Chemed(CHE) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited consolidated financial statements, including balance sheets, income statements, cash flow statements, and stockholders' equity, along with detailed notes on key financial matters and accounting policies Unaudited Consolidated Balance Sheets Consolidated Balance Sheet Key Data (USD thousands) | Indicator | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets: | | | | Cash and Cash Equivalents | $159,924 | $74,126 | | Accounts Receivable | $120,314 | $139,408 | | Total Assets | $1,505,180 | $1,442,012 | | Liabilities: | | | | Total Current Liabilities | $302,487 | $297,205 | | Long-Term Debt | $0 | $92,500 | | Total Liabilities | $553,101 | $643,297 | | Stockholders' Equity: | | | | Total Stockholders' Equity | $952,079 | $798,715 | Unaudited Consolidated Statements of Income Consolidated Income Statement Key Data (USD thousands, except per share data) | Indicator | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Service Revenue and Sales | $553,816 | $531,288 | $1,113,973 | $1,061,837 | | Cost of Sales | $374,193 | $336,821 | $744,898 | $673,373 | | Selling, General and Administrative Expenses | $94,987 | $87,853 | $195,082 | $177,807 | | Operating Income | $69,506 | $91,938 | $142,325 | $181,312 | | Net Income | $53,377 | $66,456 | $107,498 | $130,625 | | Diluted Earnings Per Share | $3.51 | $4.40 | $7.09 | $8.62 | Unaudited Consolidated Statements of Cash Flows Consolidated Cash Flow Statement Key Data (USD thousands) | Indicator | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $192,809 | $157,670 | | Net Cash Used in Investing Activities | $(33,534) | $(25,635) | | Net Cash Used in Financing Activities | $(73,477) | $(155,290) | | Increase/(Decrease) in Cash and Cash Equivalents | $85,798 | $(23,255) | | Cash and Cash Equivalents, End of Period | $159,924 | $9,640 | Unaudited Consolidated Statements of Changes in Stockholders' Equity Summary of Changes in Stockholders' Equity (USD thousands) | Indicator | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Common Stock | $36,996 | $36,651 | | Additional Paid-in Capital | $1,240,415 | $1,089,129 | | Retained Earnings | $2,294,004 | $2,090,214 | | Treasury Stock | $(2,621,657) | $(2,533,306) | | Deferred Compensation Payable to Company Stock | $2,321 | $2,272 | | Total Stockholders' Equity | $952,079 | $684,960 | Notes to Unaudited Consolidated Financial Statements 1. Basis of Presentation - The company prepared its unaudited consolidated financial statements in accordance with SEC Regulation S-X Rule 10-01, omitting certain GAAP-required disclosures. The balance sheet data as of December 31, 2022, is derived from audited financial statements. Management believes these financial statements include all necessary adjustments for a fair presentation of the company's financial position, results of operations, and cash flows[187] CLOUD COMPUTING - Roto-Rooter currently has no significant capitalized implementation costs for cloud computing. VITAS uses a cloud-based human resources system, with approximately $5.6 million in capitalized implementation costs amortized over 5.7 years starting January 2020. Amortization was $249 thousand for the second quarters of 2023 and 2022, and $497 thousand for the first six months of each year[181][182] INCOME TAXES Effective Income Tax Rates | Period | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Effective Tax Rate | 24.1% | 22.8% | 24.0% | 23.5% | | Excess Tax Benefit from Stock Option Exercises | $1.5 million reduction | $2.5 million reduction | $3.2 million reduction | $3.9 million reduction | NON-CASH TRANSACTIONS - As of June 30, 2023, and December 31, 2022, the consolidated balance sheets included $2.1 million and $1.9 million, respectively, of capitalized property and equipment not yet paid for, excluded from capital expenditures in the consolidated cash flow statements. No significant non-cash amounts were included in interest expense during the reporting periods[202] BUSINESS COMBINATIONS - The company accounts for acquired businesses using the acquisition method, recording all acquired assets and assumed liabilities at fair value on the acquisition date. Fair value determination