UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2019
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-8351
CHEMED CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
31-0791746
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
255 E. Fifth Street, Suite 2600, Cincinnati, Ohio
45202
(Address of principal executive offices)
(Zip code)
(513) 762-6690
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange
on which Registered
Amount
Date
Capital Stock $1 Par Value
CHE
New York Stock Exchange
15,921,808 Shares
June 30, 2019
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SUBSIDIARY COMPANIES
Index
Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
June 30, 2019 and December 31, 2018
3
Unaudited Consolidated Statements of Income -
Three and six months ended June 30, 2019 and 2018
4
Unaudited Consolidated Statements of Cash Flows -
Six months ended June 30, 2019 and 2018
5
Unaudited Consolidated Statements of Changes in Stockholders’ Equity-
6
Notes to Unaudited Consolidated Financial Statements
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
41
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
42
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
43
EX – 31.1
EX – 31.2
EX – 31.3
EX – 32.1
EX – 32.2
EX – 32.3
EX – 101.INS
EX – 101.SCH
EX – 101.CAL
EX – 101.DEF
EX – 101.LAB
EX – 101.PRE
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PART I. FINANCIAL INFORMATION
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2018
ASSETS
Current assets
Cash and cash equivalents
$
3,323
4,831
Accounts receivable
136,113
119,504
Inventories
6,336
5,705
Prepaid income taxes
12,951
10,646
Prepaid expenses
21,455
19,154
Total current assets
180,178
159,840
Investments of deferred compensation plans
70,460
65,624
Properties and equipment, at cost, less accumulated depreciation of $259,495 (2018 - $248,370)
149,917
162,033
Assets held for sale
15,750
-
Lease right of use assets less accumulated amortization of $13,415
90,755
Identifiable intangible assets less accumulated amortization of $34,210 (2018 - $33,284)
67,511
68,253
Goodwill
510,627
510,570
Other assets
8,874
9,209
Total Assets
1,094,072
975,529
LIABILITIES
Current liabilities
Accounts payable
51,143
50,150
Accrued insurance
46,912
46,095
Accrued compensation
50,123
63,329
Accrued legal
8,431
1,857
Short-term lease liability
31,614
Other current liabilities
35,446
30,239
Total current liabilities
223,669
191,670
Deferred income taxes
18,828
21,598
Long-term debt
85,000
89,200
Deferred compensation liabilities
70,273
64,616
Long-term lease liability
69,979
Other liabilities
7,754
17,111
Total Liabilities
475,503
384,195
Commitments and contingencies (Note 11)
STOCKHOLDERS' EQUITY
Capital stock - authorized 80,000,000 shares $1 par; issued 35,590,832 shares (2018 - 35,311,418 shares)
35,591
35,311
Paid-in capital
817,255
774,358
Retained earnings
1,311,446
1,225,617
Treasury stock - 19,749,166 shares (2018 - 19,438,358)
(1,548,138)
(1,446,296)
Deferred compensation payable in Company stock
2,415
2,344
Total Stockholders' Equity
618,569
591,334
Total Liabilities and Stockholders' Equity
See accompanying notes to unaudited consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended June 30,
Six Months Ended June 30,
2019
2018
Service revenues and sales
473,584
441,813
935,618
880,989
Cost of services provided and goods sold (excluding depreciation)
323,637
305,741
645,588
610,277
Selling, general and administrative expenses
71,556
68,297
145,585
137,297
Depreciation
9,887
9,718
19,597
18,985
Amortization
406
34
925
61
Other operating expenses/(income)
2,570
(118)
8,923
(169)
Total costs and expenses
408,056
383,672
820,618
766,451
Income from operations
65,528
58,141
115,000
114,538
Interest expense
(1,237)
(1,524)
(2,361)
(2,731)
Other income - net
13
1,038
2,452
2,056
Income before income taxes
64,304
57,655
115,091
113,863
Income taxes
(13,575)
(2,684)
(19,695)
(13,896)
Net income
50,729
54,971
95,396
99,967
Earnings Per Share:
3.18
3.43
5.98
6.22
Average number of shares outstanding
15,928
16,035
15,941
16,067
Diluted Earnings Per Share:
3.08
3.27
5.79
5.93
16,449
16,811
16,489
16,854
Cash Dividends Per Share
0.30
0.28
0.60
0.56
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash Flows from Operating Activities
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
20,522
19,046
Stock option expense
8,018
7,305
Litigation settlement
6,000
(Benefit)/provision for deferred income taxes
(2,769)
2,173
Noncash long-term incentive compensation
2,506
2,942
Asset impairment loss
2,266
Noncash directors' compensation
767
766
Amortization of debt issuance costs
153
288
Amortization of restricted stock awards
446
Changes in operating assets and liabilities:
Increase in accounts receivable
(16,613)
(6,057)
Increase in inventories
(631)
(362)
Increase in prepaid expenses
(2,301)
(113)
Decrease in accounts payable and other current liabilities
(4,175)
(14,909)
Change in current income taxes
(2,249)
10,136
Increase in other assets
(4,653)
(5,667)
Increase in other liabilities
5,833
4,889
Other sources
837
186
Net cash provided by operating activities
108,907
121,036
Cash Flows from Investing Activities
Capital expenditures
(28,312)
(23,872)
Business combinations
(1,875)
Other (uses)/sources
(137)
533
Net cash used by investing activities
(28,449)
(25,214)
Cash Flows from Financing Activities
Payments on revolving line of credit
(227,000)
(281,150)
Proceeds from revolving line of credit
222,800
358,350
Purchases of treasury stock
(71,926)
(84,304)
Proceeds from exercise of stock options
16,517
20,209
Capital stock surrendered to pay taxes on stock-based compensation
(14,884)
(21,022)
Dividends paid
(9,567)
(9,016)
Change in cash overdrafts payable
1,710
(711)
Payments on other long-term debt
(75,000)
Debt issuance costs
(968)
Other sources/(uses)
384
(663)
Net cash used by financing activities
(81,966)
(94,275)
Increase in Cash and Cash Equivalents
(1,508)
1,547
Cash and cash equivalents at beginning of year
11,121
Cash and cash equivalents at end of period
12,668
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UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Deferred
Compensation
Treasury
Payable in
Capital
Paid-in
Retained
Stock-
Company
Stock
Earnings
at Cost
Total
Balance at March 31, 2019
35,521
803,701
1,265,485
(1,519,077)
2,380
588,010
Dividends paid ($0.30 per share)
(4,768)
Stock awards and exercise of stock options
70
13,337
(6,350)
7,057
(22,676)
Other
217
(35)
35
Balance at June 30, 2019
Balance at March 31, 2018
34,885
712,991
1,078,690
(1,321,843)
2,236
506,959
Dividends paid ($0.28 per share)
(4,483)
256
31,660
(29,481)
2,435
(3,179)
(423)
111
(312)
Balance at June 30, 2018
35,141
744,228
1,129,289
(1,354,538)
2,271
556,391
Balance at December 31, 2018
Dividends paid ($0.60 per share)
280
42,489
(29,845)
12,924
408
(71)
71
Balance at December 31, 2017
34,732
695,797
1,038,955
(1,231,332)
2,202
540,354
Dividends paid ($0.56 per share)
409
49,070
(38,833)
(639)
(617)
(69)
69
(1,256)
The Notes to Consolidated Financial Statements are integral parts of these statements.
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1. Basis of Presentation
As used herein, the terms "We," "Company" and "Chemed" refer to Chemed Corporation or Chemed Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited consolidated financial statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X. Consequently, we have omitted certain disclosures required under generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. The December 31, 2018 balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. However, in our opinion, the financial statements presented herein contain all adjustments, consisting only of normal recurring adjustments, necessary to state fairly our financial position, results of operations and cash flows. These financial statements are prepared on the same basis as and should be read in conjunction with the audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.
LEASE ACCOUNTING
In February 2016, the FASB issued Accounting Standards Update “ASU No. 2016-02 Leases” which introduced a lessee model that brings most leases onto the balance sheets and updates lessor accounting to align with changes in the lessee model and the revenue recognition standard. This standard is also referred to as Accountings Standards Codification No.842 (“ASC 842”). We adopted ASC 842 effective January 1, 2019, using the optional transition method requiring leases existing at, or entered into after, January 1, 2019 to be recognized and measured. The transition method selected does not require adjustments to prior period amounts, which continue to be reflected in accordance with historical accounting. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which among other things, allowed us to carry forward the historical lease classification.
Chemed and each of its operating subsidiaries are service companies. As such, real estate leases comprise the largest lease obligation (and conversely, right of use asset) in our lease portfolio. VITAS has leased office space, as well as space for inpatient units (“IPUs”) and/or contract beds within hospitals. Roto-Rooter mainly has leased office space.
Roto-Rooter purchases equipment and leases it to certain of its independent contractors. We analyzed these leases in accordance with ASC 842 and determined they are operating leases. As a result, Roto-Rooter will continue to capitalize the equipment underlying these leases, depreciate the equipment and recognize rental income.
Adoption of the new standard resulted in right of use assets and lease liabilities of $87.8 million and $98.7 million, respectively, as of March 31, 2019. In determining the liability, we used our incremental borrowing rate based on the information available at the time of adoption, since the rate implicit in the leases cannot be readily determined. At January 1, 2019, the weighted average rate was 3.47%. The standard did not materially impact our consolidated net income or cash flows. We did not book a cumulative effect adjustment upon adoption of the standard.
