EX-13 4 a51945094ex13.htm EXHIBIT 13

EXHIBIT 13

Financial Review

Contents  
     
 
Report of Independent Registered Public Accounting Firm
61
 
Consolidated Statements of Income
63
 
Consolidated Balance Sheets
64
 
Consolidated Statements of Cash Flows
65
 
Consolidated Statements of Changes in Stockholders’ Equity
66
 
Notes to Consolidated Financial Statements
67
 
Unaudited Summary of Quarterly Results
93
 
Selected Financial Data
95
 
Unaudited Consolidating Statements of Income
96

Management’s Discussion and Analysis of Financial Conditions and Results of Operations 99


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The Company’s management, including the President and Chief Executive Officer, Executive Vice President and Chief Financial Officer and Vice President and Controller, has conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2018, based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that internal control over financial reporting was effective as of December 31, 2018, based on criteria in Internal Control—Integrated Framework issued by COSO.

PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, as stated in their report which appears on pages 61 and 62.

60


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Chemed Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Chemed Corporation and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2018.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting . Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

61


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/PricewaterhouseCoopersLLP
Cincinnati, Ohio
February 27, 2019

We have served as the Company’s auditor since 1971.

62


CONSOLIDATED STATEMENTS OF INCOME
 
                   
Chemed Corporation and Subsidiary Companies
                 
(in thousands, except per share data)
                 
For the Years Ended December 31,
 
2018
   
2017
   
2016
 
                   
Service revenues and sales (Note 2)
 
$
1,782,648
   
$
1,666,724
   
$
1,576,881
 
Cost of services provided and goods sold (excluding depreciation)
   
1,228,644
     
1,150,532
     
1,115,431
 
Selling, general and administrative expenses
   
270,209
     
276,652
     
243,572
 
Depreciation
   
38,464
     
35,488
     
34,279
 
Amortization
   
399
     
137
     
359
 
Other operating expenses (Note 20)
   
1,300
     
90,880
     
4,491
 
Total costs and expenses
   
1,539,016
     
1,553,689
     
1,398,132
 
Income from operations
   
243,632
     
113,035
     
178,749
 
Interest expense
   
(4,990
)
   
(4,272
)
   
(3,715
)
Other income--net (Note 10)
   
958
     
8,154
     
2,020
 
Income before income taxes
   
239,600
     
116,917
     
177,054
 
Income taxes (Note 11)
   
(34,056
)
   
(18,740
)
   
(68,311
)
Net Income
 
$
205,544
   
$
98,177
   
$
108,743
 
                         
Earnings Per Share (Note 15)
                       
Net Income
 
$
12.80
   
$
6.11
   
$
6.64
 
Average number of shares outstanding
   
16,059
     
16,057
     
16,383
 
Diluted Earnings Per Share (Note 15)
                       
Net Income
 
$
12.23
   
$
5.86
   
$
6.48
 
Average number of shares outstanding
   
16,803
     
16,742
     
16,789
 

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

63


CONSOLIDATED BALANCE SHEETS
 
       
Chemed Corporation and Subsidiary Companies
           
(in thousands, except shares and per share data)
           
December 31,
 
2018
   
2017
 
Assets
           
     Current assets
           
          Cash and cash equivalents (Note 9)
 
$
4,831
   
$
11,121
 
          Accounts receivable less allowances of $15,175 for 2017
   
119,504
     
113,651
 
          Inventories
   
5,705
     
5,334
 
          Prepaid income taxes
   
10,646
     
29,848
 
          Prepaid expenses
   
19,154
     
16,092
 
Total current assets
   
159,840
     
176,046
 
     Investments of deferred compensation plans held in trust (Notes 14 and 16)
   
65,624
     
62,067
 
     Properties and equipment, at cost, less accumulated depreciation (Note 12)
   
162,033
     
143,034
 
     Identifiable intangible assets less accumulated amortization of  $33,283 (2017 - $32,887) (Note 6)
   
68,253
     
54,865
 
     Goodwill
   
510,570
     
476,887
 
     Other assets
   
9,209
     
7,127
 
Total Assets
 
$
975,529
   
$
920,026
 
                 
Liabilities
               
     Current liabilities
               
          Accounts payable
 
$
50,150
   
$
48,372
 
          Current portion of long-term debt (Note 3)
   
-
     
10,000
 
          Accrued insurance
   
46,095
     
46,968
 
          Accrued compensation
   
63,329
     
62,933
 
          Accrued legal
   
1,857
     
1,786
 
          Other current liabilities
   
30,239
     
23,463
 
               Total current liabilities
   
191,670
     
193,522
 
     Deferred income taxes (Note 11)
   
21,598
     
16,640
 
     Long-term debt (Note 3)
   
89,200
     
91,200
 
     Deferred compensation liabilities (Note 14)
   
64,616
     
61,800
 
     Other liabilities
   
17,111
     
16,510
 
Total Liabilities
   
384,195
     
379,672
 
     Commitments and contingencies (Notes 13 and 17)
               
Stockholders' Equity
               
     Capital stock - authorized 80,000,000 shares $1 par; issued 35,311,418 shares
               
          (2017 - 34,732,192 shares)
   
35,311
     
34,732
 
     Paid-in capital
   
774,358
     
695,797
 
     Retained earnings
   
1,225,617
     
1,038,955
 
     Treasury stock - 19,438,358 shares (2017 - 18,694,047 shares), at cost
   
(1,446,296
)
   
(1,231,332
)
     Deferred compensation payable in Company stock (Note 14)
   
2,344
     
2,202
 
Total Stockholders' Equity
   
591,334
     
540,354
 
Total Liabilities and Stockholders' Equity
 
$
975,529
   
$
920,026
 

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

64

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Chemed Corporation and Subsidiary Companies
                 
(in thousands)
                 
For the Years Ended December 31,
 
2018
   
2017
   
2016
 
Cash Flows from Operating Activities
                 
     Net income
 
$
205,544
   
$
98,177
   
$
108,743
 
     Adjustments to reconcile net income to net cash provided by operations:
                       
          Depreciation and amortization
   
38,863
     
35,625
     
34,638
 
          Stock option expense
   
12,611
     
10,485
     
8,330
 
          Noncash portion of long-term incentive compensation
   
5,405
     
3,774
     
1,301
 
          Provision/(benefit) for deferred income taxes (Note 11)
   
5,187
     
2,407
     
(6,707
)
          Noncash directors' compensation
   
766
     
766
     
541
 
          Amortization of restricted stock awards
   
446
     
1,231
     
1,855
 
          Amortization of debt issuance costs
   
441
     
516
     
519
 
          Provision for uncollectible accounts receivable
   
-
     
17,306
     
16,319
 
          Loss on sale of transportation equipment (Note 20)
   
-
     
5,266
     
-
 
          Noncash early retirement expense (Note 20)
   
-
     
-
     
1,747
 
          Changes in operating assets and liabilities, excluding amounts acquired in business combinations:
                       
                    Decrease/(increase) in accounts receivable
   
(5,570
)
   
