UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)

    Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2017

    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
 
No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
 
 
Yes
 
No

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
Accelerated
filer
Non-accelerated
filer
Smaller reporting
company
                 
  Emerging growth company            
 
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 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
Yes
 
No

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

Class
 
Amount
 
Date
         
Capital Stock $1 Par Value
 
15,991,878 Shares
 
June 30, 2017
- 1 -

CHEMED CORPORATION AND
SUBSIDIARY COMPANIES

Index

   
   
 
Page No.
PART I.    FINANCIAL INFORMATION:
 
 
 
   
 
   
 
   
   
   
   
   
PART II.   OTHER INFORMATION
 
   
   
   
   
   
   
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, 2017
   
December 31, 2016
 
ASSETS
           
Current assets
           
Cash and cash equivalents
 
$
13,753
   
$
15,310
 
Accounts receivable less allowances of $16,193 (2016 - $14,236)
   
117,906
     
132,021
 
Inventories
   
5,618
     
5,755
 
Prepaid income taxes
   
4,537
     
3,709
 
Prepaid expenses
   
14,678
     
13,105
 
Total current assets
   
156,492
     
169,900
 
Investments of deferred compensation plans
   
58,579
     
54,389
 
Properties and equipment, at cost, less accumulated depreciation of $222,332 (2016 - $211,290)
   
140,209
     
121,302
 
Identifiable intangible assets less accumulated amortization of $32,827 (2016 - $33,225)
   
54,737
     
55,065
 
Goodwill
   
472,897
     
472,366
 
Deferred income taxes
   
20,593
     
8
 
Other assets
   
6,767
     
7,029
 
Total Assets
 
$
910,274
   
$
880,059
 
                 
LIABILITIES
               
Current liabilities
               
Accounts payable
 
$
49,154
   
$
39,586
 
Current portion of long-term debt
   
10,000
     
8,750
 
Income taxes
   
3,815
     
-
 
Accrued insurance
   
44,905
     
47,960
 
Accrued compensation
   
48,082
     
53,979
 
Accrued legal
   
92,502
     
1,805
 
Other current liabilities
   
20,142
     
19,752
 
Total current liabilities
   
268,600
     
171,832
 
Deferred income taxes
   
-
     
14,291
 
Long-term debt
   
115,000
     
100,000
 
Deferred compensation liabilities
   
57,811
     
54,288
 
Other liabilities
   
15,780
     
15,549
 
Total Liabilities
   
457,191
     
355,960
 
Commitments and contingencies (Note 11)
               
STOCKHOLDERS' EQUITY
               
Capital stock - authorized 80,000,000 shares $1 par; issued 34,470,426 shares (2016 - 34,270,104 shares)
   
34,470
     
34,270
 
Paid-in capital
   
661,553
     
639,703
 
Retained earnings
   
957,941
     
958,149
 
Treasury stock - 18,563,720 shares (2016 - 18,083,527)
   
(1,203,077
)
   
(1,110,536
)
Deferred compensation payable in Company stock
   
2,196
     
2,513
 
Total Stockholders' Equity
   
453,083
     
524,099
 
Total Liabilities and Stockholders' Equity
 
$
910,274
   
$
880,059
 
                 
   
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,
 
   
2017
   
2016
   
2017
   
2016
 
Service revenues and sales
 
$
415,059
   
$
390,409
   
$
820,923
   
$
780,798
 
Cost of services provided and goods sold (excluding depreciation)
   
285,852
     
276,255
     
570,992
     
554,690
 
Selling, general and administrative expenses
   
68,654
     
62,628
     
138,112
     
121,673
 
Depreciation
   
8,833
     
8,581
     
17,726
     
17,005
 
Amortization
   
32
     
91
     
78
     
183
 
Other operating expenses
   
90,636
     
4,491
     
91,509
     
4,491
 
Total costs and expenses
   
454,007
     
352,046
     
818,417
     
698,042
 
Income/(loss) from operations
   
(38,948
)
   
38,363
     
2,506
     
82,756
 
Interest expense
   
(1,121
)
   
(971
)
   
(2,116
)
   
(1,813
)
Other income/(expense) - net
   
1,653
     
3,217
     
4,116
     
293
 
Income/(loss) before income taxes
   
(38,416
)
   
40,609
     
4,506
     
81,236
 
Income taxes
   
16,760
     
(15,724
)
   
3,682
     
(31,511
)
Net income/(loss)
 
$
(21,656
)
 
$
24,885
   
$
8,188
   
$
49,725
 
                                 
Earnings/(Loss) Per Share
                               
Net income/(loss)
 
$
(1.35
)
 
$
1.51
   
$
0.51
   
$
3.00
 
Average number of shares outstanding
   
16,010
     
16,443
     
16,114
     
16,583
 
                                 
Diluted Earnings/(Loss) Per Share
                               
Net income/(loss)
 
$
(1.35
)
 
$
1.48
   
$
0.49
   
$
2.93
 
Average number of shares outstanding
   
16,010
     
16,831
     
16,758
     
16,999
 
                                 
Cash Dividends Per Share
 
$
0.26
   
$
0.24
   
$
0.52
   
$
0.48
 
                                 
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,
 
   
2017
   
2016
 
Cash Flows from Operating Activities
           
Net income
 
$
8,188
   
$
49,725
 
Adjustments to reconcile net income to net cash provided
               
by operating activities:
               
Depreciation and amortization
   
17,804
     
17,188
 
Provision for uncollectible accounts receivable
   
8,250
     
8,124
 
Stock option expense
   
6,055
     
4,840
 
Benefit for deferred income taxes
   
(34,876
)
   
(4,244
)
Potential litigation settlement
   
90,000
     
-
 
Noncash early retirement expense
   
-
     
1,747
 
Amortization of restricted stock awards
   
638
     
974
 
Noncash directors' compensation
   
766
     
541
 
Noncash long-term incentive compensation
   
1,783
     
196
 
Amortization of debt issuance costs
   
258
     
260
 
Changes in operating assets and liabilities:
               
Decrease/(increase) in accounts receivable
   
5,804
     
(839
)
Decrease in inventories
   
137
     
194
 
Increase in prepaid expenses
   
(1,573
)
   
(2,605
)
Decrease in accounts payable and other current liabilities
   
(6,931
)
   
(4,879
)
Increase in income taxes
   
2,982
     
3,109
 
Increase in other assets
   
(4,152
)
   
(3,636
)
Increase in other liabilities
   
3,754
     
4,145
 
Excess tax benefit on share-based compensation
   
-
     
(1,383
)
Other sources/(uses)
   
1,437
     
(9
)
Net cash provided by operating activities
   
100,324
     
73,448
 
Cash Flows from Investing Activities
               
Capital expenditures
   
(28,133
)
   
(19,983
)
Business combinations
   
(525
)
   
-
 
Other sources
   
87
     
214
 
Net cash used by investing activities
   
(28,571
)
   
(19,769
)
Cash Flows from Financing Activities
               
Proceeds from long-term debt
   
135,800
     
92,400
 
Payments on revolving line of credit
   
(115,800
)
   
(32,400
)
Purchases of treasury stock
   
(85,063
)
   
(94,337
)
Change in cash overdrafts payable
   
(1,090
)
   
(5,440
)
Proceeds from exercise of stock options
   
10,398
     
3,533
 
Capital stock surrendered to pay taxes on stock-based compensation
   
(5,716
)
   
(5,163
)
Dividends paid
   
(8,396
)
   
(8,039
)
Payments on other long-term debt
   
(3,750
)
   
(3,750
)
Excess tax benefit on share-based compensation
   
-
     
1,383
 
Other sources
   
307
     
881
 
Net cash used by financing activities
   
(73,310
)
   
(50,932
)
Increase/(Decrease) in Cash and Cash Equivalents
   
(1,557
)
   
2,747
 
Cash and cash equivalents at beginning of year
   
15,310
     
14,727
 
Cash and cash equivalents at end of period
 
$
13,753
   
$
17,474
 
                 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
- 5 -

 
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, 2016 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, 2016.

