Chemed Corp: Form 10-Q for the period ended Jun 30, 2023

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 vast majority of the Company’s operations are located in the United States. As both operations are service companies, our employees are the most critical resource of the Company. We have very little or no exposure related to customers, vendors, or employees in other regions of the world.

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

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and Adjusted EBITDA as a percent of revenue are not measures derived in accordance with US GAAP. We provide non-GAAP measures to help readers evaluate our operating results and to compare our operating performance with that of similar companies that have different capital structures. Our non-GAAP measures should not be considered in isolation or as a substitute for comparable measures presented in accordance with GAAP. A reconciliation of our non-GAAP measures is presented on pages 35-37.

For the three months ended June 30, 2023, the increase in consolidated service revenues and sales was driven by a 7.8% increase at VITAS and a 0.2% decrease at Roto-Rooter. The decrease in service revenues at Roto-Rooter was driven mainly by a decrease in drain cleaning offset by increases in excavation and water restoration. The increase in service revenues at VITAS is comprised primarily of a 6.2% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.7%, partially offset by 100-basis points as a result of CMS reimplementing sequestration that was suspended at the start of the pandemic. Acuity mix shift had minimal impact in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare cap and other contra revenue changes negatively impacted revenue growth by 10-basis points.

For the six months ended June 30, 2023, the increase in consolidated service revenues and sales was driven by a 5.8% increase at VITAS and a 3.8% increase at Roto-Rooter. The increase in service revenues at Roto-Rooter was driven mainly by an increase in plumbing, excavation, and water restoration, offset by a decrease in drain cleaning. The increase in service revenues at VITAS is comprised primarily of a 4.6% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.8%, partially offset by 150-basis points as a result of CMS reimplementing sequestration that was suspended at the start of the pandemic in 2020. Acuity mix shift had minimal impact in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare cap and other contra revenue changes negatively impacted revenue growth by 10-basis points.

The pandemic has resulted in a significant shortage of licensed healthcare workers industry wide. VITAS has not been immune to this shortage. As a result, on July 1, 2022, VITAS implemented a hiring and retention bonus program for its licensed healthcare workers. It is a temporary program intended to help VITAS attract and retain licensed healthcare workers in light of the pandemic- induced healthcare worker shortage. An eligible employee must continue in employment for a period of one-year from July 1st to receive a bonus. Additionally, employees hired between July 1, 2022 and June 30, 2023 are eligible if they continue employment for a one-year period from their hire date. The Company accrued $12.8 million in the second quarter of 2023 and $23.8 million in the first six months of 2023 related to this retention bonus program. A total of $43.4 million has been accrued since the start of the program. A payment of $28.6 million was made in July 2023 related to the employed workers as of July 1, 2022. The remaining accrued amount will be paid over the following four quarters. See page 38 for additional VITAS operating metrics.

While significant continuing issues related to the COVID-19 pandemic appear to be over or materially mitigated, we will continue to monitor any impact on our business including employees, customers, patients, and supply vendors.

While many companies have been adversely impacted by the banking crisis of March 2023, we do not anticipate any significant financial impact. The vast majority of our cash on hand is in the two largest banks in the United States, as measured by total assets.

VITAS 2023 revenue, prior to Medicare Cap, is estimated to increase 8.5% to 9.5% when compared to 2022. Forecasted revenue growth is negatively impacted by 75-basis points as a result of the sequestration relief in the first half of 2022 compared to a full year of sequestration in 2023. ADC is estimated to increase 6.5% to 7.5%. Full year adjusted EBITDA margin, prior to Medicare Cap and accrued retention bonuses related to the hiring initiatives, is estimated to be 16.5% to 17.0%. We are currently estimating $11 million for Medicare Cap billing limitations in calendar year 2023.

Roto-Rooter is forecasted to achieve full-year 2023 revenue growth of 1.0% to 2.0%. Roto-Rooter’s adjusted EBITDA margin for 2023 is expected to be 28.0% to 28.5%.

Based upon the above, full-year 2023 earnings per diluted share, excluding: non-cash expense for stock options, tax benefits from stock option exercises, costs related to litigation, retention program for licensed healthcare employees, and other discrete items, is estimated to be in the range of $19.90 to $20.10. Current 2023 guidance assumes an effective corporate tax rate on adjusted earnings of 24.7% and a diluted share count of 15.2 million shares. Chemed’s 2022 reported adjusted earnings per diluted share was $19.75.

