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 September 30, 2021
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
15,395,049 Shares
September 30, 2021
SUBSIDIARY COMPANIES
Index
Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
September 30, 2021 and December 31, 2020
3
Unaudited Consolidated Statements of Income -
Three and nine months ended September 30, 2021 and 2020
4
Unaudited Consolidated Statements of Cash Flows -
Nine months ended September 30, 2021 and 2020
5
Unaudited Consolidated Statements of Changes in Stockholders’ Equity-
6
Notes to Unaudited Consolidated Financial Statements
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
40
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
41
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
42
EX – 31.1
EX – 31.2
EX – 31.3
EX – 32.1
EX – 32.2
EX – 32.3
EX – 101
EX – 104
PART I. FINANCIAL INFORMATION
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2020
ASSETS
Current assets
Cash and cash equivalents
$
28,743
162,675
Accounts receivable
118,193
126,853
Inventories
8,394
7,095
Prepaid income taxes
12,940
6,603
Prepaid expenses
32,294
26,177
Total current assets
200,564
329,403
Investments of deferred compensation plans
102,045
88,811
Properties and equipment, at cost, less accumulated depreciation of $310,972 (2020 - $293,380)
190,781
187,820
Lease right of use asset
127,077
123,448
Identifiable intangible assets less accumulated amortization of $55,138 (2020 - $47,607)
110,606
118,085
Goodwill
578,610
578,585
Other assets
8,450
8,759
Total Assets
1,318,133
1,434,911
LIABILITIES
Current liabilities
Accounts payable
60,042
54,234
Income taxes
180
9,464
Accrued insurance
52,645
54,703
Accrued compensation
97,256
91,282
Accrued legal
1,497
10,632
Short-term lease liability
35,148
36,200
Other current liabilities
39,318
42,593
Total current liabilities
286,086
299,108
Deferred income taxes
20,100
20,664
Deferred compensation liabilities
100,409
88,456
Long-term lease liability
104,198
99,210
Other liabilities
27,621
26,273
Total Liabilities
538,414
533,711
Commitments and contingencies (Note 10)
STOCKHOLDERS' EQUITY
Capital stock - authorized 80,000,000 shares $1 par; issued 36,402,025 shares (2020 - 36,258,638 shares)
36,402
36,259
Paid-in capital
1,007,506
961,404
Retained earnings
1,901,245
1,723,777
Treasury stock - 21,073,917 shares (2020 - 20,351,562 shares)
(2,167,640)
(1,822,579)
Deferred compensation payable in Company stock
2,206
2,339
Total Stockholders' Equity
779,719
901,200
Total Liabilities and Stockholders' Equity
See accompanying Notes to Unaudited Consolidated Financial Statements.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
Service revenues and sales
538,667
528,297
1,598,283
1,546,294
Cost of services provided and goods sold (excluding depreciation)
342,164
339,240
1,033,130
1,043,148
Selling, general and administrative expenses
89,217
88,317
274,654
243,413
Depreciation
11,844
11,714
37,171
34,761
Amortization
2,510
2,511
7,530
7,476
Other operating expenses/(income)
63
12,207
789
(28,935)
Total costs and expenses
445,798
453,989
1,353,274
1,299,863
Income from operations
92,869
74,308
245,009
246,431
Interest expense
(583)
(379)
(1,343)
(2,005)
Other income - net
3,134
7,675
10,521
5,723
Income before income taxes
95,420
81,604
254,187
250,149
(23,417)
(13,882)
(60,262)
(44,435)
Net income
72,003
67,722
193,925
205,714
Earnings Per Share:
4.62
4.25
12.27
12.90
Average number of shares outstanding
15,587
15,940
15,808
15,948
Diluted Earnings Per Share:
4.55
4.14
12.06
12.53
15,842
16,373
16,083
16,419
Cash Dividends Per Share
0.36
0.34
1.04
0.98
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
44,701
42,237
Stock option expense
16,342
13,296
Litigation settlements
(9,440)
2,684
Noncash long-term incentive compensation
5,344
5,301
Noncash directors' compensation
1,173
1,171
(Benefit)/provision for deferred income taxes
(561)
831
Amortization of debt issuance costs
229
Unutilized CARES Act grant
-
48,041
Deferred payroll taxes
22,941
Changes in operating assets and liabilities:
Decrease in accounts receivable
9,247
27,993
Increase in inventories
(1,299)
(84)
Increase in prepaid expenses
(6,117)
(2,072)
Increase in accounts payable and other current liabilities
6,330
34,526
Change in current income taxes
(15,749)
(4,366)
Net change in lease assets and liabilities
15
1,583
Increase in other assets
(13,561)
(9,646)
Increase in other liabilities
13,474
10,735
Other sources
974
1,298
Net cash provided by operating activities
245,027
402,412
Cash Flows from Investing Activities
Capital expenditures
(44,472)
(42,670)
Business combinations
(3,600)
760
672
Net cash used by investing activities
(43,712)
(45,598)
Cash Flows from Financing Activities
Purchases of treasury stock
(330,380)
(147,123)
Proceeds from exercise of stock options
17,918
31,498
Dividends paid
(16,457)
(15,639)
Capital stock surrendered to pay taxes on stock-based compensation
(9,445)
(18,707)
Change in cash overdrafts payable
3,054
(9,849)
Payments on revolving line of credit
(1,500)
(264,900)
Proceeds from revolving line of credit
1,500
174,900
Other sources/(uses)
(387)
Net cash used by financing activities
(335,247)
(250,207)
(Decrease)/Increase in Cash and Cash Equivalents
(133,932)
106,607
Cash and cash equivalents at beginning of year
6,158
Cash and cash equivalents at end of period
112,765
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended September 30, 2021 and 2020:
Deferred
Compensation
Treasury
Payable in
Capital
Paid-in
Retained
Stock-
Company
Stock
Earnings
at Cost
Total
Balance at June 30, 2021
36,385
999,697
1,834,835
(2,002,326)
2,183
870,774
Dividends paid ($0.36 per share)
(5,593)
Stock awards and exercise of stock options
17
8,233
(1,426)
6,824
(163,731)
Other
(424)
(157)
(558)
Balance at September 30, 2021
`
Balance at June 30, 2020
36,040
904,421
1,553,144
(1,745,299)
2,390
750,696
Dividends paid ($0.34 per share)
(5,401)
97
20,636
(7,581)
13,152
(24,975)
214
46
(46)
Balance at September 30, 2020
36,137
925,271
1,615,465
(1,777,809)
2,344
801,408
The Notes to Consolidated Financial Statements are integral parts of these statements.
