Annual Statements Open main menu

CHEMED CORP - Quarter Report: 2020 September (Form 10-Q)

che-20200930x10q

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, 2020

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).

Yes  

x

No  

o  

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

x

Accelerated Filer

o

Non-accelerated Filer

o

Smaller Reporting Company

o

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).

Yes  

 o 

No  

x  

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

15,951,822 Shares

September 30, 2020

 


-1-


CHEMED CORPORATION AND

SUBSIDIARY COMPANIES

Index

Page No.

PART I. FINANCIAL INFORMATION:

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets -

September 30, 2020 and December 31, 2019

3

Unaudited Consolidated Statements of Income -

Three and nine months ended September 30, 2020 and 2019

4

Unaudited Consolidated Statements of Cash Flows -

Nine months ended September 30, 2020 and 2019

5

Unaudited Consolidated Statements of Changes in Stockholders’ Equity-

Three and nine months ended September 30, 2020 and 2019

6

Notes to Unaudited Consolidated Financial Statements

7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3. Quantitative and Qualitative Disclosures about Market Risk

43

Item 4. Controls and Procedures

43

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

43

Item 1A. Risk Factors

43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3. Defaults Upon Senior Securities

44

Item 4. Mine Safety Disclosures

44

Item 5. Other Information

44

Item 6. Exhibits

45

EX – 31.1

EX – 31.2

EX – 31.3

EX – 32.1

EX – 32.2

EX – 32.3

EX – 101

EX – 104


-2-


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

September 30, 2020

December 31, 2019

ASSETS

Current assets

Cash and cash equivalents

$

112,765 

$

6,158 

Accounts receivable less allowances of $1,293 (2019 - $353)

110,839 

143,827 

Inventories

7,546 

7,462 

Prepaid income taxes

14,224 

10,074 

Prepaid expenses

25,222 

23,150 

Total current assets

270,596 

190,671 

Investments of deferred compensation plans

86,865 

77,446 

Properties and equipment, at cost, less accumulated depreciation of $288,657 (2019 - $270,140)

181,386 

175,763 

Lease right of use asset

120,382 

111,652 

Identifiable intangible assets less accumulated amortization of $45,095 (2019 - $37,620)

120,401 

126,370 

Goodwill

578,519 

577,367 

Other assets

8,805 

9,048 

Total Assets

$

1,366,954 

$

1,268,317 

LIABILITIES

Current liabilities

Accounts payable

$

39,268 

$

51,101 

Accrued insurance

50,727 

50,328 

Accrued compensation

101,868 

70,814 

Accrued legal

9,561 

6,941 

Short-term lease liability

33,311 

39,280 

Unutilized CARES Act grant

48,041 

-

Other current liabilities

46,387 

43,756 

Total current liabilities

329,163 

262,220 

Deferred income taxes

19,222 

18,504 

Long-term debt

-

90,000 

Deferred compensation liabilities

86,875 

76,446 

Long-term lease liability

99,241 

86,656 

Other liabilities

31,045 

7,883 

Total Liabilities

565,546 

541,709 

Commitments and contingencies (Note 11)

 

 

STOCKHOLDERS' EQUITY

Capital stock - authorized 80,000,000 shares $1 par; issued 36,137,463 shares (2019 - 35,810,528 shares)

36,137 

35,811 

Paid-in capital

925,271 

860,671 

Retained earnings

1,615,465 

1,425,752 

Treasury stock - 20,261,187 shares (2019 - 19,867,220 shares)

(1,777,809)

(1,597,940)

Deferred compensation payable in Company stock

2,344 

2,314 

Total Stockholders' Equity

801,408 

726,608 

Total Liabilities and Stockholders' Equity

$

1,366,954 

$

1,268,317 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 


-3-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

Service revenues and sales

$

528,297

$

480,613

$

1,546,294

$

1,416,231

Cost of services provided and goods sold (excluding depreciation)

339,240

328,183

1,043,148

973,771

Selling, general and administrative expenses

88,317

76,836

243,413

222,421

Depreciation

11,714

10,147

34,761

29,744

Amortization

2,511

441

7,476

1,366

Other operating (income)/expenses

12,207

78

(28,935)

9,001

Total costs and expenses

453,989

415,685

1,299,863

1,236,303

Income from operations

74,308

64,928

246,431

179,928

Interest expense

(379)

(1,041)

(2,005)

(3,402)

Other income - net

7,675

3,036

5,723

5,488

Income before income taxes

81,604

66,923

250,149

182,014

Income taxes

(13,882)

(7,976)

(44,435)

(27,671)

Net income

$

67,722

$

58,947

$

205,714

$

154,343

Earnings Per Share:

Net income

$

4.25

$

3.69

$

12.90

$

9.68

Average number of shares outstanding

15,940

15,970

15,948

15,952

Diluted Earnings Per Share:

Net income

$

4.14

$

3.56

$

12.53

$

9.35

Average number of shares outstanding

16,373

16,555

16,419

16,514

Cash Dividends Per Share

$

0.34

$

0.32

$

0.98

$

0.92

See accompanying Notes to Unaudited Consolidated Financial Statements.

 


-4-


 

CHEMED CORPORATION AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Nine Months Ended September 30,

2020

2019

Cash Flows from Operating Activities

Net income

$

205,714 

$

154,343 

Adjustments to reconcile net income to net cash provided

by operating activities:

Unutilized CARES Act grant

48,041 

-

Depreciation and amortization

42,237 

31,110 

Deferred payroll taxes

22,941 

-

Stock option expense

13,296 

10,729 

Noncash long-term incentive compensation

5,301 

4,184 

Litigation settlement

2,684

6,000

Noncash directors' compensation

1,171

767

Provision/(benefit) for deferred income taxes

831

(6,085)

Amortization of debt issuance costs

229

229

Asset impairment loss

-

2,266

Changes in operating assets and liabilities:

Decrease in accounts receivable

27,993 

10,558 

Increase in inventories

(84)

(1,649)

Increase in prepaid expenses

(2,072)

(6,836)

Increase in accounts payable and other current liabilities

34,526

28,622 

Change in current income taxes

(4,366)

(81)

Net change in lease assets and liabilities

1,583 

1,311 

Increase in other assets

(9,646)

(8,145)

Increase in other liabilities

10,735 

9,045 

Other sources

1,298 

1,277 

Net cash provided by operating activities

402,412 

237,645 

Cash Flows from Investing Activities

Capital expenditures

(42,670)

(39,753)

Business combinations

(3,600)

(138,010)

Other sources

672 

101 

Net cash used by investing activities

(45,598)

(177,662)

Cash Flows from Financing Activities

Payments on revolving line of credit

(264,900)

(359,900)

Proceeds from revolving line of credit

174,900 

400,700 

Purchases of treasury stock

(147,123)

(71,926)

Proceeds from exercise of stock options

31,498 

23,383 

Capital stock surrendered to pay taxes on stock-based compensation

(18,707)

(26,108)

Dividends paid

(15,639)

(14,657)

Change in cash overdrafts payable

(9,849)

(7,535)

Other (uses)/sources

(387)

295 

Net cash used by financing activities

(250,207)

(55,748)

Increase in Cash and Cash Equivalents

106,607 

4,235 

Cash and cash equivalents at beginning of year

6,158 

4,831 

Cash and cash equivalents at end of period

$

112,765 

$

9,066 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 


-5-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(in thousands, except per share data)

For the three months ended September 30, 2020 and 2019:

Deferred

Compensation

Treasury

Payable in

Capital

Paid-in

Retained

Stock-

Company

Stock

Capital

Earnings

at Cost

Stock

Total

Balance at June 30, 2020

36,040 

904,421 

1,553,144 

(1,745,299)

2,390 

750,696 

Net income

-

-

67,722 

-

-

67,722 

Dividends paid ($0.34 per share)

-

-

(5,401)

-

-

(5,401)

Stock awards and exercise of stock options

97 

20,636 

-

(7,581)

-

13,152 

Purchases of treasury stock

-

-

-

(24,975)

-

(24,975)

Other

-

214 

-

46 

(46)

214 

Balance at September 30, 2020

$

36,137 

$

925,271 

$

1,615,465 

$

(1,777,809)

$

2,344 

$

801,408 

Deferred

Compensation

`

Treasury

Payable in

Capital

Paid-in

Retained

Stock-

Company

Stock

Capital

Earnings

at Cost

Stock

Total

Balance at June 30, 2019

35,591 

817,255 

1,311,446 

(1,548,138)

2,415 

618,569 

Net income

-

-

58,947 

-

-

58,947 

Dividends paid ($0.32 per share)

-

-

(5,090)

-

-

(5,090)

Stock awards and exercise of stock options

147 

24,660 

-

(24,775)

-

32 

Other

-

(78)

-

69 

(69)

(78)

Balance at September 30, 2019

$

35,738 

$

841,837 

$

1,365,303 

$

(1,572,844)

$

2,346 

$

672,380 

For the nine months ended September 30, 2020 and 2019:

Deferred

Compensation

Treasury

Payable in

Capital

Paid-in

Retained

Stock-

Company

Stock

Capital

Earnings

at Cost

Stock

Total

Balance at December 31, 2019

35,811 

860,671 

1,425,752 

(1,597,940)

2,314 

726,608 

Net income

-

-

205,714 

-

-

205,714 

Dividends paid ($0.98 per share)

-

-

(15,639)

-

-

(15,639)

Stock awards and exercise of stock options

326 

64,948 

-

(32,716)

-

32,558 

Purchases of treasury stock

-

-

-

(147,123)

-

(147,123)

Other

-

(348)

(362)

(30)

30 

(710)

Balance at September 30, 2020

$

36,137 

$

925,271 

$

1,615,465 

$

(1,777,809)

$

2,344 

$

801,408 

Deferred

Compensation

Treasury

Payable in

Capital

Paid-in

Retained

Stock-

Company

Stock

Capital

Earnings

at Cost

Stock

Total

Balance at December 31, 2018

35,311 

774,358 

1,225,617 

(1,446,296)

2,344 

591,334 

Net income

-

-

154,343 

-

-

154,343 

Dividends paid ($0.92 per share)

-

-

(14,657)

-

-

(14,657)

Stock awards and exercise of stock options

427 

67,149 

-

(54,620)

-

12,956 

Purchases of treasury stock

-

-

-

(71,926)

-

(71,926)

Other

-

330 

-

(2)

2 

330 

Balance at September 30, 2019

$

35,738 

$

841,837 

$

1,365,303 

$

(1,572,844)

$

2,346 

$

672,380 

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


-6-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

Notes to Unaudited Consolidated Financial Statements

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, 2019 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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 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, 2019.