involves estimates and valuation techniques, primarily the income approach. Goodwill is assessed annually for impairment[32] 2. Revenue Recognition VITAS Revenue Recognition - VITAS service revenue is reported at the final consideration expected to be received, primarily from third-party payers (commercial health insurers and government programs like Medicare and Medicaid). Revenue recognition is based on service output, recognized daily or hourly. The company monitors the Medicare annual per-beneficiary cap and estimates potential repayments based on projected trends, adjusting revenue accordingly[18][13][209] VITAS Patient Care Service Revenue Composition (USD thousands) | Payer/Level of Care | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Medicare | $304,072 | $280,667 | $599,017 | $563,407 | | Medicaid | $14,100 | $13,661 | $27,750 | $27,346 | | Commercial Insurance | $8,426 | $7,670 | $15,915 | $14,819 | | Total | $326,598 | $301,998 | $642,682 | $605,572 | | Other Revenue | $3,154 | $3,213 | $6,175 | $6,220 | | Net Revenue | $320,861 | $297,781 | $631,339 | $596,970 | - VITAS provides free care to patients meeting charity care standards, with related costs included in the cost of services. Charity care costs were $2.2 million in Q2 2023 and $1.9 million in Q2 2022; for the first six months, they were $4.2 million in 2023 and $4.0 million in 2022[198] Roto-Rooter Revenue Recognition - Roto-Rooter provides plumbing, drain cleaning, excavation, water restoration, and other related services, primarily through company-owned branches, independent contractors, and a network of franchisees. Revenue for short-cycle core services (plumbing, drain cleaning, excavation) and water restoration services is recognized upon service completion, as customers acknowledge payment obligations and satisfaction immediately. Revenue from independent contractors and franchisees is recognized over time (weekly/monthly) as Roto-Rooter's brand usage rights and advertising support provide continuous value to them[211][214][222][223] Roto-Rooter Segmented Revenue Composition (USD thousands) | Service Type | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Drain Cleaning | $60,362 | $64,532 | $126,851 | $131,219 | | Plumbing | $48,719 | $48,885 | $99,172 | $96,557 | | Excavation | $57,552 | $55,546 | $117,128 | $110,734 | | Water Restoration | $44,978 | $43,673 | $95,741 | $84,033 | | Independent Contractors | $21,875 | $21,005 | $45,175 | $42,423 | | Franchise Fees | $1,388 | $1,370 | $2,739 | $2,688 | | Net Revenue | $232,955 | $233,507 | $482,634 | $464,867 | 3. Segments - The company operates through two wholly-owned subsidiaries, VITAS Healthcare Corporation and Roto-Rooter Group, Inc. VITAS focuses on hospice care services, while Roto-Rooter provides plumbing, drain cleaning, and water restoration services. Corporate administrative expenses and unallocated investment and financing income/expenses are reported as the "Corporate" segment[21][226] After-Tax Income/(Loss) by Business Segment (USD thousands) | Segment | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | VITAS | $26,128 | $35,212 | $50,892 | $71,694 | | Roto-Rooter | $44,374 | $47,072 | $92,027 | $91,009 | | Corporate | $(17,125) | $(15,828) | $(35,421) | $(32,078) | | Net Income | $53,377 | $66,456 | $107,498 | $130,625 | 4. Earnings per Share Earnings Per Share Calculation (USD thousands, except per share data) | Indicator | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $53,377 | $66,456 | $107,498 | $130,625 | | Weighted Average Common Shares Outstanding | 15,058 | 14,932 | 15,013 | 14,959 | | Earnings Per Share | $3.54 | $4.45 | $7.16 | $8.73 | | Diluted Weighted Average Common Shares Outstanding | 15,219 | 15,111 | 15,167 | 15,152 | | Diluted Earnings Per Share | $3.51 | $4.40 | $7.09 | $8.62 | - For the three and six months ended June 30, 2023, 311,335 and 596,000 stock options, respectively, were excluded from the diluted earnings per share calculation due to their anti-dilutive nature[230][231] 5. Long-Term Debt and Lines of Credit - The company entered into a Fifth Amended and Restated Credit Agreement (the "2022 Credit Arrangement") on June 28, 2022, comprising a $450 million