CLOUD COMPUTING
On January 1, 2019, we early adopted ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. We adopted the ASU on a prospective basis.
As of June 30, 2019, we have two cloud computing arrangements that are service contracts. Roto-Rooter is implementing a system to assist in technician dispatch and VITAS is implementing a new human resources system. We have capitalized approximately $2.8 million related to implementation of this project which is included in prepaid assets in the accompanying balance sheets. There has been no amortization expense associated with the asset, as the software has not yet been placed in service. We anticipate amortizing the assets over the original term of the arrangements plus renewal options that are reasonably certain of being exercised.
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NON-EMPLOYEE STOCK COMPENSATION
In June 2018, the FASB issued Accounting Standards Update “ASU No. 2018-07 – Compensation – Stock Compensation”. The ASU expands the scope of current guidance to include all share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. The guidance in the ASU is effective for the Company in all fiscal years beginning after December 15, 2018. Adoption of this standard had no material impact on our consolidated financial statements.
CASH FLOW CLASSIFICATION
In August 2016, the FASB issued Accounting Standards Update “ASU No. 2016-15 – Cash Flow Classification” which amends guidance on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU 2016-15 was to reduce diversity in practice related to eight specific cash flow issues. The guidance in this ASU was effective for fiscal years beginning after December 15, 2017. We adopted this ASU as of January 1, 2018. There was no material effect to our statements of cash flow.
INCOME TAXES
Our effective income tax rate was 21.1% in the second quarter of 2019 compared to 4.7% during the second quarter of 2018. Excess tax benefit on stock options reduced our income tax expenses by $3.2 million and $11.7 million, respectively for the quarters ended June 30, 2019 and 2018.
Our effective income tax rate was 17.1% for the first six months of 2019 compared to 12.2% during the first six months of 2018. Excess tax benefit on stock options reduced our income tax expenses by $9.9 million and $15.5 million, respectively for the first six months ended June 30, 2019 and 2018.
NON-CASH TRANSACTIONS
Included in the accompanying Consolidated Balance Sheets are $1.1 million and $3.2 million of capitalized property and equipment which were not paid for as of June 30, 2019 and December 31, 2018, respectively. These amounts have been excluded from capital expenditures in the accompanying Consolidated Statements of Cash Flow. There are no material non-cash amounts included in interest expense for any period presented.
2. Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update “ASU No. 2014-09 – Revenue from Contracts with Customers.” The standard and subsequent amendments are theoretically intended to develop a common revenue standard for removing inconsistencies and weaknesses, improve comparability, provide for more useful information to users through improved disclosure requirements and simplify the preparation of financial statements. The standard is also referred to as Accounting Standards Codification No. 606 (“ASC 606”). We adopted ASC 606 effective January 1, 2018. The required disclosures of ASC 606 and impact of adoption are discussed below for each of our operating subsidiaries.
VITAS
Service revenue for VITAS is reported at the amount that reflects the ultimate consideration we expect to receive in exchange for providing patient care. These amounts are due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), and include variable consideration for revenue adjustments due to settlements of audits and reviews, as well as certain hospice-specific revenue capitations. Amounts are generally billed monthly or subsequent to patient discharge. Subsequent changes in the transaction price initially recognized are not significant.
Hospice services are provided on a daily basis and the type of service provided is determined based on a physician’s determination of each patient’s specific needs on that given day. Reimbursement rates for hospice services are on a per diem basis regardless of the type of service provided or the payor. Reimbursement rates from government programs are established by the appropriate governmental agency and are standard across all hospice providers. Reimbursement rates from health insurers are negotiated with each payor and generally structured to closely mirror the Medicare reimbursement model. The types of hospice services provided and associated reimbursement model for each are as follows:
Routine Home Care occurs when a patient receives hospice care in their home, including a nursing home setting. The routine home care rate is paid for each day that a patient is in a hospice program and is not receiving one of the other categories of hospice care. For Medicare patients, the routine home care rate reflects a two-tiered rate, with a higher rate for the first 60 days of a hospice patient’s care and a lower rate
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for days 61 and after. In addition, there is a Service Intensity Add-on payment which covers direct home care visits conducted by a registered nurse or social worker in the last seven days of a hospice patient’s life, reimbursed up to 4 hours per day in 15 minute increments at the continuous home care rate.
General Inpatient Care occurs when a patient requires services in a controlled setting for a short period of time for pain control or symptom management which cannot be managed in other settings. General inpatient care services must be provided in a Medicare or Medicaid certified hospital or long-term care facility or at a freestanding inpatient hospice facility with the required registered nurse staffing.
Continuous Home Care is provided to patients while at home, including a nursing home setting, during periods of crisis when intensive monitoring and care, primarily nursing care, is required in order to achieve palliation or management of acute medical symptoms. Continuous home care requires a minimum of 8 hours of care within a 24-hour day, which begins at midnight. The care must be predominantly nursing care provided by either a registered nurse or licensed nurse practitioner. While the published Medicare continuous home care rates are daily rates, Medicare pays for continuous home care in 15 minute increments. This 15 minute rate is calculated by dividing the daily rate by 96.
Respite Care permits a hospice patient to receive services on an inpatient basis for a short period of time in order to provide relief for the patient’s family or other caregivers from the demands of caring for the patient. A hospice can receive payment for respite care for a given patient for up to five consecutive days at a time, after which respite care is reimbursed at the routine home care rate.
Each level of care represents a separate promise under the contract of care and is provided independently for each patient contingent upon the patient’s specific medical needs as determined by a physician. However, the clinical criteria used to determine a patient’s level of care is consistent across all patients, given that, each patient is subject to the same payor rules and regulations. As a result, we have concluded that each level of care is capable of being distinct and is distinct in the context of the contract. Furthermore, we have determined that each level of care represents a stand ready service provided as a series of either days or hours of patient care. We believe that the performance obligations for each level of care meet criteria to be satisfied over time. VITAS recognizes revenue based on the service output. VITAS believes this to be the most faithful depiction of the transfer of control of services as the patient simultaneously receives and consumes the benefits provided by our performance. Revenue is recognized on a daily or hourly basis for each patient in accordance with the reimbursement model for each type of service. VITAS’ performance obligations relate to contracts with an expected duration of less than one year. Therefore, VITAS has elected to apply the optional exception provided in ASC 606 and is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially satisfied performance obligations referred to above relate to bereavement services provided to patients’ families for at least 12 months after discharge.
Care is provided to patients regardless of their ability to pay. Patients who meet our criteria for charity care are provided care without charge. There is no revenue or associated accounts receivable in the accompanying consolidated financial statements related to charity care. The cost of providing charity care during the quarters ended June 30, 2019 and 2018 was $2.2 million and $2.1 million, respectively. The cost of providing charity care during the first six months ended June 30, 2019 and 2018 was $4.3 million and $4.2 million, respectively. The cost of charity care is included in cost of services provided and goods sold and is calculated by taking the ratio of charity care days to total days of care and multiplying by the total cost of care.
Generally, patients who are covered by third-party payors are responsible for related deductibles and coinsurance which vary in amount. VITAS also provides service to patients without a reimbursement source and may offer those patients discounts from standard charges. VITAS estimates the transaction price for patients with deductibles and coinsurance, along with those uninsured patients, based on historical experience and current conditions. The estimate of any contractual adjustments, discounts or implicit price concessions reduces the amount of revenue initially recognized. Subsequent changes to the estimate of the transaction price are recorded as adjustments to patient service revenue in the period of change. Subsequent changes that are determined to be the result of an adverse change in the patients’ ability to pay (i.e. change in credit risk) are recorded as bad debt expense. VITAS has no material adjustments related to subsequent changes in the estimate of the transaction price or subsequent changes as the result of an adverse change in the patient’s ability to pay for any period reported.
Laws and regulations concerning government programs, including Medicare and Medicaid, are complex and subject to varying interpretation. Compliance with such laws and regulations may be subject to future government review and interpretation. Additionally, the contracts we have with commercial health insurance payors provide for retroactive audit and review of claims. Settlement with third party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient
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care. The variable consideration is estimated based on the terms of the payment agreement, existing correspondence from the payor and our historical settlement activity. These estimates are adjusted in future periods, as new information becomes available.
We are subject to certain limitations on Medicare payments for services which are considered variable consideration, as follows:
Inpatient Cap. If the number of inpatient care days any hospice program provides to Medicare beneficiaries exceeds 20% of the total days of hospice care such program provided to all Medicare patients for an annual period beginning September 28, the days in excess of the 20% figure may be reimbursed only at the routine homecare rate. None of VITAS’ hospice programs exceeded the payment limits on inpatient services during the three and six months ended June 30, 2019 and 2018.
Medicare Cap. We are also subject to a Medicare annual per-beneficiary cap (“Medicare cap”). Compliance with the Medicare cap is measured in one of two ways based on a provider election. The “streamlined” method compares total Medicare payments received under a Medicare provider number with respect to services provided to all Medicare hospice care beneficiaries in the program or programs covered by that Medicare provider number with the product of the per-beneficiary cap amount and the number of Medicare beneficiaries electing hospice care for the first time from that hospice program or programs from September 28 through September 27 of the following year. At June 30, 2019, all our programs except one are using the “streamlined” method.
