAS expects its full-year 2017 revenue growth, prior to Medicare cap, to be in the range of 2.0% to 3.0%. Admissions and Average Daily Census in 2017 are estimated to expand approximately 3.0% to 5.0%. Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 15.0% to 15.5%. This guidance includes $2.5 million for Medicare cap billing limitations. Roto-Rooter expects full-year 2017 revenue growth of 12.0% to 13.0%. The revenue estimate is a based upon increased job pricing of approximately 2.0% and continued growth in water restoration services. Adjusted EBITDA margin for 2017 is estimated in the range of 22.0% to 22.5%. 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, 2016 to June 30, 2017 include the following:

- A $14.1 million decrease in accounts receivable due mainly to timing of Medicare and Medicaid payments.
- An $18.9 million increase in properties plant and equipment mainly due to the purchase of transportation equipment during the quarter.
- A $20.6 million increase in deferred taxes associated with amounts recorded for a potential litigation settlement.
- A $9.6 million increase in accounts payable mainly due to transportation equipment accrued but not paid at June 30, 2017.
- A $5.9 million decrease in accrued compensation due to the payments of cash bonuses accrued in 2016.
- A $90.7 million increase in accrued legal due to a potential litigation settlement.
- A $16.3 million increase in long-term debt due to borrowings on our revolving line of credit.

Net cash provided by operating activities increased $26.9 million mainly as a result of a $14.3 million increase in net income excluding potential litigation settlement and a $6.6 million decrease in accounts receivable. The potential litigation settlement recorded is non-cash at June 30, 2017 and does not impact net cash provided by operating activities.

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 $40.0 million from the Federal government from hospice services every other Friday. The timing of period end will have a significant impact on the accounts receivable at VITAS. These changes generally normalize over a two year period, as cash flow variations in one year are offset in the following year.

Management continually evaluates cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of available capital resources.

We have issued $36.1 million in standby letters of credit as of June 30, 2017, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of June 30, 2017, we have approximately $268.9 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

### Commitments and Contingencies

Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly. We are in compliance with all financial and other debt covenants as of June 30, 2017 and anticipate remaining in compliance throughout the foreseeable future.

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

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On 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. This case is in the discovery phase. Based on recent case developments, including recent mediation discussions with the U.S. Department of Justice, we believe it probable that this matter will be settled, to include payments of $55.8 million after-tax ($90.0 million pretax) including attorneys’ fees. A final settlement will require the parties to resolve several outstanding issues, and to draft and negotiate definitive documentation. There can be no assurance that such a final definitive settlement will be reached on these, or other, terms. For additional procedural history of this litigation, please refer to our prior quarterly and annual filings. The costs incurred related to U.S. v. Vitas and related regulatory matters were $2.1 million and $1.2 million for the quarters ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, the net costs were $4.2 million and $3.5 million respectively.

Net income/(loss) for the three and six months ended June 30, 2017 includes the $55.8 million of after-tax expense ($90 million pre-tax) for the accrual of such potential litigation settlement. As required by U.S. Generally Accepted Accounting Principles, the Company accrues for contingent loss claims in its financial statements when it is probable that a liability has been incurred and the amount can be reasonably estimated.

The Company and certain current and former directors and officers are defendants in a case captioned *In re Chemed Corp. Shareholder Derivative Litigation*, No. 13 Civ. 1854 (LPS) (CJB) (D. Del.), which was consolidated on February 2, 2015.

On February 2, 2015, the Court appointed KBC Asset Management NV 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 and defendants renewed a previously filed motion to dismiss those claims and allegations. The consolidated Complaint named fourteen individual defendants, together with the Company as nominal defendant. The Complaint alleges a claim for breach of fiduciary duty against the individual defendants for allegedly permitting the Company to submit false claims to the U.S. government. The Complaint 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 May 12, 2016, the Court issued a Memorandum Order granting Chemed’s motion to dismiss, and 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 (i.e., by June 13, 2016) 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.

However, on June 13, 2016, counsel for Chemed shareholder Michael Kvint filed a letter with the Court requesting a two-week extension to file a motion to substitute Mr. Kvint as lead plaintiff, in place of Lead Plaintiff KBC and 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. Mr. Kvint’s motion was fully briefed by the parties. On April 25, 2017, Magistrate Judge Burke issued a Report and Recommendation recommending that the Court permit Mr. Kvint to intervene as Lead Plaintiff and grant leave to amend the complaint to replead the duty of loyalty claim only. On May 16, 2017, Chief Judge Stark signed an Order adopting that Report and Recommendation. Plaintiff Kvint filed a Corrected Amended Complaint on May 30, 2017. On July 25, 2017, the Court entered an order permitting Defendants to file a Motion to Dismiss the Corrected Amended Complaint on or before August 14, 2017, with Plaintiff’s Answering Brief in opposition to the Motion to Dismiss to be filed on or before October 16, 2017, and Defendants’ Reply Brief in support of the Motion to Dismiss to be filed on or before November 13, 2017. As the Company has previously disclosed, the legal fees and costs associated with defending against this lawsuit are presently being paid by insurance. For additional procedural history of this litigation, please refer to our prior quarterly and annual filings.

