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

- Company: [Chemed Corp](/companies/che.md) (CIK 19584)
- Form: 10-Q
- Filed: 2017-10-27
- Accepted by EDGAR: Oct 27, 2017, 11:17 ET
- Period: 2017-09-30
- Accession: 0001157523-17-002853
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/19584/000115752317002853/a51705552.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/19584/000115752317002853/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-07-01 to 2017-09-30 | $288.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2017-01-01 to 2017-09-30 | $859.0m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2017-07-01 to 2017-09-30 | $66.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2017-01-01 to 2017-09-30 | $205.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | $54.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-01-01 to 2017-09-30 | $56.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-07-01 to 2017-09-30 | $1.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2017-01-01 to 2017-09-30 | $3.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | $18.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-01-01 to 2017-09-30 | $15.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | $35.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-01-01 to 2017-09-30 | $43.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | $2.13 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | $2.60 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-07-01 to 2017-09-30 | $2.22 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2017-01-01 to 2017-09-30 | $2.72 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-07-01 to 2017-09-30 | 16,676,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2017-01-01 to 2017-09-30 | 16,763,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $50.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2017-01-01 to 2017-09-30 | $12.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2017-01-01 to 2017-09-30 | $94.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-09-30 | $18.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $135.3m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $895.5m | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $269.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $417.8m | us-gaap:Liabilities |
| Long-term debt | at 2017-09-30 | $72.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-09-30 | $10.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-09-30 | $477.7m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2017-09-30 | 15,966,003 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 58,879 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, 2017 | 2016 | Nine months ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | **$417,444** | $392,607 | **$1,238,367** | $1,173,405 |
| Net income | **$35,437** | $26,829 | **$43,625** | $76,554 |
| Diluted EPS | **$2.13** | $1.62 | **$2.60** | $4.54 |
| Adjusted net income | **$35,772** | $28,643 | **$102,174** | $86,625 |
| Adjusted diluted EPS | **$2.15** | $1.73 | **$6.10** | $5.14 |
| Adjusted EBITDA | **$67,604** | $57,387 | **$195,921** | $170,391 |
| Adjusted EBITDA as a % of revenue | **16.2%** | 14.6% | **15.8%** | 14.5% |

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and Adjusted EBITDA as a percent of revenue are not measures derived in accordance with US GAAP. We provide non-GAAP measures to help readers evaluate our operating results and to compare our operating performance with that of similar companies that have different capital structures. Our non-GAAP measures should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP. A reconciliation of our non-GAAP measures is presented on pages 30-32.

Both VITAS and Roto-Rooter have significant operations in Houston and south Florida. For the three and nine months ended September 30, 2017 we did not experience any material business interruptions or loss of assets related to the hurricanes in Houston or Florida.

Net income for the nine months ended September 30, 2017 includes $55.8 million ($3.33 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 is 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 September 30, 2017, the increase in consolidated service revenues and sales was driven by a 17.1% increase at Roto-Rooter and a 2.2% 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, 49.1% is related to water restoration. The increase in service revenues at VITAS was primarily a result of Medicare reimbursement rates increasing 1.3%, a 2.8% increase in days of care, offset by acuity mix shift which negatively impacted revenue 2.2% when compared to the prior year period. Adjusted EBITDA as a percent of revenue increased 160 basis points when compared to the prior year quarter mainly as a result of mix shift in levels of care and improved cost management for high acuity care. See page 33 for additional VITAS operating metrics.

For the nine months ended September 30, 2017, the increase in consolidated service revenues and sales was driven by a 14.4% increase at Roto-Rooter and a 2.0% 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 2.7% increase in days of care, offset by acuity mix shift which negatively impacted revenue 2.4% when compared to the prior year period. Adjusted EBITDA as a percent of revenue increased 130 basis points when compared to the prior year quarter mainly as a result of mix shift in levels of care and improved cost management for high acuity care. See page 33 for additional VITAS operating metrics.

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 2.0% to 3.0%. Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 15.0%. This guidance includes $1.5 million for Medicare cap billing limitations. Roto-Rooter expects full-year 2017 revenue growth of 13.0% to 14.0%. 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 22.5%. We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.