1,072
     
(42,142
)
                    Decrease/(increase) in inventories
   
(351
)
   
421
     
559
 
                    Increase in prepaid expenses
   
(2,665
)
   
(2,987
)
   
(253
)
                    Increase in accounts payable and other current liabilities
   
8,935
     
12,890
     
891
 
                    (Decrease)/increase in income taxes
   
18,898
     
(26,104
)
   
13,886
 
                    Increase in other assets
   
(5,544
)
   
(8,330
)
   
(5,224
)
                    Increase in other liabilities
   
3,451
     
8,561
     
7,105
 
         Excess tax benefit on stock-based compensation
   
-
     
-
     
(7,195
)
          Other sources
   
721
     
1,419
     
480
 
               Net cash provided by operating activities
   
287,138
     
162,495
     
135,393
 
Cash Flows from Investing Activities
                       
     Capital expenditures
   
(52,872
)
   
(64,300
)
   
(39,772
)
     Business combinations, net of cash acquired (Note 7)
   
(53,177
)
   
(4,725
)
   
-
 
     Other sources/(uses)
   
824
     
1,417
     
(90
)
               Net cash used by investing activities
   
(105,225
)
   
(67,608
)
   
(39,862
)
Cash Flows from Financing Activities
                       
     Proceeds from revolving line of credit
   
469,550
     
212,350
     
127,050
 
     Payments on revolving line of credit
   
(406,550
)
   
(211,150
)
   
(102,050
)
     Purchases of treasury stock
   
(158,884
)
   
(94,640
)
   
(102,313
)
     Payments on other long-term debt
   
(75,000
)
   
(8,750
)
   
(7,500
)
     Proceeds from exercise of stock options (Note 4)
   
32,412
     
27,092
     
8,421
 
     Capital stock surrendered to pay taxes on stock-based compensation
   
(27,548
)
   
(14,223
)
   
(8,772
)
     Dividends paid
   
(18,662
)
   
(17,371
)
   
(16,439
)
     Change in cash overdraft payable
   
(1,531
)
   
6,700
     
(736
)
    Debt issuance costs
   
(1,052
)
   
-
     
-
 
    Excess tax benefit on stock-based compensation
   
-
     
-
     
7,195
 
     Other sources/(uses)
   
(938
)
   
916
     
196
 
               Net cash used by financing activities
   
(188,203
)
   
(99,076
)
   
(94,948
)
Increase/(decrease) in cash and cash equivalents
   
(6,290
)
   
(4,189
)
   
583
 
Cash and cash equivalents at beginning of year
   
11,121
     
15,310
     
14,727
 
Cash and cash equivalents at end of year
 
$
4,831
   
$
11,121
   
$
15,310
 

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

65


CONSOLIDATED STATEMENTS OF CHANGES
 
IN STOCKHOLDERS' EQUITY
 
Chemed Corporation and Subsidiary Companies
                                   
(in thousands, except per share data)
                         
Deferred
       
                           
Compensation
       
                     
Treasury
   
Payable in
       
   
Capital
   
Paid-in
   
Retained
   
Stock-
   
Company
       
   
Stock
   
Capital
   
Earnings
   
at Cost
   
Stock
   
Total
 
    Balance at December 31, 2015
 
$
33,985
   
$
603,006
   
$
865,845
   
$
(991,978
)
 
$
2,395
   
$
513,253
 
Net income
   
-
     
-
     
108,743
     
-
     
-
     
108,743
 
Dividends paid ($1.00 per share)
   
-
     
-
     
(16,439
)
   
-
     
-
     
(16,439
)
Stock awards and exercise of stock options (Note 4)
   
285
     
36,453
     
-
     
(16,127
)
   
-
     
20,611
 
Purchases of treasury stock (Note 19)
   
-
     
-
     
-
     
(102,313
)
   
-
     
(102,313
)
Other
   
-
     
244
     
-
     
(118
)
   
118
     
244
 
    Balance at December 31, 2016
   
34,270
     
639,703
     
958,149
     
(1,110,536
)
   
2,513
     
524,099
 
Net income
   
-
     
-
     
98,177
     
-
     
-
     
98,177
 
Dividends paid ($1.08 per share)
   
-
     
-
     
(17,371
)
   
-
     
-
     
(17,371
)
Stock awards and exercise of stock options (Note 4)
   
462
     
55,264
     
-
     
(26,467
)
   
-
     
29,259
 
Purchases of treasury stock (Note 19)
   
-
     
-
     
-
     
(94,640
)
   
-
     
(94,640
)
Other
   
-
     
830
     
-
     
311
     
(311
)
   
830
 
    Balance at December 31, 2017
   
34,732
     
695,797
     
1,038,955
     
(1,231,332
)
   
2,202
     
540,354
 
Net income
   
-
     
-
     
205,544
     
-
     
-
     
205,544
 
Dividends paid ($1.16 per share)
   
-
     
-
     
(18,662
)
   
-
     
-
     
(18,662
)
Stock awards and exercise of stock options (Note 4)
   
579
     
79,452
     
-
     
(55,939
)
   
-
     
24,092
 
Purchases of treasury stock (Note 19)
   
-
     
-
     
-
     
(158,884
)
   
-
     
(158,884
)
Other
   
-
     
(891
)
   
(220
)
   
(141
)
   
142
     
(1,110
)
    Balance at December 31, 2018
 
$
35,311
   
$
774,358
   
$
1,225,617
   
$
(1,446,296
)
 
$
2,344
   
$
591,334
 

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

66


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Summary of Significant Accounting Policies
NATURE OF OPERATIONS
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 provides plumbing, drain cleaning and water restoration services to both residential and commercial customers. Through its network of company-owned branches, independent contractors and franchisees, Roto-Rooter offers plumbing, drain cleaning service and water restoration to approximately 90% of the U.S. population.

PRINCIPLES OF ACCOUNTING
The consolidated financial statements have been prepared on a going-concern basis.  Management has adopted the evaluation requirements of Accounting Stanadards Update “ASU No. 2014-15 – Presentation of Financial Statements – Going Concern”.

The consolidated financial statements include the accounts of Chemed Corporation and its wholly owned subsidiaries.  All intercompany transactions have been eliminated.  We have analyzed the provisions of the Financial Accounting Standards Board (“FASB”) authoritative guidance on the consolidation of variable interest entities relative to our contractual relationships with Roto-Rooter’s independent contractors and franchisees.  The guidance requires the primary beneficiary of a Variable Interest Entity (“VIE”) to consolidate the accounts of the VIE. We have concluded that neither the independent contractors nor the franchisees are VIEs.

Certain reclassifications have been made to prior year financial statements to conform to current presentation.

CASH EQUIVALENTS
Cash equivalents comprise short-term, highly liquid investments, including money market funds that have original maturities of three months or less.

CONCENTRATION OF RISK
As of December 31, 2018 and 2017, approximately 68% and 59%, respectively, of VITAS’ total accounts receivable balance were due from Medicare and 26% and 32%, respectively, of VITAS’ total accounts receivable balance were due from various state Medicaid or managed Medicaid programs.  Combined accounts receivable from Medicare, Medicaid, and managed Medicaid represent approximately 75% of the consolidated net accounts receivable in the accompanying consolidated balance sheets as of December 31, 2018.

