Annual Statements Open main menu

CHEMED CORP - Quarter Report: 2019 June (Form 10-Q)

che-20190630x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x    Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2019

o    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-8351

CHEMED CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

31-0791746

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

255 E. Fifth Street, Suite 2600, Cincinnati, Ohio

45202

(Address of principal executive offices)

(Zip code)

(513) 762-6690

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

x

No

o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

x

No

o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer

x

Accelerated Filer

o

Non-accelerated Filer

o

Smaller Reporting Company

o

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

o

No

x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange

on which Registered

Amount

Date

 

 

 

 

 

Capital Stock $1 Par Value

CHE

New York Stock Exchange

15,921,808 Shares

June 30, 2019

 


-1-


CHEMED CORPORATION AND

SUBSIDIARY COMPANIES

Index

Page No.

PART I. FINANCIAL INFORMATION:

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets -

June 30, 2019 and December 31, 2018

3

Unaudited Consolidated Statements of Income -

Three and six months ended June 30, 2019 and 2018

4

Unaudited Consolidated Statements of Cash Flows -

Six months ended June 30, 2019 and 2018

5

Unaudited Consolidated Statements of Changes in Stockholders’ Equity-

Three and six months ended June 30, 2019 and 2018

6

Notes to Unaudited Consolidated Financial Statements

7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3. Quantitative and Qualitative Disclosures about Market Risk

41

Item 4. Controls and Procedures

41

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

41

Item 1A. Risk Factors

41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3. Defaults Upon Senior Securities

42

Item 4. Mine Safety Disclosures

42

Item 5. Other Information

42

Item 6. Exhibits

43

EX – 31.1

EX – 31.2

EX – 31.3

EX – 32.1

EX – 32.2

EX – 32.3

EX – 101.INS

EX – 101.SCH

EX – 101.CAL

EX – 101.DEF

EX – 101.LAB

EX – 101.PRE


-2-


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

June 30, 2019

December 31, 2018

ASSETS

Current assets

Cash and cash equivalents

$

3,323 

$

4,831 

Accounts receivable

136,113 

119,504 

Inventories

6,336 

5,705 

Prepaid income taxes

12,951 

10,646 

Prepaid expenses

21,455 

19,154 

Total current assets

180,178 

159,840 

Investments of deferred compensation plans

70,460 

65,624 

Properties and equipment, at cost, less accumulated depreciation of $259,495 (2018 - $248,370)

149,917 

162,033 

Assets held for sale

15,750 

-

Lease right of use assets less accumulated amortization of $13,415

90,755 

-

Identifiable intangible assets less accumulated amortization of $34,210 (2018 - $33,284)

67,511 

68,253 

Goodwill

510,627 

510,570 

Other assets

8,874 

9,209 

Total Assets

$

1,094,072 

$

975,529 

LIABILITIES

Current liabilities

Accounts payable

$

51,143 

$

50,150 

Accrued insurance

46,912 

46,095 

Accrued compensation

50,123 

63,329 

Accrued legal

8,431 

1,857 

Short-term lease liability

31,614 

-

Other current liabilities

35,446 

30,239 

Total current liabilities

223,669 

191,670 

Deferred income taxes

18,828 

21,598 

Long-term debt

85,000 

89,200 

Deferred compensation liabilities

70,273 

64,616 

Long-term lease liability

69,979 

-

Other liabilities

7,754 

17,111 

Total Liabilities

475,503 

384,195 

Commitments and contingencies (Note 11)

 

 

STOCKHOLDERS' EQUITY

Capital stock - authorized 80,000,000 shares $1 par; issued 35,590,832 shares (2018 - 35,311,418 shares)

35,591 

35,311 

Paid-in capital

817,255 

774,358 

Retained earnings

1,311,446 

1,225,617 

Treasury stock - 19,749,166 shares (2018 - 19,438,358)

(1,548,138)

(1,446,296)

Deferred compensation payable in Company stock

2,415 

2,344 

Total Stockholders' Equity

618,569 

591,334 

Total Liabilities and Stockholders' Equity

$

1,094,072 

$

975,529 

See accompanying notes to unaudited consolidated financial statements.

 

-3-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Service revenues and sales

$

473,584 

$

441,813 

$

935,618 

$

880,989 

Cost of services provided and goods sold (excluding depreciation)

323,637 

305,741 

645,588 

610,277 

Selling, general and administrative expenses

71,556 

68,297 

145,585 

137,297 

Depreciation

9,887 

9,718 

19,597 

18,985 

Amortization

406 

34 

925 

61 

Other operating expenses/(income)

2,570 

(118)

8,923 

(169)

Total costs and expenses

408,056 

383,672 

820,618 

766,451 

Income from operations

65,528 

58,141 

115,000 

114,538 

Interest expense

(1,237)

(1,524)

(2,361)

(2,731)

Other income - net

13 

1,038 

2,452 

2,056 

Income before income taxes

64,304 

57,655 

115,091 

113,863 

Income taxes

(13,575)

(2,684)

(19,695)

(13,896)

Net income

$

50,729 

$

54,971 

$

95,396 

$

99,967 

Earnings Per Share:

Net income

$

3.18 

$

3.43 

$

5.98 

$

6.22 

Average number of shares outstanding

15,928 

16,035 

15,941 

16,067 

Diluted Earnings Per Share:

Net income

$

3.08 

$

3.27 

$

5.79 

$

5.93 

Average number of shares outstanding

16,449 

16,811 

16,489 

16,854 

Cash Dividends Per Share

$

0.30 

$

0.28 

$

0.60 

$

0.56 

See accompanying notes to unaudited consolidated financial statements.

 


-4-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Six Months Ended June 30,

2019

2018

Cash Flows from Operating Activities

Net income

$

95,396 

$

99,967 

Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation and amortization

20,522 

19,046 

Stock option expense

8,018 

7,305 

Litigation settlement

6,000 

-

(Benefit)/provision for deferred income taxes

(2,769)

2,173 

Noncash long-term incentive compensation

2,506 

2,942 

Asset impairment loss

2,266 

-

Noncash directors' compensation

767 

766 

Amortization of debt issuance costs

153 

288 

Amortization of restricted stock awards

-

446 

Changes in operating assets and liabilities:

Increase in accounts receivable

(16,613)

(6,057)

Increase in inventories

(631)

(362)

Increase in prepaid expenses

(2,301)

(113)

Decrease in accounts payable and other current liabilities

(4,175)

(14,909)

Change in current income taxes

(2,249)

10,136 

Increase in other assets

(4,653)

(5,667)

Increase in other liabilities

5,833 

4,889 

Other sources

837 

186 

Net cash provided by operating activities

108,907 

121,036 

Cash Flows from Investing Activities

Capital expenditures

(28,312)

(23,872)

Business combinations

-

(1,875)

Other (uses)/sources

(137)

533 

Net cash used by investing activities

(28,449)

(25,214)

Cash Flows from Financing Activities

Payments on revolving line of credit

(227,000)

(281,150)

Proceeds from revolving line of credit

222,800 

358,350 

Purchases of treasury stock

(71,926)

(84,304)

Proceeds from exercise of stock options

16,517 

20,209 

Capital stock surrendered to pay taxes on stock-based compensation

(14,884)

(21,022)

Dividends paid

(9,567)

(9,016)

Change in cash overdrafts payable

1,710 

(711)

Payments on other long-term debt

-

(75,000)

Debt issuance costs

-

(968)

Other sources/(uses)

384 

(663)

Net cash used by financing activities

(81,966)

(94,275)

Increase in Cash and Cash Equivalents

(1,508)

1,547 

Cash and cash equivalents at beginning of year

4,831 

11,121 

Cash and cash equivalents at end of period

$

3,323 

$

12,668 

See accompanying notes to unaudited consolidated financial statements.

 


-5-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(in thousands, except per share data)

Deferred

Compensation

Treasury

Payable in

Capital

Paid-in

Retained

Stock-

Company

Stock

Capital

Earnings

at Cost

Stock

Total

Balance at March 31, 2019

35,521 

803,701 

1,265,485 

(1,519,077)

2,380 

588,010 

Net income

-

-

50,729 

-

-

50,729 

Dividends paid ($0.30 per share)

-

-

(4,768)

-

-

(4,768)

Stock awards and exercise of stock options

70 

13,337 

-

(6,350)

-

7,057 

Purchases of treasury stock

-

-

-

(22,676)

-

(22,676)

Other

-

217 

-

(35)

35 

217 

Balance at June 30, 2019

$

35,591 

$

817,255 

$

1,311,446 

$

(1,548,138)

$

2,415 

$

618,569 

Deferred

Compensation

Treasury

Payable in

Capital

Paid-in

Retained

Stock-

Company

Stock

Capital

Earnings

at Cost

Stock

Total

Balance at March 31, 2018

34,885 

712,991 

1,078,690 

(1,321,843)

2,236 

506,959 

Net income

-

-

54,971 

-

-

54,971 

Dividends paid ($0.28 per share)

-

-

(4,483)

-

-

(4,483)

Stock awards and exercise of stock options

256 

31,660 

-

(29,481)

-

2,435 

Purchases of treasury stock

-

-

-

(3,179)

-

(3,179)

Other

-

(423)

111 

(35)

35 

(312)

Balance at June 30, 2018

$

35,141 

$

744,228 

$

1,129,289 

$

(1,354,538)

$

2,271 

$

556,391 

Deferred

Compensation

Treasury

Payable in

Capital

Paid-in

Retained

Stock-

Company

Stock

Capital

Earnings

at Cost

Stock

Total

Balance at December 31, 2018

35,311 

774,358 

1,225,617 

(1,446,296)

2,344 

591,334 

Net income

-

-

95,396 

-

-

95,396 

Dividends paid ($0.60 per share)

-

-

(9,567)

-

-

(9,567)

Stock awards and exercise of stock options

280 

42,489 

-

(29,845)

-

12,924 

Purchases of treasury stock

-

-

-

(71,926)

-

(71,926)

Other

-

408 

-

(71)

71 

408 

Balance at June 30, 2019

$

35,591 

$

817,255 

$

1,311,446 

$

(1,548,138)

$

2,415 

$

618,569 

Deferred

Compensation

Treasury

Payable in

Capital

Paid-in

Retained

Stock-

Company

Stock

Capital

Earnings

at Cost

Stock

Total

Balance at December 31, 2017

34,732 

695,797 

1,038,955 

(1,231,332)

2,202 

540,354 

Net income

-

-

99,967 

-

-

99,967 

Dividends paid ($0.56 per share)

-

-

(9,016)

-

-

(9,016)

Stock awards and exercise of stock options

409 

49,070 

-

(38,833)

-

10,646 

Purchases of treasury stock

-

-

-

(84,304)

-

(84,304)

Other

-

(639)

(617)

(69)

69 

(1,256)

Balance at June 30, 2018

$

35,141 

$

744,228 

$

1,129,289 

$

(1,354,538)

$

2,271 

$

556,391 

The Notes to Consolidated Financial Statements are integral parts of these statements.

-6-


 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

Notes to Unaudited Consolidated Financial Statements

1.    Basis of Presentation

As used herein, the terms "We," "Company" and "Chemed" refer to Chemed Corporation or Chemed Corporation and its consolidated subsidiaries.