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

CURRENT EXPECTED CREDIT LOSSES

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments, Credit Losses. The ASU introduces the current expected credit loss (“CECL”) methodology. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for financial assets at the time the asset is originated or acquired. This generally results in earlier recognition of credit losses and greater transparency about credit risk. The Company adopted the provisions of ASU No. 2016-13 on January 1, 2020 using the modified retrospective method. The provisions of ASU No. 2016-13 did not significantly impact the method or timing that the Company recognizes expected credit losses and the cumulative effect of adoption was immaterial.

The Company’s only material financial asset subject to ASU No. 2016-13 is accounts receivable, trade and other. The Company recognizes an allowance for credit losses related to accounts receivable to present the net amount expected to be collected as of the balance sheet date. Accounts receivable are written-off when it is determined that the amount is deemed uncollectible. The following presents a detailed discussion of the operating subsidiaries’ accounts receivable and their evaluation of credit risk related to those accounts:

Roto-Rooter’s trade accounts receivable are comprised mainly of amounts due from commercial entities and commercial insurance carriers. Roto-Rooter’s accounts receivable are generally outstanding for 90 days or less and there are no significant amounts outstanding greater than one year. Roto-Rooter historically has not experienced significant write-offs due to credit losses. For amounts due from commercial entities, Roto-Rooter utilizes a provision matrix based on historical credit losses by aging category. For amounts due from commercial insurance carriers, mainly from water restoration revenue, Roto-Rooter periodically reviews published default tables related to commercial insurance carriers and provides an allowance. As further discussed below, Roto-Rooter assesses on a quarterly basis whether the historical rates used are expected to be representative of credit risk over the life of the account taking into consideration existing economic conditions.

In excess of 90% of VITAS’ accounts receivable are from the Federal or state governments under Medicare and Medicaid. VITAS believes that it is reasonable to expect that the risk of non-payment as a result of credit issues from these government entities is zero. As such, there is no allowance for credit losses established related to these accounts. The remainder of VITAS’ accounts are from commercial insurance carriers. VITAS’ accounts are generally outstanding for 90 days or less and there are no significant amounts outstanding greater than one year. VITAS historically has not experienced significant write-offs due to credit losses. VITAS periodically reviews published default tables related to commercial insurance carriers and provides an allowance. VITAS assesses on a quarterly basis whether these default rates are expected to be representative of credit risk over the life of the account taking into consideration existing economic conditions.

As further discussed in footnote 5, Chemed has $37.9 million in standby letters of credit outstanding. These letters of credit are with large, highly rated financial institutions. The Company periodically reviews published default tables related to these institutions to assess the need for an allowance. Chemed believes that any expected credit loss related to outstanding letters of credit based on current economic conditions is not material.

In conjunction with its quarter and year to date September 30, 2020 closing process, subsequent to the adoption of ASU No. 2016-13, Roto-Rooter re-assessed its expected credit losses as a result of COVID-19. In addition to the historical provision matrix

-7-


described above, and in conjunction with the quarterly assessment of current economic conditions and published default rates to evaluate credit risk over the life of the account, Roto-Rooter analyzed the industries from which the accounts receivable originated. Using available information and judgment, additional expected credit losses were recorded for industries deemed higher risk during the economic shut down, such as restaurants, hotels and bars. The additional charge taken for the three and nine months ended September 30, 2020 related to expected credit losses from COVID-19 issues was $185,000 and $1.1 million, respectively. The full economic impact as a result of COVID-19 and the related business shut-downs will not be known for some period of time. The amount recorded for the three and nine months ended September 30, 2020 represents management’s current best estimate.

ADDITIONS

(CHARGED)

CREDITED

(CHARGED)

TO COSTS

CREDITED

BALANCE AT

AND

TO OTHER

BALANCE AT

1/1/2020

EXPENSES

ACCOUNTS

DEDUCTIONS

OTHER

9/30/2020

$

(353)

$

(1,052)

$

(475)

$

574

$

13

$

(1,293)

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, 2020. 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. VITAS has cared for approximately 3,500 COVID positive patients through September 30, 2020.

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 $22.9 million of certain employer payroll taxes as permitted by the CARES Act.

During the period from May 1, 2020 through December 31, 2020, the 2% Medicare sequestration reimbursement cut is suspended. For the three and nine month period ended September 30, 2020 approximately $6.3 million and $10.5 million, respectively, was recognized as revenue due to the suspension of sequestration.

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 losses.

-8-


The components of the amount recognized are as follows, (in thousands):

Three months ended

Nine months ended

September 30, 2020

September 30, 2020

Incremental PTO

$

-

$

21,425 

Hard costs

6,945 

10,759 

Incremental Medicare Cap

(2,250)

-

Lost revenue

(13,500)

-

Other operating (income)/expense

$

(8,805)

$

32,184 

Hard costs are primarily expenses paid to outside vendors for personal protection equipment, COVID testing for front line workers, and deep cleaning of in-patient facilities. In April, VITAS provided an extra two weeks of paid time off to all frontline workers.

During the second quarter of 2020, VITAS recognized $2.3 million for anticipated additional Medicare Cap revenue reductions. The deterioration of admissions was not as severe as anticipated and therefore, the $2.3 million was reversed in the third quarter of 2020.

During the second quarter of 2020, VITAS recognized $13.5 million for estimated lost revenue as a result of the pandemic. On September 19, 2020, the U.S. Department of Health and Human Services (“HHS”) released additional guidance related to Relief Funds granted. Included in this guidance was clarification that lost revenue represents “a negative change in year-over-year net patient care operating income”. This is a significant change from the definition of lost revenue previously provided by HHS. As a result of these changes in facts and circumstances, the $13.5 million that was previously recognized was reversed in the third quarter of 2020. We will continue to monitor guidance provided by HHS. Current guidance states that the Company has through June 30, 2021 to utilize the provider relief funding; any unutilized amounts remaining after June 30, 2021 will need to be returned to the government.

LEASE ACCOUNTING

In February 2016, the FASB issued Accounting Standards Update “ASU No. 2016-02 Leases” which introduced a lessee model that brings most leases onto the balance sheets and updates lessor accounting to align with changes in the lessee model and the revenue recognition standard. This standard is also referred to as Accountings Standards Codification No.842 (“ASC 842”). We adopted ASC 842 effective January 1, 2019, using the optional transition method requiring leases existing at, or entered into after, January 1, 2019 to be recognized and measured. The transition method selected does not require adjustments to prior period amounts, which continue to be reflected in accordance with historical accounting. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which among other things, allowed us to carry forward the historical lease classification.

Chemed and each of its operating subsidiaries are service companies. As such, real estate leases comprise the largest lease obligation (and conversely, right of use asset) in our lease portfolio. VITAS has leased office space, as well as space for inpatient units (“IPUs”) and/or contract beds within hospitals. Roto-Rooter mainly has leased office space.

Roto-Rooter purchases equipment and leases it to certain of its independent contractors. We analyzed these leases in accordance with ASC 842 and determined they are operating leases. As a result, Roto-Rooter will continue to capitalize the equipment underlying these leases, depreciate the equipment and recognize rental income.

Adoption of the new standard resulted in right of use assets and lease liabilities of $93.1 million and $104.3 million, respectively, as of January 1, 2019. In determining the liability, we used our incremental borrowing rate based on the information available at the time of adoption, since the rate implicit in the leases cannot be readily determined. At January 1, 2019, the weighted average rate was 3.47%. The standard did not materially impact our consolidated net income or cash flows. We did not book a cumulative effect adjustment upon adoption of the standard.

CLOUD COMPUTING

On January 1, 2019, we early adopted ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. We adopted the ASU on a prospective basis.

As of September 30, 2020, 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 $9.2 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 and nine months ended September 30, 2020, $282,000 and $807,000 has been amortized. There has been no other amortization expense

-9-


associated with the Roto-Rooter project, as the software has not yet been placed in service. We anticipate amortizing this asset over the original term of the arrangement plus renewal options that are reasonably certain of being exercised.

NON-EMPLOYEE STOCK COMPENSATION

In June 2018, the FASB issued Accounting Standards Update “ASU No. 2018-07 – Compensation – Stock Compensation”. The ASU expands the scope of current guidance to include all share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. The guidance in the ASU is effective for the Company in all fiscal years beginning after December 15, 2018. Adoption of this standard had no material impact on our Consolidated Financial Statements.

INCOME TAXES

Our effective income tax rate was 17.0% in the third quarter of 2020 compared to 11.9% during the third quarter of 2019. Excess tax benefit on stock options reduced our income tax expenses by $7.2 million and $8.8 million, respectively for the quarters ended September 30, 2020 and 2019.

Our effective income tax rate was 17.8% in the first nine months of 2020 compared to 15.2% during the first nine months of 2019. Excess tax benefit on stock options reduced our income tax expenses by $19.9 million and $18.7 million, respectively for the first nine months ended September 30, 2020 and 2019.

NON-CASH TRANSACTIONS

Included in the accompanying Consolidated Balance Sheets are $979,000 and $1.8 million of capitalized property and equipment which were not paid for as of September 30, 2020 and December 31, 2019, respectively. These amounts have been excluded from capital expenditures in the accompanying Consolidated Statements of Cash Flow. There are no material non-cash amounts included in interest expense for any period presented.

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 footnote 17 for discussion of recent acquisitions.

ESTIMATES

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

2.    Revenue Recognition

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

VITAS

Service revenue for VITAS is reported at the amount that reflects the ultimate consideration we expect to receive in exchange for providing patient care. These amounts are due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), and 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.

-10-


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 during the quarters ended September 30, 2020 and 2019 was $2.1 million and $2.3 million, respectively. The cost of providing charity care during the nine months ended September 30, 2020 and 2019 was $6.1 million and $6.6 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

-11-


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 and nine months ended September 30, 2020 and 2019.

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, 2020, 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, the sequestration has been lifted for the period from May 1 through December 31, 2020.

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 quarter ended September 30, 2019, we recorded $1.3 million in net Medicare cap revenue reduction related to four programs for the 2019 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. During the first nine months ended September 30, 2019, we recorded $7.1 million in net Medicare cap revenue reduction related to four programs for the 2019 government fiscal year. Additionally, we recorded $847,000 related to adjustments of prior year cap liabilities.

-12-


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, 2020 is as follows (in thousands):

Medicare

Medicaid

Commercial

Total

Routine home care

$

260,658

$

12,107

6,091

$

278,856

Continuous care

27,739

1,364

1,596

30,699

Inpatient care

24,199

2,415

1,019

27,633

$

312,596

$

15,886

$

8,706

$

337,188

All other revenue - self-pay, respite care, etc.