As further described in Note 18, we had agreements with a vendor to provide specified pharmacy services for VITAS and its hospice patients.  In 2018 and 2017, respectively, purchases made from this vendor represent 99% and 85%, respectively, of all pharmacy services used by VITAS.

INVENTORIES
Substantially all of the inventories are either general merchandise or finished goods.  Inventories are stated at the lower of cost or net realizable value.  For determining the value of inventories, cost methods that reasonably approximate the first-in, first-out (“FIFO”) method are used.

DEPRECIATION AND PROPERTIES AND EQUIPMENT
Depreciation of properties and equipment is computed using the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are amortized over the lesser of the remaining lease terms (excluding option terms) or their useful lives.  Expenditures for maintenance, repairs, renewals and betterments that do not materially prolong the useful lives of the assets are expensed as incurred. The cost of property retired or sold and the related accumulated depreciation are removed from the accounts, and the resulting gain or loss is reflected currently in other operating expense or other income, net.

67


Expenditures for major software purchases and software developed for internal use are capitalized and depreciated using the straight-line method over the estimated useful lives of the assets.  For software developed for internal use, external direct costs for materials and services and certain internal payroll and related fringe benefit costs are capitalized in accordance with the FASB’s authoritative guidance on accounting for the costs of computer software developed or obtained for internal use.

The weighted average lives of our property and equipment at December 31, 2018, were:

Buildings and building improvements
32.8
 yrs.
Transportation equipment
10.5
 
Machinery and equipment
5.1
 
Computer software
4.6
 
Furniture and fixtures
4.8
 

GOODWILL AND INTANGIBLE ASSETS

The table below shows a rollforward of Goodwill (in thousands):

         
Roto-
       
   
Vitas
   
Rooter
   
Total
 
Balance at December 31, 2016
 
$
328,301
   
$
144,065
   
$
472,366
 
Business combinations
   
-
     
4,396
     
4,396
 
Foreign currency adjustments
   
-
     
125
     
125
 
Balance at December 31, 2017
 
$
328,301
   
$
148,586
   
$
476,887
 
Business combinations
   
5,030
     
28,780
     
33,810
 
Foreign currency adjustments
   
-
     
(127
)
   
(127
)
Balance at December 31, 2018
 
$
333,331
   
$
177,239
   
$
510,570
 

Identifiable, definite-lived intangible assets arise from purchase business combinations and are amortized using either an accelerated method or the straight-line method over the estimated useful lives of the assets.  The selection of an amortization method is based on which method best reflects the economic pattern of usage of the asset.  Reacquired franchise rights are amortized over the remaining term of the franchise agreement at the time of acquisition.  The weighted average lives of our identifiable, definite-lived intangible assets at December 31, 2018, were:

Covenants not to compete
6.5
 yrs.
Reacquired franchise rights
7.9
 
Referral networks
10.0
 
Customer lists
12.0
 

The date of our annual goodwill and indefinite-lived intangible asset impairment analysis is October 1.  The VITAS trade name is considered to have an indefinite life.  We also capitalize the direct costs of obtaining licenses to operate either hospice programs or plumbing operations subject to a minimum capitalization threshold.  These costs are amortized over the life of the license using the straight-line method.  Certificates of Need (“CON”), which are required in certain states for hospice operations, are generally granted without expiration and thus, we believe them to be indefinite-lived assets subject to impairment testing.

We consider that Roto-Rooter Corp. (“RRC”), Roto-Rooter Services Co. (“RRSC”) and VITAS are appropriate reporting units for testing goodwill impairment.  We consider RRC and RRSC separate reporting units but one operating segment.  This is appropriate as they each have their own set of general ledger accounts that can be analyzed at “one level below an operating segment” per the definition of a reporting unit in FASB guidance.

We completed our qualitative analysis for impairment of goodwill and our indefinite-lived intangible assets as of October 1, 2018.  Based on our assessment, we do not believe that it is more likely than not that our reporting units or indefinite-lived assets fair values are less than their carrying values.

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LONG-LIVED ASSETS
If we believe a triggering event may have occurred that indicates a possible impairment of our long-lived assets, we perform an estimate and valuation of the future benefits of our long-lived assets (other than goodwill, the VITAS trade name and capitalized CON costs) based on key financial indicators. If the projected undiscounted cash flows of a major business unit indicate that properties and equipment or identifiable, definite-lived intangible assets have been impaired, a write-down to fair value is made.

OTHER ASSETS
Debt issuance costs are included in other assets.  Issuance costs related to revolving credit agreements are amortized using the straight-line method, over the life of the agreement.  All other issuance costs are amortized using the effective interest method over the life of the debt.  There are no amounts included in other assets that individually exceed 5% of total assets.

SALES TAX
The Roto-Rooter segment collects sales tax from customers when required by state and federal laws.  We record the amount of sales tax collected net in the accompanying consolidated statements of income.

OPERATING EXPENSES
Cost of services provided and goods sold (excluding depreciation) includes salaries, wages and benefits of service providers and field personnel, material costs, medical supplies and equipment, pharmaceuticals, insurance costs, service vehicle costs and other expenses directly related to providing service revenues or generating sales.  Selling, general and administrative expenses include salaries, wages, stock-based compensation expense and benefits of selling, marketing and administrative employees, advertising expenses, communications and branch telephone expenses, office rent and operating costs, legal, banking and professional fees and other administrative costs.  The cost associated with VITAS sales personnel is included in cost of services provided and goods sold (excluding depreciation).

ADVERTISING
We expense the production costs of advertising the first time the advertising takes place.  We pay for and expense the cost of internet advertising and placement on a “per click” basis.  Similarly, the majority of our telephone directory listings are paid for and expensed on a “cost per call” basis. For those directories that are not on this billing basis, the cost of the directory is expensed when the directories are placed in circulation.  Advertising expense for the year ended December 31, 2018, was $47.0 million (2017 – $40.9 million; 2016 - $37.2 million).

COMPUTATION OF 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 specific areas of financial reporting. 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 year ended December 31, 2018 was to decrease our income tax expense by $22.9 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 $1.42 and $1.27, respectively. The impact of this ASU on our financial statements for the year ended December 31, 2017 was to decrease our income tax expense by $18.9 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 $1.18 and $1.08, respectively.

OTHER CURRENT LIABILITIES
There are no amounts included in other current liabilities that individually exceed 5% of total current liabilities.

OTHER LIABILITIES (NON-CURRENT)
There are no amounts included in other liabilities that individually exceed 5% of total liabilities.

STOCK-BASED COMPENSATION PLANS
Stock-based compensation cost is measured at the grant date, based on the fair value of the award and recognized as expense over the employee’s requisite service period on a straight-line basis.

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INSURANCE ACCRUALS
For our Roto-Rooter segment and 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.  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 by stop-loss coverage at $1,000,000. 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 $750,000.