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### Financial Condition

### Liquidity and Capital Resources

Material changes in the balance sheet accounts from December 31, 2016 to September 30, 2017 include the following:

- A $40.5 million decrease in accounts receivable due mainly to timing of Medicare and Medicaid payments.
- A $21.8 million increase in properties plant and equipment mainly due to the purchase of transportation equipment during the quarter.
- A $36.2 million increase in net deferred taxes associated with amounts recorded for a potential litigation settlement.
- A $4.8 million decrease in accounts payable mainly due to timing of payments.
- A $12.3 increase in income taxes due to timing of payments.
- An $89.6 million increase in accrued legal due to a potential litigation settlement.
- A $26.3 million decrease in long-term debt due to payments on our term loan and revolving line of credit.

Net cash provided by operating activities increased $62.6 million mainly as a result of a $22.9 million increase in net income excluding potential litigation settlement and a $19.5 million decrease caused by changes in accounts receivable. The potential litigation settlement recorded is non-cash at September 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 $35.6 million in standby letters of credit as of September 30, 2017, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of September 30, 2017, we have approximately $309.4 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 September 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. 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 $935,000 and $599,000 for the quarters ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the net costs were $5.2 million and $4.1 million respectively.

Net income for the nine months ended September 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 GAAP, 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 September 13, 2017, the Court entered an order dismissing with prejudice the claims against defendants Timothy S, O’Toole and Joel F. Gemunder and permitting Defendants to file a Motion to Dismiss the Corrected Amended Complaint on or before September 29, 2017, with Plaintiff’s Answering to be filed on or before December 1, 2017, and Defendants’ Reply Brief to be filed on or before December 29, 2017. Defendants filed their Motion to Dismiss timely. 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.

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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.

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 CA filed its Answer and served written discovery on Chhina.

On May 19, 2017, Chere Phillips (a Home Health Aide in Sacramento) and Lady Moore (a former Social Worker in Sacramento) filed a lawsuit against VITAS Healthcare Corporation of California in Sacramento County Superior Court, alleging claims for (1) failure to pay all wages due; (2) failure to authorize and permit rest periods; (3) failure to provide off-duty meal periods; (4) failure to furnish accurate wage statements; (5) unreimbursed business expenses; (6) waiting time penalties; (7) violations of unfair competition law; and (8) violation of the Private Attorney General Act. The case is captioned: *Chere Phillips and Lady Moore v. VITAS Healthcare Corporation of California*, Sacramento County Superior Court, Case No. 34-2017-0021-2755. Plaintiffs sought to pursue these claims in the form of a state-wide class action of current and former non-exempt employees employed with VITAS CA in California within the four years preceding the filing of the lawsuit. Plaintiffs served VITAS with the lawsuit on June 5, 2017. VITAS CA timely answered the Complaint generally denying the Plaintiffs’ allegations. The Court has stayed all class discovery in this case pending the resolution of the November 10, 2017 in the *Seper* and *Chhina* cases.

There are currently three other lawsuits against VITAS pending in the superior courts of other California counties that contain claims and class periods that substantially overlap with Phillips’ and Moore’s claims. These are *Seper, v. VITAS Healthcare Corp of California et al., filed on September 26, 2016 in Los Angeles County Superior Court BC 642857; Chhina v. VITAS Health Service, Inc. et al., filed on September 27, 2016 in San Diego County Superior Court, 34-2015-00033998 CU\_OE\_CTL; both described above* and *Williams v. VITAS Healthcare Corporation of California*, filed on May 22, 2017 in Alameda County Superior Court, RG 17853886.

Jazzina Williams’ (a Home Health Aide in Sacramento) lawsuit alleges claims for (1) failure to pay all wages due; (2) failure to authorize and permit rest periods; (3) failure to provide off-duty meal periods; (4) failure to furnish accurate wage statements; (5) unreimbursed business expenses; (6) waiting time penalties; and (7) violations of the Private Attorney General Act. Williams seeks to pursue these claims in the form of a state-wide class action of current and former non-exempt employees. Plaintiff served VITAS with the lawsuit on May 31, 2017. VITAS timely answered the Complaint generally denying Plaintiff’s allegations. Williams is pursuing discovery of her individual claims and has agreed to a stay of class discovery pending outcome of a November 10, 2017 mediation of the *Seper* and *Chhina* cases. Defendant filed and served each of Plaintiffs Williams, Phillips, and Moore with a Notice of Related Cases on July 19, 2017. Defendant understands that the *Seper* and *Chhina* cases will be effectively consolidated in Los Angeles County Superior court: *Chhina* will be dismissed as a separate action and joined with *Seper* through the filing of an amended complaint in *Seper* in which *Chhina* is also identified as a named plaintiff.