EARNINGS PER SHARE
In March 2016, the FASB issued Accounting Standards Update “ASU No. 2016-09 - Compensation – Stock Compensation” which is part of the FASB’s Simplification Initiative.  The object of this initiative is to identify, evaluate, and improve areas of GAAP. The areas of simplification in this initiative involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The guidance was effective for fiscal years beginning after December 15, 2016.  We adopted the applicable provisions of ASU 2016-09 on a prospective basis.  The impact of this ASU on our financial statements for the quarter ended June 30, 2017 was to decrease our income tax expense by $2.6 million as the result of excess tax benefits on stock based compensation being recorded on the statements of income. This, combined with the required change in diluted share count, resulted in an increase to basic and diluted earnings per share of $0.17. The impact of this ASU on our financial statements for the six months ended June 30, 2017 was to decrease our income tax expense by $6.3 million as the result of excess tax benefits on stock based compensation being recorded on the statements of income. This, combined with the required change in diluted share count, resulted in an increase to basic earnings per share by $0.39 and an increase to diluted earnings per share by $0.38.
 
INCOME TAXES
    The effective tax rate for the three and six month periods ended June 30, 2017 was 43.6% (income tax benefit on pre-tax loss) and 81.7% (income tax benefit on pre-tax income), respectively. These rates differ from the US statutory tax rates primarily as the result of the adoption of ASU 2016-09 described above. The remaining difference relates to our normal, small permanent differences between book and tax income having a larger than normal impact on our effective rate due to a lower absolute dollar value of pretax income (loss). These permanent differences generally do not significantly impact our effective rate. However, as described fully in footnote 11, we recorded a charge during the quarter for potential litigation settlement of $90.0 million causing a decrease in pretax income (increase in pretax loss).

 
2.   Revenue Recognition

Both the VITAS segment and the Roto-Rooter segment recognize service revenues and sales when the earnings process has been completed.  Generally, this occurs when services are provided or products are shipped.  VITAS recognizes revenue at the estimated realizable amount due from third-party payers.  Medicare payments are subject to certain limitations, as described below.

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 they are likely to exceed the annual per-beneficiary Medicare cap (“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 action to influence the patient mix or to increase patient admissions.  However, should we project our corrective action will not prevent that program from exceeding its Medicare cap, we estimate the amount of revenue recognized during the period that will require repayment to the Federal government under the Medicare cap and record the amount as a reduction to patient revenue.

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 $2.2 million is owed for Medicare cap in three programs arising during the 2013, 2014 and 2015 measurement periods.  The amounts were 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 demand the $2.2 million under their “as if” methodology.  We have not recorded a reserve as of June 30, 2017 for $1.9 million of the potential exposure.  We have appealed CMS’s methodology change with the appropriate regulatory appeal board.

- 6 -

 
During the three and six months ended June 30, 2016, respectively, no Medicare cap was recorded.

During the three and six months ended June 30, 2017, respectively, we recorded $247,000 for two programs cap liability for the 2013, 2014 and 2015 measurement periods of the amount recorded, $105,000 relates to the sequestration issue described above.

Shown below is the Medicare cap liability activity for the fiscal periods ended (in thousands):

   
June 30,
 
   
2017
   
2016
 
Beginning balance January 1,
 
$
235
   
$
1,165
 
Prior measurement periods
   
247
     
-
 
Payments
   
-
     
(618
)
Ending balance June 30,
 
$
482
   
$
547
 

Vitas provides charity care, in certain circumstances, to patients without charge when management of the hospice program determines, at the time services are performed, that the patient cannot afford payment.  There is no revenue or associated accounts receivable in the accompanying consolidated financial statements related to charity care.  The cost of charity care is calculated by taking the ratio of charity care days to total days of care and multiplying by total cost of care.  The cost of charity care is as follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
$
1,761
   
$
1,715
   
$
3,698
   
$
3,521
 


3.   Segments

Service revenues and sales and after-tax earnings by business segment are as follows (in thousands):

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Service Revenues and Sales
                       
VITAS
 
$
284,710
   
$
278,739
   
$
567,026
   
$
556,266
 
Roto-Rooter
   
130,349
     
111,670
     
253,897
     
224,532
 
Total
 
$
415,059
   
$
390,409
   
$
820,923
   
$
780,798
 
                                 
After-tax Income/(Loss)
                               
VITAS
 
$
(32,254
)
 
$
18,550
   
$
(11,657
)
 
$
37,637
 
Roto-Rooter
   
17,058
     
13,341
     
31,682
     
26,359
 
Total
   
(15,196
)
   
31,891
     
20,025
     
63,996
 
Corporate
   
(6,460
)
   
(7,006
)
   
(11,837
)
   
(14,271
)
Net income
 
$
(21,656
)
 
$
24,885
   
$
8,188
   
$
49,725
 

We report corporate administrative expenses and unallocated investing and financing income and expense not directly related to either segment as “Corporate”.
 
 
- 7 -

 
4.  Earnings/(Loss) per Share

Earnings/(loss) per share (“EPS”/”LPS”) 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/(Loss)
 
For the Three Months Ended June 30,
 
Income/(Loss)
   
Shares
   
Earnings/(Loss)
per Share
 
2017
                 
Loss
 
$
(21,656
)
   
16,010
   
$
(1.35
)
Dilutive stock options
   
-
     
-
         
Nonvested stock awards
   
-
     
-
         
Diluted loss
 
$
(21,656
)
   
16,010
   
$
(1.35
)
                         
2016
                       
Earnings
 
$
24,885
     
16,443
   
$
1.51
 
Dilutive stock options
   
-
     
289
         
Nonvested stock awards
   
-
     
99
         
Diluted earnings
 
$
24,885
     
16,831
   
$
1.48
 
 
   
Net Income
 
For the Six Months Ended June 30,
 
Income
   
Shares
   
Earnings
per Share
 
2017
                 
Earnings
 
$
8,188
     
16,114
   
$
0.51
 
Dilutive stock options
   
-
     
557
         
Nonvested stock awards
   
-
     
87
         
Diluted earnings
 
$
8,188
     
16,758
   
$
0.49
 
                         
2016
                       
Earnings
 
$
49,725
     
16,583
   
$
3.00
 
Dilutive stock options
   
-
     
297
         
Nonvested stock awards
   
-
     
119
         
Diluted earnings
 
$
49,725
     
16,999
   
$
2.93
 

For the three months ended June 30, 2017, all stock options and nonvested stock awards have been excluded in the calculation of dilutive earnings per share as they be would anti-dilutive due to the net loss for the period.