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

\- 18 -

On November 14, 2016, the Parties filed a Stipulation to transfer the venue of the lawsuit from San Francisco to Los Angeles. The Los Angeles Superior Court Complex Division accepted transfer of the case on December 6, 2016 and stayed the case. On December 16, 2016, VITAS CA filed its Answer and served written discovery on Seper.

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

The Court in Seper lifted the stay at the Initial Status Conference on May 11, 2017. At the Conference, Seper’s counsel informed the Court that he was in contact with Jiwan Chhina’s counsel to consolidate the two cases. The Court set a Further Status Conference for July 13, 2017 expressly to receive a status update on the consolidation efforts. If the cases are consolidated and proceed under the jurisdiction of the Los Angeles Superior Court Complex Division, the Chhina case in the San Diego Superior Court would then be dismissed. The Parties have agreed to stay further discovery efforts pending the issue of consolidation of the two cases. Counsel for Seper and counsel for Chhina are currently preparing a joint Amended Complaint.

The Company is not able to reasonably estimate the probability of loss or range of loss for either of these lawsuits at this time.

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

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### Results of Operations

### Three months ended June 30, 2017 versus 2016 - Consolidated Results

Our service revenues and sales for the second quarter of 2017 increased 6.3% versus services and sales revenues for the second quarter of 2016. Of this increase, a $6.0 million increase was attributable to VITAS and $18.7 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 | $11,978 | 5.5 |
| Continuous care | (3,271) | (9.4) |
| General inpatient | (2,489) | (10.2) |
| Medicare cap | (247) | - |
| Roto-Rooter |  |  |
| Plumbing | 6,469 | 13.3 |
| Drain cleaning | 1,599 | 4.4 |
| Water restoration | 8,763 | 72.1 |
| Contractor operations | 1,381 | 14.1 |
| Other | 467 | 9.5 |
| Total | $24,650 | 6.3 |

The increase in VITAS’ revenues for the second quarter of 2017 versus the second quarter of 2016 was comprised of an average net Medicare reimbursement rate increasing approximately 1.7%, a 2.8% increase in days of care offset by acuity mix shift which negatively impacted revenue 2.5% when compared to the prior year period.

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

|  | Days of Care 2017 | 2016 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **1,417,840** | 1,366,985 | 3.7 |
| Continuous care | **43,108** | 47,775 | (9.8) |
| General inpatient | **31,251** | 36,833 | (15.2) |
| Total days of care | **1,492,199** | 1,451,593 | 2.8 |

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

The increase in plumbing revenues for the second quarter of 2017 versus 2016 is attributable to a 10.6% increase in price and service mix shift as well as a 2.7% increase in job count. Drain cleaning revenues for the second quarter of 2017 versus 2016 reflect a 6.4% increase in price and service mix shift offset by a 2.0% decrease in job count. Water restoration for the second quarter of 2017 versus 2016 increased 72.1% as a result of continued expansion of this service offering in all Roto-Rooter locations. Contractor operations increased 14.1% mainly due to their expansion into water restoration.

The consolidated gross margin was 31.1% in the second quarter of 2017 as compared with 29.2% in the second quarter of 2016. On a segment basis, VITAS’ gross margin was 22.8% in the second quarter of 2017 as compared with 21.5%, in the second quarter of 2016. The increase in VITAS gross margin is the result of labor and ancillary cost management. The Roto-Rooter segment’s gross margin was 49.3% for the second quarter of 2017 compared with 48.5% in the second quarter of 2016. The increase in Roto-Rooter gross margin is the result mainly of higher revenues, particularly in water restoration, allowing more fixed costs to be covered.

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

| SG&A expenses before market value adjustments of deferred compensation | Three months ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| plans, long-term incentive compensation, and OIG investigation expenses | **$64,018** | $57,771 |
| Expenses related to OIG investigation | **2,093** | 1,170 |
| Impact of market value adjustments related to assets held in deferred |  |  |
| compensation trusts | **1,587** | 3,188 |
| Long-term incentive compensation | **956** | 499 |
| Total SG&A expenses | **$68,654** | $62,628 |

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 second quarter of 2017 were up 10.8% when compared to the second quarter of 2016. This increase was mainly a result of the increase in variable expenses caused by increased revenue, particularly in the Roto-Rooter segment, increased advertising expense at Roto-Rooter and normal salary increases in 2017.

Other operating expenses were $90.6 million in the second quarter of 2017 due to $90.0 million related to a potential litigation settlement and $636,000 due to the closure of the programs in one state at Vitas. $4.5 million related to early retirement expenses were included in other operating expenses in the second quarter of 2016.