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The Company is not able to reasonably estimate the probability of loss or range of loss for any 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.

### Results of Operations

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

Our service revenues and sales for the third quarter of 2017 increased 6.3% versus services and sales revenues for the third quarter of 2016. Of this increase, a $6.1 million increase was attributable to VITAS and $18.8 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 | $11,217 | 5.0 |
| Continuous care | (4,025) | (11.9) |
| General inpatient | (1,334) | (5.6) |
| Medicare cap | 228 | 100.0 |
| Roto-Rooter |  |  |
| Plumbing | 7,262 | 15.2 |
| Drain cleaning | 1,442 | 4.1 |
| Water restoration | 9,208 | 77.2 |
| Contractor operations | 632 | 6.4 |
| Other | 207 | 4.2 |
| Total | $24,837 | 6.3 |

The increase in VITAS’ revenues for the third quarter of 2017 versus the third quarter of 2016 was comprised of an average net Medicare reimbursement rate increasing approximately 1.3%, a 2.8% increase in days of care offset by acuity mix shift which negatively impacted revenue 2.2% when compared to the prior year period.

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

|  | Days of Care 2017 | 2016 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **1,458,153** | 1,407,623 | 3.6 |
| Continuous care | **41,237** | 46,582 | (11.5) |
| General inpatient | **32,567** | 36,241 | (10.1) |
| Total days of care | **1,531,957** | 1,490,446 | 2.8 |

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

The increase in plumbing revenues for the third quarter of 2017 versus 2016 is attributable to a 14.2% increase in price and service mix shift as well as a 1.0% increase in job count. Drain cleaning revenues for the third quarter of 2017 versus 2016 reflect a 6.2% increase in price and service mix shift offset by a 2.1% decrease in job count. Water restoration for the third quarter of 2017 versus 2016 increased 77.2% as a result of continued expansion of this service offering including a 38.0% increase in number of jobs performed. Contractor operations increased 6.4% mainly due to their expansion into water restoration.

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The consolidated gross margin was 31.0% in the third quarter of 2017 as compared with 28.3% in the third quarter of 2016. On a segment basis, VITAS’ gross margin was 23.1% in the third quarter of 2017 as compared with 20.7%, in the third 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 48.7% for the third quarter of 2017 compared with 47.8% in the third quarter of 2016. The increase in Roto-Rooter gross margin is the result mainly of higher revenues, particularly in water restoration, with relatively low increase in branch level fixed costs.

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, 2017 | 2016 |
| --- | ---: | ---: |
| plans, long-term incentive compensation, and OIG investigation expenses | **$63,463** | $56,475 |
| Impact of market value adjustments related to assets held in deferred |  |  |
| compensation trusts | **1,417** | 1,656 |
| Long-term incentive compensation | **1,104** | 643 |
| Expenses related to OIG investigation | **935** | 599 |
| Total SG&A expenses | **$66,919** | $59,373 |

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 2017 were up 12.4% when compared to the third 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.

During the third quarter of 2017, a credit of $371,000 was recorded due to the recovery of previously recognized expenses related to the closure of the programs in one state at Vitas. There were no other operating expenses recorded in the third quarter of 2016.

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

| Market value adjustment on assets held in | Three months ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| deferred compensation trusts | **$1,417** | $1,656 |
| Loss on disposal of property and equipment | **(146)** | (134) |
| Interest income | **51** | 119 |
| Other | **1** | (1) |
| Total other income/(expense) - net | **$1,323** | $1,640 |

Our effective income tax rate was 34.7% in the third quarter of 2017 compared to 38.3% during the third 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. Excluding the adoption of the ASU, our effective income tax rate is 38.0%.