The “proportional” method compares the total Medicare payments received under a Medicare provider number with respect to services provided to all Medicare hospice care beneficiaries in the program or programs covered by the Medicare provider number between September 28 and September 27 of the following year with the product of the per beneficiary cap amount and a pro-rated number of Medicare beneficiaries receiving hospice services from that program during the same period. The pro-rated number of Medicare beneficiaries is calculated based on the ratio of days the beneficiary received hospice services during the measurement period to the total number of days the beneficiary received hospice services.
We actively monitor each of our hospice programs, by provider number, as to their specific admission, discharge rate and median length of stay data in an attempt to determine whether revenues are likely to exceed the annual per-beneficiary Medicare cap. Should we determine that revenues for a program are likely to exceed the Medicare cap based on projected trends, we attempt to institute corrective actions, which include changes to the patient mix and increased patient admissions. However, should we project our corrective action will not prevent that program from exceeding its Medicare cap, we estimate revenue recognized during the government fiscal year that will require repayment to the Federal government under the Medicare cap and record an adjustment to revenue of an amount equal to a ratable portion of our best estimate for the year.
In 2013, the U.S. government implemented automatic budget reductions of 2.0% for all government payees, including hospice benefits paid under the Medicare program. In 2015, CMS determined that the Medicare cap should be calculated “as if” sequestration did not occur. As a result of this decision, VITAS has received notification from our third-party intermediary that an additional $5.8 million is owed for Medicare cap in three programs arising during the 2013 through 2017 measurement periods. The amounts are automatically deducted from our semi-monthly PIP payments. We do not believe that CMS is authorized under the sequestration authority or the statutory methodology for establishing the Medicare cap to the amounts they have withheld and intend to withhold under their current “as if” methodology. We have appealed CMS’s methodology change.
During the quarter ended June 30, 2019, we recorded $2.4 million in net Medicare cap revenue reduction related to three programs for the 2019 government fiscal year. Additionally, we recorded $847,000 related to adjustments of prior year cap liabilities. During the quarter ended June 30, 2018, we recorded $355,000 in net Medicare cap revenue reduction related to one program for the 2018 government fiscal year. Additionally, we recorded $181,000 related to adjustments of prior year cap liabilities.
During the first six months ended June 30, 2019, we recorded $5.8 million in net Medicare cap revenue reduction related to four programs for the 2019 government fiscal year. Additionally, we recorded $847,000 related to adjustments of prior year cap liabilities. During the six months ended June 30, 2018, we reversed $1.5 million of the $2.4 million Medicare cap revenue reduction recognized in the fourth quarter of 2017 due to improved metrics in two VITAS programs offset by $181,000 related to adjustments of prior year cap liabilities.
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For VITAS’ patients in the nursing home setting in which Medicaid pays the nursing home room and board, VITAS serves as a pass-through between Medicaid and the nursing home. We are responsible for paying the nursing home for that patient’s room and board. Medicaid reimburses us for 95% of the amount we have paid. This results in a 5% net expense for VITAS related to nursing home room and board. This transaction creates a performance obligation in that VITAS is facilitating room and board being delivered to our patient. As a result, the 5% net expense is recognized as a contra-revenue account under ASC 606 in the accompanying financial statements.
The composition of patient care service revenue by payor and level of care for the quarter ended June 30, 2019 is as follows (in thousands):
Medicare
Medicaid
Commercial
Routine home care
248,545
11,907
6,009
266,461
Continuous care
27,975
1,408
1,403
30,786
Inpatient care
19,282
2,117
1,495
22,894
295,802
15,432
8,907
320,141
All other revenue - self-pay, respite care, etc.
2,237
Subtotal
322,378
Medicare cap adjustment
(3,198)
Implicit price concessions
(3,720)
Room and board, net
(2,710)
Net revenue
312,750
The composition of patient care service revenue by payor and level of care for the quarter ended June 30, 2018 is as follows (in thousands):
232,637
12,019
5,725
250,381
27,581
1,428
1,504
30,513
17,029
1,853
1,195
20,077
277,247
15,300
8,424
300,971
1,998
302,969
(536)
(2,959)
(2,675)
296,799
The composition of patient care service revenue by payor and level of care for the six months ended June 30, 2019 is as follows (in thousands):
489,978
23,581
11,753
525,312
56,949
3,195
2,886
63,030
38,271
4,265
2,928
45,464
585,198
31,041
17,567
633,806
4,242
638,048
(6,598)
(6,667)
(5,252)
619,531
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The composition of patient care service revenue by payor and level of care for the six months ended June 30, 2018 is as follows (in thousands):
456,658
23,299
11,455
491,412
55,213
3,031
3,035
61,279
35,887
3,901
2,398
42,186
547,758
30,231
16,888
594,877
3,740
598,617
1,282
(5,792)
(5,294)
588,813
Roto-Rooter
Roto-Rooter provides plumbing, drain cleaning, water restoration and other related services to both residential and commercial customers primarily in the United States. Services are provided through a network of company-owned branches, independent contractors and franchisees. Service revenue for Roto-Rooter is reported at the amount that reflects the ultimate consideration we expect to receive in exchange for providing services.
Roto-Rooter owns and operates branches focusing mainly on large population centers in the United States. Roto-Rooter’s primary lines of business in company-owned branches consist of plumbing, sewer and drain cleaning, excavation and water restoration. For purposes of ASC 606 analysis, plumbing, sewer and drain cleaning, and excavation have been combined into one portfolio and are referred to as “short-term core services”. Water restoration is analyzed as a separate portfolio. The following describes the key characteristics of these portfolios:
Short-term Core Services are plumbing, drain and sewer cleaning and excavation services. These services are provided to both commercial and residential customers. The duration of services provided in this category range from a few hours to a few days. There are no significant warranty costs or on-going obligations to the customer once a service has been completed. For residential customers, payment is received at the time of job completion before the Roto-Rooter technician leaves the residence. Commercial customers may be granted credit subject to internally designated authority limits and credit check guidelines. If credit is granted, payment terms are generally 30 days or less.
Each job in this category is a distinct service with a distinct performance obligation to the customer. Revenue is recognized at the completion of each job. Variable consideration consists of pre-invoice discounts and post-invoice discounts. Pre-invoice discounts are given in the form of coupons or price concessions. Post-invoice discounts consist of credit memos generally granted to resolve customer service issues. Variable consideration is estimated based on historical activity and recorded at the time service is completed.
Water Restoration Services involve the remediation of water and humidity after a flood. These services are provided to both commercial and residential customers. The duration of services provided in this category generally ranges from 3 to 5 days. There are no significant warranties or on-going obligations to the customer once service has been completed. The majority of these services are paid by the customer’s insurance company. Variable consideration relates primarily to allowances taken by insurance companies upon payment. Variable consideration is estimated based on historical activity and recorded at the time service is completed.
For both short-term core services and water restoration services, Roto-Rooter satisfies its performance obligation at a point in time. The services provided generally involve fixing plumbing, drainage or flood-related issues at the customer’s property. At the time service is complete, the customer acknowledges its obligation to pay for service and its satisfaction with the service performed. This provides evidence that the customer has accepted the service and Roto-Rooter is now entitled to payment. As such, Roto-Rooter recognizes revenue for these services upon completion of the job and receipt of customer acknowledgement. Roto-Rooter’s performance obligations for short-term core services and water restoration services relate to contracts with an expected duration of less than a year. Therefore, Roto-Rooter has elected to apply the optional exception provided in ASC 606 and is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. Roto-Rooter does not have significant
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unsatisfied or partially unsatisfied performance obligations at the time of initial revenue recognition for short-term core or water restoration services.
Roto-Rooter owns the rights to certain territories and contracts with independent third-parties to operate the territory under Roto-Rooter’s registered trademarks. Such contracts are for a specified term but cancellable by either party without penalty with 90 days’ advance notice. Under the terms of these arrangements, Roto-Rooter provides certain back office support and advertising along with a limited license to use Roto-Rooter’s registered trademarks. The independent contractor is responsible for all day-to-day management of the business including staffing decisions and pricing of services provided. All performance obligations of Roto-Rooter cease at the termination of the arrangement.
Independent contractors pay Roto-Rooter a standard fee calculated as a percentage of their weekly labor sales. The primary value for the independent contractors under these arrangements is the right to use Roto-Rooter’s registered trademarks. Roto-Rooter recognizes revenue from independent contractors over-time (weekly) as the independent contractor’s labor sales are completed. Payment from independent contractors is also received on a weekly basis. The use of Roto-Rooter’s registered trademarks and advertising provides immediate value to the independent contractor as a result of Roto-Rooter’s nationally recognized brand. Therefore, over-time recognition provides the most faithful depiction of the transfer of services as the customer simultaneously receives and consumes the benefits provided. There is no significant variable consideration related to these arrangements.
Roto-Rooter has licensed the rights to operate under Roto-Rooter’s registered trademarks in other territories to franchisees. Each such contract is for a 10 year term but cancellable by Roto-Rooter for cause with 60 day advance notice without penalty. The franchisee may cancel the contract for any reason with 60 days advance notice without penalty. Under the terms of the contract, Roto-Rooter provides national advertising and consultation on various aspects of operating a Roto-Rooter business along with the right to use Roto-Rooter’s registered trademarks. The franchisee is responsible for all day- to-day management of the business including staffing decisions, pricing of services provided and local advertising spend and placement. All performance obligations of Roto-Rooter cease at the termination of the arrangement.
