Chemed Corp: Form 10-Q for the period ended Sep 30, 2018

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):

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 30-36.

Effective January 1, 2018 the Company adopted ASU No. 2014-09 – Revenue from Contracts with Customers. This resulted in the change in classification of net room and board expenses associated with certain patients residing in nursing homes classified from cost of services to revenue. The amount of the change in classification was $2.6 million and $7.9 million for the three and nine months ended September 30, 2018. Additionally, approximately $4.6 million and $13.9 million that was historically considered bad debt expenses previously classified in selling, general and administrative expenses were recorded in revenue for the three and nine months ended September 30, 2018. The Company adopted the standard on a modified retrospective basis for all contracts. Thus, 2017 has not been restated to conform with the 2018 presentation. Footnote 2 to the Consolidated Financial Statements gives a complete description of the Company’s adoption.

For the three months ended September 30, 2018, the increase in consolidated service revenues and sales was driven by an 10.8% increase at Roto-Rooter and a 4.4% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines offset by a $1.6 million decrease related to the adoption of the new revenue recognition standard. The increase in service revenues at VITAS is comprised primarily of a 0.8% geographically weighted average Medicare reimbursement rate increase, a 7.8% increase in average daily census, offset by $1.9 million in Medicare cap revenue reduction, a 1.8% in acuity mix shift and a $5.5 million decrease related to the adoption of the new revenue recognition standard. See page 37 for additional VITAS operating metrics.

For the nine months ended September 30, 2018, the increase in consolidated service revenues and sales was driven by a 13.6% increase at Roto-Rooter and a 4.0% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines offset by a $5.2 million decrease related to the adoption of the new revenue recognition standard. The increase in service revenues at VITAS is comprised primarily of a 0.8% geographically weighted average Medicare reimbursement rate increase and a 7.2% increase in average daily census, offset by $668,000 in Medicare cap revenue reduction (compared to $247,000 for the same period in 2017), acuity mix shift and a $16.6 million decrease related to the adoption of the new revenue recognition standard. See page 37 for additional VITAS operating metrics.

Our effective income tax rate was 18.6% in the third quarter of 2018 compared to 34.7% during the third quarter of 2017. Our effective income tax rate was 14.5% for the nine months ended September 30, 2018 compared to 25.8% during the nine months ended September 30, 2017. Law H.R.1, “An Act to Provide for Reconciliation Pursant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” ( the “Act”) reduced our overall effective tax rate. The Act amends the Internal Revenue Code to reduce tax rates and modifies policies, credits, and deductions for individuals and businesses. Additionally, excess tax benefit on stock options reduced our income tax expense by $3.1 million and $1.8 million, respectively for the quarters ended September 30, 2018 and 2017. Additionally, excess tax benefit on stock options reduced our income tax expense by $18.6 million and $8.1 million, respectively for the nine months ended September 30, 2018 and 2017.

-20-

While we have significant Roto-Rooter operations in Florida, North Carolina and Virginia, we had no significant casualty losses or business interruptions as a result of Hurricane Florence or Hurricane Michael.

On September 26, 2018, VITAS completed the acquisition of Hospice of Citrus and the Nature Coast for $11.0 million in cash. This acquisition expands VITAS’ services to an additional 12 counties within the state of Florida. A substantial portion of the aggregate purchase price was allocated to goodwill. The purchase price allocation related to this acquisition is preliminary and is anticipated to be finalized in the fourth quarter. The operating results of this business combination have been included in our results of operations since the acquisition date and are not material for the quarter or nine months ended September 30, 2018.

VITAS expects its full-year 2018 revenue growth, prior to Medicare cap, to be in the range of 4.5% to 5.0%. Admissions are estimated to expand approximately 3.5% to 4.0% and Average Daily Census in 2018 is estimated to expand approximately 6.7%. Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 15.9%. We are currently estimating $1.3 million for Medicare Cap billing limitations in the fourth quarter of 2018. Roto-Rooter expects to achieve full-year 2018 revenue growth of 13.0% to 14.0%. The revenue estimate is based upon increased job pricing of approximately 2.0%, continued growth in core plumbing and drain cleaning services as well as revenue growth in water restoration services. Adjusted EBITDA margin for 2018 is estimated in the range of 23.6%. 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, 2017 to September 30, 2018 include the following:

• An increase of $56.3 million in cash and a $28.8 million increase in long-term debt due to borrowings on our revolving line of credit mainly to fund acquisitions made subsequent to quarter end as discussed in Footnote 17.
• A $4.7 million decrease in accounts receivable due to timing of payments.
• A $23.8 million decrease in prepaid taxes due to timing of payments.
• A $6.4 million increase in goodwill due to acquisitions at VITAS and Roto-Rooter.
• A $11.4 million decrease in accounts payable due to timing of payments.
• A $7.8 million increase in accrued compensation due to 2018 accrual offset by the payments of cash bonuses in 2018 accrued in 2017.
• A $169.2 million increase in treasury stock due to stock repurchases.

Net cash provided by operating activities increased $39.6 million from September 30, 2017 to September 30, 2018 mainly as a result of a $107.6 million increase in net income offset by the after-tax impact of the litigation settlement recorded in 2017. 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.

On June 20, 2018, we replaced our existing credit agreement with the Fourth Amended and Restated Credit Agreement (“2018 Credit Agreement”). Terms of the 2018 Credit Agreement consist of a five-year, $450 million revolving credit facility and a $150 million expansion feature, which may consist of term loans or additional revolving commitments. The revolving credit facility has a five-year maturity with principal payments due at maturity. The interest rate at the inception of the agreement is LIBOR plus 100 basis points. The 2018 Credit Agreement has a floating interest rate that is generally LIBOR plus a tiered additional rate which varies based on our current leverage ratio.

We have issued $36.4 million in standby letters of credit as of September 30, 2018, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of September 30, 2018, we have approximately $283.6 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

-21-

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, 2018 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.

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. The matter has been fully briefed and argued. 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.

On October 30, 2017, the Company entered into a settlement agreement (the “Settlement Agreement”) to resolve civil litigation under the False Claims Act brought by the United States Department of Justice (“DOJ”) on behalf of the OIG and various relators concerning VITAS, filed in the U.S. District Court of the Western District of Missouri (the “2013 Action”). The Company denied any violation of law and agreed to settlement without admission of wrongdoing.

In connection with the settlement VITAS and certain of its subsidiaries entered into a corporate integrity agreement (“CIA”) on October 30, 2017. The CIA formalizes various aspects of VITAS’ already existing Compliance Program and contains requirements designed to document compliance with federal healthcare program requirements. It has a term of five years during which it imposes monitoring, reporting, certification, oversight, screening and training obligations, certain of which had previously been implemented by VITAS. It also requires VITAS to engage an Independent Review Organization to perform audit and review functions and to prepare reports regarding compliance with federal healthcare programs. In the event of breach of the CIA, VITAS could become liable for payment of stipulated penalties or could be excluded from participation in federal healthcare programs.

-22-

Under the Settlement Agreement, the United States agreed to release the Company, VITAS, and its hospice operation subsidiaries from any civil or administrative monetary liability relating to any patients’ disputed terminal medical prognosis of six months or less; a lack of medical necessity for billed Continuous Home Care, General Inpatient Care, or Respite Care levels of hospice care; or that the claims for those levels of hospice care were not eligible for payment for any other reason. The OIG agreed, conditioned on the Company’s full payment and in consideration of VITAS’ obligations under the CIA, to release its permissive exclusion rights and refrain from instituting any administrative action seeking to exclude the Company, VITAS, and its affiliates from participating in Medicare, Medicaid, or other federal healthcare programs in this regard.

The costs incurred related to U.S. v. VITAS and related regulatory matters were $935,000 million and $5.2 million for the quarter and year to date September 30, 2017, respectively. No significant costs were incurred during the quarter and nine months ended September 30, 2018, respectively.

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 (“Jordan Seper case”).

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.

Jiwann 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 period, 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, Jiwan Chhina v. VITAS Health Services of California, Inc., a California corporation; VITAS Healthcare Corporation of California, a Delaware corporation; VITAS Healthcare Corporation of California, a Delaware corporation dba VITAS Healthcare Inc.; and DOES 1 to 100, inclusive; San Diego Superior Court Case Number 37-2015-00033978-CU-OE-CTL on November 3, 2016 (“Jiwann Chhina case”). 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 CA 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 Attorneys 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 resolution of mediation in the Jordan Seper and Jiwann Chhina cases.