For the nine months ended September 30, 2021 and 2020:
Balance at December 31, 2020
Dividends paid ($1.04 per share)
143
45,870
(14,681)
31,332
232
(133)
99
Balance at December 31, 2019
35,811
860,671
1,425,752
(1,597,940)
2,314
726,608
Dividends paid ($0.98 per share)
326
64,948
(32,716)
32,558
(348)
(362)
(30)
30
(710)
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, 2020 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. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other future period, and we make no representations related thereto. 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, 2020.
CORONAVIRUS AID, RELIEF AND ECONOMIC STIMULUS (CARES) ACT
The current COVID-19 pandemic did have a material impact on our results of operations, cash flow and financial position as of and for the three and nine months ended September 30, 2021. We are closely monitoring the impact of the pandemic on all aspects of our business including impacts to employees, customers, patients, suppliers and vendors. The Company’s two operating subsidiaries have been categorized as critical infrastructure businesses and are not currently materially limited by federal, state or local regulations that restrict movement or operating ability.
The length and severity of the pandemic, coupled with related governmental actions including relief acts and actions relating to our workforce at federal, state and local levels, and underlying economic disruption will determine the ultimate short-term and long-term impact to our business operations and financial results. We are unable to predict the myriad of possible issues that could arise or the ultimate effect to our businesses as a result of the unknown short, medium and long-term impacts that the pandemic will have on the United States economy and society as a whole.
On March 27, 2020, the CARES Act was passed. It is intended to provide economic relief to individuals and businesses affected by the coronavirus pandemic. It also contains provisions related to healthcare providers’ operations and the issues caused by the coronavirus pandemic. The following are significant economic impacts for Chemed and its subsidiaries as a result of specific provisions of the CARES Act:
A portion of the CARES Act provides $100 billion from the Public Health and Social Services Emergency Fund (“Relief Fund”) to healthcare providers on the front lines of the coronavirus response. Of this distribution, $30 billion was designated to be automatically distributed to facilities and healthcare providers based upon their 2019 Medicare fee-for-service revenue.
On April 10, 2020 VITAS automatically received $80.2 million from the Relief Fund based upon VITAS’s 2019 Medicare fee-for-service Medicare revenue. The main condition that is attached to the grant is that the money will be used “only for health care related expenses or lost revenues that are attributable to coronavirus”. HHS guidance does not specifically designate what healthcare expenses are related to COVID-19. The guidance to date is general and broad but does provide some examples such as equipment and supplies, workforce training, reporting COVID-19 test results, securing separate facilities for COVID-19 patients and acquiring additional resources to expand or preserve care delivery.
The additional conditions to the Relief Fund payment are specific in nature, such as the money cannot be used for gun control advocacy purposes, abortions, embryo research, etc. The Company is in compliance, and intends to maintain compliance, with these specific conditions. Based on this analysis, management believes that there is reasonable assurance that VITAS will comply with the conditions.
Chemed and its subsidiaries have deferred $36.4 million of certain employer payroll taxes as permitted by the CARES Act. $18.2 million is classified as short-term and $18.2 million is classified as a long-term liability.
During the period from May 1, 2020 through September 30, 2021, the 2% Medicare sequestration reimbursement cut was suspended. For the three and nine month periods ended September 30, 2021, approximately $6.0 million and $17.9 million, respectively, was recognized as revenue due to the suspension of sequestration. In April 2021, legislation was signed into law that suspended sequestration through December 31, 2021.
There is no U.S. GAAP that covers accounting for such government “grants” to for-profit entities. As a result, the Company analogized to International Accounting Standard 20 – Accounting for Government Grants and Disclosures (“IAS 20”). Under IAS 20, once it is reasonably assured that the entity will comply with the conditions of the grant, the grant money should be recognized on a systematic basis over the periods in which the entity recognizes the related expenses or lost revenue.
All CARES Act funds received were fully recognized as of December 31, 2020. However, the rules concerning the utilization of the funds continue to evolve and we will continue to comply with those applicable to us. The portal to report utilization of CARES Act funds opened on July 1, 2021. We completed our reporting by the September 30, 2021 deadline.
CLOUD COMPUTING
As of September 30, 2021, we have two cloud computing arrangements that are service contracts. Roto-Rooter is implementing a system to assist in technician dispatch and VITAS implemented a new human resources system. We have capitalized approximately $8.9 million related to implementation of these projects which are included in prepaid assets in the accompanying balance sheets. The VITAS human resource system was placed into service in January 2020 and is being amortized over 5 years. For the three months ended September 30, 2021 and 2020, $249,000 and $282,000, respectively, has been amortized. For the nine months ended September 30, 2021 and 2020, $697,000 and $807,000, respectively, has been amortized. The Roto-Rooter project was placed into service during the second quarter of 2021. For the three and nine months ended September 30, 2021, $15,000 and $84,000 respectively has been amortized.
INCOME TAXES
In December 2019, the FASB issued Accounting Standards Update “ASU No. 2019-12 – Simplifying the Accounting for Income Taxes”. The ASU adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes minor improvements to the codifications. The ASU is effective for the Company on January 1, 2021. The impact of adoption was not material.
Our effective income tax rate was 24.5% in the third quarter of 2021 compared to 17.0% during the third quarter of 2020. Excess tax benefit on stock options reduced our income tax expenses by $1.2 million and $7.2 million, respectively for the quarters ended September 30, 2021 and 2020.
Our effective income tax rate was 23.7% in the first nine months of 2021 compared to 17.8% during the first nine months of 2020. Excess tax benefit on stock options reduced our income tax expenses by $5.3 million and $19.9 million, respectively for the first nine months ended September 30, 2021 and 2020.
NON-CASH TRANSACTIONS
Included in the accompanying Consolidated Balance Sheets are $1.0 million and $3.9 million of capitalized property and equipment which were not paid for as of September 30, 2021 and December 31, 2020, respectively. Accrued property and equipment purchases 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.
BUSINESS COMBINATIONS
We account for acquired businesses using the acquisition method of accounting. All assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of fair value involves estimates and the use of valuation techniques when market value is not readily available. We use various techniques to determine fair value in accordance with accepted valuation models, primarily the income approach. The significant assumptions used in developing fair values include, but are not limited to, revenue growth rates, the amount and timing of future cash flows, discount rates, useful lives, royalty rates and future tax rates. The excess of purchase price over the fair value of assets and liabilities acquired is recorded as goodwill. See Note 17 for discussion of recent acquisitions.