2,910

Subtotal

$

340,098

Medicare cap adjustment

4,072

Implicit price concessions

(3,784)

Room and board, net

(3,289)

Net revenue

$

337,097

The composition of patient care service revenue by payor and level of care for the quarter ended September 30, 2019 is as follows (in thousands):

Medicare

Medicaid

Commercial

Total

Routine home care

$

255,856

$

12,332

$

6,558

$

274,746

Continuous care

26,423

1,549

1,474

29,446

Inpatient care

20,038

1,976

1,585

23,599

$

302,317

$

15,857

$

9,617

$

327,791

All other revenue - self-pay, respite care, etc.

2,356

Subtotal

$

330,147

Medicare cap adjustment

(1,317)

Implicit price concessions

(4,236)

Room and board, net

(2,846)

Net revenue

$

321,748

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):

Medicare

Medicaid

Commercial

Total

Routine home care

$

772,162 

$

36,914 

$

17,878 

$

826,954 

Continuous care

96,354 

4,856 

4,626 

105,836 

Inpatient care

74,796 

7,285 

3,902 

85,983 

$

943,312 

$

49,055 

$

26,406 

$

1,018,773 

All other revenue - self-pay, respite care, etc.

8,175 

Subtotal

$

1,026,948 

Medicare cap adjustment

(4,178)

Implicit price concessions

(10,976)

Room and board, net

(9,317)

Net revenue

$

1,002,477 


-13-


The composition of patient care service revenue by payor and level of care for the nine months ended September 30, 2019 is as follows (in thousands):

Medicare

Medicaid

Commercial

Total

Routine home care

$

745,835 

$

35,913 

$

18,311 

$

800,059 

Continuous care

83,372 

4,744 

4,360 

92,476 

Inpatient care

58,309 

6,241 

4,513 

69,063 

$

887,516 

$

46,898 

$

27,184 

$

961,598 

All other revenue - self-pay, respite care, etc.

6,598 

Subtotal

$

968,196 

Medicare cap adjustment

(7,915)

Implicit price concessions

(10,904)

Room and board, net

(8,098)

Net revenue

$

941,279 

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

-14-


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,

2020

2019

Short-term core service jobs

$

143,089 

$

116,277 

Water restoration

32,137 

27,642 

Contractor revenue

16,274 

14,359 

Franchise fees

1,235 

1,819 

All other

3,332 

2,791 

Subtotal

$

196,067 

$

162,888 

Implicit price concessions and credit memos

(4,867)

(4,023)

Net revenue

$

191,200 

$

158,865 

The composition of disaggregated revenue for the first nine months is as follows (in thousands):

September 30,

2020

2019

Short-term core service jobs

$

404,054 

$

344,673 

Water restoration

92,810 

86,804 

Contractor revenue

47,695 

42,986 

Franchise fees

3,635 

5,063 

All other

9,836 

8,773 

Subtotal

$

558,030 

$

488,299 

Implicit price concessions and credit memos

(14,213)

(13,347)

Net revenue

$

543,817 

$

474,952 

-15-


3.    Segments

Service revenues and sales by business segment are shown in Footnote 2. After-tax income/(loss) by business segment are as follows (in thousands):

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

VITAS

$

45,737

$

39,773

$

147,262

$

106,400

Roto-Rooter

31,176

26,140

84,966

76,302

Total

76,913

65,913

232,228

182,702

Corporate

(9,191)

(6,966)

(26,514)

(28,359)

Net income

$

67,722

$

58,947

$

205,714

$

154,343

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

2020

Earnings

$

67,722

15,940

$

4.25

Dilutive stock options

-

358

Nonvested stock awards

-

75

Diluted earnings

$

67,722

16,373

$

4.14

2019

Earnings

$

58,947

15,970

$

3.69

Dilutive stock options

-

500

Nonvested stock awards

-

85

Diluted earnings

$

58,947

16,555

$

3.56

Net Income

For the Nine Months Ended September 30,

Income

Shares

Earnings per Share

2020

Earnings

$

205,714 

15,948 

$

12.90 

Dilutive stock options

-

394 

Nonvested stock awards

-

77 

Diluted earnings

$

205,714 

16,419 

$

12.53 

2019

Earnings

$

154,343 

15,952 

$

9.68 

Dilutive stock options

-

484 

Nonvested stock awards

-

78 

Diluted earnings

$

154,343 

16,514 

$

9.35 

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.

For the three months ended September 30, 2019, there were no stock options excluded from the computation of dilutive earnings per share because they would have been anti-dilutive.

-16-


For the nine months ended September 30, 2019, there were 246,000 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. There is no debt outstanding as of September 30, 2020.

  

The 2018 Credit Agreement contains the following quarterly financial covenants effective as of September 30, 2020:

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, 2020. We have issued $37.9 million in standby letters of credit as of September 30, 2020, mainly for insurance purposes. Issued letters of credit reduce our available credit under the 2018 Credit Agreement. As of September 30, 2020, we have approximately $412.1 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility.

6.    Other Operating Expenses/(Income)

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

CARES Act grant

$

8,805

$

-

$

(32,184)

$

-

Litigation settlement

3,095

-

3,095

6,000

Loss on disposal of fixed assets

307

78

154

735

Transportation equipment held for sale

-

-

-

2,266

Total other operating expenses/(income)

$

12,207

$

78

$

(28,935)

$

9,001

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):

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

Market value adjustment on assets held in

deferred compensation trust

$

7,256

$

2,886

$

5,093

$

5,094

Interest income

423

173

647

387

Other-net

(4)

(23)

(17)

7

Total other income - net

$

7,675

$

3,036

$

5,723

$

5,488

 

8.    Leases

Chemed and each of its operating subsidiaries are service companies. As such, real estate leases comprise the largest lease obligation (and conversely, right of use asset) in our lease portfolio. VITAS has leased office space, as well as space for IPUs and/or contract beds within hospitals. Roto-Rooter has leased office space. Our leases have remaining terms of under 1 year to 10 years, some of which include options to extend the lease for up to 5 years, and some of which include options to terminate the lease within 1 year.

We do not currently have any finance leases, therefore all lease information disclosed is related to operating leases.

-17-


The components of balance sheet information related to leases were as follows:


September 30,


December 31,

2020

2019

Assets

Operating lease assets

$

120,382 

$

111,652 

Liabilities

Current operating leases

33,311 

39,280 

Noncurrent operating leases

99,241 

86,656 

Total operating lease liabilities

$

132,552 

$

125,936 

The components of lease expense for the third quarter is as follows (in thousands):

Three months ended September 30,

2020

2019

Lease Expense (a)

Operating lease expense

$

15,277 

$

12,728 

Sublease income

(31)

-

Net lease expense

$

15,246 

$

12,728 

The components of lease expense for the first nine months is as follows (in thousands):

Nine months ended September 30,

2020

2019

Lease Expense (a)

Operating lease expense

$

45,007 

$

35,181 

Sublease income

(38)

(6)

Net lease expense

$

44,969 

$

35,175 

(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,

2020

2019

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from leases

$

37,393 

$

30,237 

Leased assets obtained in exchange for new operating lease liabilities

$

44,366 

$

38,890 

Weighted Average Remaining Lease Term at September 30, 2020

Operating leases

5.1

years

Weighted Average Discount Rate at September 30, 2020

Operating leases

2.98

%

Maturity of Operating Lease Liabilities (in thousands)

2020

$

11,344

2021

39,588

2022

29,719

2023

22,767

2024

16,931

Thereafter

27,738

Total lease payments

$

148,087

Less: interest

(10,977)

Less: future lease obligations not yet commenced

(4,558)

Total liability recognized on the balance sheet

$

132,552

-18-


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 $4.6 million lease payments for leases signed but not yet commenced.

 

9.    Stock-Based Compensation Plans

On February 21, 2020, the Compensation/Incentive Committee of the Board of Directors (“CIC”) granted 5,156 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, 2022, 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 $3.3 million.

On February 21, 2020, the CIC also granted 5,156 PSUs contingent upon the achievement of certain earnings per share (“EPS”) targets for the three year period ending December 31, 2022. 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 $5.0 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):

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

$

11,506

$

6,445

$

18,445

$

17,155

 

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 will resolve 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”).

-19-


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. For additional procedural history of these cases, please refer to our prior quarterly and annual filings.

The settlement amount of $5.75 million plus employment taxes was recorded in the first quarter of 2019. As of December 31, 2019, $6.0 million was accrued in the accompanying Consolidated Balance Sheet. 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. On January 28, 2020, the court granted preliminary approval of the settlement. A notice of the proposed settlement has been sent to the members of the class by the class claims administrator. The court has re-set the date for the final approval of the settlement hearing for December 8, 2020.

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. He sought a determination that the action may proceed and be maintained as a class action and for compensatory and statutory damages (premium payments for missed rest periods, uncompensated rest periods, wages for time allegedly not paid such as travel time, repair time, and vehicle maintenance time, and unreimbursed expenses), penalties and restitutions, pre- and post-judgement interest and attorneys’ fees and costs. The lawsuit 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. As of September 30, 2020, $3.1 million was accrued in the accompanying Consolidated Balance Sheet. A hearing for preliminary approval of the settlement is scheduled for November 19, 2020.

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.

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, 2020, and December 31, 2019, approximately 67% and 71%, respectively, of VITAS’ total accounts receivable balance were from Medicare and 26% and 24%, 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 80% of the consolidated net accounts receivable in the accompanying consolidated balance sheets as of September 30, 2020.

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 no cash overdrafts payable included in accounts payable at September 30, 2020 (December 31, 2019 - $9.8 million).

From time to time throughout the year, we invest excess cash in money market funds with major commercial banks. We closely monitor the creditworthiness of the institutions with which we invest our overnight funds. The amount invested was not material for each balance sheet date presented.

-20-


 

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, 2020 (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

$

86,865 

$

86,865 

$

-

$

-

Total debt

-

-

-

-

The following shows the carrying value, fair value and the hierarchy for our financial instruments as of December 31, 2019 (in thousands):

Fair Value Measure

Carrying Value

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Mutual fund investments of deferred

compensation plans held in trust

$

77,446 

$

77,446 

$

-

$

-

Total debt

90,000 

-

90,000 

-

For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount is a reasonable estimate of fair value because of the liquidity and short-term nature of these instruments. As further described in Footnote 5, our outstanding long-term debt and current portion of long-term debt have floating interest rates that are reset at short-term intervals, generally 30 or 60 days. The interest rate we pay also includes an additional amount based on our current leverage ratio. As such, we believe our borrowings reflect significant nonperformance risks, mainly credit risk. Based on these factors, we believe the fair value of our long-term debt and current portion of long-term debt approximate the carrying value.