Franchisees pay Roto-Rooter a standard monthly fee based on the population within the franchise territory. The standard fee is revised on a yearly basis based on changes in the Consumer Price Index for All Urban Consumers. The primary value for the franchisees under this arrangement is the right to use Roto-Rooter’s registered trademarks. Roto-Rooter recognizes revenue from franchisees over-time (monthly). Payment from franchisees is also received on a monthly basis. The use of Roto-Rooter’s registered trademarks and advertising provides immediate value to the franchisees as a result of Roto-Rooter’s nationally recognized brand. Therefore, over-time recognition provides the most faithful depiction of the transfer of services as the customer simultaneously receives and consumes the benefits provided. There is no significant variable consideration related to these arrangements.
The composition of disaggregated revenue for the second quarter is as follows (in thousands):
June 30,
Short-term core service jobs
115,143
105,086
Water restoration
28,239
24,765
Contractor revenue
14,580
12,366
Franchise fees
1,623
1,574
All other
2,974
2,835
162,559
146,626
Implicit price concessions and credit memos
(1,725)
(1,612)
160,834
145,014
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The composition of disaggregated revenue for the first six months is as follows (in thousands):
226,202
209,172
55,891
52,502
28,589
24,731
3,245
3,165
5,981
6,155
319,908
295,725
(3,821)
(3,549)
316,087
292,176
Initial Adoption of ASC 606
The Company utilized the modified retrospective method of adoption for all contracts. The Company has consistently applied the accounting policies to all periods presented in the consolidated financial statements. Sales tax collected from customers at Roto-Rooter is excluded from revenue under ASC 606 and prior revenue standards.
3. Segments
Service revenues and sales by business segment are shown in Footnote 2. After-tax earnings by business segment are as follows (in thousands):
Three months ended June 30,
Six months ended June 30,
After-tax Income/(Loss)
37,339
31,785
66,626
63,800
27,175
25,298
50,162
48,236
64,514
57,083
116,788
112,036
Corporate
(13,785)
(2,112)
(21,392)
(12,069)
We report corporate administrative expenses and unallocated investing and financing income and expense not directly related to either segment as “Corporate”.
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4. Earnings per Share
Earnings per share (“EPS”) are computed using the weighted average number of shares of capital stock outstanding. Earnings and diluted earnings per share are computed as follows (in thousands, except per share data):
Net Income
For the Three Months Ended June 30,
Income
Shares
Earnings per Share
Dilutive stock options
449
Nonvested stock awards
72
Diluted earnings
674
102
For the Six Months Ended June 30,
474
74
683
104
For the three and six month periods ended June 30, 2019, there were 246,000 stock options excluded in the computation of dilutive earnings per share because they would have been anti-dilutive.
For the three and six month periods ended June 30, 2018, there were no stock options excluded in the computation of dilutive earnings per share because they would have been anti-dilutive.
5. Long-Term Debt and Lines of Credit
On June 20, 2018, we replaced our existing credit agreement with the Fourth Amended and Restated Credit Agreement (“2018 Credit Agreement”). Terms of the 2018 Credit Agreement consist of a five year, $450 million revolving credit facility and a $150 million expansion feature, which may consist of term loans or additional revolving commitments. The interest rate at the inception of the agreement is LIBOR plus 100 basis points. The 2018 Credit Agreement has a floating interest rate that is generally LIBOR plus a tiered additional rate which varies based on our current leverage ratio. The amount outstanding as of June 30, 2019 is $85.0 million.
Debt issuance costs associated with the prior credit agreement were not written off as the lenders and their relative percentages participation in the facility did not change. With respect to the 2018 Credit Agreement, deferred financing costs were $1.0 million.
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The 2018 Credit Agreement contains the following quarterly financial covenants:
Description
Requirement
Leverage Ratio (Consolidated Indebtedness/Consolidated Adj. EBITDA)
< 3.50 to 1.00
Fixed Charge Coverage Ratio (Consolidated Free Cash Flow/Consolidated Fixed Charges)
> 1.50 to 1.00
We are in compliance with all debt covenants as of June 30, 2019. We have issued $38.0 million in standby letters of credit as of June 30, 2019, mainly for insurance purposes. Issued letters of credit reduce our available credit under the 2018 Credit Agreement. As of June 30, 2019, we have approximately $327.0 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility.
6. Other Operating Expenses/(Income)
(204)
Transportation equipment held for sale
Loss on disposal of fixed assets
304
86
657
Total other operating expenses/(income)
During the three months ended June 30, 2019, the Company recorded $2.3 million for the impairment of transportation equipment that is being held for sale. See footnote 18.
During the six months ended June 30, 2019, the Company recorded $6.0 million for a potential legal settlement, which includes the settlement amount, estimated employment taxes and other litigation costs. See footnote 11 for further discussion.
7. Other Income – Net
Other income – net comprises the following (in thousands):
Market value adjustment on assets held in
deferred compensation trust
(130)
779
2,207
1,638
Interest income
112
259
214
417
Other - net
31
1
Total other income - net
8. Leases
Chemed and each of its operating subsidiaries are service companies. As such, real estate leases comprise the largest lease obligation (and conversely, right of use asset) in our lease portfolio. VITAS has leased office space, as well as space for IPUs and/or contract beds within hospitals. Roto-Rooter has leased office space. Our leases have remaining terms of under 1 year to 10 years, some of which include options to extend the lease for up to 5 years, and some of which include options to terminate the lease within 1 year.
We made a policy election to exclude leases with a lease term less than 12 months from being recorded on the balance sheet. We adopted the practical expedient related to the combining of lease and non-lease components, which allows us to account for the lease and non-lease components as a single lease component.
Adoption of the new standard resulted in right of use assets and lease liabilities of approximately $87.8 million and $98.7 million, respectively, as of March 31, 2019. In determining the liability, we used our incremental borrowing rate based
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on the information available at the time of adoption, since the rate implicit in the leases cannot be readily determined. At January 1, 2019, the weighted average rate was 3.47%. The standard did not materially impact our consolidated net income or cash flows. We did not book a cumulative effect adjustment upon adoption of the standard.
We do not currently have any finance leases, all lease information disclosed is related to operating leases.
The components of balance sheet information related to leases were as follows:
Six months endedJune 30,
Assets
Operating lease assets
Liabilities
Current operating leases
Noncurrent operating leases
Total operating lease liabilities
101,593
The components of lease expense were as follows:
Three months endedJune 30,
Lease Expense (a)
Operating lease expense
11,573
23,098
Sublease income
(6)
Net lease expense
23,092
(a)Includes short-term leases and variable lease costs, which are immaterial. Included in both cost of services provided and goods sold and selling, general and administrative expenses.
The components of cash flow information related to leases were as follows:
Three months ended
Six months ended
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from leases
10,214
20,201
Leased assets obtained in exchange for new operating lease liabilities
12,731
15,944
Weighted Average Remaining Lease Term
Operating leases
4.34
years
Weighted Average Discount Rate
3.46
%
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Maturity of Operating Lease Liabilities (in thousands)
34,669
2020
25,465
2021
18,796
2022
12,074
2023
7,656
Thereafter
12,327
Total lease payments
110,987
Less: interest
(8,143)
Less: future lease obligations not yet commenced
(1,251)
Total liability recognized on the balance sheet
The following is a summary of future minimum rental payments under operating leases that have initial noncancelable terms in excess of one year at December 31, 2018:
26,791
24,152
19,669
13,851
8,179
10,974
103,616
For leases commencing prior to 2019, minimum rental payments exclude payments to landlords for real estate taxes and common area maintenance. Operating lease payments include $2.3 million related to extended lease terms that are reasonably certain of being exercised and exclude $1.3 million lease payments for leases signed but not yet commenced.
9. Stock-Based Compensation Plans
On February 22, 2019, the Compensation/Incentive Committee of the Board of Directors (“CIC”) granted 6,864 Performance Stock Units (“PSUs”) contingent upon the achievement of certain total shareholder return (“TSR”) targets as compared to the TSR of a group of peer companies for the three year period ending December 31, 2021, the date at which such awards vest. The cumulative compensation cost of the TSR-based PSU award to be recorded over the three year service period is $3.0 million.
On February 22, 2019, the CIC also granted 6,864 PSUs contingent upon the achievement of certain earnings per share (“EPS”) targets for the three year period ending December 31, 2021. At the end of each reporting period, the Company estimates the number of shares that it believes will ultimately be earned and records the corresponding expense over the service period of the award. We currently estimate the cumulative compensation cost of the EPS-based PSUs to be recorded over the three year service period is $2.2 million.
10. Retirement Plans
All of the Company’s plans that provide retirement and similar benefits are defined contribution plans. These expenses include the impact of market gains and losses on assets held in deferred compensation plans and are recorded in selling, general and administrative expenses. Expenses for the Company’s retirement and profit-sharing plans, excess benefit plans and other similar plans are as follows (in thousands):
3,796
4,807
10,710
9,974
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11. Legal and Regulatory Matters
The VITAS segment of the Company’s business operates in a heavily-regulated industry. As a result, the Company is subjected to inquiries and investigations by various government agencies, as well as to lawsuits, including qui tam actions. The following sections describe the various ongoing material lawsuits and investigations of which the Company is currently aware. It is not possible at this time for us to estimate either the timing or outcome of any of those matters, or whether any potential loss, or range of potential losses, is probable or reasonably estimable.
Regulatory Matters and Litigation
On October 30, 2017, the Company entered into a settlement agreement (the “Settlement Agreement”) to resolve civil litigation under the False Claims Act brought by the United States Department of Justice (“DOJ”) on behalf of the OIG and various relators concerning VITAS, filed in the U.S. District Court of the Western District of Missouri (the “2013 Action”). The Company denied any violation of law and agreed to settlement without admission of wrongdoing.