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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, 2017 | 2016 |
| --- | ---: | ---: |
| Expenses related to OIG investigation | **$(578)** | $(370) |
| Program closure income | **223** | - |
| Medicare cap sequestration adjustment | **-** | (141) |
| Corporate |  |  |
| Excess tax benefits on stock compensation | **1,783** | - |
| Stock option expense | **(1,064)** | (897) |
| Long-term incentive compensation | **(699)** | (406) |
| Total | **$(335)** | $(1,814) |

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

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

|  | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| VITAS | $5,551 | 26.6 |
| Roto-Rooter | 3,179 | 24.7 |
| Corporate | (122) | (1.8) |
|  | $8,608 | 32.1 |

VITAS’ after-tax earnings were positively impacted in 2017 compared to 2016 by a $6.1 million increase in revenue and a $2.3 million decrease in cost of services provided and goods sold. After-tax earnings as a percent of revenue in the third quarter of 2017 were 9.2%, an increase of 1.8% over the third quarter of 2016.

Roto-Rooter’s net income was positively impacted in 2017 compared to 2016 primarily by a $9.2 million revenue increase in Roto-Rooter’s water restoration line of business and a $7.3 million increase in plumbing revenue. After-tax earnings as a percent of revenue at Roto-Rooter in the third quarter of 2017 was 12.5% as compared to 11.7% in the third quarter of 2016.

### Results of Operations

### Nine months ended September 30, 2017 versus 2016 - Consolidated Results

Our service revenues and sales for the first nine months of 2017 increased 5.5% versus services and sales revenues for the first nine months of 2016. Of this increase, a $16.9 million increase was attributable to VITAS and $48.1 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 | $33,882 | 5.1 |
| Continuous care | (11,600) | (10.9) |
| General inpatient | (5,417) | (7.3) |
| Medicare cap | (19) | (8.3) |
| Roto-Rooter |  |  |
| Plumbing | 16,852 | 11.6 |
| Drain cleaning | 3,454 | 3.2 |
| Water restoration | 23,597 | 64.6 |
| Contractor operations | 3,180 | 10.8 |
| Other | 1,033 | 6.9 |
| Total | $64,962 | 5.5 |

-22-

The increase in VITAS’ revenues for the first nine months of 2017 versus the first nine months of 2016 was comprised of an average net Medicare reimbursement rate increasing approximately 1.3%, a 2.7% 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 nine months ended September 30 were as follows:

|  | Days of Care 2017 | 2016 | Increase/(Decrease) Percent |
| --- | ---: | ---: | ---: |
| Routine homecare | **4,256,541** | 4,109,775 | 3.6 |
| Continuous care | **129,762** | 145,327 | (10.7) |
| General inpatient | **97,803** | 111,323 | (12.1) |
| Total days of care | **4,484,106** | 4,366,425 | 2.7 |

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 2017 versus 2016 is attributable primarily to service mix shift as well as a 0.6% increase in job count. Drain cleaning revenues for the first nine months of 2017 versus 2016 reflect a 5.3% increase in price and service mix shift offset by a 2.1% decrease in job count. Water restoration for the first nine months of 2017 versus 2016 increased 64.6% as a result of continued expansion of this service offering including a 32.6% increase in jobs performed. Contractor operations increased 10.8% mainly due to their expansion into water restoration.

The consolidated gross margin was 30.6% in the first nine months of 2017 as compared with 28.7% in the first nine months of 2016. On a segment basis, VITAS’ gross margin was 22.5% in the first nine months of 2017 as compared with 21.1%, in the first nine months of 2016. The increase in VITAS’ gross margin is the result of mix shift to higher margin care, labor and ancillary cost management. The Roto-Rooter segment’s gross margin was 48.9% for the first nine months of 2017 compared with 48.0% in the first nine months of 2016. The increase in the Roto-Rooter gross margin is the result mainly of higher revenues, particularly in water restoration, with relatively low increase in branch level fixed costs.