15.    Capital Stock Repurchase Plan Transactions

We repurchased the following capital stock:

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

Total cost of repurchased shares (in thousands)

$

24,975

$

-

$

147,123

$

71,926 

Shares repurchased

50,000

-

325,000

219,009 

Weighted average price per share

$

499.48

$

-

$

452.69

$

328.41 

In March 2020, the Board of Directors authorized an additional $250.0 million for stock repurchase under Chemed’s existing share repurchase program. We currently have $206.9 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.

-21-


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. We are currently evaluating the impact of this standard on our consolidated financial statements.

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.

On August 2, 2019, we entered into an Asset Purchase Agreement (the “Agreement”) to purchase substantially all of the assets of HSW RR, Inc., a Delaware corporation (“HSW”) and certain related assets of its affiliates, for $120 million, subject to a working capital adjustment that resulted in an additional $1.4 million payment to HSW. HSW owned and operated fourteen Roto-Rooter franchises mainly in the southwestern section of the United States, including Los Angeles, Dallas and Phoenix. Included in the assets purchased were the assets of Western Drain Supply, Inc., a plumbing supply company. The purchase was made using a combination of cash on-hand and borrowings under Chemed’s existing $450 million revolving credit facility. On September 16, 2019, we completed the acquisition.

On July 1, 2019, we completed the acquisition of a Roto-Rooter franchise and the related assets in Oakland, CA for $18.0 million in cash.

The acquisitions were made as a continuation of Roto-Rooter’s strategy to re-acquire franchises in large markets in the United States. The allocation for the two acquisitions completed in 2019 is as follows (in thousands):

HSW

Oakland

Total

Goodwill

$

56,191

$

10,535

$

66,726

Reacquired franchise rights

52,980

6,190

59,170

Property, plant, and equipment

5,998

675

6,673

Working capital

3,760

22

3,782

Customer relationships

2,220

500

2,720

Non-compete agreements

140

100

240

Other assets and liabilities - net

128

23

151

$

121,417

$

18,045

$

139,462

Reacquired franchise rights, included in identifiable intangibles on the Consolidated Balance Sheets, are amortized over the period remaining in each individual franchise agreement. The average amortization period for reacquired franchise rights for the acquisitions made in the third quarter of 2019 is 7.4 years.

The franchise fee revenue, the valuation of reacquired franchise rights and amortization for the acquired franchises are as follows:

Annualized

Valuation

Amortization of

2018 Franchise

of Reacquired

Reacquired

Revenue

Franchise Rights

Franchise Rights

HSW

$

1,782

$

52,980

$

7,258

Oakland

95

6,190

825

Subtotal

1,877

$

59,170

$

8,083

All other franchise territories

4,505

$

6,382

Amortization of reacquired franchise rights comprises the following (in thousands):

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

$

2,352 

$

331 

$

7,056 

$

1,103 

Customer relationships, included in identifiable intangibles on the Consolidated Balance Sheets, are amortized over an average amortization period of 20.4 years. Non-compete agreements are amortized over the period of the agreement. The average amortization period for non-compete agreements for the transactions made in the third quarter of 2019 is 4.0 years.

-22-


Goodwill is assessed for impairment on a yearly basis as of October 1. The primary factor that contributed to the purchase price resulting in the recognition of goodwill is operational efficiencies expected as a result of consolidating stand- alone franchises and Roto-Rooter’s network of nationwide branches. All goodwill recognized is deductible for tax purposes.

The pro forma revenue and earnings of the Company for the three and nine months ended September 30, as if all acquisitions made in fiscal 2020 and 2019 were completed on January 1, 2019, are as follows: (in thousands, except per share data):

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

Service revenues and sales

$

528,297

$

500,289

$

1,546,674

$

1,480,432

Net income

$

67,722

$

62,194

$

205,773

$

164,679

Earnings per share

$

4.25

$

3.89

$

12.90

$

10.32

Diluted earnings per share

$

4.14

$

3.76

$

12.53

$

9.97

Shown below is movement in Goodwill (in thousands):

VITAS

Roto-Rooter

Total

Balance at December 31, 2019

$

333,331 

$

244,036 

$

577,367 

Business combinations

-

1,193

1,193

Foreign currency adjustments

-

(41)

(41)

Balance at September 30, 2020

$

333,331 

$

245,188

$

578,519


-23-


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):

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

Service revenues and sales

$

528,297

$

480,613

$

1,546,294

$

1,416,231

Net income

$

67,722

$

58,947

$

205,714

$

154,343

Diluted EPS

$

4.14

$

3.56

$

12.53

$

9.35

Adjusted net income

$

79,556

$

57,213

$

212,494

$

160,603

Adjusted diluted EPS

$

4.86

$

3.46

$

12.94

$

9.73

Adjusted EBITDA

$

117,805

$

86,907

$

319,576

$

246,794

Adjusted EBITDA as a % of revenue

22.3

%

18.1

%

20.7

%

17.4

%

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 39-41.

For the three months ended September 30, 2020, the increase in consolidated service revenues and sales was driven by an 20.4% increase at Roto-Rooter and a 4.8% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in almost all major service lines for residential customers as well as a result of acquisitions completed in 2019. The increase in service revenues at VITAS is comprised primarily of a $5.4 million reduction in Medicare Cap contra-revenue, a geographically weighted average Medicare reimbursement rate increase of approximately 5.7%, and acuity mix shift which reduced the blended average Medicare rate increase approximately 2.4% offset by a 0.2% decrease in days-of-care. See page 42 for additional VITAS operating metrics.

For the nine months ended September 30, 2020, the increase in consolidated service revenues and sales was driven by a 14.5% increase at Roto-Rooter and a 6.5% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in almost all major service lines for residential customers as well as a result of acquisitions completed in 2019. The increase in service revenues at VITAS is comprised primarily of a 2.8% increase in days-of-care, a geographically weighted average Medicare reimbursement rate increase of approximately 5.4%, and acuity mix shift which reduced the blended Medicare rate increase by approximately 2.1%. See page 42 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 and nine months ended September 30, 2020. 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 continued health of our workforce cannot be predicted during the pandemic. Significant shortages of labor could inhibit the ability of both VITAS and Roto-Rooter to perform services. The inability to procure personal-protective equipment, and to protect worker health and customer safety, could negatively impact the health of our workforce. A portion of our workforce is currently working from remote locations on a regular basis which increases both operational and cybersecurity risks.

VITAS is working closely with hospitals, doctors and other healthcare providers. The response of these healthcare providers to the pandemic may limit VITAS’ ability to provide care and may result in fewer referrals. A prolonged or severe economic downturn may significantly impact Roto-Rooter’s service revenue. A significant disruption in the supply chain for critical items needed by either VITAS or Roto-Rooter could inhibit our ability to provide services or significantly increase the cost of providing those services.

-24-


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. VITAS has cared for approximately 3,500 COVID positive patients through September 30, 2020.

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 $22.9 million of certain employer payroll taxes as permitted by the CARES Act.

During the period from May 1, 2020 through December 31, 2020, the 2% Medicare sequestration reimbursement cut is suspended. For the three and nine month period ended September 30, 2020 approximately $6.3 million and $10.5 million, respectively, was recognized as revenue due to the suspension of sequestration.

There is no U.S. GAAP that covers such accounting for 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 losses.

The components of the amount recognized are as follows, (in thousands):

Three months ended

Nine months ended

September 30, 2020

September 30, 2020

Incremental PTO

$

-

$

21,425 

Hard costs

6,945 

10,759 

Incremental Medicare Cap

(2,250)

-

Lost revenue

(13,500)

-

Other operating (income)/expense

$

(8,805)

$

32,184 

Hard costs are primarily expenses paid to outside vendors for personal protection equipment, COVID testing for front line workers and deep cleaning of in-patient facilities. In April, VITAS provided an extra two weeks of paid time off to all frontline workers.

During the second quarter of 2020, VITAS recognized $2.3 million for anticipated additional Medicare Cap revenue reductions. The deterioration of admissions was not as severe as anticipated and therefore, the $2.3 million was reversed in the third quarter of 2020.

During the second quarter of 2020, VITAS recognized $13.5 million for estimated lost revenue as a result of the pandemic. On September 19, 2020, the U.S. Department of Health and Human Services (“HHS”) released additional guidance related to Relief Funds granted. Included in this guidance was clarification that lost revenue represents “a negative change in year-over-year net patient care operating income”. This is a significant change from the definition of lost revenue previously provided by HHS. As a result of these changes in facts and circumstances, the $13.5 million that was previously recognized was reversed in the third quarter of 2020. We will continue to monitor guidance provided by HHS. Current guidance states that the Company has through June 30, 2021 to utilize the provider relief funding; any unutilized amounts remaining after June 30, 2021 will need to be returned to the government.

-25-


The situation surrounding COVID-19 remains fluid. We evaluate our cash flow, liquidity and capital resources on a daily basis. VITAS and Roto-Rooter continue to operate and have positive net income and operating cash flow. We have $412.1 million available for borrowing under our $450 million revolving line-of-credit.

On August 6, 2019, the Centers for Medicare and Medicaid Services released the fiscal year 2020 hospice wage index and payment rate update (“FY 2020 update”). The FY 2020 update includes the normal yearly inflationary increase by level of care plus a rebasing of the continuous care, inpatient care and respite care rates. The rebasing of these levels of care was to reflect non-inflationary changes in providers’ costs over time. The rebasing increased the national average reimbursement rate for continuous care by 39.9% and inpatient care by 34.7%. Respite care is not material to our operations. The rebasing of these levels of care was effective on October 1, 2019.

On August 2, 2019, we entered into an Asset Purchase Agreement (the “Agreement”) to purchase substantially all of the assets of HSW RR, Inc., a Delaware corporation (“HSW”) and certain related assets of its affiliates, for $120 million, subject to a working capital adjustment. HSW owned and operated fourteen Roto-Rooter franchises mainly in the southwestern section of the United States, including Los Angeles, Dallas and Phoenix. Included in the assets purchased were the assets of Western Drain Supply, Inc., a plumbing supply company. The purchase was made using a combination of cash on-hand and borrowings under Chemed’s existing $450 million revolving credit facility. On September 16, 2019, we completed the acquisition.

On July 1, 2019, we completed the acquisition of a Roto-Rooter franchise and the related assets in Oakland, CA for $18.0 million in cash.