For the six month period ended June 30, 2017, there were no stock options excluded from the computation of diluted earnings per share because they would have been anti-dilutive.

 For the three and six month periods ended June 30, 2016, 418,000 stock options were excluded from the computation of diluted earnings per share because they would have been anti-dilutive.

5.   Long-Term Debt

On June 30, 2014, we replaced our existing credit agreement with the Third Amended and Restated Credit Agreement (“2014 Credit Agreement”).  Terms of the 2014 Credit Agreement consist of a five-year, $350 million revolving credit facility and a $100 million term loan.  The 2014 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 interest rate as of June 30, 2017 is LIBOR plus 113 basis points.
 
- 8 -

 
The debt outstanding as of June 30, 2017 consists of the following:

       
Revolver
 
$
45,000
 
Term loan
   
80,000
 
Total
   
125,000
 
Current portion of long-term debt
   
(10,000
)
Long-term debt
 
$
115,000
 
Scheduled principal payments of the term loan are as follows:
 
 
2017  
$
5,000
 
 
2018    
10,000
 
 
2019    
65,000
 
     
$
80,000
 

The 2014 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
     
Annual Operating Lease Commitment
 
< $50.0 million

We are in compliance with all debt covenants as of June 30, 2017. We have issued $36.1 million in standby letters of credit as of June 30, 2017 mainly for insurance purposes.  Issued letters of credit reduce our available credit under the 2014 Credit Agreement.  As of June 30, 2017, we have approximately $268.9 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility.

6.   Other Operating Expenses
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Potential litigation settlement
 
$
90,000
   
$
-
   
$
90,000
   
$
-
 
Program closure expense
   
636
     
-
     
1,509
     
-
 
Retirement expenses
   
-
     
4,491
     
-
     
4,491
 
Total other operating expenses
 
$
90,636
   
$
4,491
   
$
91,509
   
$
4,491
 

During the three and six months ended June 30, 2017, the Company recorded $90 million for a potential litigation settlement.  See footnote 11 for further discussion.

During the three and six months ended June 30, 2017, the Company recorded $636,000 and $1.5 million, respectively, related to the closure of three Alabama programs at VITAS.

During the three and six months ended June 30, 2016, the Company recorded early retirement related costs and accelerated stock-based compensation expense of approximately $4.5 million pretax and $2.8 million after-tax, related to the early retirement of VITAS’ former Chief Executive Officer.
 
- 9 -

 
7.   Other Income/(Expense) – Net

Other income/(expense) -- net comprises the following (in thousands):
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Market value adjustment on assets held in
                       
deferred compensation trust
 
$
1,587
   
$
3,188
   
$
4,202
   
$
201
 
Loss on disposal of property and equipment
   
(98
)
   
(57
)
   
(334
)
   
(90
)
Interest income
   
161
     
85
     
245
     
182
 
Other - net
   
3
     
1
     
3
     
-
 
     Total other income/(expense) - net
 
$
1,653
   
$
3,217
   
$
4,116
   
$
293
 
 
 8.   Stock-Based Compensation Plans

On February 17, 2017, the Compensation/Incentive Committee of the Board of Directors (“CIC”) granted 7,304 Performance Stock Units (“PSUs”) contingent upon the achievement of certain total shareholders return (“TSR”) targets as compared to the TSR of a group of peer companies for the three-year period ending December 31, 2019, 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 $1.7 million.

On February 17, 2017, the CIC also granted 7,304 PSUs contingent upon the achievement of certain earnings per share (“EPS”) targets for the three-year period ending December 31, 2019.  At the end of each reporting period, the Company estimates the number of shares that it believes will ultimately be earned and records that 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 $1.3 million.

9.   Independent Contractor Operations

The Roto-Rooter segment sublicenses with 69 independent contractors to operate certain plumbing repair, excavation, water restoration and drain cleaning businesses in lesser-populated areas of the United States and Canada.  We had notes receivable from our independent contractors as of June 30, 2017 totaling $1.4 million (December 31, 2016 - $1.7 million).  In most cases these loans are fully or partially secured by equipment owned by the contractor.  The interest rates on the loans range from 0% to 7% per annum and the remaining terms of the loans range from 2.5 months to 5.4 years at June 30, 2017.  We recorded the following from our independent contractors (in thousands):
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Revenues
 
$
11,151
   
$
9,770
   
$
22,176
   
$
19,629
 
Pretax income
   
6,742
     
6,024
     
13,431
     
12,180
 
 
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.  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,
 
2017
 
2016
 
2017
 
2016
 
 
$
4,551
   
$
5,861
   
$
10,709
   
$
6,387
 
 
- 10 -

 
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. Other than as described below with respect to U.S. v. Vitas, it is not possible at this time for us to estimate either the timing or outcome of any of those matters, or whether any potential loss, or range of potential losses, is probable or reasonably estimable.

Regulatory Matters and Litigation

On May 2, 2013, the government filed a False Claims Act complaint against the Company and certain of its hospice-related subsidiaries in the U.S. District Court for the Western District of Missouri, United States v. VITAS Hospice Services, LLC, et al., No. 4:13-cv-00449-BCW (the “2013 Action”).  Prior to that date, the Company received various qui tam lawsuits and subpoenas from the U.S. Department of Justice and OIG that have been previously disclosed.  The 2013 Action alleges that, since at least 2002, VITAS, and since 2004, the Company, submitted or caused the submission of false claims to the Medicare program by (a) billing Medicare for continuous home care services when the patients were not eligible, the services were not provided, or the medical care was inappropriate, and (b) billing Medicare for patients who were not eligible for the Medicare hospice benefit because they did not have a life expectancy of six months or less if their illnesses ran their normal course.  This complaint seeks treble damages, statutory penalties, and the costs of the action, plus interest.  The defendants filed a motion to dismiss on September 24, 2013.  On September 30, 2014, the Court denied the motion, except to the extent that claims were filed before July 24, 2002. On November 13, 2014, the government filed a Second Amended Complaint.  The Second Amended Complaint changed and supplemented some of the allegations, but did not otherwise expand the causes of action or the nature of the relief sought against VITAS.  VITAS filed its Answer to the Second Amended Complaint on August 11, 2015.  This case is in the discovery phase.  Based on recent case developments, including recent mediation discussions with the U.S. Department of Justice, we believe it probable that this matter will be settled, to include payments of $55.8 million after-tax ($90.0 million pretax) including attorneys’ fees.  A final settlement will require the parties to resolve several outstanding issues, and to draft and negotiate definitive documentation.  There can be no assurance that such a final definitive settlement will be reached on these, or other, terms.  For additional procedural history of this litigation, please refer to our prior quarterly and annual filings.  The costs incurred related to U.S. v. Vitas and related regulatory matters were $2.1 million and $1.2 million for the quarters ended June 30, 2017 and 2016, respectively.  For the six months ended June 30, 2017 and 2016, the net costs were $4.2 million and $3.5 million respectively.