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

| Market value adjustment on assets held in | Three months ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| deferred compensation trusts | **$1,587** | $3,188 |
| Interest income | **161** | 85 |
| Loss on disposal of property and equipment | **(98)** | (57) |
| Other | **3** | 1 |
| Total other income/(expense) - net | **$1,653** | $3,217 |

Our effective income tax rate was 43.6% in the second quarter of 2017 (tax benefit) compared to 38.7% (tax expense) during the second quarter of 2016. The change in the effective income tax rate is a result of the adoption of ASU No. 2016-09 – Compensation – Stock Compensation in 2017 which requires that the excess tax benefits from stock based compensation now be recorded in the income tax provision on the statements of income.

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

| VITAS | Three months ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Potential litigation settlement | **$(55,800)** | $- |
| Expenses related to OIG investigation | **(1,292)** | (722) |
| Program closure expenses | **(385)** | - |
| Medicare cap sequestration adjustment | **(65)** | - |
| Early retirement expenses | **-** | (2,840) |
| Roto-Rooter |  |  |
| Expenses related to litigation settlements | **(129)** | (27) |
| Corporate |  |  |
| Excess tax benefits on stock compensation | **2,643** | - |
| Stock option expense | **(1,931)** | (1,440) |
| Long-term incentive compensation | **(604)** | (316) |
| Expenses related to securities litigation | **-** | 2 |
| Total | **$(57,563)** | $(5,343) |

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### Three months ended June 30, 2017 versus 2016 - Segment Results

The change in net income/(loss) for the second quarter of 2017 versus the second quarter of 2016 is due to (in thousands):

|  | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| VITAS | $(50,804) | (273.9) |
| Roto-Rooter | 3,717 | 27.9 |
| Corporate | 546 | 7.8 |
|  | $(46,541) | (187.0) |

VITAS’ net loss was the result of a $55.8 million (after-tax) potential litigation settlement.

Roto-Rooter’s net income was positively impacted in 2017 compared to 2016 primarily by an $8.8 million revenue increase in Roto-Rooter’s water restoration line of business, a $6.5 million increase in plumbing revenue and a $3.4 million increase in all other revenue types. After-tax earnings as a percent of revenue at Roto-Rooter in the second quarter of 2017 was 13.1% as compared to 11.9% in the second quarter of 2016.

The improvement at Corporate is due mainly to the impact of the adoption of ASU 2016-09 which positively impacted the Company’s tax provision by approximately $2.6 million.

### Results of Operations

### Six months ended June 30, 2017 versus 2016 - Consolidated Results

Our service revenues and sales for the first six months of 2017 increased 5.1% versus services and sales revenues for the first six months of 2016. Of this increase, a $10.8 million increase was attributable to VITAS and $29.4 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 | $22,665 | 5.2 |
| Continuous care | (7,575) | (10.5) |
| General inpatient | (4,083) | (8.2) |
| Medicare cap | (247) | - |
| Roto-Rooter |  |  |
| Plumbing | 9,591 | 9.9 |
| Drain cleaning | 2,011 | 2.8 |
| Water restoration | 14,388 | 58.5 |
| Contractor operations | 2,548 | 13.0 |
| Other | 827 | 8.1 |
| Total | $40,125 | 5.1 |

The increase in VITAS’ revenues for the first six months of 2017 versus the first six months of 2016 was comprised of an average net Medicare reimbursement rate increasing approximately 1.7%, a 2.6% increase in days of care offset by acuity mix shift which negatively impacted revenue when compared to the prior year period.

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

|  | Days of Care 2017 | 2016 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **2,798,388** | 2,702,152 | 3.6 |
| Continuous care | **88,525** | 98,745 | (10.3) |
| General inpatient | **65,236** | 75,082 | (13.1) |
| Total days of care | **2,952,149** | 2,875,979 | 2.6 |

\- 22 -

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

The increase in plumbing revenues for the first six months of 2017 versus 2016 is attributable to a 9.5% increase in price and service mix shift as well as a 0.4% increase in job count. Drain cleaning revenues for the first six months of 2017 versus 2016 reflect a 6.4% increase in price and service mix shift offset by a 3.6% decrease in job count. Water restoration for the first six months of 2017 versus 2016 increased 58.5% as a result of continued expansion of this service offering in all Roto-Rooter locations. Contractor operations increased 13.0% mainly due to their expansion into water restoration.

The consolidated gross margin was 30.4% in the first six months of 2017 as compared with 29.0% in the first six months of 2016. On a segment basis, VITAS’ gross margin was 22.1% in the first six months of 2017 as compared with 21.3%, in the first six months of 2016. The increase in VITAS’ gross margin is the result of labor and ancillary cost management. The Roto-Rooter segment’s gross margin was 49.0% for the first six months of 2017 compared with 48.0% in the first six months of 2016. The increase in the Roto-Rooter gross margin is the result mainly of higher revenues, particularly in water restoration, allowing more fixed costs to be covered.