Reacquired franchise rights, included in identifiable intangibles on the Consolidated Balance Sheets, are amortized over the period remaining in each individual franchise agreement. The average amortization period for reacquired franchise rights for the acquisitions made in the third quarter of 2019 is 7.4 years.

The franchise fee revenue, the valuation of reacquired franchise rights and amortization for the acquired franchises are as follows:

Multiple of Annual

Annualized

Valuation

Franchise Fees

Amortization of

2018 Franchise

of Reacquired

to Reacquired

Reacquired

Revenue

Franchise Rights

Franchise Rights

Franchise Rights

HSW

$

1,782

$

52,980

29.7

yrs

$

7,258

Oakland

95

6,190

65.2

825

Subtotal

1,877

$

59,170

31.5

yrs

$

8,083

All other franchise territories

4,505

$

6,382

Amortization of reacquired franchise agreements comprises the following (in thousands):

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

$

2,352 

$

331 

$

7,056 

$

1,103 

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. Once we complete this phase of our projected operating results, we would then modify the projections for the timing of price increases, changes in commission structure, wages, marketing programs and a variety of continuous improvement initiatives that our business segments plan on executing over the coming year. 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 2020 pandemic has made accurate modeling and providing meaningful earnings guidance for Chemed exceptionally challenging. Federal, state and local government authorities are forced to make swift decisions within our healthcare system, labor pools and general economy. These governmental decisions have the potential for an immediate and material impact on VITAS and Roto-Rooter operating results.

Over the past seven months, 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 guidance for the remainder of the calendar year. However,

-26-


this guidance should be taken with the recognition the pandemic will continue to materially disrupt all aspects of our healthcare system and general economy to such an extent that future rules, regulations and government mandates could materially impact our ability to achieve this guidance.

Revenue growth for VITAS in 2020, prior to Medicare Cap, is estimated to be 4%. Average Daily Census in 2020 is estimated to expand approximately 1.3%. Full-year Adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 21%. We are currently estimating $8.7 million for Medicare Cap billing limitations for calendar year 2020. We also anticipate the $80.2 million of CARES Act funds formulaically calculated by the federal government based upon our 2019 Medicare fee-for-service revenue will be adequate to cover increased costs specifically related to operating our healthcare unit during the pandemic as well as any incremental Medicare Cap billing limitations triggered from declines in Medicare admissions. Chemed’s full year adjusted earnings per share guidance eliminates any financial benefit from the CARES Act funds that relate to lost revenue. We anticipate returning any unused CARES Act funds to the federal government at the end of the pandemic measurement period. Roto-Rooter is forecasted to achieve full-year 2020 revenue growth of 12.5% to 13.0%. Roto-Rooter’s Adjusted EBITDA margin for 2020 is estimated to be 26.1%. We anticipate that our operating income and cash flows will 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, 2019 to September 30, 2020 include the following:

A $33.0 million decrease in accounts receivable due to timing of receipts.

A $11.8 million decrease in accounts payable due to timing of payments.

A $31.1 million increase in accrued compensation due to accrual of additional paid time off for VITAS front line works and an increase in accrued bonus.

A $48.0 million increase in the unutilized portion of the CARES Act grant received in the second quarter of 2020.

A $90.0 million decrease in long-term debt due to payments made in 2020.

A $23.2 million increase in other liabilities mainly due to the deferral of certain payroll taxes as permitted by the CARES Act.

A $179.9 million increase in treasury stock due mainly to stock repurchases.

Net cash provided by operating activities increased $164.8 million from September 30, 2019 to September 30, 2020. The main drivers of the increase relate to the receipt of $80.2 million in CARES Act grant funds and the deferral of payroll tax payments as permitted by the CARES Act. Additionally, 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 replaced our existing credit agreement with the Fourth Amended and Restated Credit Agreement (“2018 Credit Agreement”). Terms of the 2018 Credit Agreement consist of a five year, $450 million revolving credit facility and a $150 million expansion feature, which may consist of term loans or additional revolving commitments. The revolving credit facility has a five year maturity with principal payments due at maturity.  The interest rate at the inception of the agreement 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 issued $37.9 million in standby letters of credit as of September 30, 2020, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of September 30, 2020, we have approximately $412.1 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, 2020 and anticipate remaining in compliance throughout the foreseeable future.

-27-


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.

On October 30, 2017, the Company entered into a settlement agreement (the “Settlement Agreement”) to resolve civil litigation under the False Claims Act brought by the United States Department of Justice (“DOJ”) on behalf of the OIG and various relators concerning VITAS, filed in the U.S. District Court of the Western District of Missouri. The 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 will resolve 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. For additional procedural history of these cases, please refer to our prior quarterly and annual filings.

The settlement amount of $5.75 million plus employment taxes was recorded in the first quarter of 2019. As of December 31, 2019, $6.0 million was accrued in the accompanying Consolidated Balance Sheet. 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. On January 28, 2020, the court granted preliminary approval of the settlement. A notice of the proposed settlement has been sent to the members of the class by the class claims administrator. The court has re-set the date for the final approval of the settlement hearing for December 8, 2020.

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. He sought a determination that the action may proceed and be maintained as a class action and for compensatory and statutory damages (premium payments for missed rest periods, uncompensated rest periods, wages for time allegedly not paid such as travel time, repair time, and vehicle maintenance time, and unreimbursed expenses), penalties and restitutions, pre- and post-judgement interest and attorneys’ fees and costs. The lawsuit 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. As of September 30, 2020, $3.1 million was accrued in the accompanying Consolidated Balance Sheet. A hearing for preliminary approval of the settlement is scheduled for November 19, 2020.

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

-28-


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.

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.

Results of Operations

Three months ended September 30, 2020 versus 2019 - Consolidated Results

Our service revenues and sales for the third quarter of 2020 increased 9.9% versus services and sales revenues for the third quarter of 2019. Of this increase, a $15.3 million increase was attributable to VITAS and $32.3 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

Three months ended September 30,

2020

2019

VITAS

Routine homecare

$

278,856

$

274,746

Continuous care

30,699

29,446

General inpatient

27,633

23,599

Other

2,910

2,356

Medicare cap adjustment

4,072

(1,317)

Room and board - net

(3,289)

(2,846)

Implicit price concessions

(3,784)

(4,236)

Roto-Rooter

Drain cleaning - short term core

55,527

46,485

Plumbing - short term core

39,439

34,772

Subtotal

94,966

81,257

Excavation - short term core

47,688

34,537

Water restoration

32,137

27,642

Contractor operations

16,274

14,359

Outside franchisee fees

1,235

1,819

Other - short term core

435

483

Other

3,332

2,791

Implicit price concessions

(4,867)

(4,023)

Total

$

528,297

$

480,613

Days of care at VITAS during the quarter ended September 30 were as follows:

Days of Care

Increase/(Decrease)

2020

2019

Percent

Routine homecare

1,426,191

1,361,508

4.8

Nursing home

261,396

315,566

(17.2)

Respite

4,566

8,582

(46.8)

Subtotal routine homecare and respite

1,692,153

1,685,656

0.4

Continuous care

33,013

39,670

(16.8)

General inpatient

27,017

30,553

(11.6)

Total days of care

1,752,183

1,755,879

(0.2)

This increase in service revenues at VITAS is comprised primarily of reduction in Medicare Cap contra-revenue of $5.4 million, a geographically weighted average Medicare reimbursement rate increase of approximately 5.7%, and acuity mix shift which reduced the blended average Medicare rate increase by approximately 2.4% as well as a 0.2% decrease in days-of-care.

During the quarter ended September 30, 2020, we reversed $4.1 million in net Medicare cap revenue reduction for the 2020 government fiscal year. During the quarter ended September 30, 2019, we recorded $1.3 million in net Medicare cap revenue reduction related to three programs for the 2019 government fiscal year. Additionally, we recorded $847,000 related to adjustments to prior year cap liabilities.

-29-


The increase in plumbing revenues for the third quarter of 2020 versus 2019 is attributable to a 2.8% decrease in price and service mix shift and a 16.2% increase in job count. The increase in excavation revenues for the third quarter of 2020 versus 2019 is attributable to a 14.2% increase in price and service mix shift and a 23.9% increase in job count. Drain cleaning revenues for the third quarter of 2020 versus 2019 reflect a 0.6% increase in price and service mix shift and a 18.9% increase in job count. Water restoration revenue increased for the third quarter of 2020 versus 2019 due to a 10.3% increase in job count and an 6.0% increase in price. Contractor operations increased 13.3% mainly due to their continued expansion into water restoration. The increase in job count for all service lines was driven by residential customers.

The consolidated gross margin was 35.8% in the third quarter of 2020 as compared with 31.7% in the third quarter of 2019. On a segment basis, VITAS’ gross margin was 26.8% in the third quarter of 2020 as compared with 23.1%, in the third quarter of 2019. The increase in gross margin is attributable mainly to decreased labor costs and a reversal of Medicare Cap liability during the third quarter of 2020. The Roto-Rooter segment’s gross margin was 51.6% for the third quarter of 2020 as compared with 49.2% in the third quarter of 2019 primarily due to increased revenue and expense management.

Selling, general and administrative expenses (“SG&A”) comprise (in thousands):

Three months ended September 30,

2020

2019

SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts

$

79,287

$

72,273

Impact of market value adjustments related to assets held in deferred compensation trusts

7,256

2,886

Long-term incentive compensation

1,774

1,677

Total SG&A expenses

$

88,317

$

76,836

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 2020 were up 9.7% when compared to the third quarter of 2019. This increase was mainly a result of the increase in variable selling and general administrative expenses caused by increased revenue.

Depreciation for the third quarter of 2020 increased 15.4% when compared to the third quarter of 2019 primarily due to new equipment purchased at Roto-Rooter related to the acquisitions completed in the second half of 2019.

Amortization for the third quarter of 2020 increased 469.4% when compared to the third quarter of 2019 due to the amortization of reacquired franchise rights related to acquisitions completed in the second half of 2019.