We have prepared the accompanying unaudited consolidated financial statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X. Consequently, we have omitted certain disclosures required under generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. The December 31, 2018 balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, in our opinion, the financial statements presented herein contain all adjustments, consisting only of normal recurring adjustments, necessary to state fairly our financial position, results of operations and cash flows. These financial statements are prepared on the same basis as and should be read in conjunction with the audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.

LEASE ACCOUNTING

In February 2016, the FASB issued Accounting Standards Update “ASU No. 2016-02 Leases” which introduced a lessee model that brings most leases onto the balance sheets and updates lessor accounting to align with changes in the lessee model and the revenue recognition standard. This standard is also referred to as Accountings Standards Codification No.842 (“ASC 842”). We adopted ASC 842 effective January 1, 2019, using the optional transition method requiring leases existing at, or entered into after, January 1, 2019 to be recognized and measured. The transition method selected does not require adjustments to prior period amounts, which continue to be reflected in accordance with historical accounting. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which among other things, allowed us to carry forward the historical lease classification.

Chemed and each of its operating subsidiaries are service companies. As such, real estate leases comprise the largest lease obligation (and conversely, right of use asset) in our lease portfolio. VITAS has leased office space, as well as space for inpatient units (“IPUs”) and/or contract beds within hospitals. Roto-Rooter mainly has leased office space.

Roto-Rooter purchases equipment and leases it to certain of its independent contractors. We analyzed these leases in accordance with ASC 842 and determined they are operating leases. As a result, Roto-Rooter will continue to capitalize the equipment underlying these leases, depreciate the equipment and recognize rental income.

Adoption of the new standard resulted in right of use assets and lease liabilities of $87.8 million and $98.7 million, respectively, as of March 31, 2019. In determining the liability, we used our incremental borrowing rate based on the information available at the time of adoption, since the rate implicit in the leases cannot be readily determined. At January 1, 2019, the weighted average rate was 3.47%. The standard did not materially impact our consolidated net income or cash flows. We did not book a cumulative effect adjustment upon adoption of the standard.

CLOUD COMPUTING

On January 1, 2019, we early adopted ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. We adopted the ASU on a prospective basis.

As of June 30, 2019, we have two cloud computing arrangements that are service contracts. Roto-Rooter is implementing a system to assist in technician dispatch and VITAS is implementing a new human resources system. We have capitalized approximately $2.8 million related to implementation of this project which is included in prepaid assets in the accompanying balance sheets. There has been no amortization expense associated with the asset, as the software has not yet been placed in service. We anticipate amortizing the assets over the original term of the arrangements plus renewal options that are reasonably certain of being exercised.

-7-


NON-EMPLOYEE STOCK COMPENSATION

In June 2018, the FASB issued Accounting Standards Update “ASU No. 2018-07 – Compensation – Stock Compensation”. The ASU expands the scope of current guidance to include all share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. The guidance in the ASU is effective for the Company in all fiscal years beginning after December 15, 2018. Adoption of this standard had no material impact on our consolidated financial statements.

CASH FLOW CLASSIFICATION

In August 2016, the FASB issued Accounting Standards Update “ASU No. 2016-15 – Cash Flow Classification” which amends guidance on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU 2016-15 was to reduce diversity in practice related to eight specific cash flow issues. The guidance in this ASU was effective for fiscal years beginning after December 15, 2017. We adopted this ASU as of January 1, 2018. There was no material effect to our statements of cash flow.

INCOME TAXES

Our effective income tax rate was 21.1% in the second quarter of 2019 compared to 4.7% during the second quarter of 2018. Excess tax benefit on stock options reduced our income tax expenses by $3.2 million and $11.7 million, respectively for the quarters ended June 30, 2019 and 2018.

Our effective income tax rate was 17.1% for the first six months of 2019 compared to 12.2% during the first six months of 2018. Excess tax benefit on stock options reduced our income tax expenses by $9.9 million and $15.5 million, respectively for the first six months ended June 30, 2019 and 2018.

NON-CASH TRANSACTIONS

Included in the accompanying Consolidated Balance Sheets are $1.1 million and $3.2 million of capitalized property and equipment which were not paid for as of June 30, 2019 and December 31, 2018, respectively. These amounts have been excluded from capital expenditures in the accompanying Consolidated Statements of Cash Flow. There are no material non-cash amounts included in interest expense for any period presented.

 

2.    Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update “ASU No. 2014-09 – Revenue from Contracts with Customers.” The standard and subsequent amendments are theoretically intended to develop a common revenue standard for removing inconsistencies and weaknesses, improve comparability, provide for more useful information to users through improved disclosure requirements and simplify the preparation of financial statements. The standard is also referred to as Accounting Standards Codification No. 606 (“ASC 606”). We adopted ASC 606 effective January 1, 2018. The required disclosures of ASC 606 and impact of adoption are discussed below for each of our operating subsidiaries.

VITAS

Service revenue for VITAS is reported at the amount that reflects the ultimate consideration we expect to receive in exchange for providing patient care. These amounts are due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), and include variable consideration for revenue adjustments due to settlements of audits and reviews, as well as certain hospice-specific revenue capitations. Amounts are generally billed monthly or subsequent to patient discharge. Subsequent changes in the transaction price initially recognized are not significant.

Hospice services are provided on a daily basis and the type of service provided is determined based on a physician’s determination of each patient’s specific needs on that given day. Reimbursement rates for hospice services are on a per diem basis regardless of the type of service provided or the payor. Reimbursement rates from government programs are established by the appropriate governmental agency and are standard across all hospice providers. Reimbursement rates from health insurers are negotiated with each payor and generally structured to closely mirror the Medicare reimbursement model. The types of hospice services provided and associated reimbursement model for each are as follows:

Routine Home Care occurs when a patient receives hospice care in their home, including a nursing home setting.  The routine home care rate is paid for each day that a patient is in a hospice program and is not receiving one of the other categories of hospice care.  For Medicare patients, the routine home care rate reflects a two-tiered rate, with a higher rate for the first 60 days of a hospice patient’s care and a lower rate

-8-


for days 61 and after.  In addition, there is a Service Intensity Add-on payment which covers direct home care visits conducted by a registered nurse or social worker in the last seven days of a hospice patient’s life, reimbursed up to 4 hours per day in 15 minute increments at the continuous home care rate.

General Inpatient Care occurs when a patient requires services in a controlled setting for a short period of time for pain control or symptom management which cannot be managed in other settings.  General inpatient care services must be provided in a Medicare or Medicaid certified hospital or long-term care facility or at a freestanding inpatient hospice facility with the required registered nurse staffing.

Continuous Home Care is provided to patients while at home, including a nursing home setting, during periods of crisis when intensive monitoring and care, primarily nursing care, is required in order to achieve palliation or management of acute medical symptoms.  Continuous home care requires a minimum of 8 hours of care within a 24-hour day, which begins at midnight.  The care must be predominantly nursing care provided by either a registered nurse or licensed nurse practitioner.  While the published Medicare continuous home care rates are daily rates, Medicare pays for continuous home care in 15 minute increments.  This 15 minute rate is calculated by dividing the daily rate by 96.

Respite Care permits a hospice patient to receive services on an inpatient basis for a short period of time in order to provide relief for the patient’s family or other caregivers from the demands of caring for the patient.  A hospice can receive payment for respite care for a given patient for up to five consecutive days at a time, after which respite care is reimbursed at the routine home care rate.

Each level of care represents a separate promise under the contract of care and is provided independently for each patient contingent upon the patient’s specific medical needs as determined by a physician. However, the clinical criteria used to determine a patient’s level of care is consistent across all patients, given that, each patient is subject to the same payor rules and regulations. As a result, we have concluded that each level of care is capable of being distinct and is distinct in the context of the contract. Furthermore, we have determined that each level of care represents a stand ready service provided as a series of either days or hours of patient care. We believe that the performance obligations for each level of care meet criteria to be satisfied over time. VITAS recognizes revenue based on the service output. VITAS believes this to be the most faithful depiction of the transfer of control of services as the patient simultaneously receives and consumes the benefits provided by our performance. Revenue is recognized on a daily or hourly basis for each patient in accordance with the reimbursement model for each type of service. VITAS’ performance obligations relate to contracts with an expected duration of less than one year. Therefore, VITAS has elected to apply the optional exception provided in ASC 606 and is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially satisfied performance obligations referred to above relate to bereavement services provided to patients’ families for at least 12 months after discharge.

Care is provided to patients regardless of their ability to pay. Patients who meet our criteria for charity care are provided care without charge. There is no revenue or associated accounts receivable in the accompanying consolidated financial statements related to charity care. The cost of providing charity care during the quarters ended June 30, 2019 and 2018 was $2.2 million and $2.1 million, respectively. The cost of providing charity care during the first six months ended June 30, 2019 and 2018 was $4.3 million and $4.2 million, respectively. The cost of charity care is included in cost of services provided and goods sold and is calculated by taking the ratio of charity care days to total days of care and multiplying by the total cost of care.

Generally, patients who are covered by third-party payors are responsible for related deductibles and coinsurance which vary in amount. VITAS also provides service to patients without a reimbursement source and may offer those patients discounts from standard charges. VITAS estimates the transaction price for patients with deductibles and coinsurance, along with those uninsured patients, based on historical experience and current conditions. The estimate of any contractual adjustments, discounts or implicit price concessions reduces the amount of revenue initially recognized. Subsequent changes to the estimate of the transaction price are recorded as adjustments to patient service revenue in the period of change. Subsequent changes that are determined to be the result of an adverse change in the patients’ ability to pay (i.e. change in credit risk) are recorded as bad debt expense. VITAS has no material adjustments related to subsequent changes in the estimate of the transaction price or subsequent changes as the result of an adverse change in the patient’s ability to pay for any period reported.

Laws and regulations concerning government programs, including Medicare and Medicaid, are complex and subject to varying interpretation. Compliance with such laws and regulations may be subject to future government review and interpretation. Additionally, the contracts we have with commercial health insurance payors provide for retroactive audit and review of claims. Settlement with third party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient

-9-


care. The variable consideration is estimated based on the terms of the payment agreement, existing correspondence from the payor and our historical settlement activity. These estimates are adjusted in future periods, as new information becomes available.

We are subject to certain limitations on Medicare payments for services which are considered variable consideration, as follows:

Inpatient Cap. If the number of inpatient care days any hospice program provides to Medicare beneficiaries exceeds 20% of the total days of hospice care such program provided to all Medicare patients for an annual period beginning September 28, the days in excess of the 20% figure may be reimbursed only at the routine homecare rate. None of VITAS’ hospice programs exceeded the payment limits on inpatient services during the three and six months ended June 30, 2019 and 2018.

Medicare Cap. We are also subject to a Medicare annual per-beneficiary cap (“Medicare cap”). Compliance with the Medicare cap is measured in one of two ways based on a provider election. The “streamlined” method compares total Medicare payments received under a Medicare provider number with respect to services provided to all Medicare hospice care beneficiaries in the program or programs covered by that Medicare provider number with the product of the per-beneficiary cap amount and the number of Medicare beneficiaries electing hospice care for the first time from that hospice program or programs from September 28 through September 27 of the following year. At June 30, 2019, all our programs except one are using the “streamlined” method.