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

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

On February 2, 2015, the Court appointed KBC Asset Management NV the sole lead plaintiff and its counsel, the sole lead and liaison counsel. On March 3, 2015, Lead Plaintiff KBC designated its Complaint as the operative complaint in the consolidated proceedings and defendants renewed a previously filed motion to dismiss those claims and allegations.  The consolidated Complaint named fourteen individual defendants, together with the Company as nominal defendant.  The Complaint alleges a claim for breach of fiduciary duty against the individual defendants for allegedly permitting the Company to submit false claims to the U.S. government.  The Complaint seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.  On May 12, 2016, the Court issued a Memorandum Order granting Chemed’s motion to dismiss, and  dismissing Lead Plaintiff KBC’s Complaint without prejudice to KBC’s opportunity to file within 30 days of the date of the Court’s Order (i.e., by June 13, 2016) an amended Complaint addressing the deficiencies in its duty of loyalty claim.  Lead Plaintiff KBC did not file an amended Complaint within the time specified by the Court.
 
 
- 11 -

 
However, on June 13, 2016, counsel for Chemed shareholder Michael Kvint filed a letter with the Court requesting a two-week extension to file a motion to substitute Mr. Kvint as lead plaintiff, in place of Lead Plaintiff KBC and to file an amended Complaint.  Alternatively, counsel for Mr. Kvint requested that any dismissal of the action be with prejudice to KBC only.  On June 14, 2016, Chemed filed a reply letter with the Court, reserving its rights to oppose any motion filed by Mr. Kvint and, if warranted, to oppose any other actions taken by Mr. Kvint to proceed with the action (including by filing an untimely amended Complaint).  On June 21, 2016, the Court entered an Oral Order providing Mr. Kvint until June 30, 2016 to file a Motion to Substitute and Motion for Leave to File an Amended Complaint.  On that date, Mr. Kvint filed, under seal, a Motion to Substitute Plaintiff and File Amended Complaint, and attached a Proposed Amended Complaint.    Mr. Kvint’s motion was fully briefed by the parties.  On April 25, 2017, Magistrate Judge Burke issued a Report and Recommendation recommending that the Court permit Mr. Kvint to intervene as Lead Plaintiff and grant leave to amend the complaint to replead the duty of loyalty claim only.  On May 16, 2017, Chief Judge Stark signed an Order adopting that Report and Recommendation.  Plaintiff Kvint filed a Corrected Amended Complaint on May 30, 2017.  On July 25, 2017, the Court entered an order permitting Defendants to file a Motion to Dismiss the Corrected Amended Complaint on or before August 14, 2017, with Plaintiff’s Answering Brief in opposition to the Motion to Dismiss to be filed on or before October 16, 2017, and Defendants’ Reply Brief in support of the Motion to Dismiss to be filed on or before November 13, 2017.  As the Company has previously disclosed, the legal fees and costs associated with defending against this lawsuit are presently being paid by insurance. For additional procedural history of this litigation, please refer to our prior quarterly and annual filings.

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

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

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

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

The Company is not able to reasonably estimate the probability of loss or range of loss for either of these lawsuits at this time.
 
- 12 -

 
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.

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 $8.2 and $17.0 million for the three and six months ended June 30, 2017, respectively. Vitas made purchases from two providers of $8.5 and $17.4 million for the three and six months ended June 30, 2016, respectively.  Purchases from these providers were approximately 90% of all pharmacy services used by VITAS during each quarter presented.

13.   Cash Overdrafts and Cash Equivalents

There are $7.5 million in cash overdrafts payable included in accounts payable at June 30, 2017 (December 31, 2016 - $8.6 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.  We had $79,000 in cash equivalents as of June 30, 2017.  There was $72,000 in cash equivalents as of December 31, 2016.

Included in properties and equipment and accounts payable on the balance sheet at June 30, 2017 is $10.8 million of unpaid commitments related to the purchase of transportation equipment.  This amount will be paid in July 2017 and is not reflected in capital expenditures in the statement of cash flows.  Unpaid commitments to purchase properties and equipment for comparable periods is not material.

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, 2017 (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
 
$
58,579
   
$
58,579
   
$
-
   
$
-
 
Total debt
   
125,000
     
-
     
125,000
     
-
 

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of December 31, 2016 (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
 
$
54,389
   
$
54,389
   
$
-
   
$
-
 
Total debt
   
108,750
     
-
     
108,750
     
-
 

- 13 -

 
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.

15.   Capital Stock Repurchase Plan Transactions

We repurchased the following capital stock for the three and six months ended June 30, 2017 and 2016:
 
 
Three months ended June 30,
   
Six months ended June 30,
 
     2017      2016      2017      2016  
                         
Total cost of repurchased shares (in thousands):
 
$
30,801
   
$
49,853
   
$
85,063
   
$
102,313
 
Shares repurchased
   
150,000
     
380,134
     
450,000
     
780,134
 
Weighted average price per share
 
$
205.34
   
$
131.15
   
$
189.03
   
$
131.15
 

In March 2017, the Board of Directors authorized an additional $100.0 million for stock repurchase under Chemed’s existing share repurchase program. We currently have $65.1 million of authorization remaining under this share repurchase plan.
16.   Recent Accounting Statements

In May 2014, the FASB issued Accounting Standards Update “ASU No. 2014-09 – Revenue from Contracts with Customers” which provides additional guidance to clarify the principles for recognizing revenue.  The standard and subsequent amendments are intended to develop a common revenue standard for removing inconsistencies and weaknesses, improve comparability, provide more useful information to users through improved disclosure requirements, and simplify the preparation of financial statements. This guidance and subsequent amendments are effective for fiscal years beginning after December 15, 2017.    We are in the process of analyzing various contractual arrangements with customers at each subsidiary.  We believe that it is likely, as a result of adopting the ASU that certain expenses currently included in bad debt expense will be shown as contractual allowances (i.e. net revenue).  We currently do not have an estimate of the magnitude of this potential impact.  We anticipate a modified retrospective adoption of the ASU.

In February 2016, the FASB issued Accounting Standards Update “ASU No. 2016-02 – Leases” which introduces 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.   The guidance is effective for fiscal years beginning after December 15, 2018.  We are currently evaluating the impact of this ASU on our financial statements, existing lease recognition policies and disclosures.

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 is to reduce diversity in practice related to eight specific cash flow issues.  The guidance in this ASU is effective for fiscal years beginning after December 15, 2017.    We have analyzed the impact of ASU 2016-15 on our statement of cash flows and do not expect it to have a material effect.

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.

- 14 -

 
17.   Goodwill

Shown below is movement in Goodwill (in thousands):
   
Vitas
   
Roto-Rooter
   
Total
 
Balance at December 31, 2016
 
$
328,301
   
$
144,065
   
$
472,366
 
Business combinations
   
-
     
481
     
481
 
Foreign currency adjustments
   
-
     
50
     
50
 
Balance at June 30, 2017
 
$
328,301
   
$
144,596
   
$
472,897
 
 
 
- 15 -

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

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and Adjusted EBITDA as a % of revenue are not measures derived in accordance with GAAP.  We provide non-GAAP measures to help readers evaluate our operating results and to compare our operating performance with that of similar companies that have different capital structures.  Our non-GAAP measures should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP.  A reconciliation of our non-GAAP measures is presented on pages 29-31.

