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 28-29.

For the three months ended March 31, 2026, the increase in consolidated service revenues and sales was driven by a 3.1% increase at VITAS offset by a 0.9% decrease at Roto-Rooter. The increase in service revenues at VITAS is comprised primarily of 2.2% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.6%. Acuity mix shift negatively impacted revenue growth by 120-basis points in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare Cap and other contra revenue changes decreased revenue growth by 47-basis points.

The decline in service revenues at Roto-Rooter was driven by a 1.9% decrease in commercial revenue and a 1.5% decrease in residential revenue.

Financial Condition

Liquidity and Capital Resources

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

A $32.9 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 $62.0 million from the Federal government for hospice services

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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 $20.5 million increase in goodwill due to the two acquisitions at Roto-Rooter.

A $23.3 million increase in income taxes payable due to timing of payments.

A $91.2 million increase in long-term debt due primarily to the acquisitions and stock repurchases.

A $201.1 million increase in treasury stock due to stock repurchases.

Net cash provided by operating activities increased $55.5 million from March 31, 2025 to March 31, 2026. See the Unaudited Consolidated Statements of Cash Flow 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. The interest on 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 March 31, 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 $45.5 million in standby letters of credit as of March 31, 2026 under the Prior Credit Agreement, which has continued under the Credit Agreement mainly for insurance purposes. Issued letters of credit reduce our available credit under the Credit Agreement. As of March 31, 2026, we have approximately $313.3 million of unused lines of credit available and are eligible to be drawn down under the Prior 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 were in compliance with all financial and other debt covenants as of March 31, 2026 under the Prior Credit Agreement and anticipate remaining in compliance under the Credit Agreement throughout the foreseeable future.

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 March 31, 2026 versus 2025 - Consolidated Results

Our service revenues and sales for the first quarter of 2026 increased 1.6% versus services and sales revenues for the first quarter of 2025. Of this increase, a $12.6 million increase was attributable to VITAS, offset by a $2.0 million decrease 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:

The increase in service revenues at VITAS is comprised primarily of 2.2% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.6%. Acuity mix shift negatively impacted revenue growth by 120-basis points in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare Cap and other contra revenue changes decreased revenue growth by 47-basis points.

The increase in plumbing revenues for the first quarter of 2026 versus 2025 is attributable to a 14.1% increase in price and service mix shift offset by a 6.4% decrease in job count. The increase in drain cleaning revenues for the first quarter of 2026 versus 2025 is attributable to a 12.3% increase in price and service mix offset by a 12.0% decrease in job count. Excavation revenues decreased

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1.1%, water restoration revenues decreased 11.7%, and contractors operations decreased 3.3%. Implicit pr

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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 reduce our available credit under the revolving credit agreement. As of December 31, 2025, we have approximately $404.5 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility. We believe our cash flow from operating activities and our unused eligible lines of credit are sufficient to fund our obligations and operate our business in the near and long term. We continually evaluate cash utilization alternatives, including share repurchase, debt repayment, acquisitions, and increased dividends to determine the most beneficial use of available capital resources.

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CASH FLOW

Our cash flows for 2025, 2024 and 2023 are summarized as follows (in millions):

2025 versus 2024

Net cash provided by operating activities decreased $29.2 million from the year ended December 31, 2024 to the year ended December 31, 2025. The main drivers are a decrease in earnings of $36.8 million combined with working capital changes. Significant changes in our accounts receivable balances are driven mainly 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 from hospice services every other Friday. The timing of year 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. The swing in accounts receivable increased cash flow by $22.3 million between 2025 and 2024.

In 2025, we repurchased 932,500 shares of Chemed capital stock at a weighted average price of $459.02 per share. In 2024, we repurchased 638,235 shares of Chemed capital stock at a weighted average price of $562.08 per share. Based on our current operations and our current sources of capital, we believe we have the ability to continue our current share repurchase program into the foreseeable future.

2024 versus 2023

Net cash provided by operating activities increased $87.2 million from the year ended December 31, 2023 to the year ended December 31, 2024. The main drivers are an increase in earnings of $29.5 million combined with working capital changes. Significant changes in our accounts receivable balances are driven mainly by the timing of payments received from the Federal government at our VITAS subsidiary. We typically receive a payment in excess of $55.0 million from the Federal government from hospice services every other Friday. The timing of year 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. The swing in accounts receivable increased cash flow by $52.2 million between 2024 and 2023.