The “proportional” method compares the total Medicare payments received under a Medicare provider number with respect to services provided to all Medicare hospice care beneficiaries in the program or programs covered by the Medicare provider number between September 28 and September 27 of the following year with the product of the per beneficiary cap amount and a pro-rated number of Medicare beneficiaries receiving hospice services from that program during the same period. The pro-rated number of Medicare beneficiaries is calculated based on the ratio of days the beneficiary received hospice services during the measurement period to the total number of days the beneficiary received hospice services.

We actively monitor each of our hospice programs, by provider number, as to their specific admission, discharge rate and median length of stay data in an attempt to determine whether revenues are likely to exceed the annual per-beneficiary Medicare cap. Should we determine that revenues for a program are likely to exceed the Medicare cap based on projected trends, we attempt to institute corrective actions, which include changes to the patient mix and increased patient admissions. However, should we project our corrective action will not prevent that program from exceeding its Medicare cap, we estimate revenue recognized during the government fiscal year that will require repayment to the Federal government under the Medicare cap and record an adjustment to revenue of an amount equal to a ratable portion of our best estimate for the year.

In 2013, the U.S. government implemented automatic budget reductions of 2.0% for all government payees, including hospice benefits paid under the Medicare program. In 2015, CMS determined that the Medicare cap should be calculated “as if” sequestration did not occur. As a result of this decision, VITAS has received notification from our third-party intermediary that an additional $5.8 million is owed for Medicare cap in three programs arising during the 2013 through 2017 measurement periods. The amounts are automatically deducted from our semi-monthly PIP payments. We do not believe that CMS is authorized under the sequestration authority or the statutory methodology for establishing the Medicare cap to the amounts they have withheld and intend to withhold under their current “as if” methodology. We have appealed CMS’s methodology change.

During the quarter ended June 30, 2019, we recorded $2.4 million in net Medicare cap revenue reduction related to three programs for the 2019 government fiscal year. Additionally, we recorded $847,000 related to adjustments of prior year cap liabilities. During the quarter ended June 30, 2018, we recorded $355,000 in net Medicare cap revenue reduction related to one program for the 2018 government fiscal year. Additionally, we recorded $181,000 related to adjustments of prior year cap liabilities.

During the first six months ended June 30, 2019, we recorded $5.8 million in net Medicare cap revenue reduction related to four programs for the 2019 government fiscal year. Additionally, we recorded $847,000 related to adjustments of prior year cap liabilities. During the six months ended June 30, 2018, we reversed $1.5 million of the $2.4 million Medicare cap revenue reduction recognized in the fourth quarter of 2017 due to improved metrics in two VITAS programs offset by $181,000 related to adjustments of prior year cap liabilities.

-10-


For VITAS’ patients in the nursing home setting in which Medicaid pays the nursing home room and board, VITAS serves as a pass-through between Medicaid and the nursing home. We are responsible for paying the nursing home for that patient’s room and board. Medicaid reimburses us for 95% of the amount we have paid. This results in a 5% net expense for VITAS related to nursing home room and board. This transaction creates a performance obligation in that VITAS is facilitating room and board being delivered to our patient. As a result, the 5% net expense is recognized as a contra-revenue account under ASC 606 in the accompanying financial statements.

The composition of patient care service revenue by payor and level of care for the quarter ended June 30, 2019 is as follows (in thousands):

Medicare

Medicaid

Commercial

Total

Routine home care

$

248,545

$

11,907

6,009

$

266,461

Continuous care

27,975

1,408

1,403

30,786

Inpatient care

19,282

2,117

1,495

22,894

$

295,802

$

15,432

$

8,907

$

320,141

All other revenue - self-pay, respite care, etc.

2,237

Subtotal

$

322,378

Medicare cap adjustment

(3,198)

Implicit price concessions

(3,720)

Room and board, net

(2,710)

Net revenue

$

312,750

The composition of patient care service revenue by payor and level of care for the quarter ended June 30, 2018 is as follows (in thousands):

Medicare

Medicaid

Commercial

Total

Routine home care

$

232,637 

$

12,019 

$

5,725 

$

250,381 

Continuous care

27,581 

1,428 

1,504 

30,513 

Inpatient care

17,029 

1,853 

1,195 

20,077 

$

277,247 

$

15,300 

$

8,424 

$

300,971 

All other revenue - self-pay, respite care, etc.

1,998 

Subtotal

$

302,969 

Medicare cap adjustment

(536)

Implicit price concessions

(2,959)

Room and board, net

(2,675)

Net revenue

$

296,799 

The composition of patient care service revenue by payor and level of care for the six months ended June 30, 2019 is as follows (in thousands):

Medicare

Medicaid

Commercial

Total

Routine home care

$

489,978 

$

23,581 

$

11,753 

$

525,312 

Continuous care

56,949 

3,195 

2,886 

63,030 

Inpatient care

38,271 

4,265 

2,928 

45,464 

$

585,198 

$

31,041 

$

17,567 

$

633,806 

All other revenue - self-pay, respite care, etc.

4,242 

Subtotal

$

638,048 

Medicare cap adjustment

(6,598)

Implicit price concessions

(6,667)

Room and board, net

(5,252)

Net revenue

$

619,531 

-11-


The composition of patient care service revenue by payor and level of care for the six months ended June 30, 2018 is as follows (in thousands):

Medicare

Medicaid

Commercial

Total

Routine home care

$

456,658 

$

23,299 

$

11,455 

$

491,412 

Continuous care

55,213 

3,031 

3,035 

61,279 

Inpatient care

35,887 

3,901 

2,398 

42,186 

$

547,758 

$

30,231 

$

16,888 

$

594,877 

All other revenue - self-pay, respite care, etc.

3,740 

Subtotal

$

598,617 

Medicare cap adjustment

1,282 

Implicit price concessions

(5,792)

Room and board, net

(5,294)

Net revenue

$

588,813 

Roto-Rooter

Roto-Rooter provides plumbing, drain cleaning, water restoration and other related services to both residential and commercial customers primarily in the United States. Services are provided through a network of company-owned branches, independent contractors and franchisees. Service revenue for Roto-Rooter is reported at the amount that reflects the ultimate consideration we expect to receive in exchange for providing services.

Roto-Rooter owns and operates branches focusing mainly on large population centers in the United States. Roto-Rooter’s primary lines of business in company-owned branches consist of plumbing, sewer and drain cleaning, excavation and water restoration. For purposes of ASC 606 analysis, plumbing, sewer and drain cleaning, and excavation have been combined into one portfolio and are referred to as “short-term core services”. Water restoration is analyzed as a separate portfolio. The following describes the key characteristics of these portfolios:

Short-term Core Services are plumbing, drain and sewer cleaning and excavation services. These services are provided to both commercial and residential customers. The duration of services provided in this category range from a few hours to a few days. There are no significant warranty costs or on-going obligations to the customer once a service has been completed. For residential customers, payment is received at the time of job completion before the Roto-Rooter technician leaves the residence. Commercial customers may be granted credit subject to internally designated authority limits and credit check guidelines. If credit is granted, payment terms are generally 30 days or less.

Each job in this category is a distinct service with a distinct performance obligation to the customer. Revenue is recognized at the completion of each job. Variable consideration consists of pre-invoice discounts and post-invoice discounts. Pre-invoice discounts are given in the form of coupons or price concessions. Post-invoice discounts consist of credit memos generally granted to resolve customer service issues. Variable consideration is estimated based on historical activity and recorded at the time service is completed.

Water Restoration Services involve the remediation of water and humidity after a flood. These services are provided to both commercial and residential customers. The duration of services provided in this category generally ranges from 3 to 5 days. There are no significant warranties or on-going obligations to the customer once service has been completed. The majority of these services are paid by the customer’s insurance company. Variable consideration relates primarily to allowances taken by insurance companies upon payment. Variable consideration is estimated based on historical activity and recorded at the time service is completed.

For both short-term core services and water restoration services, Roto-Rooter satisfies its performance obligation at a point in time. The services provided generally involve fixing plumbing, drainage or flood-related issues at the customer’s property. At the time service is complete, the customer acknowledges its obligation to pay for service and its satisfaction with the service performed. This provides evidence that the customer has accepted the service and Roto-Rooter is now entitled to payment. As such, Roto-Rooter recognizes revenue for these services upon completion of the job and receipt of customer acknowledgement. Roto-Rooter’s performance obligations for short-term core services and water restoration services relate to contracts with an expected duration of less than a year. Therefore, Roto-Rooter has elected to apply the optional exception provided in ASC 606 and is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. Roto-Rooter does not have significant

-12-


unsatisfied or partially unsatisfied performance obligations at the time of initial revenue recognition for short-term core or water restoration services.

Roto-Rooter owns the rights to certain territories and contracts with independent third-parties to operate the territory under Roto-Rooter’s registered trademarks. Such contracts are for a specified term but cancellable by either party without penalty with 90 days’ advance notice. Under the terms of these arrangements, Roto-Rooter provides certain back office support and advertising along with a limited license to use Roto-Rooter’s registered trademarks. The independent contractor is responsible for all day-to-day management of the business including staffing decisions and pricing of services provided. All performance obligations of Roto-Rooter cease at the termination of the arrangement.

Independent contractors pay Roto-Rooter a standard fee calculated as a percentage of their weekly labor sales. The primary value for the independent contractors under these arrangements is the right to use Roto-Rooter’s registered trademarks. Roto-Rooter recognizes revenue from independent contractors over-time (weekly) as the independent contractor’s labor sales are completed. Payment from independent contractors is also received on a weekly basis. The use of Roto-Rooter’s registered trademarks and advertising provides immediate value to the independent contractor as a result of Roto-Rooter’s nationally recognized brand. Therefore, over-time recognition provides the most faithful depiction of the transfer of services as the customer simultaneously receives and consumes the benefits provided. There is no significant variable consideration related to these arrangements.

Roto-Rooter has licensed the rights to operate under Roto-Rooter’s registered trademarks in other territories to franchisees. Each such contract is for a 10 year term but cancellable by Roto-Rooter for cause with 60 day advance notice without penalty. The franchisee may cancel the contract for any reason with 60 days advance notice without penalty. Under the terms of the contract, Roto-Rooter provides national advertising and consultation on various aspects of operating a Roto-Rooter business along with the right to use Roto-Rooter’s registered trademarks. The franchisee is responsible for all day- to-day management of the business including staffing decisions, pricing of services provided and local advertising spend and placement. All performance obligations of Roto-Rooter cease at the termination of the arrangement.

Franchisees pay Roto-Rooter a standard monthly fee based on the population within the franchise territory. The standard fee is revised on a yearly basis based on changes in the Consumer Price Index for All Urban Consumers. The primary value for the franchisees under this arrangement is the right to use Roto-Rooter’s registered trademarks. Roto-Rooter recognizes revenue from franchisees over-time (monthly). Payment from franchisees is also received on a monthly basis. The use of Roto-Rooter’s registered trademarks and advertising provides immediate value to the franchisees as a result of Roto-Rooter’s nationally recognized brand. Therefore, over-time recognition provides the most faithful depiction of the transfer of services as the customer simultaneously receives and consumes the benefits provided. There is no significant variable consideration related to these arrangements.