Other operating expenses comprise the following (in thousands):

Three months ended September 30,

2020

2019

CARES Act grant

$

8,805 

$

-

Loss on disposal of fixed assets

307 

78 

Litigation settlement

3,095 

-

Total other operating expenses

$

12,207 

$

78 

Other income – net comprise (in thousands):

Three months ended September 30,

2020

2019

Market value adjustment on assets held in deferred compensation trusts

$

7,256 

$

2,886 

Interest income

423 

173 

Other

(4)

(23)

Total other income - net

$

7,675 

$

3,036 


-30-


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

Three months ended September 30,

2020

2019

Income tax provision calculated at the statutory federal rate

$

17,137

$

14,054

Stock compensation tax benefits

(7,187)

(8,792)

State and local income taxes

3,028

1,183

Other--net

904

1,531

Income tax provision

$

13,882

$

7,976

Effective tax rate

17.0

%

11.9

%

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

Three months ended September 30,

2020

2019

VITAS

CARES Act grant

$

(6,528)

$

-

Direct costs related to COVID-19

(5,181)

-

COVID-19 Medicare cap

1,679

-

Medicare cap sequestration adjustment

635

(639)

Roto-Rooter

Litigation settlement

(2,275)

-

Amortization of reacquired franchise agreements

(1,728)

(244)

Direct costs related to COVID-19

(971)

-

Acquisition expenses

-

(2,411)

Corporate

Excess tax benefits on stock compensation

7,187

8,792

Stock option expense

(2,970)

(2,278)

Long-term incentive compensation

(1,682)

(1,486)

Total

$

(11,834)

$

1,734

Three months ended September 30, 2020 versus 2019 - Segment Results

Net income/(loss) for the third quarter of 2020 versus the third quarter of 2019 by segment (in thousands):

Three months ended September 30,

2020

2019

VITAS

$

45,737

$

39,773

Roto-Rooter

31,176

26,140

Corporate

(9,191)

(6,966)

$

67,722

$

58,947

VITAS’ after-tax earnings increased due to higher revenue and improved labor management and ancillary costs. After-tax earnings as a percent of revenue at VITAS in the third quarter of 2020 was 13.6% as compared to 12.3% in the third quarter of 2019.

Roto-Rooter’s net income was impacted in 2020 compared to 2019 primarily by higher revenue offset by increased depreciation and amortization expense. After-tax earnings as a percent of revenue at Roto-Rooter in the third quarter of 2020 was 16.3%, essentially equal to the third quarter of 2019.

After-tax Corporate expenses for 2020 increased 31.9% when compared to 2019 due mainly to a $1.6 million decrease in the excess tax benefits on stock compensation.


-31-


Results of Operations

Nine months ended September 30, 2020 versus 2019 - Consolidated Results

Our service revenues and sales for the first nine months of 2020 increased 9.2% versus services and sales revenues for the first nine months of 2019. Of this increase, a $61.2 million increase was attributable to VITAS and $69.9 million increase was attributable to Roto-Rooter. The following chart shows the components of revenue by operating segment (in thousands):

Nine months ended September 30,

2020

2019

VITAS

Routine homecare

$

826,954 

$

800,059 

Continuous care

105,836 

92,476 

General inpatient

85,983 

69,063 

Other

8,175 

6,598 

Medicare cap adjustment

(4,178)

(7,915)

Room and board - net

(9,317)

(8,098)

Implicit price concessions

(10,976)

(10,904)

Roto-Rooter

Drain cleaning - short term core

159,003 

137,176 

Plumbing - short term core

108,255 

101,361 

Subtotal

267,258 

238,537 

Excavation - short term core

135,425 

104,497 

Water restoration

92,810 

86,804 

Contractor operations

47,695 

42,986 

Outside franchisee fees

3,635 

5,063 

Other - short term core

1,371 

1,639 

Other

9,836 

8,773 

Implicit price concessions

(14,213)

(13,347)

Total

$

1,546,294 

$

1,416,231 

Days of care at VITAS during the nine months ended September 30 were as follows:

Days of Care

Increase/(Decrease)

2020

2019

Percent

Routine homecare

4,192,681 

3,961,261 

5.8 

Nursing home

844,232 

909,318 

(7.2)

Respite

15,416 

21,552 

(28.5)

Subtotal routine homecare and respite

5,052,329 

4,892,131 

3.3 

Continuous care

110,200 

125,397 

(12.1)

General inpatient

84,907 

89,366 

(5.0)

Total days of care

5,247,436 

5,106,894 

2.8 

The revenue increase at VITAS is comprised primarily of the 2.8% increase in days-of-care, a geographically weighted average Medicare reimbursement rate increase of approximately 5.4%, and acuity mix shift which then decreased the blended Medicare rate increase by approximately 2.1%.

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. During the first nine months ended September 30, 2019, we recorded $7.9 million in net Medicare cap revenue reduction related to four programs for the 2019 government fiscal year. Additionally, we recorded $847,000 related to adjustments of prior year cap liabilities.

The increase in plumbing revenues for the first nine months of 2020 versus 2019 is attributable to a 1.7% increase in price and service mix shift and an 5.1% increase in job count. The increase in excavation revenues for the first nine months of 2020 versus 2019 is attributable to a 10.0% increase in price and service mix shift and a 19.6% increase in job count. Drain cleaning revenues for the first nine months of 2020 versus 2019 reflect a 3.6% increase in price and service mix shift and a 12.3% increase in job count. The increase in water restoration revenue for the first nine months of 2020 versus 2019 is attributable to a 6.2% increase in job count and by a 0.7% increase in price. Contractor operations increased 11.0% mainly due to their continued expansion into water restoration. The increase in job count for all service lines was driven by residential customers.

The consolidated gross margin was 32.5% in the first nine months of 2020 as compared with 31.2% in the first nine months of 2019. On a segment basis, VITAS’ gross margin was 22.9% in the first nine months of 2020 as compared with 22.6%, in the first nine

-32-


months of 2019. The Roto-Rooter segment’s gross margin was 50.3% for the first nine months of 2020 as compared with 48.3% in the first nine months of 2019 primarily due to increased revenue and expense management.

Selling, general and administrative expenses (“SG&A”) comprise (in thousands):

Nine months ended September 30,

2020

2019

SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts

$

232,797 

$

212,775 

Long-term incentive compensation

5,523 

4,552 

Impact of market value adjustments related to assets held in deferred compensation trusts

5,093 

5,094 

Total SG&A expenses

$

243,413 

$

222,421 

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 2020 were up 9.4% when compared to the first nine months of 2019. This increase was mainly a result of the increase in variable selling and general administrative expenses caused by increased revenue.

Depreciation for the first nine months of 2020 increased 16.9% when compared to the first nine months of 2019 primarily due to new equipment purchased at Roto-Rooter related to the acquisitions completed in the second half of 2019.

Amortization for the first nine months of 2020 increased 447.3% when compared to the first nine months of 2019 due to the amortization of reacquired franchise rights related to acquisitions completed in the second half of 2019.

Other operating (income)/expenses comprise the following (in thousands):

Nine months ended September 30,

2020

2019

CARES Act grant

$

(32,184)

$

-

Loss on disposal of fixed assets

154 

735 

Transportation equipment held for sale

-

2,266 

Litigation settlement

3,095 

6,000 

Total other operating (income)/expenses

$

(28,935)

$

9,001 

Other income – net comprise (in thousands):

Nine months ended September 30,

2020

2019

Market value adjustment on assets held in deferred compensation trusts

$

5,093 

$

5,094 

Interest income

647 

387 

Other

(17)

Total other income - net

$

5,723 

$

5,488 

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

Nine months ended September 30,

2020

2019

Income tax provision calculated at the statutory federal rate

$

52,531 

$

38,223 

Stock compensation tax benefits

(19,943)

(18,737)

State and local income taxes

9,118 

4,652 

Other--net

2,729 

3,533 

Income tax provision

$

44,435 

$

27,671 

Effective tax rate

17.8 

%

15.2 

%

-33-


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

Nine Months Ended September 30,

2020

2019

VITAS

CARES Act grant

$

24,009

$

-

Direct costs related to COVID-19

(24,009)

-

Medicare cap sequestration adjustment

(462)

(2,279)

Litigation settlement

-

(4,476)

Non cash ASC 842 benefit

-

(490)

Roto-Rooter

Amortization of acquired and cancelled franchise agreements

(5,185)

(811)

Direct costs related to COVID-19

(2,426)

-

Litigation settlement

(2,275)

-

Acquisition expenses

-

(2,482)

Non cash ASC 842 benefit

-

(40)

Corporate

Excess tax benefits on stock compensation

19,943

18,737

Stock option expense

(11,369)

(8,804)

Long-term incentive compensation

(5,006)

(3,915)

Impairment loss on transportation equipment

-

(1,733)

Non cash ASC 842 benefit

-

124

Acquisition expenses

-

(91)

Total

$

(6,780)

$

(6,260)

Nine months ended September 30, 2020 versus 2019 - Segment Results

Net income/(loss) for the first nine months of 2020 versus the first nine months of 2019 by segment (in thousands):

Nine months ended September 30,

2020

2019

VITAS

$

147,262

$

106,400

Roto-Rooter

84,966

76,302

Corporate

(26,514)

(28,359)

$

205,714

$

154,343

VITAS’ after-tax earnings were positively impacted in 2020 compared to 2019 due to higher revenue and improved labor management and ancillary costs. After-tax earnings as a percent of revenue at VITAS in the first nine months of 2020 was 14.7% as compared to 11.3% in the first nine months of 2019.

Roto-Rooter’s net income was impacted in 2020 compared to 2019 primarily by higher revenue offset by increased depreciation and amortization expense. After-tax earnings as a percent of revenue at Roto-Rooter in the first nine months of 2020 was 15.6% as compared to 16.1% in the first nine months of 2019.

After-tax Corporate expenses for 2020 decreased 6.5% when compared to 2019 due mainly to a $1.2 million increase in the excess tax benefits on stock compensation.