Quarterly amortization of intangible assets is mainly driven by two Roto-Rooter franchise acquisitions completed in 2019. The total purchase price of these acquisitions was $138.0 million. As part of the purchase price allocation, approximately $59.2 million was determined to be the value of reacquired franchise rights which are being amortized over the remaining life of each franchise agreement. The average remaining life on the reacquired franchise agreements was approximately seven years. Quarterly amortization of reacquired franchise rights for these two acquisitions is approximately $2.0 million ($8.1 million annualized through 2026). This contrasts to quarterly franchise fees historically collected from these two franchisees of approximately $470,000 ($1.9 million annualized).
ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying Notes. Actual results could differ from those estimates. Disclosures of after-tax expenses and adjustments are based on estimates of the effective income tax rates for the applicable segments.
2. Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update “ASU No. 2014-09 – Revenue from Contracts with Customers.” The standard and subsequent amendments are theoretically intended to develop a common revenue standard for removing inconsistencies and weaknesses, improve comparability, provide for more useful information to users through improved disclosure requirements and simplify the preparation of financial statements. The standard is also referred to as Accounting Standards Codification No. 606 (“ASC 606”).
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 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 was $2.1 million for the quarters ended September 30, 2021 and 2020, respectively. The cost of providing charity care during the first nine months ended September 30, 2021 and 2020 was $6.4 million and $6.1 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. Medicare and Medicaid programs have broad authority to audit and review compliance with such laws and regulations, and impose payment suspensions when merited. Additionally, the contracts we have with commercial health insurance payors provide for retroactive audit and review of claims. Settlement with third party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. The variable consideration is estimated based on the terms of the payment agreement, existing correspondence from the payor and our historical settlement activity. These estimates are adjusted in future periods, as new information becomes available.
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 months ended September 30, 2021 and 2020.
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 September 30, 2021, 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 $8.7 million is owed for Medicare cap in three programs arising during the 2013 through 2020 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. Pursuant to the recent legislation and the April extension, the sequestration has been lifted for the period from May 1, 2020 through December 31, 2021.
During the quarter ended September 30, 2021, we recorded $97,000 in net Medicare cap revenue reduction related to two programs for the 2021 government fiscal year. During the quarter ended September 30, 2020, we recorded a reversal of $4.1 million in net Medicare cap revenue reduction for the 2020 government fiscal year.
During the first nine months ended September 30, 2021, we recorded $3.6 million in net Medicare cap revenue reduction related to two programs for the 2021 government fiscal year. During the first nine months ended September 30, 2020, we recorded $4.2 million in net Medicare cap revenue reduction related to five programs for the 2020 government fiscal year.
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 September 30, 2021 is as follows (in thousands):
Medicare
Medicaid
Commercial
Routine home care
249,633
12,102
6,402
268,137
Continuous care
20,000
1,105
922
22,027
Inpatient care
25,249
2,628
1,491
29,368
294,882
15,835
8,815
319,532
All other revenue - self-pay, respite care, etc.
3,225
Subtotal
322,757
Medicare cap adjustment
(97)
Implicit price concessions
(3,119)
Room and board, net
(2,130)
Net revenue
317,411
The composition of patient care service revenue by payor and level of care for the quarter ended September 30, 2020 is as follows (in thousands):
260,658
12,107
6,091
278,856
27,739
1,364
1,596
30,699
24,199
2,415
1,019
27,633
312,596
15,886
8,706
337,188
2,910
340,098
4,072
(3,784)
(3,289)
337,097
The composition of patient care service revenue by payor and level of care for the nine months ended September 30,2021 is as follows (in thousands):
742,759
35,190
18,868
796,817
66,916
3,601
3,141
73,658
74,594
7,168
4,133
85,895
884,269
45,959
26,142
956,370
9,241
965,611
(3,597)
(9,428)
(7,451)
945,135
The composition of patient care service revenue by payor and level of care for the nine months ended September 30, 2020 is as follows (in thousands):
772,162
36,914
17,878
826,954
96,354
4,856
4,626
105,836
74,796
7,285
3,902
85,983
943,312
49,055
26,406
1,018,773
8,175
1,026,948
(4,178)
(10,976)
(9,317)
1,002,477
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 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 cash collection from weekly 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 and payment from customers are received. 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 third quarter is as follows (in thousands):
September 30,
Short-term core service jobs
161,057
143,089
Water restoration
39,786
32,137
Contractor revenue
18,969
16,274
Franchise fees
1,260
1,235
All other
3,773
3,332
224,845
196,067
Implicit price concessions and credit memos
(3,589)
(4,867)
221,256
191,200
The composition of disaggregated revenue for the first nine months is as follows (in thousands):
479,089
404,054
115,804
92,810
56,754
47,695
3,842
3,635
11,601
9,836
667,090
558,030
(13,942)
(14,213)
653,148
543,817
3. Segments
Service revenues and sales by business segment are shown in Note 2. After-tax income/(loss) by business segment are as follows (in thousands):
Three months ended September 30,
Nine months ended September 30,
42,950
45,737
113,430
147,262
44,554
31,176
124,504
84,966
87,504
76,913
237,934
232,228
Corporate
(15,501)
(9,191)
(44,009)
(26,514)
We report corporate administrative expenses and unallocated investing and financing income and expense not directly related to either segment as “Corporate”.
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 September 30,
Income
Shares
Earnings per Share
Dilutive stock options
215
Nonvested stock awards
Diluted earnings
358
75
For the Nine Months Ended September 30,
233
394
77
For the three and nine months ended September 30, 2021, 297,000 and 299,000, respectively, stock options were excluded from the computation of dilutive earnings per share because they would have been anti-dilutive.
For the three months ended September 30, 2020, there were no stock options excluded from the computation of dilutive earnings per share because they would have been anti-dilutive. For the nine months ended September 30, 2020, there were 277,000 stock options excluded from 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 2018 Credit Agreement includes transition provisions in the instance LIBOR is no longer published or used as an industry-accepted rate.
There is no debt outstanding as of September 30, 2021.
The 2018 Credit Agreement contains the following quarterly financial covenants effective as of September 30, 2021:
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 September 30, 2021. We have issued $46.2 million in standby letters of credit as of September 30, 2021, mainly for insurance purposes. Issued letters of credit reduce our available credit under the 2018 Credit Agreement. As of September 30, 2021, we have approximately $403.8 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility.
6. Other Operating Expense/(Income)
Other operating expense/(income) comprises the following (in thousands):
Loss on disposal of fixed assets
307
154
CARES Act grant
8,805
(32,184)
Litigation settlement
3,095
Total other operating expenses/(income)
See Footnote 1 for further discussion of the accounting for the CARES Act grant.