The composition of disaggregated revenue for the second quarter is as follows (in thousands):

June 30,

2019

2018

Short-term core service jobs

$

115,143 

$

105,086 

Water restoration

28,239 

24,765 

Contractor revenue

14,580 

12,366 

Franchise fees

1,623 

1,574 

All other

2,974 

2,835 

Subtotal

$

162,559 

$

146,626 

Implicit price concessions and credit memos

(1,725)

(1,612)

Net revenue

$

160,834 

$

145,014 


-13-


The composition of disaggregated revenue for the first six months is as follows (in thousands):

June 30,

2019

2018

Short-term core service jobs

$

226,202 

$

209,172 

Water restoration

55,891 

52,502 

Contractor revenue

28,589 

24,731 

Franchise fees

3,245 

3,165 

All other

5,981 

6,155 

Subtotal

$

319,908 

$

295,725 

Implicit price concessions and credit memos

(3,821)

(3,549)

Net revenue

$

316,087 

$

292,176 

Initial Adoption of ASC 606

The Company utilized the modified retrospective method of adoption for all contracts. The Company has consistently applied the accounting policies to all periods presented in the consolidated financial statements. Sales tax collected from customers at Roto-Rooter is excluded from revenue under ASC 606 and prior revenue standards.

 

3.    Segments

Service revenues and sales by business segment are shown in Footnote 2. After-tax earnings by business segment are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

2019

2018

2019

2018

After-tax Income/(Loss)

VITAS

$

37,339 

$

31,785 

$

66,626 

$

63,800 

Roto-Rooter

27,175 

25,298 

50,162 

48,236 

Total

64,514 

57,083 

116,788 

112,036 

Corporate

(13,785)

(2,112)

(21,392)

(12,069)

Net income

$

50,729 

$

54,971 

$

95,396 

$

99,967 

We report corporate administrative expenses and unallocated investing and financing income and expense not directly related to either segment as “Corporate”.

 

-14-


4.    Earnings per Share

Earnings per share (“EPS”) are computed using the weighted average number of shares of capital stock outstanding. Earnings and diluted earnings per share are computed as follows (in thousands, except per share data):

Net Income

For the Three Months Ended June 30,

Income

Shares

Earnings per Share

2019

Earnings

$

50,729 

15,928 

$

3.18 

Dilutive stock options

-

449 

Nonvested stock awards

-

72 

Diluted earnings

$

50,729 

16,449 

$

3.08 

2018

Earnings

$

54,971 

16,035 

$

3.43 

Dilutive stock options

-

674 

Nonvested stock awards

-

102 

Diluted earnings

$

54,971 

16,811 

$

3.27 

Net Income

For the Six Months Ended June 30,

Income

Shares

Earnings per Share

2019

Earnings

$

95,396 

15,941 

$

5.98 

Dilutive stock options

-

474 

Nonvested stock awards

-

74 

Diluted earnings

$

95,396 

16,489 

$

5.79 

2018

Earnings

$

99,967 

16,067 

$

6.22 

Dilutive stock options

-

683 

Nonvested stock awards

-

104 

Diluted earnings

$

99,967 

16,854 

$

5.93 

For the three and six month periods ended June 30, 2019, there were 246,000 stock options excluded in the computation of dilutive earnings per share because they would have been anti-dilutive.

For the three and six month periods ended June 30, 2018, there were no stock options excluded in the computation of dilutive earnings per share because they would have been anti-dilutive.

 

5.    Long-Term Debt and Lines of Credit

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 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. The amount outstanding as of June 30, 2019 is $85.0 million.

  

Debt issuance costs associated with the prior credit agreement were not written off as the lenders and their relative percentages participation in the facility did not change. With respect to the 2018 Credit Agreement, deferred financing costs were $1.0 million.

-15-


The 2018 Credit Agreement contains the following quarterly financial covenants:

Description

Requirement

Leverage Ratio (Consolidated Indebtedness/Consolidated Adj. EBITDA)

< 3.50 to 1.00

Fixed Charge Coverage Ratio (Consolidated Free Cash Flow/Consolidated Fixed Charges)

> 1.50 to 1.00

We are in compliance with all debt covenants as of June 30, 2019. We have issued $38.0 million in standby letters of credit as of June 30, 2019, mainly for insurance purposes. Issued letters of credit reduce our available credit under the 2018 Credit Agreement. As of June 30, 2019, we have approximately $327.0 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility.

 

6.    Other Operating Expenses/(Income)

Three months ended June 30,

Six months ended June 30,

2019

2018

2019

2018

Litigation settlement

$

-

$

(204)

$

6,000 

$

(204)

Transportation equipment held for sale

2,266 

-

2,266 

-

Loss on disposal of fixed assets

304 

86 

657 

35 

Total other operating expenses/(income)

$

2,570 

$

(118)

$

8,923 

$

(169)

During the three months ended June 30, 2019, the Company recorded $2.3 million for the impairment of transportation equipment that is being held for sale. See footnote 18.

During the six months ended June 30, 2019, the Company recorded $6.0 million for a potential legal settlement, which includes the settlement amount, estimated employment taxes and other litigation costs. See footnote 11 for further discussion.

 

7.    Other Income – Net

Other income – net comprises the following (in thousands):

Three months ended June 30,

Six months ended June 30,

2019

2018

2019

2018

Market value adjustment on assets held in

deferred compensation trust

$

(130)

$

779 

$

2,207 

$

1,638 

Interest income

112 

259 

214 

417 

Other - net

31 

-

31 

1 

Total other income - net

$

13 

$

1,038 

$

2,452 

$

2,056 

 

8.    Leases

Chemed and each of its operating subsidiaries are service companies. As such, real estate leases comprise the largest lease obligation (and conversely, right of use asset) in our lease portfolio. VITAS has leased office space, as well as space for IPUs and/or contract beds within hospitals. Roto-Rooter has leased office space. Our leases have remaining terms of under 1 year to 10 years, some of which include options to extend the lease for up to 5 years, and some of which include options to terminate the lease within 1 year.

We made a policy election to exclude leases with a lease term less than 12 months from being recorded on the balance sheet. We adopted the practical expedient related to the combining of lease and non-lease components, which allows us to account for the lease and non-lease components as a single lease component.

Adoption of the new standard resulted in right of use assets and lease liabilities of approximately $87.8 million and $98.7 million, respectively, as of March 31, 2019. In determining the liability, we used our incremental borrowing rate based

-16-


on the information available at the time of adoption, since the rate implicit in the leases cannot be readily determined. At January 1, 2019, the weighted average rate was 3.47%. The standard did not materially impact our consolidated net income or cash flows. We did not book a cumulative effect adjustment upon adoption of the standard.

We do not currently have any finance leases, all lease information disclosed is related to operating leases.

The components of balance sheet information related to leases were as follows:

Six months ended
June 30,

2019

Assets

Operating lease assets

$

90,755 

Liabilities

Current operating leases

31,614 

Noncurrent operating leases

69,979 

Total operating lease liabilities

$

101,593 

The components of lease expense were as follows:

Three months ended
June 30,

Six months ended
June 30,

2019

2019

Lease Expense (a)

Operating lease expense

$

11,573 

$

23,098 

Sublease income

-

(6)

Net lease expense

$

11,573 

$

23,092 

(a)Includes short-term leases and variable lease costs, which are immaterial. Included in both cost of services provided and goods sold and selling, general and administrative expenses.

The components of cash flow information related to leases were as follows:

Three months ended

Six months ended

June 30, 2019

June 30, 2019

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from leases

$

10,214 

$

20,201 

Leased assets obtained in exchange for new operating lease liabilities

$

12,731 

$

15,944 

Weighted Average Remaining Lease Term

Operating leases

4.34

years

Weighted Average Discount Rate

Operating leases

3.46

%

-17-


Maturity of Operating Lease Liabilities (in thousands)

2019

$

34,669 

2020

25,465 

2021

18,796 

2022

12,074 

2023

7,656 

Thereafter

12,327 

Total lease payments

$

110,987 

Less: interest

(8,143)

Less: future lease obligations not yet commenced

(1,251)

Total liability recognized on the balance sheet

$

101,593 

The following is a summary of future minimum rental payments under operating leases that have initial noncancelable terms in excess of one year at December 31, 2018:

Maturity of Operating Lease Liabilities (in thousands)

2019

$

26,791 

2020

24,152 

2021

19,669 

2022

13,851 

2023

8,179 

Thereafter

10,974 

Total lease payments

$

103,616 

For leases commencing prior to 2019, minimum rental payments exclude payments to landlords for real estate taxes and common area maintenance. Operating lease payments include $2.3 million related to extended lease terms that are reasonably certain of being exercised and exclude $1.3 million lease payments for leases signed but not yet commenced.

 

9.    Stock-Based Compensation Plans

On February 22, 2019, the Compensation/Incentive Committee of the Board of Directors (“CIC”) granted 6,864 Performance Stock Units (“PSUs”) contingent upon the achievement of certain total shareholder return (“TSR”) targets as compared to the TSR of a group of peer companies for the three year period ending December 31, 2021, the date at which such awards vest. The cumulative compensation cost of the TSR-based PSU award to be recorded over the three year service period is $3.0 million.

On February 22, 2019, the CIC also granted 6,864 PSUs contingent upon the achievement of certain earnings per share (“EPS”) targets for the three year period ending December 31, 2021. At the end of each reporting period, the Company estimates the number of shares that it believes will ultimately be earned and records the corresponding expense over the service period of the award. We currently estimate the cumulative compensation cost of the EPS-based PSUs to be recorded over the three year service period is $2.2 million.

 

10.    Retirement Plans

All of the Company’s plans that provide retirement and similar benefits are defined contribution plans. These expenses include the impact of market gains and losses on assets held in deferred compensation plans and are recorded in selling, general and administrative expenses. Expenses for the Company’s retirement and profit-sharing plans, excess benefit plans and other similar plans are as follows (in thousands):

Three months ended June 30,

Six months ended June 30,

2019

2018

2019

2018

$

3,796

$

4,807

$

10,710

$

9,974

 

-18-


11.    Legal and Regulatory Matters

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

Regulatory Matters and Litigation

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.

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 sought 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 sought 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”).

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 sought 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 sought 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

-19-


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 the Jordan Seper and Jiwann 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: 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 (“PAGA”). Williams seeks to pursue these claims both individually and as a representative action under the PAGA on behalf of current and former California 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 possible resolution through ongoing 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 Seper and Chhina cases were consolidated in Los Angeles County Superior Court; Chhina was dismissed as a separate action and joined with Seper in the filing of amended complaint on August 28, 2018, in which both Chhina and Seper were identified as named plaintiffs. The parties engaged in a mediation process beginning in October 2018 and concluded with an agreement in March 2019. The agreement has been incorporated into a long-form agreement to be presented to the court for preliminary approval, notice to class members, and eventual final approval and payment. The settlement amount, subject to court approval is $5.75 million plus employment taxes. The definition of the class to participate in the settlement is intended to cover claims raised in the consolidated Seper/Chhina matter, claims raised in Phillips and Moore, as well as any class claims in Williams.