In connection with the settlement VITAS and certain of its subsidiaries entered into a corporate integrity agreement (“CIA”) on October 30, 2017. The CIA formalizes various aspects of VITAS’ already existing Compliance Program and contains requirements designed to document compliance with federal healthcare program requirements. It has a term of five years during which it imposes monitoring, reporting, certification, oversight, screening and training obligations, certain of which had previously been implemented by VITAS. It also requires VITAS to engage an Independent Review Organization to perform audit and review functions and to prepare reports regarding compliance with federal healthcare programs. In the event of breach of the CIA, VITAS could become liable for payment of stipulated penalties or could be excluded from participation in federal healthcare programs.
Jordan Seper (“Seper”), a Registered Nurse at VITAS’ Inland Empire program from May 12, 2014 to March 21, 2015, filed a lawsuit in San Francisco Superior Court on September 26, 2016. She alleged VITAS Healthcare Corp of CA (“VITAS CA”) (1) failed to provide minimum wage for all hours worked; (2) failed to provide overtime for all hours worked; (3) failed to provide a second meal period; (4) failed to provide rest breaks; (5) failed to indemnify for necessary expenditures; (6) failed to timely pay wages due at time of separation; and (7) engaged in unfair business practices. Seper sought a state-wide class action of current and former non-exempt employees employed with VITAS in California within the four years preceding the filing of the lawsuit. She sought court determination that this action may be maintained as a class action for the entire California class and subclasses, designation as class representative, declaratory relief, injunctive relief, damages (including wages for regular or overtime hours allegedly worked but not paid, premium payments for missed meal or rest periods, and unreimbursed expenses), all applicable penalties associated with each claim, pre and post-judgment interest, and attorneys’ fees and costs. Seper served VITAS CA with the lawsuit, Jordan A. Seper on behalf of herself and others similarly situated v. VITAS Healthcare Corporation of California, a Delaware corporation; VITAS Healthcare Corp of CA, a business entity unknown; and DOES 1 to 100, inclusive; Los Angeles Superior Court Case Number BC 642857 on October 13, 2016 (“Jordan Seper case”).
The Los Angeles Superior Court Complex Division accepted transfer of the case on December 6, 2016 and stayed the case. On December 16, 2016, VITAS CA filed its Answer and served written discovery on Seper.
Jiwann Chhina (“Chhina”), hired by VITAS as a Home Health Aide on February 5, 2002, is currently a Licensed Vocational Nurse for VITAS’ San Diego program. On September 27, 2016, Chhina filed a lawsuit in San Diego Superior Court, alleging (1) failure to pay minimum wage for all hours worked; (2) failure to provide overtime for all hours worked; (3) failure to pay wages for all hours at the regular rate; (4) failure to provide meal periods; (5) failure to provide rest breaks; (6) failure to provide complete and accurate wage statements; (7) failure to pay for all reimbursement expenses; (8) unfair business practices; and (9) violation of the California Private Attorneys General Act. Chhina sought to pursue these claims in the form of a state-wide class action of current and former non-exempt employees employed with VITAS in California within the four years preceding the filing of the lawsuit. He sought court determination that this action may be maintained as a class action for the entire California class and subclasses, designation as class representative, declaratory relief, injunctive relief, damages (including wages for regular or overtime hours allegedly worked but not paid, premium payments for missed meal or rest period, and unreimbursed expenses), all applicable penalties associated with each claim, pre-judgment interest, and attorneys’ fees and costs. Chhina served VITAS CA with the lawsuit, Jiwan Chhina v. VITAS Health Services of California, Inc., a California corporation; VITAS Healthcare Corporation of California, a Delaware corporation; VITAS Healthcare Corporation of California, a Delaware corporation dba VITAS Healthcare Inc.; and DOES 1 to 100, inclusive; San Diego Superior Court Case Number 37-2015-00033978-CU-OE-CTL on November 3, 2016 (“Jiwann Chhina case”). On December 1, 2016, VITAS CA filed its Answer and served written discovery on Chhina.
On May 19, 2017, Chere Phillips (a Home Health Aide in Sacramento) and Lady Moore (a former Social Worker in Sacramento) filed a lawsuit against VITAS CA in Sacramento County Superior Court, alleging claims for (1) failure to pay all
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wages due; (2) failure to authorize and permit rest periods; (3) failure to provide off-duty meal periods; (4) failure to furnish accurate wage statements; (5) unreimbursed business expenses; (6) waiting time penalties; (7) violations of unfair competition law; and (8) violation of the Private Attorneys General Act. The case is captioned: Chere Phillips and Lady Moore v. VITAS Healthcare Corporation of California, Sacramento County Superior Court, Case No. 34-2017-0021-2755. Plaintiffs sought to pursue these claims in the form of a state-wide class action of current and former non-exempt employees employed with VITAS CA in California within the four years preceding the filing of the lawsuit. Plaintiffs served VITAS with the lawsuit on June 5, 2017. VITAS CA timely answered the Complaint generally denying the Plaintiffs’ allegations. The Court has stayed all class discovery in this case pending resolution of the Jordan Seper and Jiwann Chhina cases.
There are currently three other lawsuits against VITAS pending in the superior courts of other California counties that contain claims and class periods that substantially overlap with Phillips’ and Moore’s claims: the Jordan Seper and Jiwann Chhina cases, and Williams v. VITAS Healthcare Corporation of California, filed on May 22, 2017 in Alameda County Superior Court, RG 17853886.
Jazzina Williams’ (a Home Health Aide in Sacramento) lawsuit alleges claims for (1) failure to pay all wages due; (2) failure to authorize and permit rest periods; (3) failure to provide off-duty meal periods; (4) failure to furnish accurate wage statements; (5) unreimbursed business expenses; (6) waiting time penalties; and (7) violations of the Private Attorneys General Act (“PAGA”). Williams seeks to pursue these claims both individually and as a representative action under the PAGA on behalf of current and former California non-exempt employees. Plaintiff served VITAS with the lawsuit on May 31, 2017. VITAS CA timely answered the Complaint generally denying Plaintiff’s allegations. Williams is pursing discovery of her individual claim and has agreed to a stay of class discovery pending possible resolution through ongoing mediation in the Jordan Seper and Jiwann Chhina cases. Defendant filed and served each of Plaintiffs Williams, Phillips, and Moore with a Notice of Related Cases on July 19, 2017.
The Seper and Chhina cases were consolidated in Los Angeles County Superior Court; Chhina was dismissed as a separate action and joined with Seper in the filing of amended complaint on August 28, 2018, in which both Chhina and Seper were identified as named plaintiffs. The parties engaged in a mediation process beginning in October 2018 and concluded with an agreement in March 2019. The agreement has been incorporated into a long-form agreement to be presented to the court for preliminary approval, notice to class members, and eventual final approval and payment. The settlement amount, subject to court approval is $5.75 million plus employment taxes. The definition of the class to participate in the settlement is intended to cover claims raised in the consolidated Seper/Chhina matter, claims raised in Phillips and Moore, as well as any class claims in Williams.
Alfred Lax (“Lax”), a current employee of Roto-Rooter Services Company (“RRSC”), was hired in the RRSC’s Menlo Park branch in 2007. On November 30, 2018, Lax filed a class action lawsuit in Santa Clara County Superior Court alleging (1) failure to provide or compensate for required rest breaks; (2) failure to properly pay for all hours worked; (3) failure to provide accurate wage statements; (4) failure to reimburse for work-related expenses; and (5) unfair business practices. Lax has stated these claims as a representative of a class defined as all service technicians employed by RRSC in California during the four years preceding the filing of the complaint. He seeks a determination that the action may proceed and be maintained as a class action and for compensatory and statutory damages (premium payments for missed rest periods, uncompensated rest periods, wages for time allegedly not paid such as travel time, repair time, and vehicle maintenance time, and unreimbursed expenses), penalties and restitutions, pre- and post-judgement interest and attorneys’ fees and costs. The lawsuit, Alfred Lax, on behalf of himself and all others similarly situated v. Roto-Rooter Services Company, and Does 1 through 50 inclusive; Santa Clara County Superior Court Case Number 18CV338652, was received by RRSC on December 11, 2018 and RRSC timely filed its answer denying the claims.
The Company is not able to reasonably estimate the probability of loss or range of loss for any of these lawsuits at this time, with the exception of Seper/Chhina, Phillips and Moore and the class claims in Williams.
The Company intends to defend vigorously against the allegations in each of the above lawsuits. Regardless of the outcome of any of the preceding matters, dealing with the various regulatory agencies and opposing parties can adversely affect us through defense costs, potential payments, diversion of management time, and related publicity. Although the Company intends to defend them vigorously, there can be no assurance that those suits will not have a material adverse effect on the Company.
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12. Concentration of Risk
During the quarter VITAS had pharmacy services agreements with one service provider to provide specified pharmacy services for VITAS and its hospice patients. VITAS made purchases from this provider of $7.0 and $8.5 million for the three months ended June 30, 2019 and 2018, respectively. VITAS made purchases from this provider of $14.3 and $16.8 million for the first six months ended June 30, 2019 and 2018, respectively. Purchases from this provider represent more than 90% of all pharmacy services used by VITAS during each period presented.
13. Cash Overdrafts and Cash Equivalents
There are $15.5 million in cash overdrafts payable included in accounts payable at June 30, 2019 (December 31, 2018 - $13.8 million).