In 2024, we repurchased 638,235 shares of Chemed capital stock at a weighted average price of $562.08 per share. In 2023, we repurchased 132,969 shares of Chemed stock at a weighted average price of $555.12 per share. Based on our current operations and our current sources of capital, we believe we have the ability to continue our current share repurchase program into the foreseeable future.

COMMITMENTS AND CONTINGENCIES

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.

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Please see Note 18 in the Notes to the Consolidated Financial Statements for a description of current material legal and regulatory matters.

CONTRACTUAL OBLIGATIONS

The table below summarizes our debt and contractual obligations as of December 31, 2025 (in thousands):

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RESULTS OF OPERATIONS

2025 Versus 2024 – Consolidated Results

Set forth below are the year-to-year changes in the components of the statement of operations relating to income for 2025 versus 2024 (in thousands, except percentages):

The VITAS segment revenue is as follows (dollars in thousands):

Days of care are as follows:

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

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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 Roto-Rooter segment revenue is as follows (dollars in thousands):

The increase in plumbing revenues 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 decrease in drain cleaning revenues 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.

The consolidated gross margin excluding depreciation was 32.5% in 2025 versus 35.1% in 2024. On a segment basis, VITAS’ gross margin excluding depreciation was 22.8% in 2025 and 25.1% in 2024. The decline was primarily due to an increase in Medicare Cap liability of $18.7 million and an increase in variable patient care expenses and wages. Roto-Rooter’s gross margin excluding depreciation was 50.1% in 2025 and 52.2% in 2024. The decline is primarily due to a $5.3 million increase in casualty insurance expense and a 41.8% increase in implicit price concessions and credit memos primarily related to the water restoration business line as well as an increase in variable expenses.

Selling, general and administrative expenses (“SG&A”) for 2025 and 2024 comprise (in thousands):

SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts for 2025 were up 4.4% when compared to 2024. This increase was mainly a result of a $2.4 million increase in legal expenses mainly at VITAS, and a $2.7 million severance accrual related to one former VITAS executive. The remaining increase is related to normal salary increases and an increase in variable selling expenses, primarily internet marketing costs at Roto-Rooter.

Included in the allocation of the purchase price for Roto-Rooter’s 2019 acquisitions was $59.2 million related to reacquired franchise rights. Reacquired franchise rights, included in identifiable intangibles on the Consolidated Balance Sheets, are amortized over the period remaining in each individual franchise agreement. The average amortization period for reacquired franchise rights for the acquisitions made in 2019 is 7.4 years. In 2025 and 2024, amortization expense from the reacquired franchise rights for these two acquisitions was $8.1 million compared to the franchise fee revenue recognized from all other Roto-Rooter franchises, nationwide, of $1.8 million and $1.7 million, respectively.

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Other operating expense for 2025 and 2024 comprise (in thousands):

Other income-net for 2025 and 2024 comprise (in thousands):

Our effective tax rate reconciliation is as follows:

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

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2025 Versus 2024– Segment Results

Net income/(loss) for 2025 versus 2024 (in thousands):

VITAS’ after-tax earnings decreased mainly due to an increase in Medicare Cap liability of $18.7 million and an increase in legal expense of $3.9 million. After-tax earnings as a percent of revenue at VITAS in 2025 was 12.5% as compared to 14.2% in 2024.

Roto-Rooter’s net income was negatively impacted in 2025 compared to 2024 due primarily to an increase in casualty insurance expense of $5.3 million and increased variable expenses combined with essentially flat revenue. Roto-Rooter’s after-tax earnings as a percent of revenue in 2025 was 15.1% as compared to 17.8% in 2024.

After-tax Corporate expenses for 2025 decreased 0.8% when compared to 2024 due primarily to a $12.9 million decrease in stock-based compensation offset by $2.7 million in severance expense recorded for one former VITAS executive, a $5.9 million decrease in interest income and a $5.1 million decrease in excess tax benefit on stock compensation.