five-year revolving credit facility and a $100 million five-year term loan. Term loan principal payments of $1.25 million are due quarterly, with interest at SOFR plus 100 basis points. The company prepaid $75 million in Q1 2023 and paid the remaining $21.3 million on April 28, 2023, reducing borrowing capacity from $550 million to $450 million[232][233] - As of June 30, 2023, the company was in compliance with all debt covenants and had $45.3 million in outstanding letters of credit, primarily for insurance purposes. Approximately $404.7 million of unused credit was available under the revolving credit facility[235] 6. Other Income/(Expense) – Net Other Income/(Expense) – Net (USD thousands) | Indicator | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Deferred Compensation Trust Asset Market Value Adjustment | $1,504 | $(5,086) | $1,184 | $(9,020) | | Interest Income | $113 | $154 | $263 | $226 | | Other - Net | $(8) | $2 | $59 | $2 | | Total Other Income/(Expense) - Net | $1,609 | $(4,930) | $1,506 | $(8,792) | 7. Leases - The company primarily leases real estate, including office space and inpatient units for VITAS, and office space for Roto-Rooter. Lease terms range from less than one year to ten years, with some including renewal or termination options. The company currently has no finance leases, and all disclosures relate to operating leases[236][241] Lease-Related Balance Sheet Information (USD thousands) | Indicator | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Operating Lease Assets | $127,215 | $135,662 | | Current Operating Lease Liabilities | $38,779 | $38,996 | | Non-Current Operating Lease Liabilities | $102,112 | $110,513 | | Total Operating Lease Liabilities | $140,891 | $149,509 | Lease Expense Composition (USD thousands) | Indicator | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Operating Lease Expense | $14,944 | $13,249 | $29,813 | $26,300 | | Sublease Income | $(23) | $(45) | $(46) | $(91) | | Net Lease Expense | $14,921 | $13,204 | $29,767 | $26,209 | 8. Stock-Based Compensation Plans - On February 17, 2023, the Board's Compensation/Incentive Committee granted 6,078 Performance Stock Units (PSUs) vesting based on Total Shareholder Return (TSR) and Earnings Per Share (EPS) targets over a three-year period ending December 31, 2025. The cumulative compensation cost for TSR-based PSUs is estimated at $5.1 million, and for EPS-based PSUs at $4.2 million, both to be recognized over the three-year service period[246][252] 9. Retirement Plans Retirement Plan Net Benefit (USD thousands) | Period | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Benefit | $5,550 | $639 | $11,424 | $3,556 | - All company plans providing retirement and similar benefits are defined contribution plans. These expenses include the impact of asset market value gains and losses in the deferred compensation plan and are recorded in selling, general, and administrative expenses[253] 10. Legal and Regulatory Matters - VITAS's business is highly regulated and subject to government agency investigations and litigation. In 2017, a settlement was reached with the Department of Justice regarding the False Claims Act, including a five-year Corporate Integrity Agreement (CIA) which concluded on June 22, 2023. VITAS was also audited by the OIG, with a final report recommending repayment of approximately $140 million, but VITAS has appealed and deposited $50.3 million to preserve its appeal rights[2][3][253][5] - In October 2020, VITAS received a civil investigative demand from the Department of Justice concerning the False Claims Act, involving 32 patients in its Florida operations. In November 2022, the DOJ declined to intervene, and the relator dismissed the case on April 6, 2023[247] - The company cannot estimate the timing or outcome of these matters, or whether any potential loss is probable or reasonably estimable. Addressing these matters could adversely affect the company through defense costs, potential damages, government funding withholdings, diversion of management time, and associated publicity[2][6] 11. Concentration of Risk - As of June 30, 2023, and December 31, 2022, approximately 61% and 64%, respectively, of VITAS's total accounts