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, 2018, 2017 and 2016, were net pretax debits/(credits) of ($3,437,000), ($1,800,000), and $1,147,000 respectively.

TAXES ON INCOME
On December 22, 2017, the President of the United States signed into law H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (previously known as “The Tax Cuts and Jobs Act”) or (the “Act”). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, U.S. generally accepted accounting principles requires resulting tax effects for the Act, to be recorded in the reporting period of enactment.

The SEC issued SAB 118, which provides guidance on accounting for the Act’s impact. Under SAB 118, an entity would use something similar to the measurement period in a business combination, not to exceed one year. For matters that have not been completed, the Company would recognize provisional amounts to the extent that they are reasonably estimable, adjust them over time as more information becomes available, and disclose this information in its financial statements.

Our accounting for all elements of the Tax Act is complete. The Company did not record any material changes to the provisional amounts previously recorded, net benefit recorded in 2017 of $8.3 million. The Company also determined new rules, such as the Global Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT), have no material impact to the financial statements.

Historically, the Company has not provided for deferred taxes on undistributed earnings because such earnings are considered to be indefinitely reinvested outside of the U.S. The Company continues this assertion that foreign earnings are permanently reinvested under the Act.

The Act provides for 100 percent bonus depreciation on personal tangible property expenditures starting September 27, 2017 through 2022. The bonus depreciation percentage is phased down from 100 percent beginning in 2023 through 2026. The Company expects to take full benefit of these bonus depreciation rules.

The IRS and other tax authorities are still issuing guidance on the Act, through various regulations some of which are still proposed and not final. The Company will implement any changes related to finalized regulations and other guidance in the period issued.

Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amount of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized due to insufficient taxable income within the carryback or carryforward period available under the tax laws. Deferred tax assets and liabilities are adjusted for the effects of changes in law and rates on the date of enactment.

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We are subject to income taxes in Canada, U.S. federal and most state jurisdictions. Judgement is required to determine our provision for income taxes. Our financial statements reflect expected future tax consequences of such uncertain positions assuming the taxing authorities’ full knowledge of the position and all relevant facts.

CONTINGENCIES
As discussed in Note 17, 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 reasonably estimable.  We record legal fees associated with legal and regulatory actions as the costs are incurred.  We disclose material loss contingencies that are probable but not reasonably estimable and those that are at least reasonably possible.

ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.  Disclosures of after-tax expenses and adjustments are based on estimates of the effective income tax rates for the applicable segments.

2.    Revenue Recognition

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

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

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

Routine Home Care occurs when a patient receives hospice care in their home, including a nursing home setting.  The routine home care rate is paid for each day that a patient is in a hospice program and is not receiving one of the other categories of hospice care.  For Medicare patients, the routine home care rate reflects a two-tiered rate, with a higher rate for the first 60 days of a hospice patient’s care and a lower rate for days 61 and after.  In addition, there is a Service Intensity Add-on payment which covers direct home care visits conducted by a registered nurse or social worker in the last seven days of a hospice patient’s life, reimbursed up to four hours per day in fifteen minute increments at the continuous home care rate.

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

71


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

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

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

Care is provided to patients regardless of their ability to pay.  Patients who meet our criteria for charity care are provided care without charge.  There is no revenue or associated accounts receivable in the accompanying consolidated financial statements related to charity care.  The cost of providing charity care during the years ended December 31, 2018, 2017 and 2016, was $8.2 million, $7.7 million and $7.0 million, respectively and is included in cost of services provided and goods sold.  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.

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

Laws and regulations concerning government programs, including Medicare and Medicaid, are complex and subject to varying interpretation.  Compliance with such laws and regulations may be subject to future government review and interpretation.  Additionally, the contracts we have with commercial health insurance payors provide for retroactive audit and review of claims.  Settlement with third party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care.  The variable consideration is estimated based on the terms of the payment agreement, existing correspondence from the payor and our historical settlement activity.  These estimates are adjusted in future periods, as new information becomes available.

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

Inpatient Cap.  If the number of inpatient care days any hospice program provides to Medicare beneficiaries exceeds 20% of the total days of hospice care such program provided to all Medicare patients for an annual period beginning September 28, the days in excess of the 20% figure may be reimbursed only at the routine homecare rate. None of VITAS’ hospice programs exceeded the payment limits on inpatient services during the years ended December 31, 2018, 2017 and 2016.

Medicare Cap.  We are also subject to a Medicare annual per-beneficiary cap (“Medicare cap”). Compliance with the Medicare cap is measured in one of two ways based on a provider election. The “streamlined” method compares total Medicare payments received under a Medicare provider number with respect to services provided to all Medicare hospice care beneficiaries in the program or programs covered by that Medicare provider number with the product of the per-beneficiary cap amount and the number of Medicare beneficiaries electing hospice care for the first time from that hospice program or programs from September 28 through September 27 of the following year.  At December 31, 2018, all our programs except one are using the “streamlined” method.

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

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

In 2013, the U.S. government implemented automatic budget reductions of 2.0% for all government payees, including hospice benefits paid under the Medicare program. In 2015, CMS determined that the Medicare cap should be calculated “as if” sequestration did not occur. As a result of this decision, VITAS has received notification from our third-party intermediary that an additional $3.6 million is owed for Medicare cap in three programs arising during the 2013 through 2018 measurement periods. The amounts are automatically deducted from our semi-monthly periodic interim payments (“PIP”). We do not believe that CMS is authorized under the sequestration authority or the statutory methodology for establishing the Medicare cap to the amounts they have withheld and intend to withhold under their current “as if” methodology. We have appealed CMS’s methodology change.

During the years ended December 31, 2018, we recorded $4.1 million in Medicare cap revenue reduction related to two programs’ 2018 measurement period liability and 2 programs’ projected 2019 measurement period liability.

During the year ended December 31, 2017, we recorded $ 2.4 million in Medicare cap revenue reduction related to two programs’ projected 2018 measurement period liability and $247,000 for two programs’ cap liability for prior periods.

During the year ended December 31, 2016, we recorded $228,000 in Medicare cap revenue reduction related to one programs’ projected 2015 measurement period liability.

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

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The composition of patient care service revenue by payor and level of care for the year ended December 31, 2018 is as follows (in thousands):

   
Medicare
   
Medicaid
   
Commercial
   
Total
 
Routine home care
 
$
939,951
   
$
47,609
   
$
22,958
   
$
1,010,518
 
Continuous care
   
110,596
     
6,126
     
5,776
     
122,498
 
Inpatient care
   
69,354
     
8,156
     
5,167
     
82,677
 
   
$
1,119,901
   
$
61,891
   
$
33,901
   
$
1,215,693
 
                                 
All other revenue - self-pay, respite care, etc.
                           