Alfred Lax (“Lax”), a current employee of Roto-Rooter Services Company (“RRSC”), was hired in the RRSC’s Menlo Park branch in 2007. On November 30, 2018, Lax filed a class action lawsuit in Santa Clara County Superior Court alleging (1) failure to provide or compensate for required rest breaks; (2) failure to properly pay for all hours worked; (3) failure to provide accurate wage statements; (4) failure to reimburse for work-related expenses; and (5) unfair business practices. Lax has stated these claims as a representative of a class defined as all service technicians employed by RRSC in California during the four years preceding the filing of the complaint. He seeks a determination that the action may proceed and be maintained as a class action and for compensatory and statutory damages (premium payments for missed rest periods, uncompensated rest periods, wages for time allegedly not paid such as travel time, repair time, and vehicle maintenance time, and unreimbursed expenses), penalties and restitutions, pre- and post-judgement interest and attorneys’ fees and costs. The lawsuit, Alfred Lax, on behalf of himself and all others similarly situated v. Roto-Rooter Services Company, and Does 1 through 50 inclusive; Santa Clara County Superior Court Case Number 18CV338652, was received by RRSC on December 11, 2018 and RRSC timely filed its answer denying the claims.

The Company is not able to reasonably estimate the probability of loss or range of loss for any of these lawsuits at this time, with the exception of Seper/Chhina, Phillips and Moore and the class claims in Williams.

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.

 

-20-


12.    Concentration of Risk

During the quarter VITAS had pharmacy services agreements with one service provider to provide specified pharmacy services for VITAS and its hospice patients. VITAS made purchases from this provider of $7.0 and $8.5 million for the three months ended June 30, 2019 and 2018, respectively. VITAS made purchases from this provider of $14.3 and $16.8 million for the first six months ended June 30, 2019 and 2018, respectively. Purchases from this provider represent more than 90% of all pharmacy services used by VITAS during each period presented.

 

13.    Cash Overdrafts and Cash Equivalents

There are $15.5 million in cash overdrafts payable included in accounts payable at June 30, 2019 (December 31, 2018 - $13.8 million).

From time to time throughout the year, we invest excess cash in money market funds with major commercial banks. We closely monitor the creditworthiness of the institutions with which we invest our overnight funds. The amount invested was not material for each balance sheet date presented.

 

14.    Financial Instruments

FASB’s authoritative guidance on fair value measurements defines a hierarchy which prioritizes the inputs in fair value measurements. Level 1 measurements are measurements using quoted prices in active markets for identical assets or liabilities. Level 2 measurements use significant other observable inputs. Level 3 measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions. In recording the fair value of assets and liabilities, companies must use the most reliable measurement available.

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of

June 30, 2019 (in thousands):

Fair Value Measure

Carrying Value

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Mutual fund investments of deferred

compensation plans held in trust

$

70,460 

$

70,460 

$

-

$

-

Total debt

85,000 

-

85,000 

-

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of December 31, 2018 (in thousands):

Fair Value Measure

Carrying Value

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Mutual fund investments of deferred

compensation plans held in trust

$

65,624 

$

65,624 

$

-

$

-

Total debt

89,200 

-

89,200 

-

For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount is a reasonable estimate of fair value because of the liquidity and short-term nature of these instruments. As further described in Footnote 5, our outstanding long-term debt and current portion of long-term debt have floating interest rates that are reset at short-term intervals, generally 30 or 60 days. The interest rate we pay also includes an additional amount based on our current leverage ratio. As such, we believe our borrowings reflect significant nonperformance risks, mainly credit risk. Based on these factors, we believe the fair value of our long-term debt and current portion of long-term debt approximate the carrying value.

 

-21-


15.    Capital Stock Repurchase Plan Transactions

We repurchased the following capital stock for the three and six months ended June 30, 2019 and 2018:

Three months ended June 30,

Six months ended June 30,

2019

2018

2019

2018

Total cost of repurchased shares (in thousands)

$

22,676 

$

3,179 

$

71,926 

$

84,304 

Shares repurchased

69,009 

10,000 

219,009 

310,000 

Weighted average price per share

$

328.59 

$

317.86 

$

328.41 

$

271.95 

In February 2019, the Board of Directors authorized an additional $150.0 million for stock repurchase under Chemed’s existing share repurchase program. We currently have $124.7 million of authorization remaining under this share repurchase plan.

 

16.    Recent Accounting Standards

In January 2017, the FASB issued Accounting Standards Update “ASU No. 2017-4 – Intangibles – Goodwill and Other”. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. The guidance in the ASU is effective for the Company in fiscal years beginning after December 15, 2019. Early adoption is permitted. We anticipate adoption of this standard will have no impact on our consolidated financial statements.

In June 2016, FASB issued Accounting Standards Update “ASU No. 2016-13 - Measurement of Credit Losses on Financial Instruments”. The ASU requires the use of the current expected credit loss model to measure impairments of financial assets. The ASU is effective for the Company for fiscal years beginning after December 15, 2019. Management is currently evaluating the impact of this ASU on the Company’ financial statements.

 

17.    Acquisitions

During the first six months of 2019, we did not complete any business combinations within our Roto-Rooter or VITAS segment.

During 2018, we completed four business combinations of former franchisees within the Roto-Rooter segment for $42.2 million in cash to increase our market penetration. The VITAS segment completed one business combination in Florida for $11.0 million to increase our market penetration.

Shown below is movement in Goodwill (in thousands):

VITAS

Roto-Rooter

Total

Balance at December 31, 2018

$

333,331 

$

177,239 

$

510,570 

Foreign currency adjustments

-

57 

57 

Balance at June 30, 2019

$

333,331 

$

177,296 

$

510,627 

18.    Assets Held for Sale

In the second quarter of 2019, we entered into an agreement to trade-in certain transportation equipment to offset replacement equipment expected to be delivered in 2020. The net book value of the transportation equipment has been reduced to the expected trade in value of $15.8 million resulting in a $2.3 million impairment charge in the second quarter of 2019.

19.    Subsequent Events

On July 1, 2019, we completed the acquisition of a Roto-Rooter franchise and the related assets in Oakland, CA for $18.0 million in cash. A substantial portion of the aggregate purchase price will be allocated to goodwill, reacquired franchise rights and other intangibles. The accounting for this acquisition has not yet been finalized.

-22-


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

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

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

Three months ended June 30,

Six months ended June 30,

2019

2018

2019

2018

Service revenues and sales

$

473,584 

$

441,813 

$

935,618 

$

880,989 

Net income

$

50,729 

$

54,971 

$

95,396 

$

99,967 

Diluted EPS

$

3.08 

$

3.27 

$

5.79 

$

5.93 

Adjusted net income

$

55,215 

$

47,158 

$

103,390 

$

93,009 

Adjusted diluted EPS

$

3.36 

$

2.81 

$

6.27 

$

5.52 

Adjusted EBITDA

$

85,089 

$

73,682 

$

159,888 

$

146,449 

Adjusted EBITDA as a % of revenue

18.0 

%

16.7 

%

17.1 

%

16.6 

%

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 37-39.

For the three months ended June 30, 2019, the increase in consolidated service revenues and sales was driven by a 10.9% increase at Roto-Rooter and a 5.4% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all service lines. The increase in service revenues at VITAS is comprised primarily of a 0.5% geographically weighted average Medicare reimbursement rate increase, a 5.9% increase in days of care, offset by $3.2 million in Medicare cap revenue reduction. See page 40 for additional VITAS operating metrics.

For the six months ended June 30, 2019, the increase in consolidated service revenues and sales was driven by an 8.2% increase at Roto-Rooter and a 5.2% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines. The increase in service revenues at VITAS is comprised primarily of a 0.5% geographically weighted average Medicare reimbursement rate increase, a 6.2% increase in days of care, offset by $6.6 million in Medicare cap revenue reduction. The first six months of 2018 included a reversal of prior Medicare cap expense of $1.3 million. See page 40 for additional VITAS operating metrics.

In February 2016, the FASB issued Accounting Standards Update “ASU No. 2016-02 Leases” which introduced a lessee model that brings most leases on to the balance sheets and updates lessor accounting to align with changes in the lessee model and the revenue recognition standard. This standard is also referred to as Accountings Standards Codification No.842 (“ASC 842”). We adopted ASC 842 effective January 1, 2019, using the optional transition method requiring leases existing at, or entered into after, January 1, 2019 to be recognized and measured. The transition method selected does not require adjustments to prior period amounts, which continue to be reflected in accordance with historical accounting. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which among other things, allowed us to carry forward the historical lease classification.

Chemed and each of its operating subsidiaries are service companies. As such, real estate leases comprise the largest lease obligation (and conversely, right of use asset) in our lease portfolio. VITAS has leased office space, as well as space for inpatient units (“IPUs”) and/or contract beds within hospitals. Roto-Rooter mainly has leased office space.

-23-


Roto-Rooter purchases equipment and leases it to certain of its independent contractors. We analyzed these leases in accordance with ASC 842 and determined they are operating leases. As a result, Roto-Rooter will continue to capitalize the equipment underlying these leases, depreciate the equipment and recognize rental income.

Adoption of the new standard resulted in right of use assets and lease liabilities of $87.8 million and $98.7 million, respectively, as of March 31, 2019. In determining the liability, we used our incremental borrowing rate based on the information available at the time of adoption, since the rate implicit in the leases cannot be readily determined. At January 1, 2019, the weighted average rate was 3.47%. The standard did not materially impact our consolidated net income or cash flows. We did not book a cumulative effect adjustment upon adoption of the standard.

Financial Condition

Liquidity and Capital Resources

Material changes in the balance sheet accounts from December 31, 2018 to June 30, 2019 include the following:

A $16.6 million increase in accounts receivable due to timing of receipts.

A $90.8 million increase in lease right of use assets due to the adoption of ASC 842.

A $15.8 million increase in assets held for sale as a result of an agreement to trade-in certain transportation

                             equipment to offset replacement equipment expected to be delivered in 2020.

A $13.2 decrease in accrued compensation due to the payments of cash bonuses in 2019 accrued in 2018.

A $6.6 million increase in accrued legal primarily due to a $6.0 million litigation settlement at VITAS.

A $31.6 million and $70.0 million increase in short-term and long-term lease liability, respectively, due to

                             the adoption of ASC 842.

A $101.8 million increase in treasury stock due mainly to stock repurchases.

Net cash provided by operating activities decreased $12.1 million from June 30, 2018 to June 30, 2019. Significant changes in our accounts receivable balances are typically driven 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 $38.0 million in standby letters of credit as of June 30, 2019, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of June 30, 2019, we have approximately $327.0 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

Commitments and Contingencies

Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly. We are in compliance with all financial and other debt covenants as of June 30, 2019 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, 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.

-24-


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.

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 sought 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 sought 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”).

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 sought 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 sought 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 the Jordan Seper and Jiwann Chhina cases.

-25-


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 (“PAGA”). Williams seeks to pursue these claims both individually and as a representative action under the PAGA on behalf of current and former California 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 possible resolution through ongoing 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 Seper and Chhina cases were consolidated in Los Angeles County Superior Court; Chhina was dismissed as a separate action and joined with Seper in the filing of amended complaint on August 28, 2018, in which both Chhina and Seper were identified as named plaintiffs. The parties engaged in a mediation process beginning in October 2018 and concluded with an agreement in March 2019. The agreement has been incorporated into a long-form agreement to be presented to the court for preliminary approval, notice to class members, and eventual final approval and payment. The settlement amount, subject to court approval is $5.75 million plus employment taxes. The definition of the class to participate in the settlement is intended to cover claims raised in the consolidated Seper/Chhina matter, claims raised in Phillips and Moore, as well as any class claims in Williams.