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

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

For the six months ended June 30, 2017, the increase in consolidated service revenues and sales was driven by a 13.1% increase at Roto-Rooter and a 1.9% increase at VITAS.  The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines, of Roto-Rooter’s total revenue increase 49.0% was related to water restoration.  The increase in service revenues at VITAS was primarily a result of Medicare reimbursement rates increasing 1.7%, a 3.2% increase in average daily census, offset by acuity mix shift which negatively impacted revenue when compared to the prior year period.  Adjusted EBITDA as a percent of revenue increased 110 basis points when compared to the prior year quarter mainly as a result of the increase in adjusted net income.  See page 32 for additional VITAS operating metrics.
 
- 16 -

 
VITAS expects its full-year 2017 revenue growth, prior to Medicare cap, to be in the range of 2.0% to 3.0%.  Admissions and Average Daily Census in 2017 are estimated to expand approximately 3.0% to 5.0%.  Adjusted EBITDA margin, prior to Medicare cap, is estimated to be 15.0% to 15.5%.  This guidance includes $2.5 million for Medicare cap billing limitations. Roto-Rooter expects full-year 2017 revenue growth of 12.0% to 13.0%.  The revenue estimate is a based upon increased job pricing of approximately 2.0% and continued growth in water restoration services.  Adjusted EBITDA margin for 2017 is estimated in the range of 22.0% to 22.5%.  We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.

Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2016 to June 30, 2017 include the following:
 
A $14.1 million decrease in accounts receivable due mainly to timing of Medicare and Medicaid payments.
An $18.9 million increase in properties plant and equipment mainly due to the purchase of transportation equipment during the quarter.
A $20.6 million increase in deferred taxes associated with amounts recorded for a potential litigation settlement.
A $9.6 million increase in accounts payable mainly due to transportation equipment accrued but not paid at June 30, 2017.
A $5.9 million decrease in accrued compensation due to the payments of cash bonuses accrued in 2016.
A $90.7 million increase in accrued legal due to a potential litigation settlement.
A $16.3 million increase in long-term debt due to borrowings on our revolving line of credit.

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

Significant changes in our accounts receivable balances are typically driven mainly by the timing of payments received from the Federal government at our VITAS subsidiary.  We typically receive a payment in excess of $40.0 million from the Federal government from hospice services every other Friday.  The timing of period end will have a significant impact on the accounts receivable at VITAS.  These changes generally normalize over a two year period, as cash flow variations in one year are offset in the following year.

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

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

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

The VITAS segment of the Company’s business operates in a heavily-regulated industry.  As a result, the Company is subjected to inquiries and investigations by various government agencies, as well as to lawsuits, including qui tam actions.  The following sections describe the various ongoing material lawsuits and investigations of which the Company is currently aware.  Other than as described below with respect to U.S. v. Vitas, it is not possible at this time for us to estimate either the timing or outcome of any of those matters, or whether any potential loss, or range of potential losses, is probable or reasonably estimable.
 
- 17 -

 
On May 2, 2013, the government filed a False Claims Act complaint against the Company and certain of its hospice-related subsidiaries in the U.S. District Court for the Western District of Missouri, United States v. VITAS Hospice Services, LLC, et al., No. 4:13-cv-00449-BCW (the “2013 Action”).  Prior to that date, the Company received various qui tam lawsuits and subpoenas from the U.S. Department of Justice and OIG that have been previously disclosed.  The 2013 Action alleges that, since at least 2002, VITAS, and since 2004, the Company, submitted or caused the submission of false claims to the Medicare program by (a) billing Medicare for continuous home care services when the patients were not eligible, the services were not provided, or the medical care was inappropriate, and (b) billing Medicare for patients who were not eligible for the Medicare hospice benefit because they did not have a life expectancy of six months or less if their illnesses ran their normal course.  This complaint seeks treble damages, statutory penalties, and the costs of the action, plus interest.  The defendants filed a motion to dismiss on September 24, 2013.  On September 30, 2014, the Court denied the motion, except to the extent that claims were filed before July 24, 2002. On November 13, 2014, the government filed a Second Amended Complaint.  The Second Amended Complaint changed and supplemented some of the allegations, but did not otherwise expand the causes of action or the nature of the relief sought against VITAS.  VITAS filed its Answer to the Second Amended Complaint on August 11, 2015.  This case is in the discovery phase.  Based on recent case developments, including recent mediation discussions with the U.S. Department of Justice, we believe it probable that this matter will be settled, to include payments of $55.8 million after-tax ($90.0 million pretax) including attorneys’ fees.  A final settlement will require the parties to resolve several outstanding issues, and to draft and negotiate definitive documentation.  There can be no assurance that such a final definitive settlement will be reached on these, or other, terms.  For additional procedural history of this litigation, please refer to our prior quarterly and annual filings.  The costs incurred related to U.S. v. Vitas and related regulatory matters were $2.1 million and $1.2 million for the quarters ended June 30, 2017 and 2016, respectively.  For the six months ended June 30, 2017 and 2016, the net costs were $4.2 million and $3.5 million respectively.

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

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

On February 2, 2015, the Court appointed KBC Asset Management NV the sole lead plaintiff and its counsel, the sole lead and liaison counsel. On March 3, 2015, Lead Plaintiff KBC designated its Complaint as the operative complaint in the consolidated proceedings and defendants renewed a previously filed motion to dismiss those claims and allegations.  The consolidated Complaint named fourteen individual defendants, together with the Company as nominal defendant.  The Complaint alleges a claim for breach of fiduciary duty against the individual defendants for allegedly permitting the Company to submit false claims to the U.S. government.  The Complaint seeks (a) a declaration that the individual defendants breached their fiduciary duties to the Company; (b) an order requiring those defendants to pay compensatory damages, restitution and exemplary damages, in unspecified amounts, to the Company; (c) an order directing the Company to implement new policies and procedures; and (d) costs and disbursements incurred in bringing the action, including attorneys’ fees.  On May 12, 2016, the Court issued a Memorandum Order granting Chemed’s motion to dismiss, and  dismissing Lead Plaintiff KBC’s Complaint without prejudice to KBC’s opportunity to file within 30 days of the date of the Court’s Order (i.e., by June 13, 2016) an amended Complaint addressing the deficiencies in its duty of loyalty claim.  Lead Plaintiff KBC did not file an amended Complaint within the time specified by the Court.