receivable were from Medicare, and 30% and 29% from various state Medicaid or managed Medicaid programs. These government programs and managed Medicaid receivables collectively accounted for approximately 71% of consolidated net accounts receivable[263] - VITAS relies on a single supplier for pharmaceutical services and most medical supplies. While these supplies are available from multiple vendors, a disruption from the primary supplier could adversely affect VITAS's operations, including temporary logistical challenges and increased costs[248] 12. Cash Overdrafts and Cash Equivalents - As of June 30, 2023, and December 31, 2022, cash overdrafts were not included in accounts payable. The company invests excess cash throughout the year in money market funds with major commercial banks and closely monitors the creditworthiness of these institutions[15][249] 13. Other Assets Other Assets Composition (USD thousands) | Indicator | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | OAS Deposits | $47,756 | $50,274 | | Life Insurance Cash Value | $3,643 | $3,636 | | Non-Current Prepayments and Deposits | $2,251 | $2,368 | | Other Long-Term Receivables | $1,747 | $1,826 | | Deferred Debt Costs | $1,311 | $1,703 | | Total | $56,708 | $59,807 | 14. Other Current Liabilities Other Current Liabilities Composition (USD thousands) | Indicator | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Healthcare Worker Retention Bonuses | $43,384 | $19,634 | | Medicare Cap | $13,115 | $14,380 | | All Other | $28,210 | $26,990 | | Total | $84,709 | $61,004 | - No single amount in the "All Other" line item exceeded 5% of total current liabilities during the reporting periods[9] 15. Financial Instruments - FASB's authoritative guidance on fair value measurement defines a hierarchy for prioritizing fair value measurement inputs: Level 1 uses quoted prices in active markets, Level 2 uses other observable inputs, and Level 3 uses unobservable inputs. For cash and cash equivalents, accounts receivable, and accounts payable, their carrying values are reasonable estimates of fair value. The fair value of long-term debt approximates its carrying value due to its floating interest rate resetting in the short term and including additional amounts based on leverage ratios[10][11] Financial Instrument Fair Value Hierarchy (USD thousands) | Indicator | Carrying Value (June 30, 2023) | Level 1 (June 30, 2023) | Level 2 (June 30, 2023) | Level 3 (June 30, 2023) | | :--- | :--- | :--- | :--- | :--- | | Deferred Compensation Plan Trust Investments | $99,522 | $99,522 | $0 | $0 | | | | | | | | Indicator | Carrying Value (December 31, 2022) | Level 1 (December 31, 2022) | Level 2 (December 31, 2022) | Level 3 (December 31, 2022) | | :--- | :--- | :--- | :--- | :--- | | Deferred Compensation Plan Trust Investments | $93,196 | $93,196 | $0 | $0 | | Long-Term Debt and Current Portion | $97,500 | $0 | $97,500 | $0 | 16. Capital Stock Repurchase Plan Transactions Capital Stock Repurchase Activity (USD thousands, except per share data) | Indicator | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Cost of Shares Repurchased | $13,425 | $49,861 | $13,425 | $77,214 | | Number of Shares Repurchased | 25,000 | 100,000 | 25,000 | 157,500 | | Weighted Average Price Per Share | $536.98 | $498.61 | $536.98 | $491.81 | | Remaining Authorized Amount | $74,443 | N/A | $74,443 | N/A | - The Board authorized an additional $600 million for the existing stock repurchase plan in May and November 2021. As of the end of the reporting period, the plan had an authorized balance of $74.4 million remaining[261] 17. Acquisitions - On June 1, 2023, Roto-Rooter acquired a franchise in South Carolina for $305 thousand in cash. In 2022, VITAS acquired assets of a hospice service provider in Florida for $1.24 million in cash, and Roto-Rooter acquired three franchises and related assets in New Jersey for $2.29 million in cash[19] Goodwill Changes (USD thousands) | Indicator | VITAS | Roto-Rooter | Total | | :--- | :--- | :--- | :--- | | Balance as of December 31, 2022 | $334,063 | $247,232 | $581,295 | | Business Combinations | - | $207 | $207 | | Foreign Currency Adjustments | - | $40 | $40 | | Balance as of June 30, 2023 | $334,063 | $247,479 | $581,542 | - Goodwill is assessed for impairment annually on October 1, and all recognized goodwill is tax-deductible. Quarterly amortization of intangible assets primarily stems from two Roto-Rooter franchise acquisitions completed in 2019, where approximately $59.2 million was identified as the value of reacquired franchise rights and is amortized over the remaining franchise agreement terms[19][50] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition and operating results for the three and six months ended June 30, 2023, focusing on its VITAS (hospice) and Roto-Rooter (plumbing services) segments, noting revenue growth but declines in net income and adjusted EBITDA due to specific operational factors Executive Summary - The majority of the company's operations are in the United States, with employees being its most critical resource. The company has minimal risk exposure to customers, suppliers, or employees in other regions[36] Key Operating Results Summary of Key Operating Results (USD thousands, except per share data) | Indicator | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Service Revenue and Sales | $553,816 | $531,288 | $1,113,973 | $1,061,837 | | Net Income | $53,377 | $66,456 | $107,498 | $130,625 | | Diluted Earnings Per Share | $3.51 | $4.40 | $7.09 | $8.62 | | Adjusted Net Income | $71,686 | $73,090 | $144,553 | $145,870 | | Adjusted Diluted Earnings Per Share | $4.71 | $4.84 | $9.53 | $9.63 | | Adjusted EBITDA | $109,133 | $110,907 | $220,167 | $221,114 | | Adjusted EBITDA as % of Revenue | 19.7% | 20.9% | 19.8% | 20.8% | - Adjusted Net Income, Adjusted Diluted Earnings Per Share, EBITDA, Adjusted EBITDA, and Adjusted EBITDA as a percentage of revenue are non-GAAP measures used to help readers evaluate operating results and compare with similar companies[22] VITAS Segment Performance - In Q2 2023, VITAS service revenue grew by 7.8%, driven by a 6.2% increase in average daily census and an approximate 2.7% increase in Medicare reimbursement rates, partially offset by 100 basis points from the re-implementation of CMS sequestration. For the first six months, VITAS service revenue grew by 5.8%, driven by a 4.6% increase in average daily census and an approximate 2.8% increase in Medicare reimbursement rates, partially offset by 150 basis points from sequestration[37][71][23][81] - To address industry-wide shortages of licensed healthcare professionals, VITAS implemented a recruitment and retention bonus program on July 1, 2022. As of Q2 2023, $12.8 million has been accrued, $23.8 million for the first six months, and a cumulative $43.4 million since the program's inception[38] - For the full year 2023, VITAS revenue (pre-Medicare Cap) is projected to grow by 8.5% to 9.5%, with average daily census expected to increase by 6.5% to 7.5%. Adjusted EBITDA margin (pre-Medicare Cap and retention bonuses) is anticipated to be 16.5% to 17.0%[25] Roto-Rooter Segment Performance - In Q2 2023, Roto-Rooter service revenue decreased by 0.2%, primarily due to a decline in drain cleaning services, partially offset by growth in excavation and water restoration services. For the first six months, Roto-Rooter service revenue grew by 3.8%, driven by increases in plumbing, excavation, and water restoration services, partially offset by a decline in drain cleaning services[37][23] - The decline in drain cleaning and plumbing volumes was primarily influenced by macroeconomic consumer caution. Growth in excavation and water restoration revenue depends on the volume and scale of drain cleaning issues. Independent contractor revenue growth was mainly due to the expansion of water restoration business[72][82] - For the full year 2023, Roto-Rooter revenue is projected to grow by 1.0% to 2.0%, with an Adjusted EBITDA margin expected to be 28.0% to 28.5%[40] Liquidity and Capital Resources - Key balance sheet changes as of June 30, 2023, include a $13 million decrease in accrued compensation (due to 2022 bonus payments), a $19.2 million decrease in accounts receivable (due to collection timing), a $23.7 million increase in other current liabilities (primarily from the healthcare worker retention bonus program), and a $97.5 million