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, 2017 | 2016 |
| --- | ---: | ---: |
| plans, long-term incentive compensation, and OIG investigation expenses | **$191,213** | $174,183 |
| Impact of market value adjustments related to assets held in deferred |  |  |
| compensation trusts | **5,619** | 1,857 |
| Expenses related to OIG investigation | **5,178** | 4,105 |
| Long-term incentive compensation | **3,021** | 901 |
| Total SG&A expenses | **$205,031** | $181,046 |

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 nine months of 2017 were up 9.8% when compared to the first nine 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 $91.1 million during the first nine months of 2017 related to a $90.0 million potential litigation settlement and $1.1 million related to the closure of the programs in one state at Vitas. During the first nine months of 2016, the Company recorded $4.5 million related to early retirement expenses.

-23-

Other income - net comprise (in thousands):

| Market value adjustment on assets held in | Nine months ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| deferred compensation trusts | **$5,619** | $1,857 |
| Loss on disposal of property and equipment | **(481)** | (224) |
| Interest income | **297** | 301 |
| Other | **4** | (1) |
| Total other income - net | **$5,439** | $1,933 |

Our effective income tax rate was 25.8% in the first nine months of 2017 compared to 38.6% during the first nine 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. Excluding the impact of the ASU, our effective income tax rate for the first nine months of 2017 was 39.6%.

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, 2017 | 2016 |
| --- | ---: | ---: |
| Potential litigation settlement | **$(55,800)** | $- |
| Expenses related to OIG investigation | **(3,198)** | (2,535) |
| Program closure expenses | **(675)** | - |
| Medicare cap sequestration adjustment | **(65)** | (141) |
| Early retirement expenses | **-** | (2,840) |
| Roto-Rooter |  |  |
| Expenses related to litigation settlements | **(129)** | (27) |
| Corporate |  |  |
| Excess tax benefits on stock compensation | **8,121** | - |
| Stock option expense | **(4,892)** | (3,958) |
| Long-term incentive compensation | **(1,911)** | (570) |
| Total | **$(58,549)** | $(10,071) |

### Nine months ended September 30, 2017 versus 2016 - Segment Results

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

|  | Increase/(Decrease) Amount | Percent |
| --- | ---: | ---: |
| VITAS | $(43,741) | (74.7) |
| Roto-Rooter | 8,500 | 21.7 |
| Corporate | 2,312 | 10.9 |
|  | $(32,929) | (43.0) |

VITAS’ 2017 after-tax earnings were impacted in 2017 when compared to 2016 by a $55.8 million (after-tax) potential ligation settlement offset by a $16.8 million increase in revenue and a $1.2 million decrease in cost of services provided and goods sold.

-24-

Roto-Rooter’s net income was positively impacted in 2017 compared to 2016 primarily by a $23.6 million revenue increase in Roto-Rooter’s water restoration line of business, a $16.9 million increase in plumbing revenue and a $7.7 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 $8.1 million which is partially offset by higher stock based compensation expenses.

-25-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017*

*(in thousands)(unaudited)*

| 2017 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $288,951 | $128,493 | $- | $417,444 |
| Cost of services provided and goods sold | 222,119 | 65,928 | - | 288,047 |
| Selling, general and administrative expenses | 23,783 | 33,694 | 9,442 | 66,919 |
| Depreciation | 4,529 | 4,268 | 22 | 8,819 |
| Amortization | - | 33 | - | 33 |
| Other operating expenses | (371) | - | - | (371) |
| Total costs and expenses | 250,060 | 103,923 | 9,464 | 363,447 |
| Income/(loss) from operations | 38,891 | 24,570 | (9,464) | 53,997 |
| Interest expense | (53) | (73) | (922) | (1,048) |
| Intercompany interest income/(expense) | 2,950 | 1,378 | (4,328) | - |
| Other income/(expense)—net | (86) | (8) | 1,417 | 1,323 |
| Income/(expense) before income taxes | 41,702 | 25,867 | (13,297) | 54,272 |
| Income taxes | (15,248) | (9,833) | 6,246 | (18,835) |
| Net income/(loss) | $26,454 | $16,034 | $(7,051) | $35,437 |
| (a) The following amounts are included in net income (in thousands): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(1,683) | $(1,683) |
| Long-term incentive compensation | - | - | (1,104) | (1,104) |
| Program closure expenses | 371 | - | - | 371 |
| Expenses related to OIG investigation | (935) | - | - | (935) |
| Total | $(564) | $- | $(2,787) | $(3,351) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| Stock option expense | $- | $- | $(1,064) | $(1,064) |
| Long-term incentive compensation | - | - | (699) | (699) |
| Program closure expenses | 223 | - | - | 223 |
| Expenses related to OIG investigation | (578) | - | - | (578) |
| Excess tax benefits on stock compensation | - | - | 1,783 | 1,783 |
| Total | $(355) | $- | $20 | $(335) |