However, on June 13, 2016, counsel for Chemed shareholder Michael Kvint filed a letter with the Court requesting a two-week extension to file a motion to substitute Mr. Kvint as lead plaintiff, in place of Lead Plaintiff KBC and to file an amended Complaint.  Alternatively, counsel for Mr. Kvint requested that any dismissal of the action be with prejudice to KBC only.  On June 14, 2016, Chemed filed a reply letter with the Court, reserving its rights to oppose any motion filed by Mr. Kvint and, if warranted, to oppose any other actions taken by Mr. Kvint to proceed with the action (including by filing an untimely amended Complaint).  On June 21, 2016, the Court entered an Oral Order providing Mr. Kvint until June 30, 2016 to file a Motion to Substitute and Motion for Leave to File an Amended Complaint.  On that date, Mr. Kvint filed, under seal, a Motion to Substitute Plaintiff and File Amended Complaint, and attached a Proposed Amended Complaint.    Mr. Kvint’s motion was fully briefed by the parties.  On April 25, 2017, Magistrate Judge Burke issued a Report and Recommendation recommending that the Court permit Mr. Kvint to intervene as Lead Plaintiff and grant leave to amend the complaint to replead the duty of loyalty claim only.  On May 16, 2017, Chief Judge Stark signed an Order adopting that Report and Recommendation.  Plaintiff Kvint filed a Corrected Amended Complaint on May 30, 2017.  On July 25, 2017, the Court entered an order permitting Defendants to file a Motion to Dismiss the Corrected Amended Complaint on or before August 14, 2017, with Plaintiff’s Answering Brief in opposition to the Motion to Dismiss to be filed on or before October 16, 2017, and Defendants’ Reply Brief in support of the Motion to Dismiss to be filed on or before November 13, 2017.  As the Company has previously disclosed, the legal fees and costs associated with defending against this lawsuit are presently being paid by insurance. For additional procedural history of this litigation, please refer to our prior quarterly and annual filings.

Jordan Seper, (“Seper”) a Registered Nurse at VITAS' Inland Empire program from May 12, 2014 to March 21, 2015, filed a lawsuit in San Francisco Superior Court on September 26, 2016.  She alleged VITAS Healthcare Corp of CA (“VITAS CA”) (1) failed to provide minimum wage for all hours worked; (2) failed to provide overtime for all hours worked; (3) failed to provide a second meal period; (4) failed to provide rest breaks; (5) failed to indemnify for necessary expenditures; (6) failed to timely pay wages due at time of separation; and (7) engaged in unfair business practices.  Seper seeks a state-wide class action of current and former non-exempt employees employed with VITAS in California within the four years preceding the filing of the lawsuit.  She seeks court determination that this action may be maintained as a class action for the entire California class and subclasses, designation as class representative, declaratory relief, injunctive relief, damages (including wages for regular or overtime hours allegedly worked but not paid, premium payments for missed meal or rest periods, and unreimbursed expenses), all applicable penalties associated with each claim, pre and post-judgment interest, and attorneys' fees and costs.  Seper served VITAS CA with the lawsuit,  Jordan A. Seper on behalf of herself and others similarly situated v. VITAS Healthcare Corporation of California, a Delaware corporation; VITAS Healthcare Corp of CA, a business entity unknown; and DOES 1 to 100, inclusive; Los Angeles Superior Court Case Number BC 642857 on October 13, 2016.
 
 
- 18 -

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

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

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

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

The Company intends to defend vigorously against the allegations in each of the above lawsuits.  Regardless of the outcome of any of the preceding matters, dealing with the various regulatory agencies and opposing parties can adversely affect us through defense costs, potential payments, diversion of management time, and related publicity.  Although the Company intends to defend them vigorously, there can be no assurance that those suits will not have a material adverse effect on the Company.
 
 
- 19 -

 
Results of Operations
Three months ended June 30, 2017 versus 2016 - Consolidated Results
Our service revenues and sales for the second quarter of 2017 increased 6.3% versus services and sales revenues for the second quarter of 2016.  Of this increase, a $6.0 million increase was attributable to VITAS and $18.7 million increase was attributable to Roto-Rooter.  The following chart shows the components of those changes (in thousands):
             
             
   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
           
Routine homecare
 
$
11,978
     
5.5
 
Continuous care
   
(3,271
)
   
(9.4
)
General inpatient
   
(2,489
)
   
(10.2
)
Medicare cap
   
(247
)
   
-
 
Roto-Rooter
               
Plumbing
   
6,469
     
13.3
 
Drain cleaning
   
1,599
     
4.4
 
Water restoration
   
8,763
     
72.1
 
Contractor operations
   
1,381
     
14.1
 
Other
   
467
     
9.5
 
Total
 
$
24,650
     
6.3
 

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

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

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

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

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

The consolidated gross margin was 31.1% in the second quarter of 2017 as compared with 29.2% in the second quarter of 2016.  On a segment basis, VITAS’ gross margin was 22.8% in the second quarter of 2017 as compared with 21.5%, in the second quarter of 2016.  The increase in VITAS gross margin is the result of labor and ancillary cost management.  The Roto-Rooter segment’s gross margin was 49.3% for the second quarter of 2017 compared with 48.5% in the second quarter of 2016.  The increase in Roto-Rooter gross margin is the result mainly of higher revenues, particularly in water restoration, allowing more fixed costs to be covered.
 
- 20 -

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

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

SG&A expenses before long-term incentive compensation, expenses related to OIG investigation and the impact of market value adjustments related to assets held in deferred compensation trusts for the second quarter of 2017 were up 10.8% when compared to the second quarter of 2016. This increase was mainly a result of the increase in variable expenses caused by increased revenue, particularly in the Roto-Rooter segment, increased advertising expense at Roto-Rooter and normal salary increases in 2017.

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

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

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

Net income for both periods included the following after-tax items/adjustments that (reduced) or increased after-tax earnings (in thousands):
             
   
Three months ended June 30,
 
   
2017
   
2016
 
VITAS
           
Potential litigation settlement
 
$
(55,800
)
 
$
-
 
Expenses related to OIG investigation
   
(1,292
)
   
(722
)
Program closure expenses
   
(385
)
   
-
 
Medicare cap sequestration adjustment
   
(65
)
   
-
 
Early retirement expenses
   
-
     
(2,840
)
Roto-Rooter
               
Expenses related to litigation settlements
   
(129
)
   
(27
)
Corporate
               
Excess tax benefits on stock compensation
   
2,643
     
-
 
Stock option expense
   
(1,931
)
   
(1,440
)
Long-term incentive compensation
   
(604
)
   
(316
)
Expenses related to securities litigation
   
-
     
2
 
Total
 
$
(57,563
)
 
$
(5,343
)
 
 
- 21 -

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

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

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

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

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

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

Results of Operations
Six months ended June 30, 2017 versus 2016 - Consolidated Results
Our service revenues and sales for the first six months of 2017 increased 5.1% versus services and sales revenues for the first six months of 2016.  Of this increase, a $10.8 million increase was attributable to VITAS and $29.4 million increase was attributable to Roto-Rooter.  The following chart shows the components of those changes (in thousands):

             
             
   
Increase/(Decrease)
 
   
Amount
   
Percent
 
VITAS
           
Routine homecare
 
$
22,665
     
5.2
 
Continuous care
   
(7,575
)
   
(10.5
)
General inpatient
   
(4,083
)
   
(8.2
)
Medicare cap
   
(247
)
   
-
 
Roto-Rooter
               
Plumbing
   
9,591
     
9.9
 
Drain cleaning
   
2,011
     
2.8
 
Water restoration
   
14,388
     
58.5
 
Contractor operations
   
2,548
     
13.0
 
Other
   
827
     
8.1
 
Total
 
$
40,125
     
5.1
 

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

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


                   
   
Days of Care
   
Increase/(Decrease)
 
   
2017
   
2016
   
Percent
 
                   
Routine homecare
   
2,798,388
     
2,702,152
     
3.6
 
Continuous care
   
88,525
     
98,745
     
(10.3
)
General inpatient
   
65,236
     
75,082
     
(13.1
)
Total days of care
   
2,952,149
     
2,875,979
     
2.6
 
 
 
- 22 -

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

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

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

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

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

SG&A expenses before long-term incentive compensation, expenses related to OIG investigation and the impact of market value adjustments related to assets held in deferred compensation trusts for the first six months of 2017 were up 8.5% when compared to the first six months of 2016. This increase was mainly a result of the increase in variable expenses caused by increased revenue, particularly in the in the Roto-Rooter segment, increased advertising expense at Roto-Rooter and normal salary increases in 2017.