decrease in long-term debt (due to early repayment)[43][67] - Net cash provided by operating activities increased by $35.1 million from $157.7 million as of June 30, 2022, to $192.8 million as of June 30, 2023, primarily driven by a $32.6 million increase in accounts payable and other current liabilities (due to retention bonus accruals) and a $19.2 million decrease in accounts receivable, partially offset by a $23.1 million decrease in net income[44][175] - The company anticipates its operating income and cash flows will be sufficient to meet business operations and commitments for the foreseeable future. Management continuously evaluates cash utilization options, including stock repurchases, debt repurchases, acquisitions, and increased dividends[66][68] - The company prepaid $75 million of its term loan in Q1 2023 and paid the remaining $21.3 million on April 28, 2023, reducing the 2022 Credit Arrangement's borrowing capacity from $550 million to $450 million. As of June 30, 2023, the company had approximately $404.7 million of unused revolving credit capacity[27][41][42] Commitments and Contingencies - The company faces various lawsuits and claims in the normal course of business and regularly receives communications from government and regulatory agencies regarding Medicare and Medicaid billing compliance. The company accrues liabilities for specific, uninsured regulatory and legal actions that are probable and estimable, and discloses actions when a loss is reasonably possible. In most cases, the company cannot reasonably estimate any potential liability due to the uncertainty of outcomes and litigation stages[69] Results of Operations - Three months ended June 30, 2023 versus 2022 Consolidated Results - Service revenue and sales increased by 4.2% in Q2 2023 compared to the prior year, with VITAS contributing $23.1 million in growth and Roto-Rooter decreasing by $552 thousand[47] Revenue Composition by Operating Segment (USD thousands) | Segment | Q2 2023 | Q2 2022 | Growth/(Decline) Percentage | | :--- | :--- | :--- | :--- | | VITAS Net Revenue | $320,861 | $297,781 | 7.8% | | Routine Home Care | $278,116 | $257,631 | 8.0% | | Continuous Care | $21,081 | $19,538 | 7.9% | | Inpatient Care | $27,401 | $24,619 | 11.3% | | Medicare Cap Adjustment | $(2,750) | $(2,000) | (37.5)% | | Roto-Rooter Net Revenue | $232,955 | $233,507 | (0.2)% | | Drain Cleaning | $60,362 | $64,532 | (6.5)% | | Plumbing | $48,719 | $48,885 | (0.3)% | | Excavation | $57,552 | $55,546 | 3.6% | | Water Restoration | $44,978 | $43,673 | 3.0% | | Total Revenue | $553,816 | $531,288 | 4.2% | Segment Results - VITAS's after-tax earnings decreased primarily due to $9.6 million in after-tax expenses from the healthcare worker retention bonus program. Roto-Rooter's after-tax earnings decreased mainly due to reduced revenue. Corporate after-tax expenses increased by 8.2%, primarily due to a $1.2 million increase in stock-based compensation[78][53][79] Net Income/(Loss) by Segment (USD thousands) | Segment | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | VITAS | $26,128 | $35,212 | | Roto-Rooter | $44,374 | $47,072 | | Corporate | $(17,125) | $(15,828) | | Total | $53,377 | $66,456 | Gross Margin Gross Margin | Segment | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Consolidated Gross Margin | 32.4% | 36.6% | | VITAS Gross Margin | 18.0% | 23.6% | | Roto-Rooter Gross Margin | 52.3% | 53.2% | - VITAS's gross margin decreased primarily due to $12.8 million in expenses from the healthcare worker retention bonus program. Roto-Rooter's gross margin decreased mainly due to reduced revenue[49] Selling, General and Administrative Expenses (SG&A) SG&A Expense Composition (USD thousands) | Indicator | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | SG&A Expenses (excluding long-term incentive and deferred compensation trust market value adjustments) | $91,733 | $91,422 | | Long-Term Incentive Compensation | $1,750 | $1,517 | | Impact of Deferred Compensation Trust Asset Market Value Adjustment | $1,504 | $(5,086) | | Total SG&A Expenses | $94,987 | $87,853 | - SG&A expenses, excluding long-term incentive compensation and the impact of deferred compensation trust market value