7,831
 
Subtotal
                         
$
1,223,524
 
Medicare cap adjustment
                           
(4,123
)
Implicit price concessions
                           
(11,785
)
Room and board, net
                           
(10,054
)
Net revenue
                         
$
1,197,562
 

Roto-Rooter

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

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

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

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

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

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

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

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

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

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

The composition of disaggregated revenue for the year ended December 31, 2018 is as follows (in thousands):

Short-term core service jobs
 
$
421,790
 
Water restoration
   
101,784
 
Contractor revenue
   
50,093
 
Franchise fees
   
6,382
 
All other
   
11,958
 
Subtotal
 
$
592,007
 
Implicit price concessions and credit memos
   
(6,921
)
Net revenue
 
$
585,086
 

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        Initial Adoption of ASC 606

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

For VITAS, expenses related to payor audits and reviews, as well as variable consideration estimated for patient deductibles and coinsurance, have been historically estimated as revenue was recognized and classified as bad debt expense, included in the consolidated statements of income as selling, general and administrative expense.  Upon adoption of ASC 606, these expenses are classified as contra-revenue.  There is no change in the timing of recognition related to the variable consideration.  The amount of these expenses during the year ended December 31, 2018 was $11.8 million.

Also for VITAS, the 5% net expense related to Medicaid room and board has been historically recorded on a net basis in cost of services provided in the consolidated income statements.  Upon adoption of ASC 606, due to the change in the residual value method required by ASC 606, the expense will be classified as a contra-revenue.  The amount of the change in the classification for these expenses during the year ended December 31, 2018 was $10.1 million.  There has been no change in the evaluation of Medicaid room and board related to net versus gross presentation.

Related to Roto-Rooter, expenses related to post-invoice variable consideration in our short-term core portfolio, and adjustments made subsequent to initial estimates related to allowances taken by insurance companies for water restoration, have been classified as a contra-revenue account in the statements of income.  These amounts were previously classified as bad debt expense in SG&A.  The amount of the change in classification for these expenses during the year ended December 31, 2018 was $6.9 million.  The initial estimate related to allowances taken by insurance companies for water restoration services has historically been classified as contra-revenue and did not change as a result of the transition.

There was no material impact on the consolidated balance sheets related to the initial adoption.  There is no impact to consolidated net income as a result of the initial adoption.  As a result of the change in classification in the statements of income, amounts previously included in the provision for uncollectible accounts in the statements of cash flow have been included in the decrease/(increase) in accounts receivable line item in 2018.  The total impact of the change from prior revenue guidance (ASC 605) to guidance adopted on January 1, 2018 related to classification in the statements of income is as follows (in thousands):

 
Impact for the year ended December 31, 2018  
 
ASC 605 
 
Adjustment 
 
ASC 606
 
Service revenue and sales
 
$
1,811,408
   
$
(28,760
)
 
$
1,782,648
 
Cost of services provided and goods sold
   
1,238,698
     
(10,054
)
   
1,228,644
 
Selling, general and administrative expenses
   
288,915
     
(18,706
)
   
270,209
 

3.    Long-Term Debt and Lines of Credit
On June 20, 2018, we replaced our existing credit agreement with the Fourth Amended and Restated Credit Agreement (“2018 Credit Agreement”).  Terms of the 2018 Credit Agreement consist of a five-year, $450 million revolving credit facility and a $150 million expansion feature, which may consist of term loans or additional revolving commitments.    The 2018 Credit Agreement has a floating interest rate that is generally LIBOR plus a tiered additional rate which varies based on our current leverage ratio.  For December 31, 2018 and 2017, respectively, the interest rate is LIBOR plus 100 basis points.

The debt outstanding at December 31, 2018 and 2017 consists of the following (in thousands):

   
December 31,
 
   
2018
   
2017
 
Revolver
 
$
89,200
   
$
26,200
 
Term loan
   
-
     
75,000
 
Total
   
89,200
     
101,200
 
Current portion of term loan
   
-
     
(10,000
)
Long-term debt
 
$
89,200
   
$
91,200
 

76


Capitalized interest was not material for any of the periods shown.  Summarized below are the total amounts of interest paid during the years ended December 31 (in thousands):

2018
 
$
4,178
 
2017
   
3,626
 
2016
   
3,047
 

The 2018 Credit Agreement contains the following quarterly financial covenants:

Description
 
Requirement
 
Chemed
         
         
Leverage Ratio (Consolidated Indebtedness/Consolidated  Adj. EBITDA)
 
< 3.50 to 1.00
 
0.41 to 1.00
         
Fixed Charge Coverage Ratio (Consolidated Free Cash Flow/Consolidated
       
Fixed Charges)
 
> 1.50 to 1.00
 
7.61 to 1.00

We are in compliance with all debt covenants as of December 31, 2018. We have issued $36.4 million in standby letters of credit as of December 31, 2018 for insurance purposes.  Issued letters of credit reduce our available credit under the 2018 Credit Agreement.  As of December 31, 2018, we have approximately $324.4 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility.

4.     Stock-Based Compensation Plans
We have three stock incentive plans under which a total of 5.1 million shares were able to be issued to key employees and directors through a grant of stock options, stock awards and/or performance stock units (“PSUs”).  The Compensation/Incentive Committee (“CIC”) of the Board of Directors administers these plans.

     We grant stock options, stock awards and PSUs to our officers, other key employees and directors to better align their long-term interests with those of our shareholders.  We grant stock options at an exercise price equal to the market price of our stock on the date of grant.  Options vest ratably annually over a three-year period.  Those granted in 2018, 2017, 2016 and 2015 have a contractual life of 5 years; those granted prior to 2014 have a contractual life of 10 years.  Restricted stock awards granted in 2015 vest ratably annually over a three year period.  Unrestricted stock awards generally are granted to our non-employee directors annually at the time of our annual meeting.  PSUs are contingent upon achievement of multi-year earnings per share (“EPS”) targets or total shareholder return (“TSR”) targets.  Upon achievement of targets, PSUs are converted to unrestricted shares of stock.

     We recognize the cost of stock options, stock awards and PSUs on a straight-line basis over the service life of the award, generally the vesting period.  We include the cost of all stock-based compensation in selling, general and administrative expense.

In May 2018, the CIC granted 2,295 unrestricted shares of stock to the Company’s outside directors.

PERFORMANCE AWARDS

In February 2016, 2017 and 2018, the CIC granted PSUs contingent upon the achievement of certain TSR targets as compared to the TSR of a group of peer companies for the three-year measurement period, at which date the awards may vest.  We utilize a Monte Carlo simulation approach in a risk-neutral framework with inputs including historical volatility and the risk-free rate of interest to value these TSR awards.  We amortize the total estimated cost over the service period of the award.

In February 2016, 2017 and 2018, the CIC granted PSUs contingent on the achievement of certain EPS targets over the three-year measurement period.  At the end of each reporting period, we estimate the number of shares of stock we believe will ultimately vest and record that expense over the service period of the award.