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

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

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

Our effective income tax rate was 81.7% in the first six months of 2017 compared to 38.8% during the first six months of 2016.  The change in the effective income tax rate is due to the adoption of ASU No. 2016-09 – Compensation – Stock Compensation which requires that the excess tax benefits from stock based compensation now be recorded in the income tax provision on the statements of income.
 
- 23 -

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

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

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

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

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

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

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

The improvement at Corporate is due mainly to the impact of the adoption of ASU 2016-09 which positively impacted the Company’s tax provision by approximately $6.3 million.
 
- 24 -

 
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE THREE MONTHS ENDED JUNE 30, 2017
 
(in thousands)(unaudited)
 
                         
                     
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
2017 (a)
                       
Service revenues and sales
 
$
284,710
   
$
130,349
   
$
-
   
$
415,059
 
Cost of services provided and goods sold
   
219,769
     
66,083
     
-
     
285,852
 
Selling, general and administrative expenses
   
24,531
     
33,763
     
10,360
     
68,654
 
Depreciation
   
4,741
     
4,070
     
22
     
8,833
 
Amortization
   
-
     
32
     
-
     
32
 
Other operating expenses
   
90,636
     
-
     
-
     
90,636
 
Total costs and expenses
   
339,677
     
103,948
     
10,382
     
454,007
 
Income/(loss) from operations
   
(54,967
)
   
26,401
     
(10,382
)
   
(38,948
)
Interest expense
   
(53
)
   
(87
)
   
(981
)
   
(1,121
)
Intercompany interest income/(expense)
   
2,826
     
1,346
     
(4,172
)
   
-
 
Other income/(expense)—net
   
71
     
(4
)
   
1,586
     
1,653
 
Income/(expense) before income taxes
   
(52,123
)
   
27,656
     
(13,949
)
   
(38,416
)
Income taxes
   
19,869
     
(10,598
)
   
7,489
     
16,760
 
Net income/(loss)
 
$
(32,254
)
 
$
17,058
   
$
(6,460
)
 
$
(21,656
)
                                 
(a) The following amounts are included in net income (in thousands):
 
 
                     
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
Pretax benefit/(cost):
                       
Potential litigation settlement
 
$
(90,000
)
 
$
-
   
$
-
   
$
(90,000
)
Medicare cap sequestration adjustment
   
(105
)
   
-
     
-
     
(105
)
Stock option expense
   
-
     
-
     
(3,054
)
   
(3,054
)
Long-term incentive compensation
   
-
     
-
     
(956
)
   
(956
)
Expenses related to litigation setlements
   
-
     
(213
)
   
-
     
(213
)
Program closure expenses
   
(636
)
   
-
     
-
     
(636
)
Expenses related to OIG investigation
   
(2,093
)
   
-
     
-
     
(2,093
)
Total
 
$
(92,834
)
 
$
(213
)
 
$
(4,010
)
 
$
(97,057
)
                                 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
After-tax benefit/(cost):
                               
Potential litigation settlement
 
$
(55,800
)
 
$
-
   
$
-
   
$
(55,800
)
Medicare cap sequestration adjustment
   
(65
)
   
-
     
-
     
(65
)
Stock option expense
   
-
     
-
     
(1,931
)
   
(1,931
)
Long-term incentive compensation
   
-
     
-
     
(604
)
   
(604
)
Expenses related to litigation setlements
   
-
     
(129
)
   
-
     
(129
)
Program closure expenses
   
(385
)
   
-
     
-
     
(385
)
Expenses related to OIG investigation
   
(1,292
)
   
-
     
-
     
(1,292
)
Excess tax benefits on stock compensation
   
-
     
-
     
2,643
     
2,643
 
Total
 
$
(57,542
)
 
$
(129
)
 
$
108
   
$
(57,563
)
 
- 25 -

 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE THREE MONTHS ENDED JUNE 30, 2016
 
(in thousands)(unaudited)
 
                         
                     
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
2016 (a)
                       
Service revenues and sales
 
$
278,739
   
$
111,670
   
$
-
   
$
390,409
 
Cost of services provided and goods sold
   
218,694
     
57,561
     
-
     
276,255
 
Selling, general and administrative expenses
   
22,638
     
29,448
     
10,542
     
62,628
 
Depreciation
   
4,814
     
3,628
     
139
     
8,581
 
Amortization
   
14
     
77
     
-
     
91
 
Other operating expenses
   
4,491
     
-
     
-
     
4,491
 
Total costs and expenses
   
250,651
     
90,714
     
10,681
     
352,046
 
Income/(loss) from operations
   
28,088
     
20,956
     
(10,681
)
   
38,363
 
Interest expense
   
(59
)
   
(92
)
   
(820
)
   
(971
)
Intercompany interest income/(expense)
   
1,927
     
866
     
(2,793
)
   
-
 
Other income/(expense)—net
   
38
     
(12
)
   
3,191
     
3,217
 
Income/(expense) before income taxes
   
29,994
     
21,718
     
(11,103
)
   
40,609
 
Income taxes
   
(11,444
)
   
(8,377
)
   
4,097
     
(15,724
)
Net income/(loss)
 
$
18,550
   
$
13,341
   
$
(7,006
)
 
$
24,885
 
                                 
(a) The following amounts are included in net income (in thousands):
 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
Pretax benefit/(cost):
                               
Early retirement expenses
 
$
(4,491
)
 
$
-
   
$
-
   
$
(4,491
)
Stock option expense
   
-
     
-
     
(2,277
)
   
(2,277
)
Long-term incentive compensation
   
-
     
-
     
(499
)
   
(499
)
Expenses related to securities litigation
   
-
     
-
     
3
     
3
 
Expenses related to litigation settlements
   
-
     
(44
)
   
-
     
(44
)
Expenses related to OIG investigation
   
(1,170
)
   
-
     
-
     
(1,170
)
Total
 
$
(5,661
)
 
$
(44
)
 
$
(2,773
)
 
$
(8,478
)
                                 
                           
Chemed
 
   
VITAS
   
Roto-Rooter
   
Corporate
   
Consolidated
 
After-tax benefit/(cost):
                               
Early retirement expenses
 
$
(2,840
)
 
$
-
   
$
-
    $
(2,840
)
Stock option expense
   
-
     
-
     
(1,440
)
   
(1,440
)
Long-term incentive compensation
   
-
     
-
     
(316
)
   