From time to time throughout the year, we invest excess cash in money market funds with major commercial banks. We closely monitor the creditworthiness of the institutions with which we invest our overnight funds. The amount invested was not material for each balance sheet date presented.
14. Financial Instruments
FASB’s authoritative guidance on fair value measurements defines a hierarchy which prioritizes the inputs in fair value measurements. Level 1 measurements are measurements using quoted prices in active markets for identical assets or liabilities. Level 2 measurements use significant other observable inputs. Level 3 measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions. In recording the fair value of assets and liabilities, companies must use the most reliable measurement available.
The following shows the carrying value, fair value and the hierarchy for our financial instruments as of
June 30, 2019 (in thousands):
Fair Value Measure
Carrying Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Mutual fund investments of deferred
compensation plans held in trust
Total debt
The following shows the carrying value, fair value and the hierarchy for our financial instruments as of December 31, 2018 (in thousands):
For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount is a reasonable estimate of fair value because of the liquidity and short-term nature of these instruments. As further described in Footnote 5, our outstanding long-term debt and current portion of long-term debt have floating interest rates that are reset at short-term intervals, generally 30 or 60 days. The interest rate we pay also includes an additional amount based on our current leverage ratio. As such, we believe our borrowings reflect significant nonperformance risks, mainly credit risk. Based on these factors, we believe the fair value of our long-term debt and current portion of long-term debt approximate the carrying value.
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15. Capital Stock Repurchase Plan Transactions
We repurchased the following capital stock for the three and six months ended June 30, 2019 and 2018:
Total cost of repurchased shares (in thousands)
22,676
3,179
71,926
84,304
Shares repurchased
69,009
10,000
219,009
310,000
Weighted average price per share
328.59
317.86
328.41
271.95
In February 2019, the Board of Directors authorized an additional $150.0 million for stock repurchase under Chemed’s existing share repurchase program. We currently have $124.7 million of authorization remaining under this share repurchase plan.
16. Recent Accounting Standards
In January 2017, the FASB issued Accounting Standards Update “ASU No. 2017-4 – Intangibles – Goodwill and Other”. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. The guidance in the ASU is effective for the Company in fiscal years beginning after December 15, 2019. Early adoption is permitted. We anticipate adoption of this standard will have no impact on our consolidated financial statements.
In June 2016, FASB issued Accounting Standards Update “ASU No. 2016-13 - Measurement of Credit Losses on Financial Instruments”. The ASU requires the use of the current expected credit loss model to measure impairments of financial assets. The ASU is effective for the Company for fiscal years beginning after December 15, 2019. Management is currently evaluating the impact of this ASU on the Company’ financial statements.
17. Acquisitions
During the first six months of 2019, we did not complete any business combinations within our Roto-Rooter or VITAS segment.
During 2018, we completed four business combinations of former franchisees within the Roto-Rooter segment for $42.2 million in cash to increase our market penetration. The VITAS segment completed one business combination in Florida for $11.0 million to increase our market penetration.
Shown below is movement in Goodwill (in thousands):
333,331
177,239
Foreign currency adjustments
57
177,296
18. Assets Held for Sale
In the second quarter of 2019, we entered into an agreement to trade-in certain transportation equipment to offset replacement equipment expected to be delivered in 2020. The net book value of the transportation equipment has been reduced to the expected trade in value of $15.8 million resulting in a $2.3 million impairment charge in the second quarter of 2019.
19. Subsequent Events
On July 1, 2019, we completed the acquisition of a Roto-Rooter franchise and the related assets in Oakland, CA for $18.0 million in cash. A substantial portion of the aggregate purchase price will be allocated to goodwill, reacquired franchise rights and other intangibles. The accounting for this acquisition has not yet been finalized.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
We operate through our two wholly-owned subsidiaries, VITAS Healthcare Corporation and Roto-Rooter Group, Inc. VITAS focuses on hospice care that helps make terminally ill patients’ final days as comfortable as possible. Through its teams of doctors, nurses, home health aides, social workers, clergy and volunteers, VITAS provides direct medical services to patients, as well as spiritual and emotional counseling to both patients and their families. Roto-Rooter’s services are focused on providing plumbing, drain cleaning, water restoration and other related services to both residential and commercial customers. Through its network of company-owned branches, independent contractors and franchisees, Roto-Rooter offers plumbing and drain cleaning service to over 90% of the U.S. population.
The following is a summary of the key operating results (in thousands except per share amounts):
Diluted EPS
Adjusted net income
55,215
47,158
103,390
93,009
Adjusted diluted EPS
3.36
2.81
6.27
5.52
Adjusted EBITDA
85,089
73,682
159,888
146,449
Adjusted EBITDA as a % of revenue
18.0
16.7
17.1
16.6
Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and Adjusted EBITDA as a percent of revenue are not measures derived in accordance with US GAAP. We provide non-GAAP measures to help readers evaluate our operating results and to compare our operating performance with that of similar companies that have different capital structures. Our non-GAAP measures should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP. A reconciliation of our non-GAAP measures is presented on pages 37-39.
For the three months ended June 30, 2019, the increase in consolidated service revenues and sales was driven by a 10.9% increase at Roto-Rooter and a 5.4% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all service lines. The increase in service revenues at VITAS is comprised primarily of a 0.5% geographically weighted average Medicare reimbursement rate increase, a 5.9% increase in days of care, offset by $3.2 million in Medicare cap revenue reduction. See page 40 for additional VITAS operating metrics.
For the six months ended June 30, 2019, the increase in consolidated service revenues and sales was driven by an 8.2% increase at Roto-Rooter and a 5.2% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines. The increase in service revenues at VITAS is comprised primarily of a 0.5% geographically weighted average Medicare reimbursement rate increase, a 6.2% increase in days of care, offset by $6.6 million in Medicare cap revenue reduction. The first six months of 2018 included a reversal of prior Medicare cap expense of $1.3 million. See page 40 for additional VITAS operating metrics.
In February 2016, the FASB issued Accounting Standards Update “ASU No. 2016-02 Leases” which introduced a lessee model that brings most leases on to the balance sheets and updates lessor accounting to align with changes in the lessee model and the revenue recognition standard. This standard is also referred to as Accountings Standards Codification No.842 (“ASC 842”). We adopted ASC 842 effective January 1, 2019, using the optional transition method requiring leases existing at, or entered into after, January 1, 2019 to be recognized and measured. The transition method selected does not require adjustments to prior period amounts, which continue to be reflected in accordance with historical accounting. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which among other things, allowed us to carry forward the historical lease classification.
-23-
Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2018 to June 30, 2019 include the following:
A $16.6 million increase in accounts receivable due to timing of receipts.
A $90.8 million increase in lease right of use assets due to the adoption of ASC 842.
A $15.8 million increase in assets held for sale as a result of an agreement to trade-in certain transportation
equipment to offset replacement equipment expected to be delivered in 2020.
A $13.2 decrease in accrued compensation due to the payments of cash bonuses in 2019 accrued in 2018.
A $6.6 million increase in accrued legal primarily due to a $6.0 million litigation settlement at VITAS.
A $31.6 million and $70.0 million increase in short-term and long-term lease liability, respectively, due to
the adoption of ASC 842.
A $101.8 million increase in treasury stock due mainly to stock repurchases.
Net cash provided by operating activities decreased $12.1 million from June 30, 2018 to June 30, 2019. Significant changes in our accounts receivable balances are typically driven by the timing of payments received from the Federal government at our VITAS subsidiary. We typically receive a payment in excess of $40.0 million from the Federal government from hospice services every other Friday. The timing of period end will have a significant impact on the accounts receivable at VITAS. These changes generally normalize over a two year period, as cash flow variations in one year are offset in the following year.
Management continually evaluates cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of available capital resources.
On June 20, 2018, we replaced our existing credit agreement with the Fourth Amended and Restated Credit Agreement (“2018 Credit Agreement”). Terms of the 2018 Credit Agreement consist of a five year, $450 million revolving credit facility and a $150 million expansion feature, which may consist of term loans or additional revolving commitments. The revolving credit facility has a five year maturity with principal payments due at maturity. The interest rate at the inception of the agreement is LIBOR plus 100 basis points. The 2018 Credit Agreement has a floating interest rate that is generally LIBOR plus a tiered additional rate which varies based on our current leverage ratio.
We have issued $38.0 million in standby letters of credit as of June 30, 2019, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of June 30, 2019, we have approximately $327.0 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility. Management believes its liquidity and sources of capital are satisfactory for the Company’s needs in the foreseeable future.
Commitments and Contingencies
Collectively, the terms of our credit agreements require us to meet various financial covenants, to be tested quarterly. We are in compliance with all financial and other debt covenants as of June 30, 2019 and anticipate remaining in compliance throughout the foreseeable future.
The VITAS segment of the Company’s business operates in a heavily-regulated industry. As a result, the Company is subjected to inquiries and investigations by various government agencies, as well as to lawsuits, including qui tam actions. The following sections describe the various ongoing material lawsuits and investigations of which the Company is currently aware. Other than as described below, it is not possible at this time for us to estimate either the timing or outcome of any of those matters, or whether any potential loss, or range of potential losses, is probable or reasonably estimable.