On June 28, 2022, we replaced our existing credit facility with a fifth amended and restated Credit Agreement (“2022 Credit Facilities”). Terms of the 2022 Credit Facilities consist of a five-year $450.0 million revolver as well as a five-year $100.0 million term loan. Principal payments of $1.25 million on the term loan are due on the last day of each fiscal quarter, with a final payment due at the end of the agreement. The 2022 Credit Facilities have a floating interest rate that is generally SOFR plus an additional tiered rate which varies based on our current leverage ratio. As of June 30, 2023, the interest rate is SOFR plus 100 basis points. The 2022 Credit Facilities include an expansion feature that provides the Company the opportunity to increase its revolver and/or term loan by an additional $250.0 million.

We made prepayments totaling $75.0 million in the first quarter of 2023, on the $100.0 million term loan. We paid the remaining balance of $21.3 million on April 28, 2023. There are no prepayment penalties associated with this repayment. This reduced the borrowing capacity of the 2022 Credit Facilities from $550.0 million to $450.0 million.

We have issued $45.3 million in standby letters of credit as of June 30, 2023, mainly for insurance purposes. Issued letters of credit reduce our available credit under the 2022 Credit Facilities. As of June 30, 2023, we have approximately $404.7 million of unused lines of credit available and are 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.

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

Financial Condition

Liquidity and Capital Resources

Material changes in the balance sheet accounts from December 31, 2022 to June 30, 2023 include the following:

A $19.2 million decrease in accounts receivable due to timing of receipts. See discussion below.

A $13.0 million decline in accrued compensation due to payment of 2022 bonuses in the first quarter of 2023.

A $23.7 million increase in other current liabilities due mainly to the healthcare worker retention bonus program at VITAS.

A $97.5 million decrease in total long-term debt due to early repayments.

Net cash provided by operating activities increased $35.1 million from June 30, 2022 to June 30, 2023. The main driver of the increase is a $32.6 million increase in accounts payable and other current liabilities due to the retention bonus accrual, a decrease of $19.2 million in accounts receivable, offset by a net income decrease of $23.1 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 $42.0 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.

Commitments and Contingencies

Collectively, the terms of the 2022 Credit Facilities require us to meet various financial covenants, to be tested quarterly. We are in compliance with all financial and other debt covenants as of June 30, 2023 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 10 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 June 30, 2023 versus 2022 - Consolidated Results

Our service revenues and sales for the second quarter of 2023 increased 4.2% versus services and sales revenues for the second quarter of 2022. Of this increase, a $23.1 million increase was attributable to VITAS, and a $552,000 decrease was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

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

The increase in service revenues at VITAS is comprised primarily of a 6.2% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.7%, partially offset by 100-basis points as a result of CMS reimplementing sequestration that was suspended at the start of the pandemic. Acuity mix shift had minimal impact in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare cap and other contra revenue changes negatively impacted revenue growth by 10-basis points.

The decrease in plumbing revenues for the second quarter of 2023 versus 2022 is attributable to a 9.3% increase in price and service mix shift offset by a 9.6% decrease in job count. The decrease in drain cleaning revenues for the second quarter of 2023 versus

2022 is attributable to a 6.5% increase in price and service mix offset by a 13.0% decrease in job count. The decline in drain cleaning and plumbing volume is mainly the result of macro-economic consumer caution, as seen by many consumer-facing businesses. Excavation and water restoration jobs are generally sold as a result of initial calls from customers regarding drain cleaning issues. As a result, the 3.6% increase in excavation revenue and the 3.0% increase in water restoration revenue are mainly a function of the numbers and size of drain cleaning issues we encounter on a quarterly basis. Independent Contractor revenue increased 4.1% due mainly to increased expansion into water restoration.

The consolidated gross margin was 32.4% in the second quarter of 2023 as compared with 36.6% in the second quarter of 2022. On a segment basis, VITAS’ gross margin was 18.0% in the second quarter of 2023 as compared with 23.6%, in the second quarter of 2022. The decrease in gross margin at VITAS is mostly the result of the $12.8 million expense recorded in the second quarter of 2023 for the licensed healthcare worker retention bonus program. The Roto-Rooter segment’s gross margin was 52.3% for the second quarter of 2023 as compared with 53.2% in the second quarter of 2022. This decline was mainly the result of declining revenue.

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 for the second quarter of 2023 were essentially flat when compared to the second quarter of 2022.