-23-

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: the Jordan Seper and Jiwann Chhina cases, 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 Attorneys 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 CA timely answered the Complaint generally denying Plaintiff’s allegations. Williams is pursing discovery of her individual claim and has agreed to a stay of class discovery pending mediation in the Jordan Seper and Jiwann Chhina cases. Defendant filed and served each of Plaintiffs Williams, Phillips, and Moore with a Notice of Related Cases on July 19, 2017.

The Jordan Seper and Jiwann Chhina cases have been consolidated in Los Angeles County Superior court; Chhina was 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, on August 28, 2018.

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, 2018 versus 2017 - Consolidated Results

Our service revenues and sales for the third quarter of 2018 increased 6.4% versus services and sales revenues for the third quarter of 2017. Of this increase, a $12.8 million increase was attributable to VITAS and $13.9 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

-24-

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

The remaining increase in VITAS’ revenues for the third quarter of 2018 versus the third quarter of 2017 was primarily comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 0.8%, offset by $1.9 million in Medicare cap revenue reductions and by the $5.5 million change in classification related to the adoption of the new revenue recognition standard.

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

The increase in plumbing revenues for the third quarter of 2018 versus 2017 is attributable to an 8.9% increase in price and service mix shift and a 1.6% increase in job count. Drain cleaning revenues for the third quarter of 2018 versus 2017 reflect a 5.6% increase in price and service mix shift and a 6.0% increase in job count. Water restoration for the third quarter of 2018 versus 2017 increased as a result of a 15.0% increase in job count and a 3.7% increase in price and service mix shift. Contractor operations increased 16.9% mainly due to their expansion into water restoration. Revenue was negatively impacted by the change in the classification of $1.6 million due to the adoption of the new revenue recognition standard.

The consolidated gross margin was 31.3% in the third quarter of 2018 as compared with 31.0% in the third quarter of 2017. On a segment basis, VITAS’ gross margin was 22.8% in the third quarter of 2018 as compared with 23.1%, in the third quarter of 2017. The decrease in VITAS gross margin is the result of a $3.0 million change in classification of implicit price concessions from selling, general and administrative expenses to revenue for the third quarter of 2018 as a result of the new revenue recognition standard. The Roto-Rooter segment’s gross margin was 49.2% for the third quarter of 2018 compared with 48.7% in the third quarter of 2017. The increase in Roto-Rooter gross margin is primarily related to improved health insurance experience during the quarter offset by the change in the classification of $1.6 million of implicit price concessions as a result of the new revenue recognition standard.

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

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

-25-

Our effective income tax rate was 18.6% in the third quarter of 2018 compared to 34.7% during the third quarter of 2017. Law H.R.1, “An Act to Provide for Reconciliation Pursant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”) reduced our overall effective tax rate. The Act amends the Internal Revenue Code to reduce tax rates and modifies policies, credits, and deductions for individuals and businesses. Additionally, excess tax benefit on stock options reduced our income tax expenses by $3.1 million and $1.8 million, respectively for the quarters ended September 30, 2018 and 2017

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

Three months ended September 30, 2018 versus 2017 - Segment Results

Net income/(loss) for the third quarter of 2018 versus the third quarter of 2017 by segment (in thousands):

VITAS’ after-tax earnings were positively impacted in 2018 compared to 2017 due to higher revenue as well as a reduced effective tax rate. After-tax earnings as a percent of revenue at VITAS in the third quarter of 2018 was 11.9% as compared to 9.2% in the third quarter of 2017.

Roto-Rooter’s net income was positively impacted in 2018 compared to 2017 primarily by higher revenue as well as a reduced effective tax rate. After-tax earnings as a percent of revenue at Roto-Rooter in the third quarter of 2018 was 17.3% as compared to 12.5% in the third quarter of 2017.

After-tax Corporate expenses for 2018 increased 31.0% when compared to 2017 due to increased long-term incentive compensation expense and a lower effective tax rate, (results in lower tax benefit) offset by a $1.3 million increase in tax benefit related to the adoption of ASU 2016-09.