77


Comparative data for the PSUs include:

   
2018 Awards
   
2017 Awards
   
2016 Awards
 
TSR Awards
                 
Shares of stock granted
   
7,523
     
7,304
     
9,541
 
Per-share fair value
 
$
341.20
   
$
226.95
   
$
150.74
 
Volatility
   
22.9
%
   
21.8
%
   
26.7
%
Risk-free interest rate
   
2.34
%
   
1.44
%
   
0.89
%
                         
EPS Awards
                       
Shares of stock granted
   
7,523
     
7,304
     
9,541
 
Per-share fair value
 
$
256.29
   
$
172.60
   
$
126.37
 
                         
Common Assumptions
                       
Service period (years)
   
2.9
     
2.9
     
2.9
 
Three-year measurement period ends December 31,
   
2020
     
2019
     
2018
 

The following table summarizes total stock option, stock award and PSU activity during 2018:

   
Stock Options
   
Stock Awards
   
Performance Units (PSUs)
 
         
Weighted Average
   
Aggregate
         
Weighted
         
Weighted
 
               
Remaining
   
Intrinsic
         
Average
   
Number of
   
Average
 
   
Number of
   
Exercise
   
Contractual
   
Value
   
Number of
   
Grant-Date
   
Target
   
Grant-Date
 
   
Options
   
Price
   
Life (Years)
   
(thousands)
   
Awards
   
Price
   
Units
   
Price
 
Outstanding at January 1, 2018
   
1,698,458
   
$
141.62
                 
9,706
   
$
121.75
     
53,732
   
$
151.09
 
Granted
   
246,350
     
306.70
                 
2,295
     
333.75
     
32,255
     
209.49
 
Exercised/Vested
   
(539,104
)
   
112.79
                 
(12,001
)
   
162.29
     
(37,827
)
   
129.48
 
Canceled/ Forfeited
   
(10,670
)
   
153.31
                 
-
     
-
     
-
     
-
 
Outstanding at December 31, 2018
   
1,395,034
   
$
181.82
     
3.6
   
$
144,271
     
-
   
$
-
     
48,160
   
$
207.17
 
                                                                 
Vested and expected to vest
                                                               
at December 31, 2018
   
1,395,034
   
$
181.82
     
3.6
   
$
144,271
     
-
   
$
-
     
83,250
     
202.10
 
Exercisable at December 31, 2018
   
770,385
     
137.48
     
3.3
     
110,291
   
n.a.
   
n.a.
   
n.a.
   
n.a.
 
* Amount includes 32,134 share units which vested and were converted to shares of stock and distributed in the first quarter of 2019.
 

We estimate the fair value of stock options using the Black-Scholes valuation model.  We determine expected term, volatility, and dividend yield and forfeiture rate based on our historical experience.  We believe that historical experience is the best indicator of these factors.

78

Comparative data for stock options, stock awards and PSUs include (in thousands, except per-share amounts):

   
Years Ended December 31,
 
   
2018
   
2017
   
2016
 
Total compensation expense of stock-based compensation
                 
plans charged against income
 
$
19,229
   
$
16,256
   
$
13,773
 
Total income tax benefit recognized in income for stock
                       
based compensation expense charged against income
   
4,788
     
5,690
     
5,062
 
Total intrinsic value of stock options exercised
   
102,144
     
50,192
     
17,635
 
Total intrinsic value of stock awards vested during the period
   
4,003
     
6,983
     
7,429
 
Per-share weighted average grant-date fair value of
                       
stock awards granted
   
333.75
     
203.52
     
126.53
 

The assumptions we used to value stock option grants are as follows:

   
2018
   
2017
   
2016
 
Stock price on date of issuance
 
$
306.70
   
$
231.91
   
$
135.85
 
Grant date fair value per share
 
$
67.16
   
$
46.27
   
$
22.74
 
Number of options granted
   
246,350
     
330,550
     
505,775
 
Expected term (years)
   
4.0
     
4.0
     
4.0
 
Risk free rate of return
   
2.99
%
   
1.86
%
   
1.09
%
Volatility
   
22.42
%
   
22.80
%
   
21.10
%
Dividend yield
   
0.4
%
   
0.5
%
   
0.8
%
Forfeiture rate
   
-
     
-
     
-
 

Other data for stock options, stock awards and PSUs for 2018 include (dollar amounts in thousands):

   
Stock
   
Stock
       
   
Options
   
Awards
   
PSUs
 
                   
Total unrecognized compensation at the end of the year
 
$
27,556
   
$
-
   
$
5,925
 
Weighted average period over which unrecognized compensation to be recognized (years)
   
2.3
     
-
     
1.8
 
Actual income tax benefit realized
 
$
24,075
   
$
944
   
$
2,086
 
Aggregate intrinsic value vested and expected to vest
 
$
144,271
   
$
-
   
$
23,363
 

EMPLOYEE STOCK PURCHASE PLAN (“ESPP”)
The ESPP allows eligible participants to purchase shares of stock through payroll deductions at current market value.  We pay administrative and broker fees associated with the ESPP.  Shares of stock purchased for the ESPP are purchased on the open market and credited directly to participants’ accounts.  In accordance with the FASB’s guidance, the ESPP is non-compensatory.

79


5.       Segments and Nature of the Business
Our segments include the VITAS segment and the Roto-Rooter segment.  Relative contributions of each segment to service revenues and sales were 67% and 33%, respectively, in 2018 and 69% and 31%, respectively, in 2017 and 2016.  The vast majority of our service revenues and sales from continuing operations are generated from business within the United States.

The reportable segments have been defined along service lines, which is consistent with the way the businesses are managed. In determining reportable segments, the RRSC and RRC operating units of the Roto-Rooter segment have been aggregated on the basis of possessing similar operating and economic characteristics.  The characteristics of these operating segments and the basis for aggregation are reviewed annually.
 
We report corporate administrative expenses and unallocated investing and financing income and expense not directly related to either segment as “Corporate”.  Corporate administrative expense includes the stewardship, accounting and reporting, legal, tax and other costs of operating a publicly held corporation.  Corporate investing and financing income and expenses include the costs and income associated with corporate debt and investment arrangements.
 
 
80

 
Segment data are set forth below (in thousands):
 
   
For the Years Ended December 31,
 
   
2018
   
2017
   
2016
 
Revenues by Type of Service
                 
VITAS
                 
  Routine homecare
 
$
1,010,518
   
$
935,913
   
$
887,940
 
  Continuous care
   
122,498
     
124,557
     
138,025
 
  General inpatient
   
82,677
     
90,472
     
97,580
 
  Other
   
7,831
     
-
     
-
 
Subtotal revenue
   
1,223,524
     
1,150,942
     
1,123,545
 
Room and board, net
 
$
(10,054
)
 
$
-
   
$
-
 
Implicit price concessions
   
(11,785
)
   
-
     
.
 