7. Other Income – Net
Other income – net comprises the following (in thousands):
Market value adjustment on assets held in
deferred compensation trust
3,078
7,256
9,770
5,093
Interest income
57
423
288
647
Other-net
(1)
(4)
463
(17)
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 inpatient units (“IPUs”) and/or contract beds within hospitals. Roto-Rooter mainly 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.
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.
We do not currently have any finance leases, therefore all lease information disclosed is related to operating leases.
The components of balance sheet information related to leases were as follows:
September 30,
December 31,
Assets
Operating lease assets
Liabilities
Current operating leases
Noncurrent operating leases
Total operating lease liabilities
139,346
135,410
The components of lease expense for the third quarter is as follows (in thousands):
Lease Expense (a)
Operating lease expense
15,342
15,277
Sublease income
(45)
(31)
Net lease expense
15,297
15,246
The components of lease expense for the first nine months is as follows (in thousands):
46,255
45,007
(135)
(38)
46,120
44,969
(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:
Nine months ended September 30,
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from leases
38,796
37,393
Leased assets obtained in exchange for new operating lease liabilities
43,143
44,366
Weighted Average Remaining Lease Term at September 30, 2021
Operating leases
4.8
years
Weighted Average Discount Rate at September 30, 2021
2.47
%
Maturity of Operating Lease Liabilities (in thousands)
11,220
2022
38,801
2023
31,254
2024
24,483
2025
18,336
Thereafter
23,921
Total lease payments
148,015
Less: interest
(8,669)
Total liability recognized on the balance sheet
For leases commencing prior to April 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 $263,000 of lease payments for leases signed but not yet commenced.
9. Stock-Based Compensation Plans
On February 19, 2021, the Compensation/Incentive Committee of the Board of Directors (“CIC”) granted 6,277 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, 2023, 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 $3.8 million.
On February 19, 2021, the CIC also granted 6,277 PSUs contingent upon the achievement of certain earnings per share (“EPS”) targets for the three year period ending December 31, 2023. 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 $3.1 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. Net (losses)/gains for the Company’s retirement and profit-sharing plans, excess benefit plans and other similar plans are as follows (in thousands):
7,006
11,506
23,609
18,445
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, which can result in penalties including repayment obligations, funding withholding, or debarment, 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.
Regulatory Matters and Litigation
On October 30, 2017, the Company entered into a 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 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.
The Company entered into a settlement agreement in March 2019 that resolved the California state-wide wage and hour class action claims raised in four separate cases: (1) 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 (“Seper”); (2) 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 (“Chhina”) (which was subsequently merged with Seper); (3) Chere Phillips and Lady Moore v. VITAS Healthcare Corporation of California, Sacramento County Superior Court, Case No. 34-2017-0021-2755 (“Phillips and Moore”); and (4) Williams v. VITAS Healthcare Corporation of California, Alameda County Superior Court Case No. RG 17853886 (“Williams”). These actions were brought by both current and former employees including a registered nurse, a licensed vocational nurse (LVN), home health aides and a social worker. Each action stated multiple claims generally including (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. The cases generally asserted claims on behalf of classes defined to include all current and former non-exempt employees employed with VITAS in California within the four years preceding the filing of each lawsuit.
The settlement amount of $5.75 million plus employment taxes was recorded in the first quarter of 2019. 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. The court granted final approval of the settlement hearing in December of 2020 and the settlement was paid in the first quarter of 2021.
Alfred Lax (“Lax”), a former employee of Roto-Rooter Services Company (“RRSC”) filed a class action lawsuit in Santa Clara County Superior Court in November of 2018 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 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. The lawsuit is, 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. The Company entered into a settlement agreement in August 2020 to resolve the allegations, for a settlement amount of $2.6 million plus employment taxes. The settlement includes technicians in its Menlo Park and Bristol locations. The settlement was recorded in the third quarter of 2020. Final approval of the settlement was granted in the first quarter of 2021 and the settlement was paid.
On October 16, 2020, VITAS received a Civil Investigative Demand (“CID”) issued by the U.S. Department of Justice pursuant to the False Claims Act concerning allegations of the submission of false claims for hospice services for which reimbursement was sought from federal healthcare programs, including Medicare. The CID has requested information regarding 32 patients from our Florida operations. We are cooperating with the U.S. Department of Justice with respect to this investigation. The Company cannot predict when the investigation will be resolved or the outcome of the investigation.
VITAS is one of a group of hospice providers selected by the OIG’s Office of Audit Services (“OAS”) for inclusion in an audit of the provision of elevated level-of-care hospice services to a sample of patients. At the audit’s conclusion, we expect that the OAS will make certain recommendations to CMS, which will be published on the OIG website, and may include repayment of Medicare funds received for elevated care of certain patients in the sample as well as extrapolated amounts based upon the incidence of claims within the sample. These extrapolated amounts may appear material. Any claims pursued by CMS will proceed in accordance with the standard reconsideration and appeals process for claims that arise out of CMS audits. The Company cannot predict the eventual outcome, or reasonably estimate any potential loss, from any such claims at this time.
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, withholding of governmental funding, diversion of management time, and related publicity. Although the Company intends to defend them vigorously, there can be no assurance that those suits will not have a material adverse effect on the Company.
12. Concentration of Risk
As of September 30, 2021, and December 31, 2020, approximately 67% and 74%, respectively, of VITAS’ total accounts receivable balance were from Medicare and 25% and 20%, respectively, of VITAS’ total accounts receivable balance were due from various state Medicaid or managed Medicaid programs. Combined accounts receivable from Medicare, Medicaid, and managed Medicaid represent approximately 73% of the consolidated net accounts receivable in the accompanying consolidated balance sheets as of September 30, 2021.
VITAS has a pharmacy services contract with one service provider for specified pharmacy services related to its hospice operations. A large majority of VITAS’ pharmaceutical purchases are from this vendor. The pharmaceuticals purchased by VITAS are available through many providers in the United States. However, a disruption from VITAS’ main service provider could adversely impact VITAS’ operations, including temporary logistical challenges and increased cost associated with getting medication to our patients.
13. Cash Overdrafts and Cash Equivalents
There are $3.1 million in cash overdrafts payable included in accounts payable at September 30, 2021. There were no cash overdrafts payable included in accounts payable at December 31, 2020.
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 September 30, 2021 (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
The following shows the carrying value, fair value and the hierarchy for our financial instruments as of December 31, 2020 (in thousands):
86,865
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 Note 5, our outstanding long-term debt and current portion of long-term debt have floating interest rates that are reset at short-term intervals, generally 30 or 60 days. The interest rate we pay also includes an additional amount based on our current leverage ratio. As such, we believe our borrowings reflect significant nonperformance risks, mainly credit risk. Based on these factors, we believe the fair value of our long-term debt and current portion of long-term debt approximate the carrying value.