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

| SG&A expenses before market value adjustments of deferred compensation | Six months ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| plans, long-term incentive compensation, and OIG investigation expenses | **$127,750** | $117,708 |
| Expenses related to OIG investigation | **4,243** | 3,506 |
| Impact of market value adjustments related to assets held in deferred |  |  |
| compensation trusts | **4,202** | 201 |
| Long-term incentive compensation | **1,917** | 258 |
| Total SG&A expenses | **$138,112** | $121,673 |

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 first six months of 2017 were up 8.5% when compared to the first six months of 2016. This increase was mainly a result of the increase in variable expenses caused by increased revenue, particularly in the in the Roto-Rooter segment, increased advertising expense at Roto-Rooter and normal salary increases in 2017.

Other operating expenses were $91.5 million during the first six months of 2017 related to a $90.0 million potential litigation settlement and $1.5 million related to the closure of the programs in one state at Vitas. During the first six months of 2016, the Company recorded $4.5 million related to early retirement expenses.

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

| Market value adjustment on assets held in | Six months ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| deferred compensation trusts | **$4,202** | $201 |
| Loss on disposal of property and equipment | **(334)** | (90) |
| Interest income | **245** | 182 |
| Other | **3** | - |
| Total other income/(expense) - net | **$4,116** | $293 |

Our effective income tax rate was 81.7% in the first six months of 2017 compared to 38.8% during the first six months of 2016. The change in the effective income tax rate is due to the adoption of ASU No. 2016-09 – Compensation – Stock Compensation which requires that the excess tax benefits from stock based compensation now be recorded in the income tax provision on the statements of income.

\- 23 -

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

| VITAS | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Potential litigation settlement | **$(55,800)** | $- |
| Expenses related to OIG investigation | **(2,620)** | (2,165) |
| Program closure expenses | **(898)** | - |
| Medicare cap sequestration adjustment | **(65)** | - |
| Early retirement expenses | **-** | (2,840) |
| Roto-Rooter |  |  |
| Expenses related to litigation settlements | **(129)** | (27) |
| Corporate |  |  |
| Excess tax benefits on stock compensation | **6,338** | - |
| Stock option expense | **(3,828)** | (3,061) |
| Long-term incentive compensation | **(1,212)** | (164) |
| Total | **$(58,214)** | $(8,257) |

### Six months ended June 30, 2017 versus 2016 - Segment Results

The change in net income/(loss) for the first six months of 2017 versus the first six months of 2016 is due to (in thousands):

|  | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| VITAS | $(49,294) | (131.0) |
| Roto-Rooter | 5,323 | 20.2 |
| Corporate | 2,434 | 17.1 |
|  | $(41,537) | (83.5) |

VITAS’ 2017 net loss was the result of a $55.8 million (after-tax) potential ligation settlement.

Roto-Rooter’s net income was positively impacted in 2017 compared to 2016 primarily by a $14.4 million revenue increase in Roto-Rooter’s water restoration line of business, a $9.6 million increase in plumbing revenue and a $5.4 million increase in all other revenue types. After-tax earnings as a percent of revenue at Roto-Rooter in 2017 were 12.5% as compared to 11.7% in 2016.

The improvement at Corporate is due mainly to the impact of the adoption of ASU 2016-09 which positively impacted the Company’s tax provision by approximately $6.3 million.

\- 24 -

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE THREE MONTHS ENDED JUNE 30, 2017*

*(in thousands)(unaudited)*

| 2017 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $284,710 | $130,349 | $- | $415,059 |
| Cost of services provided and goods sold | 219,769 | 66,083 | - | 285,852 |
| Selling, general and administrative expenses | 24,531 | 33,763 | 10,360 | 68,654 |
| Depreciation | 4,741 | 4,070 | 22 | 8,833 |
| Amortization | - | 32 | - | 32 |
| Other operating expenses | 90,636 | - | - | 90,636 |
| Total costs and expenses | 339,677 | 103,948 | 10,382 | 454,007 |
| Income/(loss) from operations | (54,967) | 26,401 | (10,382) | (38,948) |
| Interest expense | (53) | (87) | (981) | (1,121) |
| Intercompany interest income/(expense) | 2,826 | 1,346 | (4,172) | - |
| Other income/(expense)—net | 71 | (4) | 1,586 | 1,653 |
| Income/(expense) before income taxes | (52,123) | 27,656 | (13,949) | (38,416) |
| Income taxes | 19,869 | (10,598) | 7,489 | 16,760 |
| Net income/(loss) | $(32,254) | $17,058 | $(6,460) | $(21,656) |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |

| Pretax benefit/(cost): | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Potential litigation settlement | $(90,000) | $- | $- | $(90,000) |
| Medicare cap sequestration adjustment | (105) | - | - | (105) |
| Stock option expense | - | - | (3,054) | (3,054) |
| Long-term incentive compensation | - | - | (956) | (956) |
| Expenses related to litigation setlements | - | (213) | - | (213) |
| Program closure expenses | (636) | - | - | (636) |
| Expenses related to OIG investigation | (2,093) | - | - | (2,093) |
| Total | $(92,834) | $(213) | $(4,010) | $(97,057) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| Potential litigation settlement | $(55,800) | $- | $- | $(55,800) |
| Medicare cap sequestration adjustment | (65) | - | - | (65) |
| Stock option expense | - | - | (1,931) | (1,931) |
| Long-term incentive compensation | - | - | (604) | (604) |
| Expenses related to litigation setlements | - | (129) | - | (129) |
| Program closure expenses | (385) | - | - | (385) |
| Expenses related to OIG investigation | (1,292) | - | - | (1,292) |
| Excess tax benefits on stock compensation | - | - | 2,643 | 2,643 |
| Total | $(57,542) | $(129) | $108 | $(57,563) |

\- 25 -

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE THREE MONTHS ENDED JUNE 30, 2016*

*(in thousands)(unaudited)*

| 2016 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $278,739 | $111,670 | $- | $390,409 |
| Cost of services provided and goods sold | 218,694 | 57,561 | - | 276,255 |
| Selling, general and administrative expenses | 22,638 | 29,448 | 10,542 | 62,628 |
| Depreciation | 4,814 | 3,628 | 139 | 8,581 |
| Amortization | 14 | 77 | - | 91 |
| Other operating expenses | 4,491 | - | - | 4,491 |
| Total costs and expenses | 250,651 | 90,714 | 10,681 | 352,046 |
| Income/(loss) from operations | 28,088 | 20,956 | (10,681) | 38,363 |
| Interest expense | (59) | (92) | (820) | (971) |
| Intercompany interest income/(expense) | 1,927 | 866 | (2,793) | - |
| Other income/(expense)—net | 38 | (12) | 3,191 | 3,217 |
| Income/(expense) before income taxes | 29,994 | 21,718 | (11,103) | 40,609 |
| Income taxes | (11,444) | (8,377) | 4,097 | (15,724) |
| Net income/(loss) | $18,550 | $13,341 | $(7,006) | $24,885 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| Early retirement expenses | $(4,491) | $- | $- | $(4,491) |
| Stock option expense | - | - | (2,277) | (2,277) |
| Long-term incentive compensation | - | - | (499) | (499) |
| Expenses related to securities litigation | - | - | 3 | 3 |
| Expenses related to litigation settlements | - | (44) | - | (44) |
| Expenses related to OIG investigation | (1,170) | - | - | (1,170) |
| Total | $(5,661) | $(44) | $(2,773) | $(8,478) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| Early retirement expenses | $(2,840) | $- | $- | $(2,840) |
| Stock option expense | - | - | (1,440) | (1,440) |
| Long-term incentive compensation | - | - | (316) | (316) |
| Expenses related to securities litigation | - | - | 2 | 2 |
| Expenses related to litigation settlements | - | (27) | - | (27) |
| Expenses related to OIG investigation | (722) | - | - | (722) |
| Total | $(3,562) | $(27) | $(1,754) | $(5,343) |

\- 26 -

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE SIX MONTHS ENDED JUNE 30, 2017*

*(in thousands)(unaudited)*

| 2017 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $567,026 | $253,897 | $- | $820,923 |
| Cost of services provided and goods sold | 441,446 | 129,546 | - | 570,992 |
| Selling, general and administrative expenses | 48,825 | 67,223 | 22,064 | 138,112 |
| Depreciation | 9,519 | 8,054 | 153 | 17,726 |
| Amortization | 14 | 64 | - | 78 |
| Other operating expenses | 91,509 | - | - | 91,509 |
| Total costs and expenses | 591,313 | 204,887 | 22,217 | 818,417 |
| Income/(loss) from operations | (24,287) | 49,010 | (22,217) | 2,506 |
| Interest expense | (108) | (185) | (1,823) | (2,116) |
| Intercompany interest income/(expense) | 5,528 | 2,656 | (8,184) | - |
| Other income/(expense)—net | (9) | (77) | 4,202 | 4,116 |
| Income/(expense) before income taxes | (18,876) | 51,404 | (28,022) | 4,506 |
| Income taxes | 7,219 | (19,722) | 16,185 | 3,682 |
| Net income/(loss) | $(11,657) | $31,682 | $(11,837) | $8,188 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| Potential litigation settlement | $(90,000) | $- | $- | $(90,000) |
| Medicare cap sequestration adjustments | (105) | - | - | (105) |
| Stock option expense | - | - | (6,055) | (6,055) |
| Long-term incentive compensation | - | - | (1,917) | (1,917) |
| Expenses related to litigation settlements | - | (213) | - | (213) |
| Program closure expenses | (1,509) | - | - | (1,509) |
| Expenses related to OIG investigation | (4,243) | - | - | (4,243) |
| Total | $(95,857) | $(213) | $(7,972) | $(104,042) |
| After-tax benefit/(cost): |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Potential litigation settlement | $(55,800) | $- | $- | $(55,800) |
| Medicare cap sequestration adjustments | (65) | - | - | (65) |
| Stock option expense | - | - | (3,828) | (3,828) |
| Long-term incentive compensation | - | - | (1,212) | (1,212) |
| Expenses related to litigation settlements | - | (129) | - | (129) |
| Program closure expenses | (898) | - | - | (898) |
| Expenses related to OIG investigation | (2,620) | - | - | (2,620) |
| Excess tax benefits on stock compensation | - | - | 6,338 | 6,338 |
| Total | $(59,383) | $(129) | $1,298 | $(58,214) |