-24-
On May 19, 2017, Chere Phillips (a Home Health Aide in Sacramento) and Lady Moore (a former Social Worker in Sacramento) filed a lawsuit against VITAS CA in Sacramento County Superior Court, alleging claims for (1) failure to pay all wages due; (2) failure to authorize and permit rest periods; (3) failure to provide off-duty meal periods; (4) failure to furnish accurate wage statements; (5) unreimbursed business expenses; (6) waiting time penalties; (7) violations of unfair competition law; and (8) violation of the Private Attorneys General Act. The case is captioned: Chere Phillips and Lady Moore v. VITAS Healthcare Corporation of California, Sacramento County Superior Court, Case No. 34-2017-0021-2755. Plaintiffs sought to pursue these claims in the form of a state-wide class action of current and former non-exempt employees employed with VITAS CA in California within the four years preceding the filing of the lawsuit. Plaintiffs served VITAS with the lawsuit on June 5, 2017. VITAS CA timely answered the Complaint generally denying the Plaintiffs’ allegations. The Court has stayed all class discovery in this case pending resolution of the Jordan Seper and Jiwann Chhina cases.
-25-
The Company is not able to reasonably estimate the probability of loss or range of loss for any of these lawsuits at this time, with the exception of Seper/Chhina, Phillips and Moore, and the class claims in Williams.
-26-
Results of Operations
Three months ended June 30, 2019 versus 2018 - Consolidated Results
Our service revenues and sales for the second quarter of 2019 increased 7.2% versus services and sales revenues for the second quarter of 2018. Of this increase, a $16.0 million increase was attributable to VITAS and $15.8 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):
Routine homecare
General inpatient
Room and board - net
Drain cleaning - short term core
45,558
41,959
Plumbing - short term core
33,837
30,538
79,395
72,497
Excavation - short term core
35,172
32,014
Contractor operations
Outside franchisee fees
Other - short term core
576
575
Days of care at VITAS during the quarter ended June 30 were as follows:
Days of Care
Increase/(Decrease)
Percent
1,621,837
1,534,162
5.7
41,804
42,488
(1.6)
36,332
28,971
25.4
Total days of care
1,699,973
1,605,621
5.9
The remaining increase in VITAS’ revenues for the second quarter of 2019 versus the second quarter of 2018 was primarily comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 0.5% offset by $3.2 million in Medicare cap revenue reductions compared to a Medicare cap revenue reduction of $536,000 in 2018. Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.
The increase in plumbing revenues for the second quarter of 2019 versus 2018 is attributable to a 6.6% increase in price and service mix shift and a 4.2% increase in job count. The increase in excavation revenues for the second quarter of 2019 versus 2018 is attributable to a 5.5% increase in price and service mix shift and a 4.4% increase in job count. Drain cleaning revenues for the second quarter of 2019 versus 2018 reflect a 6.3% increase in price and service mix shift and a 2.3% increase in job count. Water restoration revenue for the second quarter of 2019 versus 2018 is attributable to a 7.1% increase in price and service mix shift and a 6.9% increase in job count. Contractor operations increased 17.9% mainly due to their expansion into water restoration.
-27-
The consolidated gross margin was 31.7% in the second quarter of 2019 as compared with 30.8% in the second quarter of 2018. On a segment basis, VITAS’ gross margin was 22.9% in the second quarter of 2019 as compared with 21.5%, in the second quarter of 2018 primarily due to improved labor management and reduced ancillary costs. The Roto-Rooter segment’s gross margin was 48.7% for the second quarter of 2019 compared with 49.9% in the second quarter of 2018 primarily due to higher labor costs and medical insurance claims in the second quarter of 2019.
Selling, general and administrative expenses (“SG&A”) comprise (in thousands):
SG&A expenses before long-term incentive compensation and the impact of
market value adjustments related to deferred compensation trusts
70,300
66,296
Impact of market value adjustments related to assets held in deferred
compensation trusts
1,386
1,222
Long-term incentive compensation
Total SG&A expenses
Other operating expenses increased $2.7 million from the second quarter of 2018 primarily as a result of a $2.3 million impairment of transportation equipment held for sale recorded in the second quarter of 2019.
Other income - net comprise (in thousands):
deferred compensation trusts
Our effective tax rate reconciliation is as follows:
Income tax provision calculated at the statutory federal rate
13,504
12,108
Stock compensation tax benefits
(2,867)
(10,448)
State and local income taxes
1,868
Other--net
1,070
838
Income tax provision
13,575
2,684
Effective tax rate
21.1
4.7
-28-
Net income for both periods included the following after-tax items/adjustments that (reduced) or increased after-tax earnings (in thousands):
152
Medicare cap sequestration adjustment
(1,253)
(138)
Non cash ASC 842 benefit
(1)
Amortization of acquired and cancelled franchise agreements
(244)
Acquisition expenses
Excess tax benefits on stock compensation
3,212
11,702
(3,197)
(2,900)
Impairment loss on transportation equipment
(1,733)
(1,199)
(1,003)
(4,486)
7,813
Three months ended June 30, 2019 versus 2018 - Segment Results
Net income/(loss) for the second quarter of 2019 versus the second quarter of 2018 by segment (in thousands):
VITAS’ after-tax earnings were positively impacted in 2019 compared to 2018 due to higher revenue and improved labor management and ancillary costs. After-tax earnings as a percent of revenue at VITAS in the second quarter of 2019 was 11.9% as compared to 10.7% in the second quarter of 2018.
Roto-Rooter’s net income was positively impacted in 2019 compared to 2018 primarily by higher revenue. After-tax earnings as a percent of revenue at Roto-Rooter in the second quarter of 2019 was 16.9% as compared to 17.4% in the second quarter of 2018.
After-tax Corporate expenses for 2019 increased 552.7% when compared to 2018 due mainly to a $8.5 million decrease in the excess tax benefits on stock compensation and a $2.3 million ($1.7 million after-tax) impairment of transportation equipment held for sale.
-29-
Six months ended June 30, 2019 versus 2018 - Consolidated Results
Our service revenues and sales for the first six months of 2019 increased 6.2% versus services and sales revenues for the first six months of 2018. Of this increase, a $30.7 million increase was attributable to VITAS and $23.9 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):
89,700
83,289
65,892
61,349
155,592
144,638
69,457
63,335
1,153
1,199
Days of care at VITAS during the six months ended June 30 were as follows:
3,193,505
3,008,130
6.2
85,727
85,685
0.0
71,783
60,641
18.4
3,351,015
3,154,456
The remaining increase in VITAS’ revenues for the first six months of 2019 versus the first six months of 2018 was primarily comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 0.5% offset by $6.6 million in Medicare cap revenue reductions compared to Medicare cap reversal of $1.3 million in 2018. Over 90% of VITAS’ service revenues for the period were from Medicare and Medicaid.
The increase in plumbing revenues for the first six months of 2019 versus 2018 is attributable to a 6.0% increase in price and service mix shift and by a 1.4% increase in job count. The increase in excavation revenues for the first six months of 2019 versus 2018 is attributable to a 11.0% increase in price and service mix shift offset by a 1.3% decrease in job count. Drain cleaning revenues for the first six months of 2019 versus 2018 reflect a 5.6% increase in price and service mix shift and a 2.1% increase in job count. The increase in water restoration revenue for the first six months of 2019 versus 2018 is attributable to a 3.2% increase in price and service mix shift and a 3.3% increase in job count. Contractor operations increased 15.6% mainly due to their expansion into water restoration.
The consolidated gross margin was 31.0% in the first six months of 2019 as compared with 30.7% in the first six months of 2018 primarily. On a segment basis, VITAS’ gross margin was 22.4% in the first six months of 2019 as compared
-30-
with 21.8%, in the first six months of 2018 primarily due to improved labor management and ancillary costs. The Roto-Rooter segment’s gross margin was 47.9% for the first six months of 2019 compared with 48.7% in the first six months of 2018 primarily due to higher labor costs.
140,504
132,517
2,874
3,142
Other operating expenses increased $9.1 million from the first six months of 2018 primarily as a result of a $6.0 million litigation settlement at VITAS and a $2.3 million impairment of transportation equipment held for sale recorded in the first six months of 2019.
24,169
23,911
(8,876)
(13,839)
3,470
2,790
932
1,034
19,695
13,896
12.2
-31-
(4,476)
(1,640)
(401)
(490)
(568)
Expenses related to litigation settlements
(40)
9,944
15,500
(6,524)
(5,791)
(2,429)
(2,502)
124
(91)
(7,994)
6,958
Six months ended June 30, 2019 versus 2018 - Segment Results
Net income/(loss) for the first six months of 2019 versus the first six months of 2018 by segment (in thousands):
VITAS’ after-tax earnings were positively impacted in 2019 compared to 2018 due to higher revenue offset by the impact of a litigation settlement of approximately $6.0 million ($4.5 million after-tax). After-tax earnings as a percent of revenue at VITAS in the first six months of 2019 and 2018 was 10.8%.
Roto-Rooter’s net income was positively impacted in 2019 compared to 2018 primarily by higher revenue. After-tax earnings as a percent of revenue at Roto-Rooter in the first six months of 2019 was 15.9% as compared to 16.5% in the first six months of 2018.
After-tax Corporate expenses for 2019 decreased 77.2% when compared to 2018 due mainly to a $5.6 million decrease in the excess tax benefits on stock compensation and a $2.3 million ($1.7 million after-tax) impairment of transportation equipment held for sale.