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RESULTS OF OPERATIONS

2024 Versus 2023 – Consolidated Results

Set forth below are the year-to-year changes in the components of the statement of operations relating to income for 2024 versus 2023 (in thousands, except percentages):

The VITAS segment revenue is as follows (dollars in thousands):

Days of care are as follows:

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.

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The Roto-Rooter segment revenue is as follows (dollars in thousands):

The decrease in plumbing revenues for 2024 versus 2023 is attributable to a 1.6% decrease in price and service mix shift and a 6.2% decrease in job count. The decrease in drain cleaning revenues for 2024 versus 2023 is attributable to a 2.9% increase in price and service mix shift offset by a 7.5% 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 2.5% decrease in excavation revenue and 5.7% decrease in water restoration revenue are mainly a function of the decreased plumbing and drain cleaning jobs. Contractor operations decreased 15.1%.

The consolidated gross margin excluding depreciation was 35.1% in 2024 versus 35.3% in 2023. On a segment basis, VITAS’ gross margin excluding depreciation was 25.1% in 2024 and 22.6% in 2023. The increase in gross margin at VITAS is mostly the result of the increased revenues and expiration of the retention bonus program. Roto-Rooter’s gross margin excluding depreciation was 52.2% in 2024 and 52.8% in 2023.

Selling, general and administrative expenses (“SG&A”) for 2024 and 2023 comprise (in thousands):

SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts for 2024 were up 1.9% when compared to 2023. This increase was mainly a result of normal salary increases and an increase in variable selling expenses, primarily increased marketing expenses at Roto-Rooter.

Included in the allocation of the purchase price for Roto-Rooter’s 2019 acquisitions was $59.2 million related to reacquired franchise rights. Reacquired franchise rights, included in identifiable intangibles on the Consolidated Balance Sheets, are amortized over the period remaining in each individual franchise agreement. The average amortization period for reacquired franchise rights for the acquisitions made in 2019 is 7.4 years. In 2024 and 2023, amortization expense from the reacquired franchise rights for these two acquisitions was $8.1 million compared to the franchise fee revenue recognized from all other Roto-Rooter franchises, nationwide, of $1.7 million and $1.6 million, respectively.

Other operating expense for 2024 and 2023 comprise (in thousands):

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Other income-net for 2024 and 2023 comprise (in thousands):

Our effective tax rate reconciliation is as follows:

During the third quarter of 2023, the Company recognized a tax benefit from realignment of its state and local corporate tax structure based on the location of operating resources and profitability by business segment. This benefit includes a reduction in current state and local tax expense and a one time benefit of $4.2 million in reduction of deferred tax liabilities reflecting the lower tax rates.

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

2024 Versus 2023 – Segment Results

Net income/(loss) for 2024 versus 2023 (in thousand):

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VITAS’ after-tax earnings increased mainly to higher revenue and the expiration of the retention bonus program. After-tax earnings as a percent of revenue at VITAS in 2024 was 14.2% as compared to 12.1% in 2023.

Roto-Rooter’s after-tax earnings decreased due to lower revenue and a $3.6 million tax benefit due to the impact of the deferred rate tax change in 2023 which did not recur in 2024. Roto-Rooter’s after-tax earnings as a percent of revenue at Roto-Rooter in 2024 was 17.8% as compared to 19.8% in 2023.

After-tax Corporate expenses for 2024 increased 0.8% when compared to 2023 due mainly to a $5.3 million severance agreement in 2024 and a $1.1 million tax expense due to the impact of the deferred rate tax change in 2023, which did not recur in 2024.

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CRITICAL ACCOUNTING ESTIMATES

VITAS Revenue Implicit Price Concessions

Service revenue for VITAS is reported at the amount that reflects the ultimate consideration we expect to receive in exchange for providing patient care. These amounts are due from third-party payors, primarily government programs (Medicare and Medicaid) or commercial health insurers. Revenue is recorded at the government-mandated service level rate or the contractually agreed-upon service level rate, whichever is applicable for the patient being served. At the same time, a reduction in revenue is estimated and recorded for expected contractual adjustments. These contractual adjustments are referred to as “implicit price concessions”. Implicit price concessions at VITAS are considered critical accounting estimates as they involve a significant amount of judgment by management. Over 95% of VITAS’ revenue is from Medicare or Medicaid, resulting in the majority of implicit price concessions being related to Federal or state payors. The remainder of this discussion focuses on the process related to these Federal or state related implicit price concessions.