\- 27 -

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE SIX MONTHS ENDED JUNE 30, 2016*

*(in thousands)(unaudited)*

| 2016 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $556,266 | $224,532 | $- | $780,798 |
| Cost of services provided and goods sold | 437,960 | 116,730 | - | 554,690 |
| Selling, general and administrative expenses | 47,422 | 59,255 | 14,996 | 121,673 |
| Depreciation | 9,595 | 7,129 | 281 | 17,005 |
| Amortization | 27 | 156 | - | 183 |
| Other operating expenses | 4,491 | - | - | 4,491 |
| Total costs and expenses | 499,495 | 183,270 | 15,277 | 698,042 |
| Income/(loss) from operations | 56,771 | 41,262 | (15,277) | 82,756 |
| Interest expense | (117) | (186) | (1,510) | (1,813) |
| Intercompany interest income/(expense) | 4,030 | 1,813 | (5,843) | - |
| Other income/(expense)—net | 78 | 12 | 203 | 293 |
| Income/(expense) before income taxes | 60,762 | 42,901 | (22,427) | 81,236 |
| Income taxes | (23,125) | (16,542) | 8,156 | (31,511) |
| Net income/(loss) | $37,637 | $26,359 | $(14,271) | $49,725 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(4,840) | $(4,840) |
| Long-term incentive compensation | - | - | (258) | (258) |
| Early retirement expenses | (4,491) | - | - | (4,491) |
| Expenses related to litigation settlements | - | (44) | - | (44) |
| Expenses related to OIG investigation | (3,506) | - | - | (3,506) |
| Total | $(7,997) | $(44) | $(5,098) | $(13,139) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(3,061) | $(3,061) |
| Long-term incentive compensation | - | - | (164) | (164) |
| Early retirement expenses | (2,840) | - | - | (2,840) |
| Expenses related to litigation settlements | - | (27) | - | (27) |
| Expenses related to OIG investigation | (2,165) | - | - | (2,165) |
| Total | $(5,005) | $(27) | $(3,225) | $(8,257) |

\- 28 -

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the three months ended June 30, 2017 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $(32,254) | $17,058 | $(6,460) | $(21,656) |
| Add/(deduct): |  |  |  |  |
| Interest expense | 53 | 87 | 981 | 1,121 |
| Income taxes | (19,869) | 10,598 | (7,489) | (16,760) |
| Depreciation | 4,741 | 4,070 | 22 | 8,833 |
| Amortization | - | 32 | - | 32 |
| **EBITDA** | (47,329) | 31,845 | (12,946) | (28,430) |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (2,826) | (1,346) | 4,172 | - |
| Interest income | (149) | (12) | - | (161) |
| Potential litigation settlement | 90,000 | - | - | 90,000 |
| Expenses related to OIG investigation | 2,093 | - | - | 2,093 |
| Program closure expenses | 636 | - | - | 636 |
| Medicare cap sequestration adjustment | 105 | - | - | 105 |
| Amortization of stock awards | 71 | 66 | 166 | 303 |
| Advertising cost adjustment | - | (272) | - | (272) |
| Expenses related to litigation settlements | - | 213 | - | 213 |
| Stock option expense | - | - | 3,054 | 3,054 |
| Long-term incentive compensation | - | - | 956 | 956 |
| **Adjusted EBITDA** | $42,601 | $30,494 | $(4,598) | $68,497 |
|  |  |  |  | **Chemed** |
| **For the three months ended June 30, 2016** | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Net income/(loss)** | $18,550 | $13,341 | $(7,006) | $24,885 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 59 | 92 | 820 | 971 |
| Income taxes | 11,444 | 8,377 | (4,097) | 15,724 |
| Depreciation | 4,814 | 3,628 | 139 | 8,581 |
| Amortization | 14 | 77 | - | 91 |
| **EBITDA** | 34,881 | 25,515 | (10,144) | 50,252 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (1,927) | (866) | 2,793 | - |
| Interest income | (69) | (16) | - | (85) |
| Expenses related to OIG investigation | 1,170 | - | - | 1,170 |
| Amortization of stock awards | 85 | 74 | 276 | 435 |
| Early retirement expenses | 4,491 | - | - | 4,491 |
| Expenses related to litigation settlements | - | 44 | - | 44 |
| Expenses related to securities litigation | - | - | (3) | (3) |
| Advertising cost adjustment | - | (557) | - | (557) |
| Stock option expense | - | - | 2,277 | 2,277 |
| Long-term incentive compensation | - | - | 499 | 499 |
| **Adjusted EBITDA** | $38,631 | $24,194 | $(4,302) | $58,523 |