-32-
CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2019
(in thousands)(unaudited)
Chemed
Consolidated
2019 (a)
Cost of services provided and goods sold
241,104
82,533
21,682
39,377
10,497
5,017
39
18
388
Other operating expense
235
267,704
127,550
12,802
Income/(loss) from operations
45,046
33,284
(12,802)
(53)
(100)
(1,084)
Intercompany interest income/(expense)
4,382
2,180
(6,562)
Other income—net
101
Income/(expense) before income taxes
49,476
35,406
(20,578)
(12,137)
(8,231)
6,793
Net income/(loss)
(a) The following amounts are included in net income (in thousands):
Pretax benefit/(cost):
(3,929)
(2,266)
Medicare cap sequestration
(1,689)
(1,386)
(331)
(97)
(428)
(7,581)
(9,698)
After-tax benefit/(cost):
Non cash ASC 842 expenses
(1,254)
(315)
(2,917)
-33-
FOR THE THREE MONTHS ENDED JUNE 30, 2018
2018 (a)
233,073
72,668
20,702
35,909
11,686
5,050
4,628
40
Other operating expenses
(67)
(51)
258,758
113,188
11,726
38,041
31,826
(11,726)
(92)
(1,379)
3,124
1,739
(4,863)
238
21
41,350
33,494
(17,189)
(9,565)
(8,196)
15,077
(3,652)
(1,222)
204
(185)
19
(4,874)
(4,855)
14
7,799
-34-
FOR THE SIX MONTHS ENDED JUNE 30, 2019
480,847
164,741
43,218
78,978
23,389
9,539
9,980
78
890
6,423
234
540,062
254,823
25,733
79,469
61,264
(25,733)
(101)
(194)
(2,066)
8,777
4,375
(13,152)
Other income/(expense)—net
188
56
2,208
88,333
65,501
(38,743)
(21,707)
(15,339)
17,351
(8,018)
(6,000)
(2,874)
(2,204)
(772)
Non cash ASC 842 (expenses)/benefit
(656)
(55)
163
(548)
(120)
(217)
(8,860)
(924)
(13,115)
(22,899)
(406)
(162)
(6,606)
(679)
(709)
-35-
FOR THE SIX MONTHS ENDED JUNE 30, 2018
460,329
149,948
41,213
72,006
24,078
9,846
9,072
67
(84)
(85)
511,304
231,002
24,145
77,509
61,174
(24,145)
(104)
(184)
(2,443)
6,218
3,417
(9,635)
380
37
1,639
84,003
64,444
(34,584)
(20,203)
(16,208)
22,515
(7,305)
(3,142)
(537)
(333)
(10,447)
(10,780)
(249)
7,207
-36-
Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA
Chemed Corporation and Subsidiary Companies
For the three months ended June 30, 2019
Add/(deduct):
53
100
1,084
1,237
12,137
8,231
(6,793)
EBITDA
54,378
40,911
(19,455)
75,834
Intercompany interest expense/(income)
(4,382)
(2,180)
6,562
(43)
(112)
3,929
1,689
Acquisition expense
97
51,616
38,785
(5,312)
For the three months ended June 30, 2018
92
1,379
1,524
9,565
8,196
(15,077)
46,453
38,248
(15,770)
68,931
(3,124)
(1,739)
4,863
(237)
(22)
(259)
3,652
185
Amortization of stock awards
83
155
43,110
36,522
(5,950)
-37-
For the six months ended June 30, 2019
194
2,066
2,361
21,707
15,339
(17,351)
98,008
76,565
(36,599)
137,974
(8,777)
(4,375)
13,152
(157)
(56)
(213)
2,204
Non cash ASC 842 expenses/(benefit)
656
55
(163)
548
120
97,934
72,286
(10,332)
For the six months ended June 30, 2018
184
2,443
2,731
20,203
16,208
(22,515)
93,953
73,761
(32,074)
135,640
(6,218)
(3,417)
9,635
(380)
(37)
(417)
537
Stock award amortization
107
239
87,795
70,407
(11,753)
-38-
RECONCILIATION OF ADJUSTED NET INCOME
(in thousands, except per share data)(unaudited)
Net income as reported
Add/(deduct) pre-tax cost of:
331
772
Add/(deduct) tax impacts:
Tax impact of the above pre-tax adjustments (1)
(2,000)
(966)
(4,961)
(2,238)
(3,212)
(11,702)
(9,944)
(15,500)
Diluted Earnings Per Share As Reported
Adjusted Diluted Earnings Per Share
Adjusted average number of shares outstanding
(1) The tax impact of pre-tax adjustments was calculated using the effective tax rate of the operating unit for which each adjustment is associated.
-39-
OPERATING STATISTICS FOR VITAS SEGMENT
(unaudited)
OPERATING STATISTICS
Net revenue ($000)
Homecare
Inpatient
Contractual allowances
Medicare cap allowance
Net revenue as a percent of total before Medicare cap allowances
82.7
82.6
82.3
82.1
7.1
6.6
7.0
9.5
10.1
9.9
10.2
0.7
100.0
(0.8)
(0.9)
(1.2)
(1.0)
(0.1)
0.3
97.0
98.0
97.2
98.4
Average daily census (days)
14,482
13,583
14,364
13,375
Nursing home
3,382
3,275
3,318
17,864
16,858
17,682
16,620
358
318
359
335
459
467
473
18,681
17,643
18,515
17,428
Total Admissions
17,491
16,658
35,249
35,137
Total Discharges
17,008
16,474
34,350
34,054
Average length of stay (days)
91.1
89.0
91.2
88.4
Median length of stay (days)
16.0
17.0
15.0
ADC by major diagnosis
Cerebro
35.7
36.2
35.8
36.4
Neurological
20.4
18.6
20.2
Cancer
12.7
13.9
Cardio
16.9
16.4
Respiratory
8.2
8.3
6.0
6.4
6.5
Admissions by major diagnosis
20.6
21.7
20.7
22.2
11.1
12.5
11.2
29.2
30.5
28.6
15.6
16.1
11.7
10.8
11.8
11.3
10.3
10.5
Estimated uncollectible accounts as a percent of revenues
1.2
1.0
1.1
Accounts receivable --
Days of revenue outstanding- excluding unapplied Medicare payments
32.7
31.9
N.A.
Days of revenue outstanding- including unapplied Medicare payments
27.7
25.6
-40-
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information
Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe”, “expect”, “hope”, “anticipate”, “plan” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. These forward-looking statements are based on current expectations and assumptions and involve various known and unknown risks, uncertainties, contingencies and other factors, which could cause Chemed’s actual results to differ from those expressed in such forward-looking statements. Variances in any or all of the risks, uncertainties, contingencies, and other factors from our assumptions could cause actual results to differ materially from these forward-looking statements and trends. In addition, our ability to deal with the unknown outcomes of these events, many of which are beyond our control, may affect the reliability of projections and other financial matters. Investors are cautioned that such forward-looking statements are subject to inherent risk and there are no assurances that the matters contained in such statements will be achieved. Chemed does not undertake and specifically disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of a new information, future events or otherwise.
The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At June 30, 2019, the Company had $85.0 million of variable rate debt outstanding. For each $10 million dollars borrowed under the credit facility, an increase or decrease of 100 basis points (1% point), increases or decreases the Company’s annual interest expense by $100,000.
The Company continually evaluates this interest rate exposure and periodically weighs the cost versus the benefit of fixing the variable interest rates through a variety of hedging techniques.
We carried out an evaluation, under the supervision of our President and Chief Executive Officer and with the participation of the Executive Vice President and Chief Financial Officer and the Vice President and Controller, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the President and Chief Executive Officer, Executive Vice President and Chief Financial Officer and Vice President and Controller have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Except as discussed below, there has been no change in our internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In the first quarter of 2019, we implemented a new lease accounting system and process in response to the adoption of ASC 842, effective January 1, 2019. These implementations resulted in changes to components of our internal control over financial reporting.
For information regarding the Company’s legal proceedings, see note 11, Legal and Regulatory Matters, under Part I, Item I of this Quarterly Report on Form 10-Q.
There have been no material changes from the risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K.
-41-
Item 2(c). Purchases of Equity Securities by Issuer and Affiliated Purchasers
The following table shows the activity related to our share repurchase program for the first six months of 2019:
Total Number
Weighted Average
Cumulative Shares
Dollar Amount
of Shares
Price Paid Per
Repurchased Under
Remaining Under
Repurchased
Share
the Program
The Program
February 2011 Program
January 1 through January 31, 2019
8,376,864
46,649,495
February 1 through February 28, 2019
91,893
327.84
8,468,757
166,522,918
March 1 through March 31, 2019
58,107
329.10
8,526,864
147,399,943
First Quarter Total
150,000
328.33
April 1 through April 30, 2019
May 1 through May 31, 2019
8,595,873
124,723,950
June 1 through June 30, 2019
Second Quarter Total
On February 25, 2019 our Board of Directors authorized an additional $150 million under the February 2011 Repurchase
Program.
None.
-42-
Exhibit No.
31.1
Certification by Kevin J. McNamara pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.
31.2
Certification by David P. Williams pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.
31.3
Certification by Michael D. Witzeman pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act of 1934.
32.1
Certification by Kevin J. McNamara pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification by David P. Williams pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3
Certification by Michael D. Witzeman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Chemed Corporation
(Registrant)
Dated:
July 31, 2019
By:
/s/ Kevin J. McNamara
Kevin J. McNamara
(President and Chief Executive Officer)
/s/ David P. Williams
David P. Williams
(Executive Vice President and Chief Financial Officer)
/s/ Michael D. Witzeman
Michael D. Witzeman
(Vice President and Controller)
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