15. Capital Stock Repurchase Plan Transactions
We repurchased the following capital stock:
Total cost of repurchased shares (in thousands)
163,731
24,975
330,380
147,123
Shares repurchased
350,000
50,000
700,000
325,000
Weighted average price per share
467.80
499.48
471.97
452.69
In May 2021, the Board of Directors authorized an additional $300.0 million for stock repurchase under Chemed’s existing share repurchase program. We currently have $148.0 million of authorization remaining under this share repurchase plan.
16. Recent Accounting Standards
In March 2020, the FASB issued Accounting Standards Update “ASU No. 2020-04 - Reference Rate Reform”. The update provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate expected to be discontinued. The update is effective for all entities as of March 12, 2020 and will apply through December 31, 2022. The interest rate charged on borrowings from our existing revolver is based on LIBOR. The credit agreement includes provisions for modifying the interest rate in the instance that LIBOR is discontinued. As a result, no contract modifications will be required when LIBOR is discontinued.
17. Acquisitions
On June 1, 2020, we completed the acquisition of a Roto-Rooter franchise and the related assets in Bloomington, IN for $2.2 million in cash.
Goodwill is assessed for impairment on a yearly basis as of October 1. All goodwill recognized is deductible for tax purposes.
Shown below is movement in Goodwill (in thousands):
333,331
245,254
Foreign currency adjustments
25
245,279
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
80,084
79,556
226,554
212,494
Adjusted diluted EPS
5.06
4.86
14.09
12.94
Adjusted EBITDA
119,373
117,805
338,840
319,576
Adjusted EBITDA as a % of revenue
22.2
22.3
21.2
20.7
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 36-38.
For the three months ended September 30, 2021, the increase in consolidated service revenues and sales was driven by a 15.7% increase at Roto-Rooter offset by a 5.8% decrease at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines. Roto-Rooter’s third quarter 2020 revenue was significantly impacted by shut-downs resulting from the COVID pandemic. The decrease in service revenues at VITAS is comprised primarily of a 5.3% decrease in days-of-care offset by a geographically weighted average Medicare reimbursement rate increase (including the suspension of sequestration on May 1, 2020) of approximately 1.2%. Acuity mix shift had a net impact of reducing revenue approximately $3.0 million, or 0.9% in the quarter when compared to the prior year revenue and level-of-care mix. The combination of a Medicare cap revenue reduction and other contra revenue changes negatively impacted revenue growth by approximately 80 basis points. See page 39 for additional VITAS operating metrics.
For the nine months ended September 30, 2021, the increase in consolidated service revenues and sales was driven by a 20.1% increase at Roto-Rooter offset by a 5.7% decrease at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines. Roto-Rooter’s first nine months 2020 revenue was significantly impacted by the COVID pandemic. The decrease in service revenues at VITAS is comprised primarily of a 6.2% decrease in days-of-care offset by a geographically weighted average Medicare reimbursement rate increase (including the suspension of sequestration on May 1, 2020) of approximately 1.9%. Acuity mix shift had a net impact of reducing revenue approximately $16.0 million, or 1.6% in the quarter when compared to the prior year revenue and level-of-care mix. The combination of a lower Medicare cap revenue reduction and other contra revenue changes offset a portion of the revenue decline by approximately 20 basis points. See page 39 for additional VITAS operating metrics.
The current COVID-19 pandemic did have a material impact on our business operations, results of operations, cash flow and financial position as of and for the three months and nine months ended September 30, 2021 and 2020, respectively. We are closely monitoring the impact of the pandemic on all aspects of our business including impacts to employees, customers, patients, suppliers and vendors. The Company’s two operating subsidiaries have been categorized as critical infrastructure businesses and are not currently materially limited by federal, state or local regulations that restrict movement or operating ability.
Historically, Chemed earnings guidance has been developed using previous years’ key operating metrics which are then modeled and projected out for the calendar year. Critical within these projections is the understanding of traditional patterned correlations among key operating metrics. This modeling exercise also takes into consideration anticipated industry and macro-economic issues outside of management’s control but are somewhat predictable in terms of timing and impact on our business segments’ operating results.
The COVID-19 pandemic has made accurate modeling and providing meaningful earnings guidance exceptionally challenging. Since the start of the pandemic, Chemed has been able to successfully navigate within this rapidly changing environment and produce operating results that we believe provide us with the ability to issue earnings guidance for the 2021 calendar year. However, this guidance should be taken with the recognition the pandemic will continue to disrupt our healthcare system and general economy to such an extent that future rules, regulations and government mandates could materially impact the company’s ability to achieve this guidance.
Statistically, patients residing in senior housing are identified as hospice appropriate earlier into their terminal prognosis and have a much greater probability of having a length of stay in excess of 90 days. Hospice patients referred from hospitals, oncology practices and similar referral sources are generally more acute and have a significantly lower probability of lengths-of-stay exceeding 90 days. According to data released by the National Investment Center for Seniors Housing & Care, COVID-19 continues to adversely affect senior housing occupancy. This reduced occupancy in senior housing has had a corresponding reduction in VITAS nursing home admissions. Nursing home patients represented 15.6% of VITAS’ third-quarter 2021 patient census. This compares to nursing home patients averaging 18.2% of total census just prior to the pandemic.
Based upon the above discussion, VITAS 2021 revenue, prior to Medicare Cap, is estimated to decline approximately 5% when compared to the prior year. Average Daily Census in 2021 is estimated to decline approximately 5.5%. Full-year Adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 18.8%. We are currently estimating $6.6 million for Medicare Cap billing limitations in calendar year 2021.
Roto-Rooter is forecasted to achieve full-year 2021 revenue growth of 17.3%. Roto-Rooter’s Adjusted EBITDA margin for 2021 is estimated to be between 28.5% to 29.0%.
Based upon the above, full-year 2021 adjusted earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock option exercises, costs related to litigation, and other discrete items, is estimated to be in the range of $19.00 to $19.20. This compares to initial 2021 adjusted earnings per diluted share guidance of $17.00 to $17.50. This revised 2021 guidance assumes an effective corporate tax rate on adjusted earnings of 25.1%. Chemed’s 2020 reported adjusted earnings per diluted share was $18.08.
We anticipate that our operating income and cash flows will be sufficient to operate our businesses and meet any commitments for the foreseeable future.
Financial Condition
Liquidity and Capital Resources
Material changes in the balance sheet accounts from December 31, 2020 to September 30, 2021 include the following:
An $8.7 million decrease in accounts receivable due to timing of receipts.
A $6.3 million increase in prepaid income taxes due to timing of payments.