Alfred Lax (“Lax”), a current employee of Roto-Rooter Services Company (“RRSC”), was hired in the RRSC’s Menlo Park branch in 2007. On November 30, 2018, Lax filed a class action lawsuit in Santa Clara County Superior Court alleging (1) failure to provide or compensate for required rest breaks; (2) failure to properly pay for all hours worked; (3) failure to provide accurate wage statements; (4) failure to reimburse for work-related expenses; and (5) unfair business practices. Lax has stated these claims as a representative of a class defined as all service technicians employed by RRSC in California during the four years preceding the filing of the complaint. He seeks a determination that the action may proceed and be maintained as a class action and for compensatory and statutory damages (premium payments for missed rest periods, uncompensated rest periods, wages for time allegedly not paid such as travel time, repair time, and vehicle maintenance time, and unreimbursed expenses), penalties and restitutions, pre- and post-judgement interest and attorneys’ fees and costs. The lawsuit, Alfred Lax, on behalf of himself and all others similarly situated v. Roto-Rooter Services Company, and Does 1 through 50 inclusive; Santa Clara County Superior Court Case Number 18CV338652, was received by RRSC on December 11, 2018 and RRSC timely filed its answer denying the claims.

The Company is not able to reasonably estimate the probability of loss or range of loss for any of these lawsuits at this time, with the exception of Seper/Chhina, Phillips and Moore, and the class claims in Williams.

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.


-26-


Results of Operations

Three months ended June 30, 2019 versus 2018 - Consolidated Results

Our service revenues and sales for the second quarter of 2019 increased 7.2% versus services and sales revenues for the second quarter of 2018. Of this increase, a $16.0 million increase was attributable to VITAS and $15.8 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

Three months ended June 30,

2019

2018

VITAS

Routine homecare

$

266,461 

$

250,381 

Continuous care

30,786 

30,513 

General inpatient

22,894 

20,077 

Other

2,237 

1,998 

Medicare cap adjustment

(3,198)

(536)

Room and board - net

(2,710)

(2,675)

Implicit price concessions

(3,720)

(2,959)

Roto-Rooter

Drain cleaning - short term core

45,558 

41,959 

Plumbing - short term core

33,837 

30,538 

Subtotal

79,395 

72,497 

Excavation - short term core

35,172 

32,014 

Water restoration

28,239 

24,765 

Contractor operations

14,580 

12,366 

Outside franchisee fees

1,623 

1,574 

Other - short term core

576 

575 

Other

2,974 

2,835 

Implicit price concessions

(1,725)

(1,612)

Total

$

473,584 

$

441,813 

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

Days of Care

Increase/(Decrease)

2019

2018

Percent

Routine homecare

1,621,837 

1,534,162 

5.7 

Continuous care

41,804 

42,488 

(1.6)

General inpatient

36,332 

28,971 

25.4 

Total days of care

1,699,973 

1,605,621 

5.9 

The remaining increase in VITAS’ revenues for the second quarter of 2019 versus the second quarter of 2018 was primarily comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 0.5% offset by $3.2 million in Medicare cap revenue reductions compared to a Medicare cap revenue reduction of $536,000 in 2018. Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the second quarter of 2019 versus 2018 is attributable to a 6.6% increase in price and service mix shift and a 4.2% increase in job count. The increase in excavation revenues for the second quarter of 2019 versus 2018 is attributable to a 5.5% increase in price and service mix shift and a 4.4% increase in job count. Drain cleaning revenues for the second quarter of 2019 versus 2018 reflect a 6.3% increase in price and service mix shift and a 2.3% increase in job count. Water restoration revenue for the second quarter of 2019 versus 2018 is attributable to a 7.1% increase in price and service mix shift and a 6.9% increase in job count. Contractor operations increased 17.9% mainly due to their expansion into water restoration.

-27-


The consolidated gross margin was 31.7% in the second quarter of 2019 as compared with 30.8% in the second quarter of 2018. On a segment basis, VITAS’ gross margin was 22.9% in the second quarter of 2019 as compared with 21.5%, in the second quarter of 2018 primarily due to improved labor management and reduced ancillary costs. The Roto-Rooter segment’s gross margin was 48.7% for the second quarter of 2019 compared with 49.9% in the second quarter of 2018 primarily due to higher labor costs and medical insurance claims in the second quarter of 2019.

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

Three months ended June 30,

2019

2018

SG&A expenses before long-term incentive compensation and the impact of

market value adjustments related to deferred compensation trusts

$

70,300

$

66,296

Impact of market value adjustments related to assets held in deferred

compensation trusts

1,386

1,222

Long-term incentive compensation

(130)

779

Total SG&A expenses

$

71,556

$

68,297

Other operating expenses increased $2.7 million from the second quarter of 2018 primarily as a result of a $2.3 million impairment of transportation equipment held for sale recorded in the second quarter of 2019.

Other income - net comprise (in thousands):

Three months ended June 30,

2019

2018

Market value adjustment on assets held in

deferred compensation trusts

$

(130)

$

779 

Interest income

112 

259 

Other

31 

-

Total other income - net

$

13 

$

1,038 

Our effective tax rate reconciliation is as follows:

Three months ended June 30,

2019

2018

Income tax provision calculated at the statutory federal rate

$

13,504 

$

12,108 

Stock compensation tax benefits

(2,867)

(10,448)

State and local income taxes

1,868 

186 

Other--net

1,070 

838 

Income tax provision

$

13,575 

$

2,684 

Effective tax rate

21.1 

%

4.7 

%


-28-


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

Three months ended June 30,

2019

2018

VITAS

Litigation settlement

$

-

$

152

Medicare cap sequestration adjustment

(1,253)

(138)

Non cash ASC 842 benefit

(1)

-

Roto-Rooter

Amortization of acquired and cancelled franchise agreements

(244)

-

Acquisition expenses

(71)

-

Corporate

Excess tax benefits on stock compensation

3,212

11,702

Stock option expense

(3,197)

(2,900)

Impairment loss on transportation equipment

(1,733)

-

Long-term incentive compensation

(1,199)

(1,003)

Total

$

(4,486)

$

7,813

Three months ended June 30, 2019 versus 2018 - Segment Results

Net income/(loss) for the second quarter of 2019 versus the second quarter of 2018 by segment (in thousands):

Three months ended June 30,

2019

2018

VITAS

$

37,339

$

31,785

Roto-Rooter

27,175

25,298

Corporate

(13,785)

(2,112)

$

50,729

$

54,971

VITAS’ after-tax earnings were positively impacted in 2019 compared to 2018 due to higher revenue and improved labor management and ancillary costs. After-tax earnings as a percent of revenue at VITAS in the second quarter of 2019 was 11.9% as compared to 10.7% in the second quarter of 2018.

Roto-Rooter’s net income was positively impacted in 2019 compared to 2018 primarily by higher revenue. After-tax earnings as a percent of revenue at Roto-Rooter in the second quarter of 2019 was 16.9% as compared to 17.4% in the second quarter of 2018.

After-tax Corporate expenses for 2019 increased 552.7% when compared to 2018 due mainly to a $8.5 million decrease in the excess tax benefits on stock compensation and a $2.3 million ($1.7 million after-tax) impairment of transportation equipment held for sale.

-29-


Results of Operations

Six months ended June 30, 2019 versus 2018 - Consolidated Results

Our service revenues and sales for the first six months of 2019 increased 6.2% versus services and sales revenues for the first six months of 2018. Of this increase, a $30.7 million increase was attributable to VITAS and $23.9 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

Six months ended June 30,

2019

2018

VITAS

Routine homecare

$

525,312 

$

491,412 

Continuous care

63,030 

61,279 

General inpatient

45,464 

42,186 

Other

4,242 

3,740 

Medicare cap adjustment

(6,598)

1,282 

Room and board - net

(5,252)

(5,294)

Implicit price concessions

(6,667)

(5,792)

Roto-Rooter

Drain cleaning - short term core

89,700 

83,289 

Plumbing - short term core

65,892 

61,349 

Subtotal

155,592 

144,638 

Excavation - short term core

69,457 

63,335 

Water restoration

55,891 

52,502 

Contractor operations

28,589 

24,731 

Outside franchisee fees

3,245 

3,165 

Other - short term core

1,153 

1,199 

Other

5,981 

6,155 

Implicit price concessions

(3,821)

(3,549)

Total

$

935,618 

$

880,989 

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

Days of Care

Increase/(Decrease)

2019

2018

Percent

Routine homecare

3,193,505 

3,008,130 

6.2 

Continuous care

85,727 

85,685 

0.0 

General inpatient

71,783 

60,641 

18.4 

Total days of care

3,351,015 

3,154,456 

6.2 

The remaining increase in VITAS’ revenues for the first six months of 2019 versus the first six months of 2018 was primarily comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 0.5% offset by $6.6 million in Medicare cap revenue reductions compared to Medicare cap reversal of $1.3 million in 2018. Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.

The increase in plumbing revenues for the first six months of 2019 versus 2018 is attributable to a 6.0% increase in price and service mix shift and by a 1.4% increase in job count. The increase in excavation revenues for the first six months of 2019 versus 2018 is attributable to a 11.0% increase in price and service mix shift offset by a 1.3% decrease in job count. Drain cleaning revenues for the first six months of 2019 versus 2018 reflect a 5.6% increase in price and service mix shift and a 2.1% increase in job count. The increase in water restoration revenue for the first six months of 2019 versus 2018 is attributable to a 3.2% increase in price and service mix shift and a 3.3% increase in job count. Contractor operations increased 15.6% mainly due to their expansion into water restoration.

The consolidated gross margin was 31.0% in the first six months of 2019 as compared with 30.7% in the first six months of 2018 primarily. On a segment basis, VITAS’ gross margin was 22.4% in the first six months of 2019 as compared

-30-


with 21.8%, in the first six months of 2018 primarily due to improved labor management and ancillary costs. The Roto-Rooter segment’s gross margin was 47.9% for the first six months of 2019 compared with 48.7% in the first six months of 2018 primarily due to higher labor costs.

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

Six months ended June 30,

2019

2018

SG&A expenses before long-term incentive compensation and the impact of

market value adjustments related to deferred compensation trusts

$

140,504

$

132,517

Long-term incentive compensation

2,874

3,142

Impact of market value adjustments related to assets held in deferred

compensation trusts

2,207

1,638

Total SG&A expenses

$

145,585

$

137,297

Other operating expenses increased $9.1 million from the first six months of 2018 primarily as a result of a $6.0 million litigation settlement at VITAS and a $2.3 million impairment of transportation equipment held for sale recorded in the first six months of 2019.

