CHEMED CORP (CHE)

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, excavation, 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 vast majority of the Company’s operations are located in the United States. As both operations are service companies, our employees are the most critical resource of the Company. We have very little exposure related to customers, vendors, or employees in other regions of the world. We continue to monitor macroeconomic trends and uncertainties such as inflation, the effects of recently implemented tariffs, and the potential imposition of modified or additional tariffs, as well as the impact of the war with Iran on fuel prices, which may have adverse effects on net sales and profitability. Based on preliminary analysis of the potential effects of the announced tariffs and these other factors, we do not expect a material negative effect on our net sales or profitability for the remainder of fiscal year 2026. However, we are continuing to evaluate these factors and their potential effects as well as our ability to potentially offset all or a portion of cost increases through pricing actions and cost savings efforts for fiscal year 2027 planning. Economic pressures including the challenges of high inflation and the effects of increased tariffs and the impact of the war with Iran may negatively affect our net sales and profitability in the future.

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

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and Adjusted EBITDA as a percent of revenue are not measures derived in accordance with US GAAP. We provide non-GAAP measures to help readers evaluate our operating results and to compare our operating performance with that of similar companies that have different capital structures. Our non-GAAP measures should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP. A reconciliation of our non-GAAP measures is presented on pages 37-39.

For the three months ended June 30, 2026, the increase in consolidated service revenues and sales was driven by an 11.9 % increase at VITAS and a 3.3% increase at Roto-Rooter. The increase in service revenues at VITAS is comprised primarily of 6.1% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.4%. Acuity mix shift negatively impacted revenue growth by 115-basis points in the quarter when compared to the prior year quarter’s revenue and level-of-care mix. The combination of Medicare Cap and other contra revenue changes increased revenue growth by 455-basis points. The increase in service revenues at Roto-Rooter was driven by an increase in plumbing, drain cleaning and excavation offset by a decrease in water restoration.

For the six months ended June 30, 2026, the increase in consolidated service revenues and sales was driven by a 7.4% increase at VITAS and by a 1.1% increase at Roto-Rooter. The increase in service revenues at VITAS is comprised primarily of 4.2% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.5%. Acuity mix shift negatively impacted revenue growth by 120-basis points in the year when compared to the prior year’s revenue and level-of-care mix. The combination of Medicare Cap and other contra revenue changes increased revenue growth by 190-basis points. The increase in service revenues at Roto-Rooter was driven by an increase in plumbing, drain cleaning and excavation offset by a decrease in water restoration.

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Financial Condition

Liquidity and Capital Resources

Material changes in the balance sheet accounts from December 31, 2025 to June 30, 2026 include the following:

A $6.1 million increase in accounts receivable due to the timing of payments. Other significant changes in our accounts receivable balances are typically driven by the timing of payments received from the Federal government at our VITAS subsidiary. We typically receive a payment in excess of $63.0 million from the Federal government for hospice services every other Friday. The timing of a 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.

A $10.3 million increase in prepaid expenses due to prepaid insurance premiums paid in the second quarter.

A $11.4 million increase in lease right of use asset due to lease renewals. This resulted in a similar increase in the lease liability accounts.

A $32.4 million increase in goodwill due to four acquisitions at Roto-Rooter.

A $20.3 million increase in accounts payable due to timing of payments.

A $10.8 million increase in the liability of deferred compensation plans due mainly to market valuation gains. This resulted in a similar increase in the assets associated with deferred compensation plans.

A $140.0 million increase in long-term debt due primarily to acquisitions and stock repurchases.

A $291.9 million increase in treasury stock due to stock repurchases.

Net cash provided by operating activities increased $1.7 million from June 30, 2025 to June 30, 2026. See the Unaudited Consolidated Statements of Cash Flows on page 5 for the detail components making up the change.

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 anticipate that our operating income and cash flows will be sufficient to operate our business and meet any commitments for the foreseeable future.

Commitments and Contingencies

On April 10, 2026, we replaced the Prior Credit Agreement with a sixth amended and restated Credit Agreement. Terms of the Credit Agreement consist of a five-year $450.0 million revolving credit facility including $100.0 million for letters of credit. This Credit Agreement has a floating interest rate that is generally the secured overnight financing rate (“SOFR”) plus an additional tiered rate which varies based on our current leverage ratio. As of June 30, 2026, the interest rate is SOFR plus 100 basis points. The Credit Agreement includes an expansion feature that provides the Company the opportunity to increase its revolver by an additional $250.0 million.