Results of Operations

Nine months ended September 30, 2018 versus 2017 - Consolidated Results

Our service revenues and sales for the first nine months of 2018 increased 7.0% versus services and sales revenues for the first nine months of 2017. Of this increase, a $34.6 million increase was attributable to VITAS and $52.2 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

-26-

Days of care at VITAS during the nine months ended were as follows:

The remaining increase in VITAS’ revenues for the first nine months of 2018 versus the first nine months of 2017 was primarily comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 0.8%, offset by a $668,000 in Medicare cap liability compared to $247,000 contra-revenue in the same period of 2017 and $16.6 million change in classification related to the adoption of the new revenue recognition standard.

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 2018 versus 2017 is attributable to an 10.7% increase in price and service mix shift and a 3.9% increase in job count. Drain cleaning revenues for the first nine months of 2018 versus 2017 reflect a 6.4% increase in price and service mix shift and a 5.0% increase in job count. The increase in water restoration for the first nine months of 2018 versus 2017 is a result of a 19.1% increase in job count and a 9.5% increase in price a service mix shift. Contractor operations increased 13.2% mainly due to their expansion into water restoration. Revenue was negatively impacted by the change in the classification of $5.2 million due to the adoption of the new revenue recognition standard.

The consolidated gross margin was 30.9% in the first nine months of 2018 as compared with 30.6% in the first nine months of 2017. On a segment basis, VITAS’ gross margin was 22.1% in the first nine months of 2018 as compared with 22.5%, in the first nine months of 2017. The decrease in VITAS gross margin is the result of an $8.7 million change in classification of implicit price concessions from selling, general and administrative expenses to revenue for the first nine months of 2018. The Roto-Rooter segment’s gross margin was 48.9% for the first nine months of 2018 and 2017, respectively.

-27-

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

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 2018 were up 2.6% when compared to the first nine months of 2017. This increase was mainly a result of the increase in variable selling expenses caused by increased revenue and increased advertising expense at Roto-Rooter offset by $13.9 million of implicit price concessions being classified in revenue versus selling, general and administrative expenses due to the new revenue recognition standard.

Other operating expense for the first nine months of 2017 was $91.1 million. This was related to a $90.0 million litigation settlement as well as $1.1 million related to the closure of the programs in one state at VITAS.

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

Our effective income tax rate was 14.5% for the year ended September 30, 2018 compared to 25.8% during the year ended September 30, 2017. Law H.R.1, “An Act to Provide for Reconciliation Pursant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”) reduced our overall effective tax rate. The Act amends the Internal Revenue Code to reduce tax rates and modifies policies, credits, and deductions for individuals and businesses. Additionally, excess tax benefit on stock options reduced our income tax expenses by $18.6 million and $8.1 million, respectively for the years ended September 30, 2018 and 2017.

-28-

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

Nine months ended September 30, 2018 versus 2017 - Segment Results

Net income/(loss) for the first nine months of 2018 versus the first nine months of 2017 by (in thousands):

VITAS’ after-tax earnings were positively impacted in 2018 compared to 2017 due to higher revenue as well as a reduced effective tax rate. VITAS’ lower net income in 2017 was the result of a $55.8 million (after-tax) litigation settlement.

Roto-Rooter’s net income was positively impacted in 2018 compared to 2017 primarily by an increase in revenue as well as a reduced effective tax rate.

After-tax Corporate expenses for 2018 increased 12.8% when compared to 2017 due to increased stock option expense, long-term incentive compensation expense, and a lower effective tax rate (results in a lower tax benefit) offset by a $10.5 million increase in tax benefit related to the adoption of ASU No. 2016-09 and the impact of tax reform.

-29-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018

(in thousands)(unaudited)

-30-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017

(in thousands)(unaudited)

-31-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(in thousands)(unaudited)

-32-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(in thousands)(unaudited)

-33-

Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA

(in thousands)

-34-

Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA

(in thousands)

-35-

RECONCILIATION OF ADJUSTED NET INCOME

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

-36-

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

OPERATING STATISTICS FOR VITAS SEGMENT

(unaudited)

-37-

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.

The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At September 30, 2018, the Company had $130.0 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.

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.

There have been no material changes from the risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K.

-38-