Other income - net comprise (in thousands):

Six months ended June 30,

2019

2018

Market value adjustment on assets held in

deferred compensation trusts

$

2,207 

$

1,638 

Interest income

214 

417 

Other

31 

Total other income - net

$

2,452 

$

2,056 

Our effective tax rate reconciliation is as follows:

Six months ended June 30,

2019

2018

Income tax provision calculated at the statutory federal rate

$

24,169 

$

23,911 

Stock compensation tax benefits

(8,876)

(13,839)

State and local income taxes

3,470 

2,790 

Other--net

932 

1,034 

Income tax provision

$

19,695 

$

13,896 

Effective tax rate

17.1 

%

12.2 

%

-31-


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

Six Months Ended June 30,

2019

2018

VITAS

Litigation settlement

$

(4,476)

$

152

Medicare cap sequestration adjustment

(1,640)

(401)

Acquisition expenses

(490)

-

Roto-Rooter

Amortization of acquired and cancelled franchise agreements

(568)

-

Acquisition expenses

(71)

-

Expenses related to litigation settlements

(40)

-

Corporate

Excess tax benefits on stock compensation

9,944

15,500

Stock option expense

(6,524)

(5,791)

Long-term incentive compensation

(2,429)

(2,502)

Impairment loss on transportation equipment

(1,733)

-

Non cash ASC 842 benefit

124

-

Acquisition expenses

(91)

-

Total

$

(7,994)

$

6,958

Six months ended June 30, 2019 versus 2018 - Segment Results

Net income/(loss) for the first six months of 2019 versus the first six months of 2018 by segment (in thousands):

Six months ended June 30,

2019

2018

VITAS

$

66,626

$

63,800

Roto-Rooter

50,162

48,236

Corporate

(21,392)

(12,069)

$

95,396

$

99,967

VITAS’ after-tax earnings were positively impacted in 2019 compared to 2018 due to higher revenue offset by the impact of a litigation settlement of approximately $6.0 million ($4.5 million after-tax). After-tax earnings as a percent of revenue at VITAS in the first six months of 2019 and 2018 was 10.8%.

Roto-Rooter’s net income was positively impacted in 2019 compared to 2018 primarily by higher revenue. After-tax earnings as a percent of revenue at Roto-Rooter in the first six months of 2019 was 15.9% as compared to 16.5% in the first six months of 2018.

After-tax Corporate expenses for 2019 decreased 77.2% when compared to 2018 due mainly to a $5.6 million decrease in the excess tax benefits on stock compensation and a $2.3 million ($1.7 million after-tax) impairment of transportation equipment held for sale.

-32-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2019

(in thousands)(unaudited)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

2019 (a)

Service revenues and sales

$

312,750 

$

160,834 

$

-

$

473,584 

Cost of services provided and goods sold

241,104 

82,533 

-

323,637 

Selling, general and administrative expenses

21,682 

39,377 

10,497 

71,556 

Depreciation

4,831 

5,017 

39 

9,887 

Amortization

18 

388 

-

406 

Other operating expense

69 

235 

2,266 

2,570 

Total costs and expenses

267,704 

127,550 

12,802 

408,056 

Income/(loss) from operations

45,046 

33,284 

(12,802)

65,528 

Interest expense

(53)

(100)

(1,084)

(1,237)

Intercompany interest income/(expense)

4,382 

2,180 

(6,562)

-

Other income—net

101 

42 

(130)

13 

Income/(expense) before income taxes

49,476 

35,406 

(20,578)

64,304 

Income taxes

(12,137)

(8,231)

6,793 

(13,575)

Net income/(loss)

$

37,339 

$

27,175 

$

(13,785)

$

50,729 

(a) The following amounts are included in net income (in thousands):

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

Pretax benefit/(cost):

Stock option expense

$

-

$

-

$

(3,929)

$

(3,929)

Impairment loss on transportation equipment

-

-

(2,266)

(2,266)

Medicare cap sequestration

(1,689)

-

-

(1,689)

Long-term incentive compensation

-

-

(1,386)

(1,386)

Amortization of acquired and cancelled franchise agreements

-

(331)

-

(331)

Acquisition expenses

-

(97)

-

(97)

Total

$

(1,689)

$

(428)

$

(7,581)

$

(9,698)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

After-tax benefit/(cost):

Stock option expense

$

-

$

-

$

(3,197)

$

(3,197)

Impairment loss on transportation equipment

-

-

(1,733)

(1,733)

Medicare cap sequestration

(1,253)

$

-

-

(1,253)

Long-term incentive compensation

-

-

(1,199)

(1,199)

Amortization of acquired and cancelled franchise agreements

-

(244)

-

(244)

Acquisition expenses

-

(71)

-

(71)

Non cash ASC 842 expenses

(1)

-

-

(1)

Excess tax benefits on stock compensation

-

-

3,212 

3,212 

Total

$

(1,254)

$

(315)

$

(2,917)

$

(4,486)

-33-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2018

(in thousands)(unaudited)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

2018 (a)

Service revenues and sales

$

296,799 

$

145,014 

$

-

$

441,813 

Cost of services provided and goods sold

233,073 

72,668 

-

305,741 

Selling, general and administrative expenses

20,702 

35,909 

11,686 

68,297 

Depreciation

5,050 

4,628 

40 

9,718 

Amortization

-

34 

-

34 

Other operating expenses

(67)

(51)

-

(118)

Total costs and expenses

258,758 

113,188 

11,726 

383,672 

Income/(loss) from operations

38,041 

31,826 

(11,726)

58,141 

Interest expense

(53)

(92)

(1,379)

(1,524)

Intercompany interest income/(expense)

3,124 

1,739 

(4,863)

-

Other income—net

238 

21 

779 

1,038 

Income/(expense) before income taxes

41,350 

33,494 

(17,189)

57,655 

Income taxes

(9,565)

(8,196)

15,077 

(2,684)

Net income/(loss)

$

31,785 

$

25,298 

$

(2,112)

$

54,971 

(a) The following amounts are included in net income (in thousands):

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

Pretax benefit/(cost):

Stock option expense

$

-

$

-

$

(3,652)

$

(3,652)

Long-term incentive compensation

-

-

(1,222)

(1,222)

Litigation settlement

204 

-

-

204 

Medicare cap sequestration adjustment

(185)

-

-

(185)

Total

$

19 

$

-

$

(4,874)

$

(4,855)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

After-tax benefit/(cost):

Stock option expense

$

-

$

-

$

(2,900)

$

(2,900)

Long-term incentive compensation

-

-

(1,003)

(1,003)

Litigation settlement

152 

-

-

152 

Medicare cap sequestration adjustment

(138)

-

-

(138)

Excess tax benefits on stock compensation

-

-

11,702 

11,702 

Total

$

14 

$

-

$

7,799 

$

7,813 

-34-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2019

(in thousands)(unaudited)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

2019 (a)

Service revenues and sales

$

619,531 

$

316,087 

$

-

$

935,618 

Cost of services provided and goods sold

480,847 

164,741 

-

645,588 

Selling, general and administrative expenses

43,218 

78,978 

23,389 

145,585 

Depreciation

9,539 

9,980 

78 

19,597 

Amortization

35 

890 

-

925 

Other operating expenses

6,423 

234 

2,266 

8,923 

Total costs and expenses

540,062 

254,823 

25,733 

820,618 

Income/(loss) from operations

79,469 

61,264 

(25,733)

115,000 

Interest expense

(101)

(194)

(2,066)

(2,361)

Intercompany interest income/(expense)

8,777 

4,375 

(13,152)

-

Other income/(expense)—net

188 

56 

2,208 

2,452 

Income/(expense) before income taxes

88,333 

65,501 

(38,743)

115,091 

Income taxes

(21,707)

(15,339)

17,351 

(19,695)

Net income/(loss)

$

66,626 

$

50,162 

$

(21,392)

$

95,396 

(a) The following amounts are included in net income (in thousands):

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

Pretax benefit/(cost):

Stock option expense

$

-

$

-

$

(8,018)

$

(8,018)

Litigation settlement

(6,000)

-

-

(6,000)

Long-term incentive compensation

-

-

(2,874)

(2,874)

Impairment loss on transportation equipment

-

-

(2,266)

(2,266)

Medicare cap sequestration adjustment

(2,204)

-

-

(2,204)

Amortization of acquired and cancelled franchise agreements

-

(772)

-

(772)

Non cash ASC 842 (expenses)/benefit

(656)

(55)

163 

(548)

Acquisition expenses

-

(97)

(120)

(217)

Total

$

(8,860)

$

(924)

$

(13,115)

$

(22,899)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

After-tax benefit/(cost):

Stock option expense

$

-

$

-

$

(6,524)

$

(6,524)

Litigation settlement

(4,476)

-

-

(4,476)

Long-term incentive compensation

-

-

(2,429)

(2,429)

Impairment loss on transportation equipment

-

-

(1,733)

(1,733)

Medicare cap sequestration adjustment

(1,640)

-

-

(1,640)

Amortization of acquired and cancelled franchise agreements

-

(568)

-

(568)

Non cash ASC 842 (expenses)/benefit

(490)

(40)

124 

(406)

Acquisition expenses

-

(71)

(91)

(162)

Excess tax benefits on stock compensation

-

-

9,944 

9,944 

Total

$

(6,606)

$

(679)

$

(709)

$

(7,994)

-35-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2018

(in thousands)(unaudited)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

2018 (a)

Service revenues and sales

$

588,813 

$

292,176 

$

-

$

880,989 

Cost of services provided and goods sold

460,329 

149,948 

-

610,277 

Selling, general and administrative expenses

41,213 

72,006 

24,078 

137,297 

Depreciation

9,846 

9,072 

67 

18,985 

Amortization

-

61 

-

61 

Other operating expenses

(84)

(85)

-

(169)

Total costs and expenses

511,304 

231,002 

24,145 

766,451 

Income/(loss) from operations

77,509 

61,174 

(24,145)

114,538 

Interest expense

(104)

(184)

(2,443)

(2,731)

Intercompany interest income/(expense)

6,218 

3,417 

(9,635)

-

Other income—net

380 

37 

1,639 

2,056 

Income/(expense) before income taxes

84,003 

64,444 

(34,584)

113,863 

Income taxes

(20,203)

(16,208)

22,515 

(13,896)

Net income/(loss)

$

63,800 

$

48,236 

$

(12,069)

$

99,967 

(a) The following amounts are included in net income (in thousands):

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

Pretax benefit/(cost):

Stock option expense

$

-

$

-

$

(7,305)

$

(7,305)

Long-term incentive compensation

-

-

(3,142)

(3,142)

Medicare cap sequestration adjustment

(537)

-

-

(537)

Litigation settlement

204 

-

-

204 

Total

$

(333)

$

-

$

(10,447)

$

(10,780)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

After-tax benefit/(cost):

Stock option expense

$

-

$

-

$

(5,791)

$

(5,791)

Long-term incentive compensation

-

-

(2,502)

(2,502)

Medicare cap sequestration adjustment

(401)

-

-

(401)

Litigation settlement

152 

-

-

152 

Excess tax benefits on stock compensation

-

-

15,500 

15,500 

Total

$

(249)

$

-

$

7,207 

$

6,958 

-36-


Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA

Chemed Corporation and Subsidiary Companies

(in thousands)

Chemed

For the three months ended June 30, 2019

VITAS

Roto-Rooter

Corporate

Consolidated

Net income/(loss)

$

37,339 

$

27,175 

$

(13,785)

$

50,729 

Add/(deduct):

Interest expense

53 

100 

1,084 

1,237 

Income taxes

12,137 

8,231 

(6,793)

13,575 

Depreciation

4,831 

5,017 

39 

9,887 

Amortization

18 

388 

-

406 

EBITDA

54,378 

40,911 

(19,455)

75,834 

Add/(deduct):

Intercompany interest expense/(income)

(4,382)

(2,180)

6,562 

-

Interest income

(69)

(43)

-

(112)