Medicare cap adjustment
   
(4,123
)
   
(2,682
)
   
(228
)
Total segment
   
1,197,562
     
1,148,260
     
1,123,317
 
Roto-Rooter
                       
  Short-term core service jobs
   
421,790
     
373,579
     
345,638
 
  Water restoration
   
101,784
     
82,272
     
50,229
 
  Contractor revenue
   
50,093
     
43,770
     
40,097
 
  Franchise fees
   
6,382
     
6,130
     
5,090
 
  Other
   
11,958
     
12,713
     
12,510
 
  Implicit price concessions and credit memos
   
(6,921
)
   
-
     
-
 
Total segment
   
585,086
     
518,464
     
453,564
 
Total service revenues and sales
 
$
1,782,648
   
$
1,666,724
   
$
1,576,881
 
After-tax Segment Earnings/(Loss)
                       
VITAS
 
$
138,846
   
$
57,645
   
$
84,961
 
Roto-Rooter
   
98,711
     
73,299
     
52,893
 
Total
   
237,557
     
130,944
     
137,854
 
Corporate
   
(32,013
)
   
(32,767
)
   
(29,111
)
Net income
 
$
205,544
   
$
98,177
   
$
108,743
 
Interest Income
                       
VITAS
 
$
13,412
   
$
12,044
   
$
8,294
 
Roto-Rooter
   
7,000
     
5,635
     
3,653
 
Total
   
20,412
     
17,679
     
11,947
 
Intercompany eliminations
   
(19,741
)
   
(17,252
)
   
(11,564
)
Total interest income
 
$
671
   
$
427
   
$
383
 
Interest Expense
                       
VITAS
 
$
175
   
$
188
   
$
211
 
Roto-Rooter
   
319
     
323
     
332
 
Total
   
494
     
511
     
543
 
Corporate
   
4,496
     
3,761
     
3,172
 
Total interest expense
 
$
4,990
   
$
4,272
   
$
3,715
 
                         
Income Tax Provision
                       
VITAS
 
$
40,847
   
$
16,436
   
$
51,910
 
Roto-Rooter
   
28,850
     
32,782
     
32,719
 
Total
   
69,697
     
49,218
     
84,629
 
Corporate
   
(35,641
)
   
(30,478
)
   
(16,318
)
Total income tax provision
 
$
34,056
   
$
18,740
   
$
68,311
 
Identifiable Assets
                       
VITAS
 
$
553,949
   
$
545,304
   
$
542,142
 
Roto-Rooter
   
351,030
     
294,663
     
261,641
 
Total
   
904,979
     
839,967
     
803,783
 
Corporate
   
70,550
     
80,059
     
76,276
 
Total identifiable assets
 
$
975,529
   
$
920,026
   
$
880,059
 

81


   
For the Years Ended December 31,
 
   
2018
   
2017
   
2016
 
Additions to Long-Lived Assets
                 
VITAS
 
$
36,969
   
$
23,469
   
$
22,000
 
Roto-Rooter
   
68,786
     
45,386
     
17,709
 
Total
   
105,755
     
68,855
     
39,709
 
Corporate
   
128
     
483
     
63
 
Total additions to long-lived assets
 
$
105,883
   
$
69,338
   
$
39,772
 
Depreciation and Amortization
                       
VITAS
 
$
19,700
   
$
18,630
   
$
19,090
 
Roto-Rooter
   
19,016
     
16,790
     
15,002
 
Total
   
38,716
     
35,420
     
34,092
 
Corporate
   
147
     
205
     
546
 
Total depreciation and amortization
 
$
38,863
   
$
35,625
   
$
34,638
 

6.      Intangible Assets
Amortization of definite-lived intangible assets for the years ended December 31, 2018, 2017, 2016, was $399,000, $137,000 and $359,000 respectively.  The following is a schedule by year of projected amortization expense for definite-lived intangible assets (in thousands):

2019
 
$
1,628
 
2020
   
1,624
 
2021
   
1,620
 
2022
   
1,611
 
2023
   
1,590
 
Thereafter
   
8,880
 

The balance in identifiable intangible assets comprises the following (in thousands):

   
Gross
   
Accumulated
   
Net Book
 
   
Asset
   
Amortization
   
Value
 
December 31, 2018
                 
Referral networks
 
$
21,850
   
$
(21,152
)
 
$
698
 
Covenants not to compete
   
9,796
     
(9,367
)
   
429
 
Customer lists
   
2,025
     
(1,235
)
   
790
 
Reacquired franchise rights
   
12,447
     
(1,529
)
   
10,918
 
    Subtotal - definite-lived intangibles
   
46,118
     
(33,283
)
   
12,835
 
VITAS trade name
   
51,300
     
-
     
51,300
 
Roto-Rooter trade name
   
150
     
-
     
150
 
Operating licenses
   
3,968
     
-
     
3,968
 
     Total
 
$
101,536
   
$
(33,283
)
 
$
68,253
 
                         
December 31, 2017
                       
Referral networks
 
$
21,140
   
$
(21,140
)
 
$
-
 
Covenants not to compete
   
9,519
     
(9,291
)
   
228
 
Customer lists
   
1,217
     
(1,217
)
   
-
 
Reacquired franchise rights
   
1,298
     
(1,239
)
   
59
 
    Subtotal - definite-lived intangibles
   
33,174
     
(32,887
)
   
287
 
VITAS trade name
   
51,300
     
-
     
51,300
 
Roto-Rooter trade name
   
150
     
-
     
150
 
Operating licenses
   
3,128
     
-
     
3,128
 
     Total
 
$
87,752
   
$
(32,887
)
 
$
54,865
 

82


7.       Business Combinations
During 2018, we completed four business combinations of former franchisees within the Roto-Rooter segment for $42.2 million in cash to increase our market penetration.  The Vitas segment completed one business combination in Florida for $11.0 million to increase our market penetration.  The purchase price of these acquisition was allocated as follows (in thousands):

Reacquired franchise rights
 
$
11,161
 
All other identifiable intangible assets
   
2,500
 
Goodwill
   
33,828
 
Other assets and liabilities - net
   
5,688
 
   
$
53,177
 

There was no gain or loss as a result of the settlement of the preexisting relationship with the former franchisees at Roto-Rooter.  Goodwill, substantially all of which is deductible for tax purposes, was determined based on the residual difference between the fair value of consideration transferred and the value assigned to all tangible and intangible assets.  Among factors that contributed to the recognition of goodwill for both Roto-Rooter and VITAS were expected synergies associated with combining operations of the acquiree into our existing operating platforms.

During 2017, we completed two business combinations of former franchisees within the Roto-Rooter segment for $4.7 million in cash to increase our market penetration.  The purchase price of these acquisition was allocated as follows (in thousands):

Identifiable intangible assets
 
$
98
 
Goodwill
   
4,396
 
Other assets and liabilities - net
   
231
 
   
$
4,725
 

We did not complete any business combinations during 2016.

The unaudited pro forma results of operations, assuming purchase business combinations completed in 2018 were completed on January 1, 2017 are presented below (in thousands, except per share data):

 
For the Years Ended
 
 
December 31,
 
 
2018
 
2017
 
Service revenues and sales
 
$
1,811,532
   
$
1,705,747
 
Net income
 
$
209,891
   
$
103,920
 
Earnings per share
 
$
13.07
   
$
6.47
 
Diluted earnings per share
 
$
12.49
   
$
6.21
 

The pro-forma revenue and net income amounts associated with the acquisitions are based on unaudited historical results of the acquiree.  No material pro-forma adjustments were made to the acquiree’s historical results.