-26-

*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): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| 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) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| 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) |

-27-

*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*CONSOLIDATING STATEMENT OF INCOME*

*FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017*

*(in thousands)(unaudited)*

| 2017 (a) | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Service revenues and sales | $855,977 | $382,390 | $- | $1,238,367 |
| Cost of services provided and goods sold | 663,565 | 195,474 | - | 859,039 |
| Selling, general and administrative expenses | 72,608 | 100,917 | 31,506 | 205,031 |
| Depreciation | 14,048 | 12,322 | 175 | 26,545 |
| Amortization | 14 | 97 | - | 111 |
| Other operating expenses | 91,138 | - | - | 91,138 |
| Total costs and expenses | 841,373 | 308,810 | 31,681 | 1,181,864 |
| Income/(loss) from operations | 14,604 | 73,580 | (31,681) | 56,503 |
| Interest expense | (161) | (259) | (2,744) | (3,164) |
| Intercompany interest income/(expense) | 8,478 | 4,035 | (12,513) | - |
| Other income/(expense)—net | (95) | (85) | 5,619 | 5,439 |
| Income/(expense) before income taxes | 22,826 | 77,271 | (41,319) | 58,778 |
| Income taxes | (8,029) | (29,555) | 22,431 | (15,153) |
| Net income/(loss) | $14,797 | $47,716 | $(18,888) | $43,625 |
| (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 | - | - | (7,738) | (7,738) |
| Long-term incentive compensation | - | - | (3,021) | (3,021) |
| Expenses related to litigation settlements | - | (213) | - | (213) |
| Program closure expenses | (1,138) | - | - | (1,138) |
| Expenses related to OIG investigation | (5,178) | - | - | (5,178) |
| Total | $(96,421) | $(213) | $(10,759) | $(107,393) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| Potential litigation settlement | $(55,800) | $- | $- | $(55,800) |
| Medicare cap sequestration adjustments | (65) | - | - | (65) |
| Stock option expense | - | - | (4,892) | (4,892) |
| Long-term incentive compensation | - | - | (1,911) | (1,911) |
| Expenses related to litigation settlements | - | (129) | - | (129) |
| Program closure expenses | (675) | - | - | (675) |
| Expenses related to OIG investigation | (3,198) | - | - | (3,198) |
| Excess tax benefits on stock compensation | - | - | 8,121 | 8,121 |
| Total | $(59,738) | $(129) | $1,318 | $(58,549) |

-28-

*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): |  |  |  |  |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| Pretax benefit/(cost): |  |  |  |  |
| 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) |
|  |  |  |  | **Chemed** |
|  | **VITAS** | **Roto-Rooter** | **Corporate** | **Consolidated** |
| After-tax benefit/(cost): |  |  |  |  |
| 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) |

-29-

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the three months ended September 30, 2017 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $26,454 | $16,034 | $(7,051) | $35,437 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 53 | 73 | 922 | 1,048 |
| Income taxes | 15,248 | 9,833 | (6,246) | 18,835 |
| Depreciation | 4,529 | 4,268 | 22 | 8,819 |
| Amortization | - | 33 | - | 33 |
| **EBITDA** | 46,284 | 30,241 | (12,353) | 64,172 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (2,950) | (1,378) | 4,328 | - |
| Interest income | (48) | (4) | - | (52) |
| Expenses related to OIG investigation | 935 | - | - | 935 |
| Program closure expenses | (371) | - | - | (371) |
| Amortization of stock awards | 72 | 67 | 156 | 295 |
| Advertising cost adjustment | - | (162) | - | (162) |
| Stock option expense | - | - | 1,683 | 1,683 |
| Long-term incentive compensation | - | - | 1,104 | 1,104 |
| **Adjusted EBITDA** | $43,922 | $28,764 | $(5,082) | $67,604 |
|  |  |  |  | **Chemed** |
| **For the three months ended September 30, 2016** | **VITAS** | **Roto-Rooter** | **Corporate** | **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 |