Stock option expense

-

-

3,929 

3,929 

Impairment loss on transportation equipment

-

-

2,266 

2,266 

Medicare cap sequestration adjustment

1,689 

-

-

1,689 

Long-term incentive compensation

-

-

1,386 

1,386 

Acquisition expense

-

97 

-

97 

Adjusted EBITDA

$

51,616 

$

38,785 

$

(5,312)

$

85,089 

Chemed

For the three months ended June 30, 2018

VITAS

Roto-Rooter

Corporate

Consolidated

Net income/(loss)

$

31,785 

$

25,298 

$

(2,112)

$

54,971 

Add/(deduct):

Interest expense

53 

92 

1,379 

1,524 

Income taxes

9,565 

8,196 

(15,077)

2,684 

Depreciation

5,050 

4,628 

40 

9,718 

Amortization

-

34 

-

34 

EBITDA

46,453 

38,248 

(15,770)

68,931 

Add/(deduct):

Intercompany interest expense/(income)

(3,124)

(1,739)

4,863 

-

Interest income

(237)

(22)

-

(259)

Stock option expense

-

-

3,652 

3,652 

Long-term incentive compensation

-

-

1,222 

1,222 

Litigation settlement

(204)

-

-

(204)

Medicare cap sequestration adjustment

185 

-

-

185 

Amortization of stock awards

37 

35 

83 

155 

Adjusted EBITDA

$

43,110 

$

36,522 

$

(5,950)

$

73,682 

-37-


Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA

Chemed Corporation and Subsidiary Companies

(in thousands)

Chemed

For the six months ended June 30, 2019

VITAS

Roto-Rooter

Corporate

Consolidated

Net income/(loss)

$

66,626 

$

50,162 

$

(21,392)

$

95,396 

Add/(deduct):

Interest expense

101 

194 

2,066 

2,361 

Income taxes

21,707 

15,339 

(17,351)

19,695 

Depreciation

9,539 

9,980 

78 

19,597 

Amortization

35 

890 

-

925 

EBITDA

98,008 

76,565 

(36,599)

137,974 

Add/(deduct):

Intercompany interest expense/(income)

(8,777)

(4,375)

13,152 

-

Interest income

(157)

(56)

-

(213)

Stock option expense

-

-

8,018 

8,018 

Litigation settlement

6,000 

-

-

6,000 

Long-term incentive compensation

-

-

2,874 

2,874 

Impairment loss on transportation equipment

-

-

2,266 

2,266 

Medicare cap sequestration adjustment

2,204 

-

-

2,204 

Non cash ASC 842 expenses/(benefit)

656 

55 

(163)

548 

Acquisition expenses

-

97 

120 

217 

Adjusted EBITDA

$

97,934 

$

72,286 

$

(10,332)

$

159,888 

Chemed

For the six months ended June 30, 2018

VITAS

Roto-Rooter

Corporate

Consolidated

Net income/(loss)

$

63,800 

$

48,236 

$

(12,069)

$

99,967 

Add/(deduct):

Interest expense

104 

184 

2,443 

2,731 

Income taxes

20,203 

16,208 

(22,515)

13,896 

Depreciation

9,846 

9,072 

67 

18,985 

Amortization

-

61 

-

61 

EBITDA

93,953 

73,761 

(32,074)

135,640 

Add/(deduct):

Intercompany interest expense/(income)

(6,218)

(3,417)

9,635 

-

Interest income

(380)

(37)

-

(417)

Stock option expense

-

-

7,305 

7,305 

Long-term incentive compensation

-

-

3,142 

3,142 

Medicare cap sequestration adjustment

537 

-

-

537 

Stock award amortization

107 

100 

239 

446 

Litigation settlement

(204)

-

-

(204)

Adjusted EBITDA

$

87,795 

$

70,407 

$

(11,753)

$

146,449 

-38-


RECONCILIATION OF ADJUSTED NET INCOME

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

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Net income as reported

$

50,729 

$

54,971 

$

95,396 

$

99,967 

Add/(deduct) pre-tax cost of:

Stock option expense

3,929 

3,652 

8,018 

7,305 

Litigation settlement

-

(204)

6,000 

(204)

Long-term incentive compensation

1,386 

1,222 

2,874 

3,142 

Impairment loss on transportation equipment

2,266 

-

2,266 

-

Medicare cap sequestration adjustment

1,689 

185 

2,204 

537 

Amortization of acquired and cancelled franchise agreements

331 

-

772 

-

Non cash ASC 842 expenses

-

-

548 

-

Acquisition expenses

97 

-

217 

-

Add/(deduct) tax impacts:

Tax impact of the above pre-tax adjustments (1)

(2,000)

(966)

(4,961)

(2,238)

Excess tax benefits on stock compensation

(3,212)

(11,702)

(9,944)

(15,500)

Adjusted net income

$

55,215 

$

47,158 

$

103,390 

$

93,009 

Diluted Earnings Per Share As Reported

Net income

$

3.08 

$

3.27 

$

5.79 

$

5.93 

Average number of shares outstanding

16,449 

16,811 

16,489 

16,854 

Adjusted Diluted Earnings Per Share

Adjusted net income

$

3.36 

$

2.81 

$

6.27 

$

5.52 

Adjusted average number of shares outstanding

16,449 

16,811 

16,489 

16,854 

(1) The tax impact of pre-tax adjustments was calculated using the effective tax rate of the operating unit for which each adjustment is associated.

-39-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

OPERATING STATISTICS FOR VITAS SEGMENT

(unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

OPERATING STATISTICS

2019

2018

2019

2018

Net revenue ($000)

Homecare

$

266,461 

$

250,381 

$

525,312 

$

491,412 

Inpatient

22,894 

20,077 

45,464 

42,186 

Continuous care

30,786 

30,513 

63,030 

61,279 

Other

2,237 

1,998 

4,242 

3,740 

Subtotal

$

322,378 

$

302,969 

$

638,048 

$

598,617 

Room and board, net

(2,710)

(2,675)

(5,252)

(5,294)

Contractual allowances

(3,720)

(2,959)

(6,667)

(5,792)

Medicare cap allowance

(3,198)

(536)

(6,598)

1,282 

Total

$

312,750 

$

296,799 

$

619,531 

$

588,813 

Net revenue as a percent of total before Medicare cap allowances

Homecare

82.7 

%

82.6 

%

82.3 

%

82.1 

%

Inpatient

7.1 

6.6 

7.1 

7.0 

Continuous care

9.5 

10.1 

9.9 

10.2 

Other

0.7 

0.7 

0.7 

0.7 

Subtotal

100.0 

100.0 

100.0 

100.0 

Room and board, net

(0.8)

(0.9)

(0.8)

(0.9)

Contractual allowances

(1.2)

(1.0)

(1.0)

(1.0)

Medicare cap allowance

(1.0)

(0.1)

(1.0)

0.3 

Total

97.0 

%

98.0 

%

97.2 

%

98.4 

%

Average daily census (days)

Homecare

14,482 

13,583 

14,364 

13,375 

Nursing home

3,382 

3,275 

3,318 

3,245 

Routine homecare

17,864 

16,858 

17,682 

16,620 

Inpatient

358 

318 

359 

335 

Continuous care

459 

467 

474 

473 

Total

18,681 

17,643 

18,515 

17,428 

Total Admissions

17,491 

16,658 

35,249 

35,137 

Total Discharges

17,008 

16,474 

34,350 

34,054 

Average length of stay (days)

91.1 

89.0 

91.2 

88.4 

Median length of stay (days)

16.0 

17.0 

15.0 

16.0 

ADC by major diagnosis

Cerebro

35.7 

%

36.2 

%

35.8 

%

36.4 

%

Neurological

20.4 

18.6 

20.2 

18.6 

Cancer

12.7 

13.9 

12.7 

13.9 

Cardio

17.0 

16.6 

16.9 

16.4 

Respiratory

8.2 

8.3 

8.2 

8.2 

Other

6.0 

6.4 

6.2 

6.5 

Total

100.0 

%

100.0 

%

100.0 

%

100.0 

%

Admissions by major diagnosis

Cerebro

20.6 

21.7 

%

20.7 

%

22.2 

%

Neurological

12.2 

11.1 

12.5 

11.2 

Cancer

29.2 

30.5 

28.6 

29.2 

Cardio

16.0 

15.6 

16.1 

15.6 

Respiratory

11.7 

10.8 

11.8 

11.3 

Other

10.3 

10.3 

10.3 

10.5 

Total

100.0 

%

100.0 

%

100.0 

%

100.0 

%

Estimated uncollectible accounts as a percent of revenues

1.2 

%

1.0 

%

1.1 

%

1.0 

%

Accounts receivable --

Days of revenue outstanding- excluding unapplied Medicare payments

32.7 

31.9 

N.A.

N.A.

Days of revenue outstanding- including unapplied Medicare payments

27.7 

25.6 

N.A.

N.A.

-40-


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.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At June 30, 2019, the Company had $85.0 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.

Item 4.    Controls and Procedures

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. Except as discussed below, 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.

In the first quarter of 2019, we implemented a new lease accounting system and process in response to the adoption of ASC 842, effective January 1, 2019. These implementations resulted in changes to components of our internal control over financial reporting.

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

For information regarding the Company’s legal proceedings, see note 11, Legal and Regulatory Matters, under Part I, Item I of this Quarterly Report on Form 10-Q.

Item 1A.    Risk Factors

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

-41-


Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Item 2(c).    Purchases of Equity Securities by Issuer and Affiliated Purchasers

The following table shows the activity related to our share repurchase program for the first six months of 2019:

Total Number

Weighted Average

Cumulative Shares

Dollar Amount

of Shares

Price Paid Per

Repurchased Under

Remaining Under

Repurchased

Share

the Program

The Program

February 2011 Program

January 1 through January 31, 2019

-

$

-

8,376,864 

$

46,649,495 

February 1 through February 28, 2019

91,893 

327.84 

8,468,757 

166,522,918 

March 1 through March 31, 2019

58,107 

329.10 

8,526,864 

$

147,399,943 

First Quarter Total

150,000 

$

328.33 

April 1 through April 30, 2019

-

$

-

8,526,864 

$

147,399,943 

May 1 through May 31, 2019

69,009 

328.59 

8,595,873 

124,723,950 

June 1 through June 30, 2019

-

-

8,595,873 

$

124,723,950 

Second Quarter Total

69,009 

$

328.59 

On February 25, 2019 our Board of Directors authorized an additional $150 million under the February 2011 Repurchase

Program.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

None.

Item 5.    Other Information

None.


-42-


Item 6.    Exhibits

Exhibit No.

Description

31.1

Certification by Kevin J. McNamara pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.

31.2

Certification by David P. Williams pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.

31.3

Certification by Michael D. Witzeman pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.

32.1

Certification by Kevin J. McNamara pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification by David P. Williams pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.3

Certification by Michael D. Witzeman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase


-43-


SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Chemed Corporation

(Registrant)

Dated:

July 31, 2019

By:

/s/ Kevin J. McNamara

Kevin J. McNamara

(President and Chief Executive Officer)

Dated:

July 31, 2019

By:

/s/ David P. Williams

David P. Williams

(Executive Vice President and Chief Financial Officer)

Dated:

July 31, 2019

By:

/s/ Michael D. Witzeman

Michael D. Witzeman

(Vice President and Controller)

-44-