A $6.1 million increase in prepaid expense due primarily to a $6.0 million increase in prepaid software at VITAS.
A $13.2 million increase in investment of deferred compensation plans due primarily to contributions and market valuation gains. These gains are offset by expense recognized in the deferred compensation liability.
A $7.5 million decrease in identifiable intangible assets due to amortization.
A $5.8 million increase in accounts payable due to timing of payments.
A $6.0 million increase in accrued compensation due to accrual of additional paid time off for VITAS front line workers and an increase in accrued bonus.
A $9.1 million decrease in accrued legal mainly as a result of the payments of two legal settlements.
A $345.1 million increase in treasury stock due mainly to stock repurchases.
Net cash provided by operating activities decreased $157.4 million from September 30, 2020 to September 30, 2021. The main drivers of the decrease are a decrease in net income of $11.8 million, the Unutilized CARES Act grant received in 2020 of $48.0 million, the deferral of payroll taxes during the second quarter of 2020 of $22.9 million and increases in cash outflows associated with accounts
payable and current income taxes of $39.6 million. 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 for hospice services every other Friday. The timing of a period end will have a significant impact on the accounts receivable at VITAS. These changes generally normalize over a two year period, as cash flow variations in one year are offset in the following year.
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 signed 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 was 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 no debt outstanding under the 2018 Credit Agreement as of September 30, 2021.
We have issued $46.2 million in standby letters of credit as of September 30, 2021, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of September 30, 2021, we have approximately $403.8 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 September 30, 2021 and anticipate remaining in compliance throughout the foreseeable future.
We are subject to various lawsuits and claims in the normal course of our business. In addition, we periodically receive communications from governmental and regulatory agencies concerning compliance with Medicare and Medicaid billing requirements at our VITAS subsidiary. We establish reserves for specific, uninsured liabilities in connection with regulatory and legal action that we deem to be probable and estimable. We disclose the existence of regulatory and legal actions when we believe it is reasonably possible that a loss could occur in connection with the specific action. In most instances, we are unable to make a reasonable estimate of any reasonably possible liability due to the uncertainty of the outcome and stage of litigation. We record legal fees associated with legal and regulatory actions as the costs are incurred.
See Note 11 in the Notes to the Unaudited Consolidated Financial Statements in Item 1 above for a description of current material legal matters.
Results of Operations
Three months ended September 30, 2021 versus 2020 - Consolidated Results
Our service revenues and sales for the third quarter of 2021 increased 2.0% versus services and sales revenues for the third quarter of 2020. Of this increase, a $30.1 million increase was attributable to Roto-Rooter offset by a $19.7 million decrease attributable to VITAS. 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
63,072
55,527
Plumbing - short term core
45,124
39,439
108,196
94,966
Excavation - short term core
52,607
47,688
Contractor operations
Outside franchisee fees
Other - short term core
254
435
Days of care at VITAS during the quarter ended September 30 were as follows:
Days of Care
Increase/(Decrease)
Percent
1,342,841
1,426,191
(5.8)
Nursing home
258,700
261,396
(1.0)
Respite
5,331
4,566
16.8
Subtotal routine homecare and respite
1,606,872
1,692,153
(5.0)
24,299
33,013
(26.4)
27,962
27,017
3.5
Total days of care
1,659,133
1,752,183
(5.3)
The decrease in service revenues at VITAS is comprised primarily of a 5.3% decrease in days-of-care offset by a geographically weighted average Medicare reimbursement rate increase (including the suspension of sequestration on May 1, 2020) of approximately 1.2%. Acuity mix shift had a net impact of reducing revenue approximately $3.0 million, or 0.9% in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare cap revenue reduction and other contra revenue changes negatively impacted revenue growth by approximately 80 basis points.
The increase in plumbing revenues for the third quarter of 2021 versus 2020 is attributable to a 1.0% increase in job count and to a 13.4% increase in price and service mix shift. The increase in excavation revenues for the third quarter of 2021 versus 2020 is attributable to a 14.2% increase in price and service mix shift and a 3.9% decrease in job count. Drain cleaning revenues for the third quarter of 2021 versus 2020 reflect a 11.2% increase in price and service mix shift and a 2.4% increase in job count. Water restoration revenue increased for the third quarter of 2021 versus 2020 due to a 11.0% increase in job count and a 12.8% increase in price and service mix shift.
The consolidated gross margin was 36.5% in the third quarter of 2021 as compared with 35.8% in the third quarter of 2020. On a segment basis, VITAS’ gross margin was 25.0% in the third quarter of 2021 as compared with 26.8%, in the third quarter of 2020. The decrease is primarily due to the payout of discretionary bonuses. The Roto-Rooter segment’s gross margin was 53.0% for the third quarter of 2021 as compared with 51.6% in the third quarter of 2020 primarily due to increased revenue and improved labor costs.
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
84,197
79,287
Impact of market value adjustments related to assets held in deferred compensation trusts
Long-term incentive compensation
1,942
1,774
Total SG&A expenses
SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts for the third quarter of 2021 were up 6.2% when compared to the third quarter of 2020. This increase was mainly a result of the increase in variable selling and general administrative expenses and increased bonus expense at Roto-Rooter caused by increased income.
Depreciation for the third quarter of 2021 increased 1.1% when compared to the third quarter of 2020.
Amortization for the third quarter of 2021 was flat when compared to the third quarter of 2020. Quarterly amortization of intangible assets is mainly driven by two Roto-Rooter franchise acquisitions completed in 2019. The total purchase price of these acquisitions was $138.0 million. As part of the purchase price allocation, approximately $59.2 million was determined to be the value of reacquired franchise rights which are being amortized over the remaining life of each franchise agreement. The average remaining life on the reacquired franchise agreements was approximately seven years. Quarterly amortization of reacquired franchise rights for these two acquisitions is approximately $2.0 million ($8.1 million annualized through 2026). This contrasts to quarterly franchise fees historically collected from these two franchisees of approximately $470,000 ($1.9 million annualized).