\- 29 -

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the six months ended June 30, 2017 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $(11,657) | $31,682 | $(11,837) | $8,188 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 108 | 185 | 1,823 | 2,116 |
| Income taxes | (7,219) | 19,722 | (16,185) | (3,682) |
| Depreciation | 9,519 | 8,054 | 153 | 17,726 |
| Amortization | 14 | 64 | - | 78 |
| **EBITDA** | (9,235) | 59,707 | (26,046) | 24,426 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (5,528) | (2,656) | 8,184 | - |
| Interest income | (219) | (26) | - | (245) |
| Potential litigation settlements | 90,000 | - | - | 90,000 |
| Medicare cap sequestration adjustment | 105 | - | - | 105 |
| Program closure expenses | 1,509 | - | - | 1,509 |
| Expenses related to OIG investigation | 4,243 | - | - | 4,243 |
| Stock award amortization | 148 | 136 | 354 | 638 |
| Advertising cost adjustment | - | (545) | - | (545) |
| Expenses related to litigation settlements | - | 213 | - | 213 |
| Stock option expense | - | - | 6,055 | 6,055 |
| Long-term incentive compensation | - | - | 1,917 | 1,917 |
| **Adjusted EBITDA** | $81,023 | $56,829 | $(9,536) | $128,316 |
|  |  |  |  | **Chemed** |
| **For the six months ended June 30, 2016** | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| **Net income/(loss)** | $37,637 | $26,359 | $(14,271) | $49,725 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 117 | 186 | 1,510 | 1,813 |
| Income taxes | 23,125 | 16,542 | (8,156) | 31,511 |
| Depreciation | 9,595 | 7,129 | 281 | 17,005 |
| Amortization | 27 | 156 | - | 183 |
| **EBITDA** | 70,501 | 50,372 | (20,636) | 100,237 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (4,030) | (1,813) | 5,843 | - |
| Interest income | (148) | (34) | - | (182) |
| Expenses related to OIG investigation | 3,506 | - | - | 3,506 |
| Early retirement expenses | 4,491 | - | - | 4,491 |
| Advertising cost adjustment | - | (1,165) | - | (1,165) |
| Stock award amortization | 216 | 155 | 603 | 974 |
| Expenses related to litigation settlements | - | 44 | - | 44 |
| Long-term incentive compensation | - | - | 258 | 258 |
| Stock option expense | - | - | 4,840 | 4,840 |
| **Adjusted EBITDA** | $74,536 | $47,559 | $(9,092) | $113,003 |

\- 30 -

*RECONCILIATION OF ADJUSTED NET INCOME*

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

|  | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net income/(loss) as reported | **$(21,656)** | $24,885 | **$8,188** | $49,725 |
| Add/(deduct) after-tax cost of: |  |  |  |  |
| Potential litigation settlement | **55,800** | - | **55,800** | - |
| Excess tax benefits on stock compensation | **(2,643)** | - | **(6,338)** | - |
| Stock option expense | **1,931** | 1,440 | **3,828** | 3,061 |
| Expenses of OIG investigation | **1,292** | 722 | **2,620** | 2,165 |
| Long-term incentive compensation | **604** | 316 | **1,212** | 164 |
| Program closure expenses | **385** | - | **898** | - |
| Expenses related to litigation settlements | **129** | 27 | **129** | 27 |
| Medicare cap sequestration adjustment | **65** | - | **65** | - |
| Early retirement expenses | **-** | 2,840 | **-** | 2,840 |
| Expenses related to securities settlements | **-** | (2) | **-** | - |
| Adjusted net income | **$35,907** | $30,228 | **$66,402** | $57,982 |
| Diluted Earnings Per Share As Reported |  |  |  |  |
| Net income/(loss) | **$(1.35)** | $1.48 | **$0.49** | $2.93 |
| Average number of shares outstanding | **16,010** | 16,831 | **16,758** | 16,999 |
| Adjusted Diluted Earnings Per Share |  |  |  |  |
| Adjusted net income | **$2.15** | $1.80 | **$3.96** | $3.41 |
| Adjusted average number of shares outstanding | **16,702** | 16,831 | **16,758** | 16,999 |