Amortization for the second quarter of 2023 was flat when compared to the second quarter of 2022. 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 income/(expense) – net comprise (in thousands):

Our effective tax rate reconciliation is as follows (in thousands):

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

Three months ended June 30, 2023 versus 2022 - Segment Results

Net income/(loss) for the second quarter of 2023 versus the second quarter of 2022 by segment (in thousands):

VITAS’ after-tax earnings decreased primarily due to the $9.6 million in after-tax expense related to VITAS’ licensed healthcare worker retention bonus program. After-tax earnings as a percent of revenue at VITAS in the second quarter of 2023 was 8.1% as compared to 11.8% in the second quarter of 2022.

Roto-Rooter’s net income was impacted in the second quarter of 2023 compared to the second quarter of 2022 primarily by lower revenues. After-tax earnings as a percent of revenue at Roto-Rooter in the second quarter of 2023 was 19.0%, as compared to 20.2% in the second quarter of 2022.

After-tax Corporate expenses for the second quarter of 2023 increased 8.2% when compared to 2022 due primarily to a $1.2 million increase in stock-based compensation.

Results of Operations

Six months ended June 30, 2023 versus 2022 - Consolidated Results

Our service revenues and sales for the first six months of 2023 increased 4.9% versus services and sales revenues for the first six months of 2022. Of this increase, a $34.4 million increase was attributable to VITAS and a $17.8 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

Days of care at VITAS during the six months ended June 30 were as follows:

The increase in service revenues at VITAS is comprised primarily of a 4.6% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.8%, partially offset by 150-basis points as a result of CMS reimplementing sequestration that was suspended at the start of the pandemic in 2020. Acuity mix shift had minimal impact in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare cap and other contra revenue changes negatively impacted revenue growth by 10-basis points.

The increase in plumbing revenues for the first six months of 2023 versus 2022 is attributable to a 11.1% increase in price and service mix shift and 8.4% decrease in job count. Drain cleaning revenues for the first six months of 2023 versus 2022 reflect a 7.3% increase in price and service mix shift offset by a 10.6% decrease in job count. The decline in drain cleaning and plumbing volume is mainly the result of macro-economic consumer caution, as seen by many consumer-facing businesses. Excavation and water restoration jobs are generally sold as a result of initial calls from customers regarding drain cleaning issues. As a result, the 5.8% increase in excavation revenue and the 13.9% increase in water restoration revenue are mainly a function of the numbers and size of drain cleaning issues we encounter on a quarterly basis. Independent Contractor revenue increased 6.5% due mainly to increased expansion into water restoration.

The consolidated gross margin was 33.1% in the first six months of 2023 as compared with 36.6% in the first six months of 2022. On a segment basis, VITAS’ gross margin was 18.2% in the first six months of 2023 as compared with 23.8%, in the first six months of 2022. The decrease in gross margin at VITAS is mostly the result of the $23.8 million expense recorded in the first six months of 2023 for the licensed healthcare worker retention bonus program. The Roto-Rooter segment’s gross margin was 52.7% for the first six months of 2023 as compared with 53.0% in the first six months of 2022.

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 for the first six months of 2023 were up 3.1% when compared to the first six months of 2022. This increase was mainly a result of the increase in variable selling expenses and normal salary increases.

Other income/(expense) – net comprise (in thousands):

Our effective tax rate reconciliation is as follows (in thousands):

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

Six months ended June 30, 2023 versus 2022 - Segment Results

Net income/(loss) for the first six months of 2023 versus the first six months of 2022 by segment (in thousands):

VITAS’ after-tax earnings decreased primarily due to the $17.7 million in after-tax expense related to VITAS’ licensed healthcare worker retention bonus program, as well as the reimplementation of the 2.0% sequestration cut that was suspended at the start of the pandemic in 2020, in the first six months of 2023 when compared to the first six months of 2022. After-tax earnings as a percent of revenue at VITAS in the first six months of 2023 was 8.1% as compared to 12.0% in the first six months of 2022.

Roto-Rooter’s after-tax earnings as a percent of revenue for the first six months of 2023 was 19.1%, as compared to 19.6% in the first six months of 2022.

After-tax Corporate expenses for the first six months of 2023 increased 10.4% when compared to the first six months of 2022 due to an $3.1 million increase in stock-based compensation.

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2023

(in thousands)(unaudited)

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2022

(in thousands)(unaudited)

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2023

(in thousands)(unaudited)

CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2022

(in thousands)(unaudited)

Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA

(in thousands)

• 35-

Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA

(in thousands)

RECONCILIATION OF ADJUSTED NET INCOME

(in thousands, except per share data)(unaudited)

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

OPERATING STATISTICS FOR VITAS SEGMENT

(unaudited)

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 new information, future events or otherwise.

The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At June 30, 2023, 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.

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.