(316
)
Expenses related to securities litigation
   
-
     
-
     
2
     
2
 
Expenses related to litigation settlements
   
-
     
(27
)
   
-
     
(27
)
Expenses related to OIG investigation
   
(722
)
   
-
     
-
     
(722
)
Total
 
$
(3,562
)
 
$
(27
)
 
$
(1,754
)
  $
(5,343
)
 
- 26 -

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE SIX MONTHS ENDED JUNE 30, 2017
 
(in thousands)(unaudited)
 
                     
               
 
 
   
 
 
 
 
 
 
 
 
                      Chemed  
     VITAS      Roto-Rooter     Corporate     Consolidated  
2017 (a)
                       
Service revenues and sales
 
$
567,026
   
$
253,897
   
$
-
   
$
820,923
 
Cost of services provided and goods sold
   
441,446
     
129,546
     
-
     
570,992
 
Selling, general and administrative expenses
   
48,825
     
67,223
     
22,064
     
138,112
 
Depreciation
   
9,519
     
8,054
     
153
     
17,726
 
Amortization
   
14
     
64
     
-
     
78
 
Other operating expenses
   
91,509
     
-
     
-
     
91,509
 
Total costs and expenses
   
591,313
     
204,887
     
22,217
     
818,417
 
Income/(loss) from operations
   
(24,287
)
   
49,010
     
(22,217
)
   
2,506
 
Interest expense
   
(108
)
   
(185
)
   
(1,823
)
   
(2,116
)
Intercompany interest income/(expense)
   
5,528
     
2,656
     
(8,184
)
   
-
 
Other income/(expense)—net
   
(9
)
   
(77
)
   
4,202
     
4,116
 
Income/(expense) before income taxes
   
(18,876
)
   
51,404
     
(28,022
)
   
4,506
 
Income taxes
   
7,219
     
(19,722
)
   
16,185
     
3,682
 
Net income/(loss)
 
$
(11,657
)
 
$
31,682
   
$
(11,837
)
 
$
8,188
 
                                 
                                 
(a) The following amounts are included in net income (in thousands):
                 
                         
 
 
   
 
 
 
 
 
 
 
 
                             
Chemed
 
     
VITAS 
     
Roto-Rooter
     
Corporate
     
Consolidated
 
Pretax benefit/(cost):
                               
Potential litigation settlement
 
$
(90,000
)
 
$
-
   
$
-
   
$
(90,000
)
Medicare cap sequestration adjustments
   
(105
)
   
-
     
-
     
(105
)
Stock option expense
   
-
     
-
     
(6,055
)
   
(6,055
)
Long-term incentive compensation
   
-
     
-
     
(1,917
)
   
(1,917
)
Expenses related to litigation settlements
   
-
     
(213
)
   
-
     
(213
)
Program closure expenses
   
(1,509
)
   
-
     
-
     
(1,509
)
Expenses related to OIG investigation
   
(4,243
)
   
-
     
-
     
(4,243
)
Total
 
$
(95,857
)
 
$
(213
)
 
$
(7,972
)
 
$
(104,042
)
                                 
                         
 
 
   
 
 
 
 
 
 
 
 
After-tax benefit/(cost):
                           
Chemed 
 
     
VITAS 
     
Roto-Rooter 
     
Corporate 
     
Consolidated 
 
                                 
Potential litigation settlement
 
$
(55,800
)
 
$
-
   
$
-
   
$
(55,800
)
Medicare cap sequestration adjustments
   
(65
)
   
-
     
-
     
(65
)
Stock option expense
   
-
     
-
     
(3,828
)
   
(3,828
)
Long-term incentive compensation
   
-
     
-
     
(1,212
)
   
(1,212
)
Expenses related to litigation settlements
   
-
     
(129
)
   
-
     
(129
)
Program closure expenses
   
(898
)
   
-
     
-
     
(898
)
Expenses related to OIG investigation
   
(2,620
)
   
-
     
-
     
(2,620
)
Excess tax benefits on stock compensation
   
-
     
-
     
6,338
     
6,338
 
Total
 
$
(59,383
)
 
$
(129
)
 
$
1,298
   
$
(58,214
)
                                 
                                 


- 27 -

                         
                         
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
 
CONSOLIDATING STATEMENT OF INCOME
 
FOR THE SIX MONTHS ENDED JUNE 30, 2016
 
(in thousands)(unaudited)
 
                     
               
 
 
   
 
 
 
 
 
 
 
 
                Chemed  
   
VITAS 
     
Roto-Rooter 
     
Corporate 
     
Consolidated 
 
2016 (a)                                
Service revenues and sales
 
$
556,266
   
$
224,532
   
$
-
   
$
780,798
 
Cost of services provided and goods sold
   
437,960
     
116,730
     
-
     
554,690
 
Selling, general and administrative expenses
   
47,422
     
59,255
     
14,996
     
121,673
 
Depreciation
   
9,595
     
7,129
     
281
     
17,005
 
Amortization
   
27
     
156
     
-
     
183
 
Other operating expenses
   
4,491
     
-
     
-
     
4,491
 
Total costs and expenses
   
499,495
     
183,270
     
15,277
     
698,042
 
Income/(loss) from operations
   
56,771
     
41,262
     
(15,277
)
   
82,756
 
Interest expense
   
(117
)
   
(186
)
   
(1,510
)
   
(1,813
)
Intercompany interest income/(expense)
   
4,030
     
1,813
     
(5,843
)
   
-
 
Other income/(expense)—net
   
78
     
12
     
203
     
293
 
Income/(expense) before income taxes
   
60,762
     
42,901
     
(22,427
)
   
81,236
 
Income taxes
   
(23,125
)
   
(16,542
)
   
8,156
     
(31,511
)
Net income/(loss)
 
$
37,637
   
$
26,359
   
$
(14,271
)
 
$
49,725
 
                                 
                                 
(a) The following amounts are included in net income (in thousands):
                 
                         
 
 
   
 
 
 
 
 
 
Chemed
 
     
VITAS 
     
Roto-Rooter 
     
Corporate 
     
Consolidated 
 
Pretax benefit/(cost):
                               
Stock option expense
 
$
-
   
$
-
   
$
(4,840
)
 
$
(4,840
)
Long-term incentive compensation
   
-
     
-
     
(258
)
   
(258
)
Early retirement expenses
   
(4,491
)
   
-
     
-
     
(4,491
)
Expenses related to litigation settlements
   
-
     
(44
)
   
-
     
(44
)
Expenses related to OIG investigation
   
(3,506
)
   
-
     
-
     
(3,506
)
Total
 
$
(7,997
)
 
$
(44
)
 
$
(5,098
)
 
$
(13,139
)
                                 
                         
 
 
   
 
 
 
 
 
 
Chemed
 
     
VITAS 
     
Roto-Rooter 
     
Corporate 
     
Consolidated 
 
After-tax benefit/(cost):
                               
Stock option expense
 
$
-
   
$
-
   
$
(3,061
)
 
$
(3,061
)
Long-term incentive compensation
   
-
     
-
     
(164
)
   
(164
)
Early retirement expenses
   
(2,840
)
   
-
     
-
     
(2,840
)
Expenses related to litigation settlements
   
-
     
(27
)
   
-