-34-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020

(in thousands)(unaudited)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

2020 (a)

                         

                         

                         

                         

Service revenues and sales

$

337,097 

$

191,200 

$

-

$

528,297 

Cost of services provided and goods sold

246,636 

92,604 

-

339,240 

Selling, general and administrative expenses

21,799 

48,074

18,444 

88,317

Depreciation

5,592 

6,089 

33 

11,714 

Amortization

18 

2,493 

-

2,511 

Other operating expense

9,052 

3,155

-

12,207

Total costs and expenses

283,097 

152,415 

18,477 

453,989 

Income/(loss) from operations

54,000 

38,785 

(18,477)

74,308 

Interest expense

(47)

(80)

(252)

(379)

Intercompany interest income/(expense)

5,337 

1,651 

(6,988)

-

Other income—net

381 

38 

7,256 

7,675 

Income/(expense) before income taxes

59,671 

40,394 

(18,461)

81,604 

Income taxes

(13,934)

(9,218)

9,270 

(13,882)

Net income/(loss)

$

45,737 

$

31,176 

$

(9,191)

$

67,722 

(a) The following amounts are included in net income (in thousands):

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

Pretax benefit/(cost):

CARES Act grant

$

(8,805)

$

-

$

-

$

(8,805)

Direct costs related to COVID-19

(6,945)

(1,321)

-

(8,266)

Stock option expense

-

-

(3,182)

(3,182)

Litigation settlement

-

(3,095)

-

(3,095)

Amortization of reacquired franchise agreements

-

(2,352)

-

(2,352)

COVID-19 Medicare cap

2,250 

-

-

2,250 

Long-term incentive compensation

-

-

(1,774)

(1,774)

Medicare cap sequestration

852 

-

-

852 

Total

$

(12,648)

$

(6,768)

$

(4,956)

$

(24,372)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

After-tax benefit/(cost):

CARES Act grant

$

(6,528)

$

-

$

-

$

(6,528)

Direct costs related to COVID-19

(5,181)

(971)

-

(6,152)

Stock option expense

-

-

(2,970)

(2,970)

Litigation settlement

-

(2,275)

-

(2,275)

Amortization of reacquired franchise agreements

-

(1,728)

-

(1,728)

Long-term incentive compensation

-

-

(1,682)

(1,682)

COVID-19 Medicare cap

1,679 

-

-

1,679 

Medicare cap sequestration

635 

-

-

635 

Excess tax benefits on stock compensation

-

-

7,187 

7,187 

Total

$

(9,395)

$

(4,974)

$

2,535 

$

(11,834)


-35-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019

(in thousands)(unaudited)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

2019 (a)

                         

                         

                         

                         

Service revenues and sales

$

321,748 

$

158,865 

$

-

$

480,613 

Cost of services provided and goods sold

247,551 

80,632 

-

328,183 

Selling, general and administrative expenses

21,965 

41,758 

13,113 

76,836 

Depreciation

5,105 

5,003 

39 

10,147 

Amortization

18 

423 

-

441 

Other operating expenses/(income)

97 

(19)

-

78 

Total costs and expenses

274,736 

127,797 

13,152 

415,685 

Income/(loss) from operations

47,012 

31,068 

(13,152)

64,928 

Interest expense

(48)

(80)

(913)

(1,041)

Intercompany interest income/(expense)

4,618 

2,234 

(6,852)

-

Other income—net

121 

31 

2,884 

3,036 

Income/(expense) before income taxes

51,703 

33,253 

(18,033)

66,923 

Income taxes

(11,930)

(7,113)

11,067 

(7,976)

Net income/(loss)

$

39,773 

$

26,140 

$

(6,966)

$

58,947 

(a) The following amounts are included in net income (in thousands):

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

Pretax benefit/(cost):

Acquisition expenses

$

-

$

(3,281)

$

-

$

(3,281)

Stock option expense

-

-

(2,711)

(2,711)

Long-term incentive compensation

-

-

(1,677)

(1,677)

Medicare cap sequestration adjustment

(859)

-

-

(859)

Amortization of reacquired franchise agreements

-

(331)

-

(331)

Total

$

(859)

$

(3,612)

$

(4,388)

$

(8,859)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

After-tax benefit/(cost):

Acquisition expenses

$

-

$

(2,411)

$

-

$

(2,411)

Stock option expense

-

-

(2,278)

(2,278)

Long-term incentive compensation

-

-

(1,486)

(1,486)

Medicare cap sequestration adjustment

(639)

-

-

(639)

Amortization of reacquired franchise agreements

-

(244)

-

(244)

Excess tax benefits on stock compensation

-

-

8,792 

8,792 

Total

$

(639)

$

(2,655)

$

5,028 

$

1,734 


-36-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020

(in thousands)(unaudited)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

2020 (a)

                         

                         

                         

                         

Service revenues and sales

$

1,002,477 

$

543,817 

$

-

$

1,546,294 

Cost of services provided and goods sold

772,880 

270,268 

-

1,043,148 

Selling, general and administrative expenses

65,141 

138,587 

39,685 

243,413 

Depreciation

16,622 

18,035 

104 

34,761 

Amortization

53 

7,423 

-

7,476 

Other operating (income)/expense

(31,661)

2,725 

(28,935)

Total costs and expenses

823,035 

437,038 

39,790 

1,299,863 

Income/(loss) from operations

179,442 

106,779 

(39,790)

246,431 

Interest expense

(137)

(272)

(1,596)

(2,005)

Intercompany interest income/(expense)

14,463 

4,422 

(18,885)

-

Other income—net

549 

68 

5,106 

5,723 

Income/(expense) before income taxes

194,317 

110,997 

(55,165)

250,149 

Income taxes

(47,055)

(26,031)

28,651 

(44,435)

Net income/(loss)

$

147,262 

$

84,966 

$

(26,514)

$

205,714 

(a) The following amounts are included in net income (in thousands):

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

Pretax benefit/(cost):

Direct costs related to COVID-19

$

(32,184)

$

(3,299)

$

-

$

(35,483)

CARES Act grant

32,184 

-

-

32,184 

Stock option expense

-

-

(13,296)

(13,296)

Amortization of reacquired franchise agreements

-

(7,056)

-

(7,056)

Long-term incentive compensation

-

-

(5,523)

(5,523)

Litigation settlement

-

(3,095)

-

(3,095)

Medicare cap sequestration adjustment

(619)

-

-

(619)

Total

$

(619)

$

(13,450)

$

(18,819)

$

(32,888)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

After-tax benefit/(cost):

Direct costs related to COVID-19

$

(24,009)

$

(2,426)

$

-

$

(26,435)

CARES Act grant

24,009 

-

-

24,009 

Stock option expense

-

-

(11,369)

(11,369)

Amortization of reacquired franchise agreements

-

(5,185)

-

(5,185)

Long-term incentive compensation

-

-

(5,006)

(5,006)

Litigation settlement

-

(2,275)

-

(2,275)

Medicare cap sequestration adjustment

(462)

-

-

(462)

Excess tax benefits on stock compensation

-

-

19,943 

19,943 

Total

$

(462)

$

(9,886)

$

3,568 

$

(6,780)


-37-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

(in thousands)(unaudited)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

2019 (a)

                         

                         

                         

                         

Service revenues and sales

$

941,279 

$

474,952 

$

-

$

1,416,231 

Cost of services provided and goods sold

728,397 

245,374 

-

973,771 

Selling, general and administrative expenses

65,182 

120,736 

36,503 

222,421 

Depreciation

14,644 

14,983 

117 

29,744 

Amortization

53 

1,313 

-

1,366 

Other operating expenses

6,521 

214 

2,266 

9,001 

Total costs and expenses

814,797 

382,620 

38,886 

1,236,303 

Income/(loss) from operations

126,482 

92,332 

(38,886)

179,928 

Interest expense

(150)

(273)

(2,979)

(3,402)

Intercompany interest income/(expense)

13,395 

6,609 

(20,004)

-

Other income—net

309 

86 

5,093 

5,488 

Income/(expense) before income taxes

140,036 

98,754 

(56,776)

182,014 

Income taxes

(33,636)

(22,452)

28,417 

(27,671)

Net income/(loss)

$

106,400 

$

76,302 

$

(28,359)

$

154,343 

(a) The following amounts are included in net income (in thousands):

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

Pretax benefit/(cost):

Stock option expense

$

-

$

-

$

(10,729)

$

(10,729)

Litigation settlement

(6,000)

-

-

(6,000)

Long-term incentive compensation

-

-

(4,552)

(4,552)

Acquisition expense

-

(3,377)

(120)

(3,497)

Medicare cap sequestration adjustment

(3,063)

-

-

(3,063)

Impairment loss on transportation equipment

-

-

(2,266)

(2,266)

Amortization of reacquired franchise agreements

-

(1,103)

-

(1,103)

Non cash ASC 842 (expenses)/benefit

(656)

(55)

163 

(548)

Total

$

(9,719)

$

(4,535)

$

(17,504)

$

(31,758)

Chemed

VITAS

Roto-Rooter

Corporate

Consolidated

After-tax benefit/(cost):

Stock option expense

$

-

$

-

$

(8,804)

$

(8,804)

Litigation settlement

(4,476)

-

-

(4,476)

Long-term incentive compensation

-

-

(3,915)

(3,915)

Acquisition expense

-

(2,482)

(91)

(2,573)

Medicare cap sequestration adjustment

(2,279)

-

-

(2,279)

Impairment loss on transportation equipment

-

-

(1,733)

(1,733)

Amortization of reacquired franchise agreements

-

(811)

-

(811)

Non cash ASC 842 (expenses)/benefit

(490)

(40)

124 

(406)

Excess tax benefits on stock compensation

-

-

18,737 

18,737 

Total

$

(7,245)

$

(3,333)

$

4,318 

$

(6,260)


-38-


Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA

Chemed Corporation and Subsidiary Companies

(in thousands)

Chemed

For the three months ended September 30, 2020

VITAS

Roto-Rooter

Corporate

Consolidated

                         

                         

                         

Net income/(loss)

$

45,737 

$

31,176 

$

(9,191)

$

67,722 

Add/(deduct):

Interest expense

47 

80 

252 

379 

Income taxes

13,934 

9,218 

(9,270)

13,882 

Depreciation

5,592 

6,089 

33 

11,714 

Amortization

18 

2,493 

-

2,511 

EBITDA

65,328 

49,056 

(18,176)

96,208 

Add/(deduct):

Intercompany interest expense/(income)

(5,337)

(1,651)

6,988 

-

Interest income

(385)

(38)

-

(423)

CARES Act grant

8,805 

-

-

8,805 

Direct costs related to COVID-19

6,945 

1,321 

-

8,266 

Stock option expense

-

-

3,182 

3,182 

Litigation settlement

-

3,095 

-

3,095 

COVID-19 related Medicare cap

(2,250)

-

-

(2,250)

Long-term incentive compensation

-

-

1,774 

1,774 

Medicare cap sequestration adjustment

(852)

-

-

(852)

Adjusted EBITDA

$

72,254 

$

51,783 

$

(6,232)

$

117,805 

Chemed

For the three months ended September 30, 2019

VITAS

Roto-Rooter

Corporate

Consolidated

Net income/(loss)

$

39,773 

$

26,140 

$

(6,966)

$

58,947 

Add/(deduct):

Interest expense

48 

80 

913 

1,041 

Income taxes

11,930 

7,113 

(11,067)

7,976 

Depreciation

5,105 

5,003 

39 

10,147 

Amortization

18 

423 

-

441 

EBITDA

56,874 

38,759 

(17,081)

78,552 

Add/(deduct):

Intercompany interest expense/(income)