The laws and regulations governing hospice services are voluminous. Federal and state agencies, or their designated intermediaries, scrutinize hospice claims under various review initiatives to determine their validity and appropriateness. These reviews generally target specific categories of patients and are not statistically chosen. The Company has processes and procedures in place to help ensure compliance. The estimate of implicit price concessions is based on two main assumptions, as follows:

There are a small percentage of claims that are rejected by the payor soon after billing. These claims generally contain a minor non-medical, documentation defect in the billing process. The estimated implicit price concession for this type of claim is based mainly on historical experience which is relatively consistent from year-to-year. The implicit price concession estimate relating to this assumption is not material.

There are claims subject to the review process described above which are initially denied by the reviewer. There are many reasons that a claim may be denied including, but not limited to: defects in the non-medical documentation; a difference of opinion with respect to the medical condition of the patient; or a perceived lack of adequate medical documentation. Each denial is researched by a team of internal VITAS employees. There is a standard appeal process for any claim we believe was inappropriately denied. The appeal for these claims may take several months if not years to make it through the entire appeal process. The estimated implicit price concession for this type of claim is based on a number of key factors, including our historical success rate of appeal, settlement history for similar reviews, the types of reviews being conducted and the overall current review environment.

Our estimate currently assumes that we ultimately do not receive consideration for approximately 20% to 30% of claims currently selected for review or expected to be selected for review. If our current estimate changes by 1%, there would be a $2.8 million impact on our estimate of implicit price concessions.

Our estimates of implicit price concessions at VITAS are updated and reviewed quarterly based on the most recent facts available. Subsequent changes in facts and circumstances are recorded in the period they become known. There have been no changes to the assumptions that would significantly impact our estimate of implicit price concessions.

Insurance Accruals

For the Roto-Rooter segment and Chemed’s Corporate Office, we initially self-insure for all casualty insurance claims (workers’ compensation, auto liability and general liability). As a result, we closely monitor and frequently evaluate our historical claims experience to estimate the appropriate level of accrual for self-insured claims. Our third-party administrator (“TPA”) processes and reviews claims on a monthly basis. Currently, our exposure on any single claim is capped by stop-loss coverage at $750,000, with the exception of auto liability claims which are capped at $3.0 million of stop-loss coverage. In developing our estimates, we accumulate historical claims data for the previous 10 years to calculate loss development factors (“LDF”) by insurance coverage type. LDFs are applied to known claims to estimate the ultimate potential liability for known and unknown claims for each open policy year. LDFs are updated annually. Because this methodology relies heavily on historical claims data, the key risk is whether the historical claims are an accurate predictor of future claims exposure. The risk also exists that certain claims have been incurred and not reported on a timely basis. To mitigate these risks, in conjunction with our TPA, we closely monitor claims to ensure timely accumulation of data and compare claims trends with the industry experience of our TPA.

For the VITAS segment, we initially self-insure for workers’ compensation claims. Currently, VITAS’ exposure on any single claim is capped at $1,000,000, due to stop loss insurance held with a commercial insurance carrier. For VITAS’ self-insurance accruals for workers’ compensation, the valuation methods used are similar to those used internally for our other business units. We are also insured for other risks with respect to professional liability with a deductible of $1,000,000.

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Our casualty insurance liabilities are recorded gross before any estimated recovery for amounts exceeding our stop loss limits. Estimated recoveries from insurance carriers are recorded as accounts receivable. Claims experience adjustments to our casualty and workers’ compensation accrual for the years ended December 31, 2025, 2024 and 2023, were net pretax expense/(credits) of $81,000, ($10,374,000), and ($6,862,000), respectively.

As an indication of the sensitivity of the accrued liability to reported claims, our analysis indicates that a 1% across-the-board increase or decrease in the amount of projected losses would increase or decrease the accrued insurance liability at December 31, 2025 by $5.4 million or 8.7%. While the amount recorded represents our best estimate of the casualty and workers’ compensation insurance liability, we have calculated, based on historical claims experience, the actual loss could reasonably be expected to increase or decrease by approximately $500,000 as of December 31, 2025.

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