-30-

*Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA*

*(in thousands)*

| Chemed Corporation and Subsidiary Companies For the nine months ended September 30, 2017 | VITAS | Roto-Rooter | Corporate | Chemed Consolidated |
| --- | ---: | ---: | ---: | ---: |
| **Net income/(loss)** | $14,797 | $47,716 | $(18,888) | $43,625 |
| Add/(deduct): |  |  |  |  |
| Interest expense | 161 | 259 | 2,744 | 3,164 |
| Income taxes | 8,029 | 29,555 | (22,431) | 15,153 |
| Depreciation | 14,048 | 12,322 | 175 | 26,545 |
| Amortization | 14 | 97 | - | 111 |
| **EBITDA** | 37,049 | 89,949 | (38,400) | 88,598 |
| Add/(deduct): |  |  |  |  |
| Intercompany interest expense/(income) | (8,478) | (4,035) | 12,513 | - |
| Interest income | (267) | (29) | - | (296) |
| Potential litigation settlement | 90,000 | - | - | 90,000 |
| Medicare cap sequestration adjustment | 105 | - | - | 105 |
| Program closure expenses | 1,138 | - | - | 1,138 |
| Expenses related to OIG investigation | 5,178 | - | - | 5,178 |
| Stock award amortization | 220 | 203 | 510 | 933 |
| Advertising cost adjustment | - | (707) | - | (707) |
| Expenses related to litigation settlements | - | 213 | - | 213 |
| Stock option expense | - | - | 7,738 | 7,738 |
| Long-term incentive compensation | - | - | 3,021 | 3,021 |
| **Adjusted EBITDA** | $124,945 | $85,594 | $(14,618) | $195,921 |
|  |  |  |  | **Chemed** |
| **For the nine months ended September 30, 2016** | **VITAS** | **Roto-Rooter** | **Corporate** | **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 |

-31-

*RECONCILIATION OF ADJUSTED NET INCOME*

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

|  | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net income/(loss) as reported | **$35,437** | $26,829 | **$43,625** | $76,554 |
| Add/(deduct) after-tax cost of: |  |  |  |  |
| Excess tax benefits on stock compensation | **(1,783)** | - | **(8,121)** | - |
| Stock option expense | **1,064** | 897 | **4,892** | 3,958 |
| Long-term incentive compensation | **699** | 406 | **1,911** | 570 |
| Expenses of OIG investigation | **578** | 370 | **3,198** | 2,535 |
| Program closure expenses | **(223)** | - | **675** | - |
| Medicare cap sequestration adjustment | **-** | 141 | **65** | 141 |
| Potential litigation settlement | **-** | - | **55,800** | - |
| Expenses related to litigation settlements | **-** | - | **129** | 27 |
| Early retirement expenses | **-** | - | **-** | 2,840 |
| Adjusted net income | **$35,772** | $28,643 | **$102,174** | $86,625 |
| Diluted Earnings Per Share As Reported |  |  |  |  |
| Net income/(loss) | **$2.13** | $1.62 | **$2.60** | $4.54 |
| Average number of shares outstanding | **16,676** | 16,559 | **16,763** | 16,851 |
| Adjusted Diluted Earnings Per Share |  |  |  |  |
| Adjusted net income | **$2.15** | $1.73 | **$6.10** | $5.14 |
| Adjusted average number of shares outstanding | **16,676** | 16,559 | **16,763** | 16,851 |