(4,618)

(2,234)

6,852 

-

Interest income

(139)

(34)

-

(173)

Acquisition expenses

-

3,281 

-

3,281 

Stock option expense

-

-

2,711 

2,711 

Long-term incentive compensation

-

-

1,677 

1,677 

Medicare cap sequestration adjustment

859 

-

-

859 

Adjusted EBITDA

$

52,976 

$

39,772 

$

(5,841)

$

86,907 


-39-


Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA

Chemed Corporation and Subsidiary Companies

(in thousands)

Chemed

For the nine months ended September 30, 2020

VITAS

Roto-Rooter

Corporate

Consolidated

                         

                         

                         

                         

Net income/(loss)

$

147,262 

$

84,966 

$

(26,514)

$

205,714 

Add/(deduct):

Interest expense

137 

272 

1,596 

2,005 

Income taxes

47,055 

26,031 

(28,651)

44,435 

Depreciation

16,622 

18,035 

104 

34,761 

Amortization

53 

7,423 

-

7,476 

EBITDA

211,129 

136,727 

(53,465)

294,391 

Add/(deduct):

Intercompany interest expense/(income)

(14,463)

(4,422)

18,885 

-

Interest income

(566)

(68)

(13)

(647)

Direct costs related to COVID-19

32,184 

3,299 

-

35,483 

Cares Act grant

(32,184)

-

-

(32,184)

Stock option expense

-

-

13,296 

13,296 

Long-term incentive compensation

-

-

5,523 

5,523 

Litigation settlement

-

3,095 

-

3,095 

Medicare cap sequestration adjustment

619 

-

-

619 

Adjusted EBITDA

$

196,719 

$

138,631 

$

(15,774)

$

319,576 

Chemed

For the nine months ended September 30, 2019

VITAS

Roto-Rooter

Corporate

Consolidated

Net income/(loss)

$

106,400 

$

76,302 

$

(28,359)

$

154,343 

Add/(deduct):

Interest expense

150 

273 

2,979 

3,402 

Income taxes

33,636 

22,452 

(28,417)

27,671 

Depreciation

14,644 

14,983 

117 

29,744 

Amortization

53 

1,313 

-

1,366 

EBITDA

154,883 

115,323 

(53,680)

216,526 

Add/(deduct):

Intercompany interest expense/(income)

(13,395)

(6,609)

20,004 

-

Interest income

(296)

(91)

-

(387)

Stock option expense

-

-

10,729 

10,729 

Litigation settlement

6,000 

-

-

6,000 

Long-term incentive compensation

-

-

4,552 

4,552 

Acquisition expense

-

3,377 

120 

3,497 

Medicare cap sequestration adjustment

3,063 

-

-

3,063 

Impairment loss on transportation equipment

-

-

2,266 

2,266 

Non cash ASC 842 expenses/(benefit)

656 

55 

(163)

548 

Adjusted EBITDA

$

150,911 

$

112,055 

$

(16,172)

$

246,794 


-40-


RECONCILIATION OF ADJUSTED NET INCOME

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

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

Net income as reported

$

67,722 

$

58,947 

$

205,714 

$

154,343 

Add/(deduct) pre-tax cost of:

Direct costs related to COVID-19

8,266 

-

35,483 

-

CARES Act grant

8,805 

-

(32,184)

-

Stock option expense

3,182 

2,711 

13,296 

10,729 

Amortization of reacquired franchise agreements

2,352 

331 

7,056 

1,103 

Long-term incentive compensation

1,774 

1,677 

5,523 

4,552 

Litigation settlement

3,095 

-

3,095 

6,000 

Medicare cap sequestration adjustment

(852)

859 

619 

3,063 

COVID-19 related Medicare cap

(2,250)

-

-

-

Impairment loss on transportation equipment

-

-

-

2,266 

Acquisition expense

-

3,281 

-

3,497 

Non cash ASC 842 expense

-

-

-

548 

Add/(deduct) tax impacts:

Tax impact of the above pre-tax adjustments (1)

(5,351)

(1,801)

(6,165)

(6,761)

Excess tax benefits on stock compensation

(7,187)

(8,792)

(19,943)

(18,737)

Adjusted net income

$

79,556 

$

57,213 

$

212,494 

$

160,603 

Diluted Earnings Per Share As Reported

Net income

$

4.14 

$

3.56 

$

12.53 

$

9.35 

Average number of shares outstanding

16,373 

16,555 

16,419 

16,514 

Adjusted Diluted Earnings Per Share

Adjusted net income

$

4.86 

$

3.46 

$

12.94 

$

9.73 

Adjusted average number of shares outstanding

16,373 

16,555 

16,419 

16,514 

(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.

-41-


CHEMED CORPORATION AND SUBSIDIARY COMPANIES

OPERATING STATISTICS FOR VITAS SEGMENT

(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

OPERATING STATISTICS

2020

2019

2020

2019

Net revenue ($000)

Homecare

$

278,856

$

274,746

$

826,954

$

800,059

Inpatient

27,633

23,599

85,983

69,063

Continuous care

30,699

29,446

105,836

92,476

Other

2,910

2,356

8,175

6,598

Subtotal

$

340,098

$

330,147

$

1,026,948

$

968,196

Room and board, net

(3,289)

(2,846)

(9,317)

(8,098)

Contractual allowances

(3,784)

(4,236)

(10,976)

(10,904)

Medicare cap allowance

4,072

(1,317)

(4,178)

(7,915)

Total

$

337,097

$

321,748

$

1,002,477

$

941,279

Net revenue as a percent of total before Medicare cap allowances

Homecare

82.0

%

83.2

%

80.5

%

82.6

%

Inpatient

8.1

7.1

8.4

7.1

Continuous care

9.0

8.9

10.3

9.6

Other

0.9

0.8

0.8

0.7

Subtotal

100.0

100.0

100.0

100.0

Room and board, net

(1.0)

(0.9)

(0.9)

(0.8)

Contractual allowances

(1.1)

(1.3)

(1.1)

(1.2)

Medicare cap allowance

1.2

(0.4)

(0.4)

(0.8)

Total

99.1

%

97.4

%

97.6

%

97.2

%

Days of care

Homecare

1,426,191

1,361,508

4,192,681

3,961,261

Nursing home

261,396

315,566

844,232

909,318

Respite

4,566

8,582

15,416

21,552

Subtotal routine homecare and respite

1,692,153

1,685,656

5,052,329

4,892,131

Inpatient

27,017

30,553

84,907

89,366

Continuous care

33,013

39,670

110,200

125,397

Total

1,752,183

1,755,879

5,247,436

5,106,894

Number of days in relevant time period

92

92

274

273

Average daily census (days)

Homecare

15,502

14,799

15,302

14,510

Nursing home

2,841

3,430

3,081

3,331

Respite

50

93

56

79

Subtotal routine homecare and respite

18,393

18,322

18,439

17,920

Inpatient

294

332

310

327

Continuous care

358

432

402

460

Total

19,045

19,086

19,151

18,707

Total Admissions

17,943

17,131

53,368

52,380

Total Discharges

18,205

16,915

51,281

51,274

Average length of stay (days)

97.1

92.6

92.9

91.6

Median length of stay (days)

14.0

17.0

14.0

16.0

ADC by major diagnosis

Cerebro

35.1

%

35.7

%

35.7

%

35.9

%

Neurological

22.1

20.7

21.7

20.4

Cancer

12.5

12.9

12.6

12.9

Cardio

16.1

16.6

15.9

16.7

Respiratory

8.0

8.1

8.2

8.1

Other

6.2

6.0

5.9

6.0

Total

100.0

%

100.0

%

100.0

%

100.0

%

Admissions by major diagnosis

Cerebro

21.4

21.1

%

21.2

%

20.8

%

Neurological

13.2

12.7

13.0

12.6

Cancer

27.4

30.5

27.8

29.2

Cardio

13.6

14.8

14.5

15.7

Respiratory

9.9

10.2

10.6

11.3

Other

14.5

10.7

12.9

10.4

Total

100.0

%

100.0

%

100.0

%

100.0

%

Estimated uncollectible accounts as a percent of revenues

1.1

%

1.3

%

1.1

%

1.1

%

Accounts receivable --

Days of revenue outstanding- excluding unapplied Medicare payments

33.4

32.7

n.a.

n.a.

Days of revenue outstanding- including unapplied Medicare payments

22.1

21.0

n.a.

n.a.


-42-


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.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk exposure relates to interest rate risk exposure through its variable interest line of credit. At September 30, 2020, 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.

Item 4.    Controls and Procedures

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.

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

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.

Item 1A.    Risk Factors

The recent COVID-19 pandemic could have a material adverse effect on our business operations, results of operations, cash flows and financial position.

We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it will impact our customers, team members, suppliers, vendors, business partners and distribution channels. The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which will adversely affect our business operations and may materially and adversely affect our results of operations, cash flows and financial position.

For additional information regarding specific risk factors related to the COVID-19 pandemic, see Management’s Discussion and Analysis of Financial Condition and Results of Operation under Part I., Item 2 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.

-43-


Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

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 2020:

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, 2020

-

$

-

8,645,873 

$

104,018,683 

February 1 through February 29, 2020

110,497 

457.73 

8,756,370 

53,440,502 

March 1 through March 31, 2020

114,503 

433.67 

8,870,873 

$

253,783,766 

First Quarter Total

225,000 

$

445.49 

April 1 through April 30, 2020

-

$

-

8,870,873 

$

253,783,766 

May 1 through May 31, 2020

-

-

8,870,873 

253,783,766 

June 1 through June 30, 2020

50,000 

438.27 

8,920,873 

$

231,870,234 

Second Quarter Total

50,000 

$

438.27 

July 1 through July 31, 2020

-

$

-

8,920,873

$

231,870,234

August 1 through August 31, 2020

33,409

499.98

8,954,282

215,166,306

September 1 through September 30, 2020

16,591

498.48

8,970,873

$

206,896,015

Third Quarter Total

50,000

$

499.48

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

None.

Item 5.    Other Information

None.


-44-


Item 6.    Exhibits

Exhibit No.

Description

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, 2020 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.

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in iXBRL and contained in Exhibit 101.


-45-


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 4, 2020

By:

/s/ Kevin J. McNamara

Kevin J. McNamara

(President and Chief Executive Officer)

Dated:

November 4, 2020

By:

/s/ David P. Williams

David P. Williams

(Executive Vice President and Chief Financial Officer)

Dated:

November 4, 2020

By:

/s/ Michael D. Witzeman

Michael D. Witzeman

(Vice President and Controller)

-46-