We have issued $47.3 million in standby letters of credit as of June 30, 2026, mainly for insurance purposes. Issued letters of credit reduce our available credit under the Credit Agreement. As of June 30, 2026, we have approximately $262.7 million of unused lines of credit available and are eligible to be drawn down under the Credit Agreement. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.

Collectively, the terms of the Credit Agreement 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, 2026.

We are subject to various lawsuits and claims in the normal course of our business. In addition, we periodically receive communications from governmental and regulatory agencies concerning compliance with Medicare and Medicaid billing requirements at our VITAS subsidiary. We establish reserves for specific, uninsured liabilities in connection with regulatory and legal action that we deem to be probable and estimable. We disclose the existence of regulatory and legal actions when we believe it is reasonably possible that a loss could occur in connection with the specific action. In most instances, we are unable to make a reasonable estimate of any reasonably possible liability due to the uncertainty of the outcome and stage of litigation. We record legal fees associated with legal and regulatory actions as the costs are incurred.

See Note 10 in the Notes to the Unaudited Consolidated Financial Statements in Item 1 above for a description of current material legal matters.

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Results of Operations

Three months ended June 30, 2026 versus 2025 - Consolidated Results

Our service revenues and sales for the second quarter of 2026 increased 8.8% versus services revenue and sales for the second quarter of 2025. Of this increase, a $47.1 million increase was attributable to VITAS, and a $7.3 million increase at Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

Days of care at VITAS during the quarters were as follows:

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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 (“VITAS”) and Roto-Rooter Group, Inc. (“Roto-Rooter”). VITAS focuses on hospice care that helps make terminally ill patients' final days as comfortable as possible. Through its team 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 is focused on providing plumbing, drain cleaning, excavation, 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 vast majority of the Company’s operations are located in the United States. As both operations are service companies, our employees are the most critical resource of the Company. We have very little or no exposure related to customers, vendors or employees in other regions of the world.

The following is a summary of the key operating results for the years ended December 31, 2025, 2024 and 2023 (in thousands except percentages and per share amounts):

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”) and Adjusted EBITDA are not measures derived in accordance with GAAP. We use Adjusted EPS as a measure of earnings for certain long-term incentive awards. We use adjusted EBITDA to determine compliance with certain debt covenants. We provide non-GAAP measures to help readers evaluate our operating results and 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. Reconciliations of our non-GAAP measures are presented in tables following the Critical Accounting Policies section.

2025 versus 2024

The increase in consolidated service revenues and sales from 2025 to 2024 was a result of a 6.5% increase at VITAS with Roto-Rooter being essentially flat. The increase in service revenues at VITAS is comprised primarily of a 5.2% increase in days-of-care, and a geographically weighted average Medicare reimbursement rate increase of approximately 3.4%. Acuity mix shift negatively impacted revenue growth by 110-basis points when compared to prior year revenue and level-of-care mix. The combination of Medicare cap and other contra revenue changes decreased revenue growth by 100-basis points.

The service revenues at Roto-Rooter were essentially flat for 2025 compared to 2024. The plumbing revenue increase of 0.7% for 2025 versus 2024 is attributable to a 3.6% increase in job count offset by a 2.9% decrease in price and service mix shift. The drain cleaning revenue decrease of 2.4% for 2025 versus 2024 is attributable to a 2.1% increase in price and service mix shift offset by a 4.5% decrease in job count. Excavation and water restoration jobs are generally sold as a result of initial calls from customers regarding drain cleaning issues. As a result, the 4.8% increase in excavation revenue and 6.9% increase in water restoration revenue are mainly a function of plumbing and drain cleaning jobs. Contractor operations decreased 4.6%. Implicit price concessions and credit memos increased 41.8% mainly related to the water restoration business.

On April 17, 2024, VITAS completed the purchase of all hospice operations and an assisted living facility from Covenant Health and Community Services, Inc d/b/a/ Covenant Care (“Covenant”) for an aggregated purchase price of $85.0 million in cash.

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The pro forma revenue and earnings for the Company for the years ended December 31, 2025 and 2024 as if the Covenant acquisition made in 2024 was completed on January 1, 2024 are as follows (in thousands, except per share data):

In late September and early October 2024, Hurricanes Helene and Milton impacted the panhandle of Florida and other parts of the southeastern United States. They did not result in any significant property loss or damage to VITAS. However, as with other similar events, we did experience a slowdown in admission activity while health systems prepared for the hurricane and then dealt with the aftermath.