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*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*OPERATING STATISTICS FOR VITAS SEGMENT*

*(unaudited)*

| OPERATING STATISTICS Net revenue ($000) | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Homecare | **$231,258** | $219,280 | **$456,794** | $434,129 |
| Inpatient | **22,000** | 24,489 | **45,923** | 50,006 |
| Continuous care | **31,699** | 34,970 | **64,556** | 72,131 |
| Total before Medicare cap allowance | **$284,957** | $278,739 | **$567,273** | $556,266 |
| Medicare cap allowance | **(247)** | - | **(247)** | - |
| Total | **$284,710** | $278,739 | **$567,026** | $556,266 |
| Net revenue as a percent of total before Medicare cap allowances |  |  |  |  |
| Homecare | **81.2%** | 78.7% | **80.5%** | 78.0% |
| Inpatient | **7.7** | 8.8 | **8.1** | 9.0 |
| Continuous care | **11.1** | 12.5 | **11.4** | 13.0 |
| 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 | **12,446** | 12,007 | **12,368** | 11,844 |
| Nursing home | **3,135** | 3,015 | **3,093** | 3,003 |
| Routine homecare | **15,581** | 15,022 | **15,461** | 14,847 |
| Inpatient | **343** | 405 | **360** | 412 |
| Continuous care | **474** | 525 | **489** | 543 |
| Total | **16,398** | 15,952 | **16,310** | 15,802 |
| Total Admissions | **16,311** | 16,180 | **33,874** | 33,048 |
| Total Discharges | **16,124** | 15,960 | **33,344** | 32,707 |
| Average length of stay (days) | **85.2** | 84.2 | **87.1** | 83.9 |
| Median length of stay (days) | **16.0** | 16.0 | **16.0** | 16.0 |
| ADC by major diagnosis |  |  |  |  |
| Cerebro | **34.8%** | 31.9% | **34.7%** | 31.7% |
| Neurological | **19.5** | 21.3 | **19.6** | 21.7 |
| Cardio | **16.5** | 17.6 | **16.5** | 17.4 |
| Cancer | **14.9** | 15.2 | **15.0** | 15.3 |
| Respiratory | **7.9** | 7.8 | **7.9** | 7.8 |
| Other | **6.4** | 6.2 | **6.3** | 6.1 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Admissions by major diagnosis |  |  |  |  |
| Cerebro | **21.4** | 20.5% | **21.7%** | 20.7% |
| Neurological | **10.7** | 10.8 | **10.8** | 11.0 |
| Cancer | **31.5** | 31.6 | **30.4** | 31.1 |
| Cardio | **15.1** | 15.7 | **15.1** | 15.7 |
| Respiratory | **10.2** | 10.2 | **11.0** | 10.6 |
| Other | **11.1** | 11.2 | **11.0** | 10.9 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Direct patient care margins |  |  |  |  |
| Routine homecare | **52.8%** | 51.9% | **52.1%** | 52.0% |
| Inpatient | **3.7** | 4.6 | **4.8** | 5.1 |
| Continuous care | **18.0** | 13.8 | **16.8** | 14.5 |
| Homecare margin drivers (dollars per patient day) |  |  |  |  |
| Labor costs | **$56.55** | $56.29 | **$57.58** | $56.50 |
| Combined drug, HME and medical supplies | **14.51** | 15.92 | **14.82** | 15.69 |
| Inpatient margin drivers (dollars per patient day) |  |  |  |  |
| Labor costs | **$377.13** | $341.29 | **$373.41** | $339.98 |
| Continuous care margin drivers (dollars per patient day) |  |  |  |  |
| Labor costs | **$583.87** | $610.58 | **$587.39** | $604.80 |
| Bad debt expense as a percent of revenues | **1.1%** | 1.2% | **1.1%** | 1.3% |
| Accounts receivable -- Days of revenue outstanding- excluding unapplied Medicare payments | **34.5** | 37.7 | **n.a.** | n.a. |
| Accounts receivable -- Days of revenue outstanding- including unapplied Medicare payments | **28.0** | 26.6 | **n.a.** | n.a. |

\- 32 -

### 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, 600 characters.

The Company's primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At June 30, 2017, the Company had $125.0 million of variable rate debt outstanding. For each $10 million dollars borrowed under the credit facility, an increase or decrease of 100 basis points (1% point), increases or decreases the Company's annual interest expense by $100,000.

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

## Controls and procedures

As filed, 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, 144 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.

\- 33 -

Filed Jul 31, 2017.
Source: SEC EDGAR, the filing index for accession 0001157523-17-002178. Last ingested by Listed: Nov 5, 2026, 15:55 ET. No prices; not investment advice.