Other operating expenses comprise the following:
Total other operating expenses
Other income – net comprise (in thousands):
Market value adjustment on assets held in deferred compensation trusts
Our effective tax rate reconciliation is as follows (in thousands):
Income tax provision calculated at the statutory federal rate
20,038
17,137
Stock compensation tax benefits
(1,199)
(7,187)
State and local income taxes
3,153
3,028
Other--net
1,425
904
Income tax provision
23,417
13,882
Effective tax rate
24.5
17.0
Net income for both periods included the following after-tax items/adjustments that (reduced) or increased after-tax earnings (in thousands):
Direct costs related to COVID-19
(1,866)
(5,181)
(6,528)
COVID-19 Medicare cap
1,679
Medicare cap sequestration adjustment
635
Amortization of reacquired franchise agreements
(1,729)
(1,728)
(305)
(971)
(2,275)
(3,462)
(2,970)
(1,752)
(1,682)
Excess tax benefits on stock compensation
1,199
7,187
(166)
(8,081)
(11,834)
Three months ended September 30, 2021 versus 2020 - Segment Results
Net income/(loss) for the third quarter of 2021 versus the third quarter of 2020 by segment (in thousands):
VITAS’ after-tax earnings decreased primarily due to lower revenue in the third quarter of 2021 when compared to the third quarter of 2020. After-tax earnings as a percent of revenue at VITAS in the third quarter of 2021 was 13.5% as compared to 13.6% in the third quarter of 2020.
Roto-Rooter’s net income was impacted in 2021 compared to 2020 primarily by higher revenue and improved labor costs. After-tax earnings as a percent of revenue at Roto-Rooter in the third quarter of 2021 was 20.1%, as compared to 16.3% in the third quarter of 2020.
After-tax Corporate expenses for 2021 increased 68.7% when compared to 2020 due mainly to a $6.0 million decrease in the excess tax benefits on stock compensation.
Nine months ended September 30, 2021 versus 2020 - Consolidated Results
Our service revenues and sales for the first nine months of 2021 increased 3.4% versus services and sales revenues for the first nine months of 2020. Of this increase, $109.3 million was attributable to Roto-Rooter offset by a $57.3 million decrease attributable to VITAS. The following chart shows the components of revenue by operating segment (in thousands):
187,477
159,003
131,045
108,255
318,522
267,258
159,714
135,425
853
1,371
Days of care at VITAS during the nine months ended September 30 were as follows:
4,008,215
4,192,681
(4.4)
735,906
844,232
(12.8)
15,509
15,416
0.6
4,759,630
5,052,329
79,385
110,200
(28.0)
82,129
84,907
(3.3)
4,921,144
5,247,436
(6.2)
The decrease in service revenues at VITAS is comprised primarily of a 6.2% decrease in days-of-care offset by a geographically weighted average Medicare reimbursement rate increase (including the suspension of sequestration on May 1, 2020) of approximately 1.9%. Acuity mix shift had a net impact of reducing revenue approximately $16.0 million, or 1.6% in the quarter when compared to the prior year revenue and level-of-care mix. The combination of a lower Medicare cap revenue reduction and other contra revenue changes offset a portion of the revenue decline by approximately 20 basis points.
The increase in plumbing revenues for the first nine months of 2021 versus 2020 is attributable to a 12.3% increase in job count and to an 8.8% increase in price and service mix shift. The increase in excavation revenues for the first nine months of 2021 versus 2020 is attributable to a 9.2% increase in job count and to an 8.7% increase in price and service mix shift. Drain cleaning revenues for the first nine months of 2021 versus 2020 reflect a 9.1% increase in price and service mix shift and an 8.8% increase in job count. Water restoration revenue increased for the first nine months of 2021 versus 2020 due to a 10.2% increase in job count and a 14.6% increase in price and service mix shift. The increase in job count for all service lines was driven by both residential and commercial customers.
The consolidated gross margin was 35.4% in the first nine months of 2021 as compared with 32.5% in the first nine months of 2020. On a segment basis, VITAS’ gross margin was 23.4% in the first nine months of 2021 as compared with 22.9%, in the first nine months of 2020. The increase is primarily due to improved labor costs. The Roto-Rooter segment’s gross margin was 52.7% for the first nine months of 2021 as compared with 50.3% in the first nine months of 2020 primarily due to increased revenue and improved labor costs.
259,376
232,797
5,508
5,523
SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts for the first nine months of 2021 were up 11.4% when compared to the first nine months of 2020. This increase was mainly a result of the increase in variable selling and general administrative expenses and increased bonus expense at Roto-Rooter caused by increased income.
Depreciation for the first nine months of 2021 increased 6.9% when compared to the first nine months of 2020.
Amortization for the first nine months of 2021 increased 0.7% when compared to the first nine months of 2020. Quarterly amortization of intangible assets is mainly driven by two Roto-Rooter franchise acquisitions completed in 2019. The total purchase price of these acquisitions was $138.0 million. As part of the purchase price allocation, approximately $59.2 million was determined to be the value of reacquired franchise rights which are being amortized over the remaining life of each franchise agreement. The average remaining life on the reacquired franchise agreements was approximately seven years. Quarterly amortization of reacquired franchise rights for these two acquisitions is approximately $2.0 million ($8.1 million annualized through 2026). This contrasts to quarterly franchise fees historically collected from these two franchisees of approximately $470,000 ($1.9 million annualized).
Other operating (income)/expenses comprise the following:
Total other operating (income)/expenses
53,379
52,531
(5,305)
(19,943)
9,332
9,118
2,856
2,729
60,262
44,435
23.7
17.8
(11,442)
(24,009)
Facility relocation costs
(1,384)
24,009
(462)
(5,186)
(5,185)
(1,140)
(2,426)
72
(13,695)
(11,369)
5,305
19,943
(4,964)
(5,006)
(29)
(32,629)
(6,780)
Nine months ended September 30, 2021 versus 2020 - Segment Results
Net income/(loss) for the first nine months of 2021 versus the first nine months of 2020 by segment (in thousands):
VITAS’ after-tax earnings decreased primarily due to lower revenue. After-tax earnings as a percent of revenue at VITAS in the first nine months of 2021 was 12.0% as compared to 14.7% in the first nine months of 2020.
Roto-Rooter’s net income was impacted in 2021 compared to 2020 primarily by higher revenue and improved labor costs. After-tax earnings as a percent of revenue at Roto-Rooter in the first nine months of 2021 was 19.1%, as compared to 15.6% in the first nine months of 2020.
After-tax Corporate expenses for 2021 increased 66.0% when compared to 2020 due mainly to a $14.6 million decrease in the excess tax benefits on stock compensation.
CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021
(in thousands)(unaudited)
Chemed
Consolidated
2021 (a)
Cost of services provided and goods sold
238,212
103,952
21,372
51,914
15,931
5,286
6,539
19
18
2,492
Other operating expense/(income)
65
(3)
1
264,953
164,894
15,951
Income/(loss) from operations
52,458
56,362
(15,951)
(43)
(285)
(255)
Intercompany interest income/(expense)
4,513
1,847
(6,360)
Other income—net
22
34
Income/(expense) before income taxes
56,950
57,958
(19,488)
(14,000)
(13,404)
3,987
Net income/(loss)
(a) The following amounts are included in net income (in thousands):
Pretax benefit/(cost):
(3,998)
(2,501)
(415)
(2,916)
(2,352)
(1,942)
(218)
(2,767)
(6,158)
(11,426)
After-tax benefit/(cost):
(2,171)
(2,034)
(4,181)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
2020 (a)
246,636
92,604
21,799
48,074
18,444
5,592
6,089
33
2,493
Other operating expense
9,052
3,155
283,097
152,415
18,477
54,000
38,785
(18,477)
(47)
(80)
(252)
5,337
1,651
(6,988)
381
38
59,671
40,394
(18,461)
(13,934)
(9,218)
9,270
(8,805)
(6,945)
(1,321)
(8,266)
(3,182)
(3,095)
2,250
(1,774)
852
(12,648)
(6,768)
(4,956)
(24,372)
(6,152)
(9,395)
(4,974)
2,535
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
724,398
308,732
66,094
158,791
49,769
17,749
19,359
53
7,477
655
133
808,949
494,492
49,833
136,186
158,656
(49,833)
(129)
(464)
(750)
13,524
5,116
(18,640)
654
150,235
163,405
(59,453)
(36,805)
(38,901)
15,444
(15,338)
(1,551)
(16,927)
(16,342)
(7,056)
(5,508)
(1,855)
98
(17,193)
(8,509)
(22,106)
(47,808)
(12,611)
(12,826)
(6,254)
(13,549)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020
772,880
270,268
65,141
138,587
39,685
16,622
18,035
104
7,423
Other operating (income)/expense
(31,661)
2,725
823,035
437,038
39,790
179,442
106,779
(39,790)
(137)
(272)
(1,596)
14,463
4,422
(18,885)
549
68
5,106
194,317
110,997
(55,165)
(47,055)
(26,031)
28,651
(3,299)
(35,483)
32,184
(13,296)
(5,523)
Litigation Settlement
(619)
(13,450)
(18,819)
(32,888)
(26,435)
(9,886)
3,568
Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA
Chemed Corporation and Subsidiary Companies
For the three months ended Setptember 30, 2021
Add/(deduct):
43
285
255
583
14,000
13,404
(3,987)
EBITDA
62,297
67,274
(19,214)
110,357
Intercompany interest expense/(income)
(4,513)
(1,847)
6,360
(24)
(34)
(58)
3,998
2,501
415
2,916
218
60,261
65,808
(6,696)
For the three months ended September 30, 2020
47
80
252
379
13,934
9,218
(9,270)
65,328
49,056
(18,176)
96,208
(5,337)
(1,651)
6,988
Interest (income)/expense
(385)
(423)
6,945
1,321
8,266
3,182
COVID-19 related Medicare cap
(2,250)
(852)
72,254
51,783
(6,232)
For the nine months ended September 30, 2021
129
464
750
1,343
36,805
38,901
(15,444)
168,166
190,705
(58,640)
300,231
(13,524)
(5,116)
18,640
(191)
(288)
15,338
1,551
16,927
(98)
169,789
186,945
(17,894)
For the nine months ended September 30, 2020
137
272
2,005
47,055
26,031
(28,651)
211,129
136,727
(53,465)
294,391
(14,463)
(4,422)
18,885
(566)
(68)
(13)
(647)
3,299
35,483
619
196,719
138,631
(15,774)
RECONCILIATION OF ADJUSTED NET INCOME
(in thousands, except per share data)(unaudited)
Net income as reported
Add/(deduct) pre-tax cost of:
2,352
7,056
1,855
Add/(deduct) tax impacts:
Tax impact of the above pre-tax adjustments (1)
(2,146)
(5,351)
(9,874)
(6,165)
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.
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
83.1
82.0
82.5
80.5
9.1
8.1
8.9
8.4
6.8
9.0
7.6
10.3
1.0
0.9
0.8
100.0
(0.7)
(0.8)
(0.9)
(1.1)
1.2
(0.3)
(0.4)
98.3
99.1
97.9
97.6
Days of care
Number of days in relevant time period
92
273
274
Average daily census (days)
14,596
15,502
14,682
15,302
2,812
2,841
2,696
3,081
58
50
56
17,466
18,393
17,435
18,439
304
294
301
310
264
291
402
18,034
19,045
18,027
19,151
Total Admissions
17,598
17,943
52,573
53,368
Total Discharges
17,686
18,205
52,747
51,281
Average length of stay (days)
96.0
97.1
95.0
92.9
Median length of stay (days)
13.0
14.0
ADC by major diagnosis
Cerebro
36.4
35.1
36.7
35.7
Neurological
22.7
22.1
22.5
21.7
Cancer
12.0
12.5
12.1
12.6
Cardio
15.5
16.1
15.9
Respiratory
7.5
8.0
8.2
5.9
6.2
5.7
Admissions by major diagnosis
20.3
21.4
21.1
13.2
12.2
27.0
27.4
26.9
27.8
14.1
13.6
14.4
14.5
11.3
9.9
10.9
10.6
15.2
12.9
Estimated uncollectible accounts as a percent of revenues
1.1
Accounts receivable --
Days of revenue outstanding- excluding unapplied Medicare payments
33.7
33.4
n.a.
Days of revenue outstanding- including unapplied Medicare payments
23.4
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 September 30, 2021, the Company had no variable rate debt outstanding. For each $10 million borrowed under the credit facility, an increase or decrease of 100 basis points (1%), 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. 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.
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 other material changes from the risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K.
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 nine months of 2021:
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, 2021
9,030,125
178,424,171
February 1 through February 28, 2021
446.44
9,050,125
169,495,380
March 1 through March 31, 2021
80,000
447.98
9,130,125
133,656,728
First Quarter Total
100,000
447.67
April 1 through April 30, 2021
14,685
478.70
9,144,810
126,627,084
May 1 through May 31, 2021
200,315
486.65
9,345,125
329,142,814
June 1 through June 30, 2021
35,000
496.21
9,380,125
311,775,318
Second Quarter Total
250,000
487.52
July 1 through July 31, 2021
August 1 through August 31, 2021
279,171
465.57
9,659,296
181,801,156
September 1 through September 30, 2021
70,829
476.60
9,730,125
148,044,270
Third Quarter Total
None.
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
The following materials from Chemed Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) The Condensed Consolidated Balance Sheet, (ii) The Condensed Consolidated Statement of Income, (iii) The Condensed Consolidated Statement of Cash Flows, (iv) The Condensed Statement of Equity, and (v) Notes to the Condensed Consolidated Financial Statements.
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL and contained in Exhibit 101.
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:
November 1, 2021
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)