Chemed Corp: Form 10-Q for the period ended Mar 31, 2024

Executive Summary

We operate through our two wholly-owned subsidiaries, VITAS Healthcare Corporation and Roto-Rooter Group, Inc. VITAS focuses on hospice care that helps make terminally ill patients’ final days as comfortable as possible. Through its teams of doctors, nurses, home health aides, social workers, clergy and volunteers, VITAS provides direct medical services to patients, as well as spiritual and emotional counseling to both patients and their families. Roto-Rooter’s services are focused on providing plumbing, drain cleaning, excavation, water restoration and other related services to both residential and commercial customers. Through its network of company-owned branches, independent contractors and franchisees, Roto-Rooter offers plumbing and drain cleaning service to over 90% of the U.S. population.

The vast majority of the Company’s operations are located in the United States. As both operations are service companies, our employees are the most critical resource of the Company. We have very little exposure related to customers, vendors, or employees in other regions of the world.

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 27-28.

For the three months ended March 31, 2024, the increase in consolidated service revenues and sales was driven by a 14.0% increase at VITAS offset by a 5.8% decrease at Roto-Rooter. The increase in service revenues at VITAS is comprised primarily of a 11.5% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.6%. Acuity mix shift negatively impacted revenue growth 60-basis points in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare cap and other contra revenue changes increased revenue growth by 50-basis points. The decrease in service revenues at Roto-Rooter was driven by a decrease in all service lines.

The pandemic 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 was a temporary program that helped VITAS attract and retain licensed healthcare workers during the pandemic- induced healthcare worker shortage. An eligible employee must continue in employment for a period of one-year from July 1, 2022 to receive a bonus. Additionally, employees hired between July 1, 2022 and June 30, 2023 were eligible if they continue employment for a one-year period from their hire date. A total of $39.7 million has been accrued since the start of the program. Payments totaling $33.6 million have been made from July 2023 to March 2024. The remaining accrued amount will be paid over the next two quarters. For the quarter ended March 31, 2023, the pre-tax cost of the retention program was $10.9 million. There was no material impact on the financial results for the quarter ended March 31, 2024. See page 29 for additional VITAS operating metrics.

Starting September 30, 2023, Chemed no longer excluded the cost of the Retention Program when presenting non-GAAP operating metrics in current or prior periods.

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 March 31, 2024, 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 were no prepayment penalties associated with this repayment. This prepayment reduced the total borrowing capacity of the 2022 Credit Facilities from $550.0 million to $450.0 million.

We have issued $45.2 million in standby letters of credit as of March 31, 2024, mainly for insurance purposes. Issued letters of credit reduce our available credit under the 2022 Credit Facilities. As of March 31, 2024, we have approximately $404.8 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, 2023 to March 31, 2024 include the following:

A $11.5 million increase in investments of deferred compensation plans due mainly to market valuation gains. This resulted in a similar increase in the liability associated with deferred compensation plans.

A $5.4 million increase in lease right of use asset due to lease renewals. This resulted in a similar increase in the long-term lease liability.

A $6.5 million increase in goodwill due to acquisitions at Roto-Rooter.

A $20.5 million increase in income taxes due to timing of payments.

A $38.6 million decline in accrued compensation due primarily to the payment of 2023 bonuses in the first quarter of 2024.

A $9.1 million decrease in other current liabilities due to payments of the retention bonus program implemented at VITAS and a decrease in the Medicare Cap liability at VITAS.

Net cash provided by operating activities increased $24.1 million from March 31, 2023 to March 31, 2024. The main drivers are an increase in earnings of $10.9 million and an increase of $7.1 million in noncash long-term incentive compensation. 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 $51.0 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 March 31, 2024 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 March 31, 2024 versus 2023 - Consolidated Results

Our service revenues and sales for the first quarter of 2024 increased 5.2% versus services and sales revenues for the first quarter of 2023. Of this increase, a $43.5 million increase was attributable to VITAS, offset by a $14.5 million decrease at Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

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

The increase in service revenues at VITAS is comprised primarily of an 11.5% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.6%. Acuity mix shift negatively impacted revenue growth by 60-basis points in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare cap and other contra revenue changes increased revenue growth by 50-basis.

The decrease in plumbing revenues for the first quarter of 2024 versus 2023 is attributable to a 2.2% decrease in price and service mix shift and by a 2.5% decrease in job count. The decrease in drain cleaning revenues for the first quarter of 2024 versus 2023 is attributable to a 9.2% decrease in job count offset by a 1.9% increase in price and service mix. Excavation and water restoration jobs are generally sold as a result of initial calls from customers regarding drain cleaning issues.

The consolidated gross margin was 34.6% in the first quarter of 2024 as compared with 33.8% in the first quarter of 2023. On a segment basis, VITAS’ gross margin was 23.2% in the first quarter of 2024 as compared with 18.3%, in the first quarter of 2023. The increase in gross margin at VITAS is mostly the result of increased revenues and the expiration of the licensed healthcare worker retention bonus program in 2023. The Roto-Rooter segment’s gross margin was 51.9% for the first quarter of 2024 as compared with 53.1% in the first quarter of 2023. 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 first quarter of 2024 were up 0.5% when compared to first quarter of 2023.

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

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. In 2023, Chemed began investing excess cash in a money market fund holding US Treasuries. Deposits and withdrawals are made daily, based on the Company’s excess cash balance. There are no penalties associated with withdrawals. The accounts bear interest at a normal market rate.

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 March 31, 2024 versus 2023 - Segment Results

Net income/(loss) for the first quarter of 2024 versus the first quarter of 2023 by segment (in thousands):

After-tax earnings as a percent of revenue at VITAS in the first quarter of 2024 was 12.4% as compared to 8.0% in the first quarter of 2023. VITAS’ after-tax earnings increased primarily due to increased revenues and the expiration of the licensed healthcare worker retention bonus program in 2023.

Roto-Rooter’s net income was negatively impacted in the first quarter of 2024 compared to the first quarter of 2023 primarily due to declining revenue. After-tax earnings as a percent of revenue at Roto-Rooter in the first quarter of 2024 was 17.4%, as compared to 19.1% in the first quarter of 2023.

After-tax Corporate expenses for the first quarter of 2024 increased 8.3% when compared to the first quarter in 2023 due primarily to a $1.7 million increase in stock-based compensation.

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2024

(in thousands)(unaudited)

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2023

(in thousands)(unaudited)

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 March 31, 2024, 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 the Company’s President and Chief Executive Officer and with the participation of the Vice President, Chief Financial Officer 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 and Vice President, Chief Financial Officer 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.