8.        Discontinued Operations
At December 31, 2018 and 2017, the accrual for our estimated liability for potential environmental cleanup and related costs arising from the 1991 sale of DuBois amounted to $1.7 million.  Of the 2018 balance, $826,000 is included in other current liabilities and $901,000 is included in other liabilities (long-term).   The estimated amounts and timing of payments of these liabilities follows (in thousands):

2019
 
$
826
 
2020
   
300
 
Thereafter
   
601
 
   
$
1,727
 

83


We are contingently liable for additional DuBois-related environmental cleanup and related costs up to a maximum of $14.9 million.  On the basis of a continuing evaluation of the potential liability, we believe it is not probable this additional liability will be paid.  Accordingly, no provision for this contingent liability has been recorded.  The potential liability is not insured, and the recorded liability does not assume the recovery of insurance proceeds.  Also, the environmental liability has not been discounted because it is not possible to reliably project the timing of payments.  We believe that any adjustments to our recorded liability will not materially adversely affect our financial position, results of operations or cash flows.

9.     Cash Overdrafts and Cash Equivalents
Included in accounts payable are cash overdrafts of $13.8 million and $15.3 million as of December 31, 2018 and 2017, respectively.

From time to time throughout the year, we invest excess cash in money market funds directly with major commercial banks.  We closely monitor the creditworthiness of the institutions with which we invest our overnight funds. The amount invested was less than $100,000 for each balance sheet date presented.

10.    Other Income -- Net
Other income -- net from continuing operations comprises the following (in thousands):

   
For the Years Ended December 31,
 
   
2018
   
2017
   
2016
 
                   
Interest income
 
$
671
   
$
427
   
$
383
 
Market value gains related to deferred
                       
compensation trusts
   
287
     
8,430
     
2,061
 
Other--net
   
-
     
(703
)
   
(424
)
Total other income
 
$
958
   
$
8,154
   
$
2,020
 

The market value gain relates to gains on the assets in the deferred compensation trust.  There is an offsetting expense in selling, general and administrative expense to reflect the corresponding increase in the liability.

11.    Income Taxes
The provision for income taxes comprises the following (in thousands):

   
For the Years Ended December 31,
 
   
2018
   
2017
   
2016
 
Current
                 
U.S. federal
 
$
23,934
   
$
11,724
   
$
64,698
 
U.S. state and local
   
4,484
     
4,144
     
9,927
 
Foreign
   
452
     
465
     
393
 
Deferred
                       
U.S. federal, state and local
   
5,185
     
2,402
     
(6,712
)
Foreign
   
1
     
5
     
5
 
Total
 
$
34,056
   
$
18,740
   
$
68,311
 

84


A summary of the temporary differences that give rise to deferred tax assets/ (liabilities) follows (in thousands):

   
December 31,
 
   
2018
   
2017
 
Accrued liabilities
 
$
30,702
   
$
30,419
 
Stock compensation expense
   
5,894
     
6,282
 
State net operating loss carryforwards
   
2,422
     
2,243
 
Implicit price concessions
   
1,171
     
291
 
Other
   
626
     
565
 
Deferred income tax assets
   
40,815
     
39,800
 
Amortization of intangible assets
   
(38,346
)
   
(36,882
)
Accelerated tax depreciation
   
(19,685
)
   
(14,057
)
Market valuation of investments
   
(1,068
)
   
(2,277
)
State income taxes
   
(1,261
)
   
(1,722
)
Currents assets
   
(1,861
)
   
(1,255
)
Other
   
(192
)
   
(247
)
Deferred income tax liabilities
   
(62,413
)
   
(56,440
)
 Net deferred income tax liabilities
 
$
(21,598
)
 
$
(16,640
)

At December 31, 2018 and 2017, state net operating loss carryforwards were $39.3 million and $36.5 million, respectively.  These net operating losses will expire, in varying amounts, between 2024 and 2038.  Based on our history of operating earnings, we have determined that our operating income will, more likely than not, be sufficient to ensure realization of our deferred income tax assets.

A reconciliation of the beginning and ending of year amount of our unrecognized tax benefit is as follows (in thousands):

   
2018
   
2017
   
2016
 
Balance at January 1,
 
$
1,123
   
$
1,069
   
$
1,052
 
Unrecognized tax benefits due to positions taken in current year
   
453
     
268
     
218
 
Decrease due to expiration of statute of limitations
   
(228
)
   
(214
)
   
(201
)
Balance at December 31,
 
$
1,348
   
$
1,123
   
$
1,069
 

We file tax returns in the U.S. federal jurisdiction and various states.  The years ended December 31, 2015 and forward remain open for review for federal income tax purposes.  The earliest open year relating to any of our major state jurisdictions is the fiscal year ended December 31, 2013.  During the next twelve months, we do not anticipate a material net change in unrecognized tax benefits.

We classify interest related to our accrual for uncertain tax positions in separate interest accounts.  As of December 31, 2018 and 2017, we have approximately $136,000 and $134,000, respectively, accrued in interest payable related to uncertain tax positions.  These accruals are included in other current liabilities in the accompanying consolidated balance sheet.  Net interest expense related to uncertain tax positions included in interest expense in the accompanying consolidated statement of income is not material.

The difference between the actual income tax provision for continuing operations and the income tax provision calculated at the statutory U.S. federal tax rate is explained as follows (in thousands):

   
For the Years Ended December 31,
 
   
2018
   
2017
   
2016
 
                   
Income tax provision calculated using the statutory rate of 21%
 
$
50,316
   
$
40,921
   
$
61,969
 
Stock compensation tax benefits
   
(22,862
)
   
(18,932
)
   
-
 
State and local income taxes, less federal income tax effect
   
7,150
     
4,600
     
6,044
 
Nondeductible expenses
   
2,280
     
1,041
     
881
 
Enactment of the tax reform act
   
-
     
(8,305
)
   
-
 
Other--net
   
(2,828
)
   
(585
)
   
(583
)
Income tax provision
 
$
34,056
   
$
18,740
   
$
68,311
 
Effective tax rate
   
14.2
%
   
16.0
%
   
38.6
%

85


Summarized below are the total amounts of income taxes paid during the years ended December 31 (in thousands):

2018
 
$
9,749
 
2017
   
42,311
 
2016
   
60,905
 

Provision has not been made for additional taxes on $35.1 million of undistributed earnings of our domestic subsidiaries.  Should we elect to sell our interest in these businesses rather than to affect a tax-free liquidation, additional taxes amounting to approximately $8.4 million would be incurred based on current income tax rates.

12.    Properties and Equipment
A summary of properties and equipment follows (in thousands):

   
December 31,
 
   
2018
   
2017
 
Land
 
$
7,964
   
$
7,108
 
Buildings and building improvements
   
96,361
     
85,570
 
Transportation equipment
   
51,559
     
47,243
 
Machinery and equipment
   
111,183
     
99,234
 
Computer software
   
49,928
     
47,840
 
Furniture and fixtures
   
72,898
     
74,191
 
Projects under development
   
20,510
     
11,882
 
Total properties and equipment
   
410,403
     
373,068
 
Less accumulated depreciation
   
(248,370
)
   
(230,034
)
Net properties and equipment
 
$
162,033