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*CHEMED CORPORATION AND SUBSIDIARY COMPANIES*

*OPERATING STATISTICS FOR VITAS SEGMENT*

*(unaudited)*

| OPERATING STATISTICS Net revenue ($000) | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended Setpember 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Homecare | **$236,565** | $225,348 | **$693,359** | $659,477 |
| Inpatient | **22,516** | 23,850 | **68,439** | 73,856 |
| Continuous care | **29,870** | 33,895 | **94,426** | 106,026 |
| Total before Medicare cap allowance | **$288,951** | $283,093 | **$856,224** | $839,359 |
| Medicare cap allowance | **-** | (228) | **(247)** | (228) |
| Total | **$288,951** | $282,865 | **$855,977** | $839,131 |
| Net revenue as a percent of total before Medicare cap allowances |  |  |  |  |
| Homecare | **81.9%** | 79.6% | **81.0%** | 78.6% |
| Inpatient | **7.8** | 8.4 | **8.0** | 8.8 |
| Continuous care | **10.3** | 12.0 | **11.0** | 12.6 |
| Total before Medicare cap allowance | **100.0** | 100.0 | **100.0** | 100.0 |
| Medicare cap allowance | **-** | (0.1) | **-** | - |
| Total | **100.0%** | 99.9% | **100.0%** | 100.0% |
| Average daily census (days) |  |  |  |  |
| Homecare | **12,596** | 12,223 | **12,444** | 11,972 |
| Nursing home | **3,254** | 3,077 | **3,148** | 3,028 |
| Routine homecare | **15,850** | 15,300 | **15,592** | 15,000 |
| Inpatient | **354** | 394 | **358** | 406 |
| Continuous care | **448** | 507 | **475** | 530 |
| Total | **16,652** | 16,201 | **16,425** | 15,936 |
| Total Admissions | **16,000** | 16,157 | **49,874** | 49,205 |
| Total Discharges | **15,726** | 15,690 | **49,074** | 48,403 |
| Average length of stay (days) | **89.5** | 87.7 | **87.9** | 85.2 |
| Median length of stay (days) | **16.0** | 16.0 | **16.0** | 16.0 |
| ADC by major diagnosis |  |  |  |  |
| Cerebro | **35.6%** | 32.9% | **35.0%** | 32.2% |
| Neurological | **18.9** | 20.7 | **19.4** | 21.3 |
| Cardio | **16.6** | 17.1 | **16.6** | 17.3 |
| Cancer | **14.4** | 15.5 | **14.8** | 15.3 |
| Respiratory | **7.9** | 7.8 | **7.9** | 7.8 |
| Other | **6.6** | 6.0 | **6.3** | 6.1 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Admissions by major diagnosis |  |  |  |  |
| Cerebro | **22.0** | 21.2% | **21.9%** | 20.9% |
| Neurological | **10.0** | 11.0 | **10.5** | 11.0 |
| Cancer | **31.5** | 33.3 | **30.8** | 31.9 |
| Cardio | **14.9** | 14.4 | **15.1** | 15.3 |
| Respiratory | **10.6** | 9.0 | **10.9** | 10.1 |
| Other | **11.0** | 11.1 | **10.8** | 10.8 |
| Total | **100.0%** | 100.0% | **100.0%** | 100.0% |
| Direct patient care margins |  |  |  |  |
| Routine homecare | **52.4%** | 51.4% | **52.2%** | 51.8% |
| Inpatient | **3.4** | (2.4) | **4.4** | 2.7 |
| Continuous care | **17.3** | 12.2 | **16.9** | 13.7 |
| Homecare margin drivers (dollars per patient day) |  |  |  |  |
| Labor costs | **$56.48** | $56.53 | **$57.20** | $56.51 |
| Combined drug, HME and medical supplies | **14.67** | 16.30 | **14.77** | 15.90 |
| Inpatient margin drivers (dollars per patient day) |  |  |  |  |
| Labor costs | **$362.48** | $360.35 | **$369.77** | $346.61 |
| Continuous care margin drivers (dollars per patient day) |  |  |  |  |
| Labor costs | **$579.31** | $618.15 | **$584.82** | $609.08 |
| Bad debt expense as a percent of revenues | **1.1%** | 1.2% | **1.1%** | 1.2% |
| Accounts receivable -- Days of revenue outstanding- excluding unapplied Medicare payments | **34.6** | 38.4 | **n.a** | n.a. |
| Accounts receivable -- Days of revenue outstanding- including unapplied Medicare payments | **19.9** | 20.7 | **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, 604 characters.

The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At September 30, 2017, the Company had $82.5 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 Oct 27, 2017.
Source: SEC EDGAR, the filing index for accession 0001157523-17-002853. Last ingested by Listed: Nov 5, 2026, 15:55 ET. No prices; not investment advice.