2024 versus 2023

The increase in consolidated service revenues and sales from 2024 to 2023 was a result of a 16.4% increase at VITAS and a 5.2% decrease at Roto-Rooter. The increase in service revenues at VITAS is comprised primarily of a 14.1% increase in days-of-care, and a geographically weighted average Medicare reimbursement rate increase of approximately 2.8%. Acuity mix shift negatively impacted revenue growth by 110-basis points when compared to prior year revenue and level-of-care mix. The combination of Medicare cap and other contra revenue changes increased revenue growth by 60-basis points. The decrease in service revenues at Roto-Rooter was driven by a decrease in all lines of service.

The pandemic created a significant shortage of licensed healthcare workers industry wide. VITAS was not immune to this shortage. As a result, on July 1, 2022, VITAS implemented a hiring and retention bonus program for its licensed healthcare workers. It is a temporary program intended to help VITAS attract and retain licensed healthcare workers in light of the pandemic induced healthcare worker shortage. An eligible employee must continue in employment for a period of one-year from July 1st to receive a bonus. Additionally, employees hired between July 1, 2022 and June 30, 2023 are eligible if they continue employment for a one-year period from their hire date. Total payments for the retention bonus program were $39.2 million paid through 2024.

On April 17, 2024, VITAS completed the purchase of all hospice operations and an assisted living facility from Covenant Health and Community Services, Inc d/b/a/ Covenant Care (“Covenant”) for an aggregated purchase price of $85.0 million in cash.

Revenue for the Covenant acquisition for 2024, was approximately $31.0 million to $32.0 million and this translated to net income of approximately $5.0 million to $6.0 million. Adjusted EBITDA for 2024 attributed to Covenant is between $7.0 million and $8.0 million.

The pro forma revenue and earnings for the Company for the years ended December 31, 2024 and 2023 as if the Covenant acquisition made in 2024 was completed on January 1, 2023 are as follows (in thousands, except per share data):

In late September and early October 2024, Hurricanes Helene and Milton impacted the panhandle of Florida and other parts of the southeastern United States. They did not result in any significant property loss or damage to VITAS. However, as with other similar events, we did experience a slowdown in admission activity while health systems prepared for the hurricane and then dealt with the aftermath.

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LIQUIDITY AND CAPITAL RESOURCES

Material changes in the balance sheet accounts from December 31, 2024 to December 31, 2025 include the following:

An $11.4 million increase in accounts receivable due to the timing of payments. Other significant changes in our accounts receivable balances are typically driven by the timing of payments received from the Federal government at our VITAS subsidiary. We typically receive a payment in excess of $60.0 million from the Federal government for hospice services every other Friday. The timing of a 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.

A $47.1 million decrease in other assets primarily related to the refund of the OAS deposit.

A $20.3 million increase in accounts payable due to timing.

A $33.7 million decline in accrued compensation due primarily to lower bonus expense in 2025 and timing of year end payroll at VITAS.

A $16.0 million increase in other current liabilities due primarily to the increase in Medicare Cap liability.

A $10.1 million increase in deferred compensation liabilities due to market valuation gains. This resulted in a similar increase in the assets associated with deferred compensation plans.

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 anticipate that our operating income and cash flows will be sufficient to operate our business and meet any commitments for the foreseeable future.

The Company had no debt outstanding at December 31, 2025 and 2024. Our current ratio was 1.1 and 1.4 at December 31, 2025 and 2024, respectively.

On June 28, 2022, we replaced our existing credit facility with a fifth amended and restated Credit Agreement (“2022 Credit Facilities”). Terms of the 2022 Credit Facilities consist of a five-year $450.0 million revolver as well as a five-year $100.0 million term loan. The 2022 Credit Facilities have a floating interest rate that is generally SOFR plus an additional tiered rate which varies based on our current leverage ratio. As of December 31, 2025 the interest rate is SOFR plus 100 basis points. The 2022 Credit Facilities include an expansion feature that provides the Company the opportunity to increase its revolver and/or term loan by an additional $250.0 million.

The term loan was repaid in 2023. This prepayment reduced the total borrowing capacity of the 2022 Credit Facilities from $550.0 million to $450.0 million There were no prepayment penalties associated with repayments. There are no significant deferred debt issuance costs capitalized related to the term loan.

The 2022 Credit Facilities contains the following quarterly financial covenants effective as of December 31, 2025:

We forecast to be in compliance with all debt covenants through fiscal 2026.

We have issued $45.5 million in standby letters of credit as of December 31, 2025, mainly for insurance purposes. Issued letters of credit re

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