adjustments, were relatively flat in Q2 2023 compared to Q2 2022[73] Other Income/(Expense) – Net Other Income/(Expense) – Net (USD thousands) | Indicator | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Deferred Compensation Trust Asset Market Value Adjustment | $1,504 | $(5,086) | | Interest Income | $113 | $154 | | Other | $(8) | $2 | | Total Other Income/(Expense) - Net | $1,609 | $(4,930) | Income Taxes Effective Tax Rate Reconciliation (USD thousands) | Indicator | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Income Tax at Statutory Federal Rate | $14,772 | $18,082 | | Stock-Based Compensation Tax Benefit | $(1,501) | $(2,499) | | State and Local Income Taxes | $2,286 | $1,965 | | Other - Net | $1,410 | $2,102 | | Income Tax Expense | $16,967 | $19,650 | | Effective Tax Rate | 24.1% | 22.8% | Results of Operations - Six months ended June 30, 2023 versus 2022 Consolidated Results - Service revenue and sales increased by 4.9% for the first six months of 2023 compared to the prior year, with VITAS contributing $34.4 million in growth and Roto-Rooter contributing $17.8 million in growth[55] Revenue Composition by Operating Segment (USD thousands) | Segment | First Six Months 2023 | First Six Months 2022 | Growth/(Decline) Percentage | | :--- | :--- | :--- | :--- | | VITAS Net Revenue | $631,339 | $596,970 | 5.8% | | Routine Home Care | $545,166 | $515,267 | 5.8% | | Continuous Care | $41,022 | $39,116 | 4.9% | | Inpatient Care | $56,494 | $51,189 | 10.4% | | Medicare Cap Adjustment | $(5,500) | $(4,500) | (22.2)% | | Roto-Rooter Net Revenue | $482,634 | $464,867 | 3.8% | | Drain Cleaning | $126,851 | $131,219 | (3.3)% | | Plumbing | $99,172 | $96,557 | 2.7% | | Excavation | $117,128 | $110,734 | 5.8% | | Water Restoration | $95,741 | $84,033 | 13.9% | | Total Revenue | $1,113,973 | $1,061,837 | 4.9% | Segment Results - VITAS's after-tax earnings decreased primarily due to $17.7 million in after-tax expenses from the healthcare worker retention bonus program and the re-implementation of the 2.0% sequestration policy. Roto-Rooter's after-tax earnings as a percentage of revenue slightly decreased. Corporate after-tax expenses increased by 10.4%, primarily due to a $3.1 million increase in stock-based compensation[62][110][86] Net Income/(Loss) by Segment (USD thousands) | Segment | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | | VITAS | $50,892 | $71,694 | | Roto-Rooter | $92,027 | $91,009 | | Corporate | $(35,421) | $(32,078) | | Total | $107,498 | $130,625 | Gross Margin Gross Margin | Segment | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | | Consolidated Gross Margin | 33.1% | 36.6% | | VITAS Gross Margin | 18.2% | 23.8% | | Roto-Rooter Gross Margin | 52.7% | 53.0% | - VITAS's gross margin decreased primarily due to $23.8 million in expenses from the healthcare worker retention bonus program[57] Selling, General and Administrative Expenses (SG&A) SG&A Expense Composition (USD thousands) | Indicator | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | | SG&A Expenses (excluding long-term incentive and deferred compensation trust market value adjustments) | $189,634 | $184,000 | | Long-Term Incentive Compensation | $4,264 | $2,827 | | Impact of Deferred Compensation Trust Asset Market Value Adjustment | $1,184 | $(9,020) | | Total SG&A Expenses | $195,082 | $177,807 | - SG&A expenses, excluding long-term incentive compensation and the impact of deferred compensation trust market value adjustments, increased by 3.1% for the first six months of 2023 compared to the prior year, primarily due to increased variable selling expenses and normal wage growth[58] Other Income/(Expense) – Net Other Income/(Expense) – Net (USD thousands) | Indicator | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | | Deferred Compensation Trust Asset Market Value Adjustment | $1,184 | $(9,020) | | Interest Income | $263 | $226 | | Other | $59 | $2 | | Total Other Income/(Expense) - Net | $1,506 | $(8,792) | Income Taxes Effective Tax Rate Reconciliation (USD thousands) | Indicator | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | | Income Tax at Statutory Federal Rate | $29,717 | $35,870 | | Stock-Based Compensation Tax Benefit | $(3,150) | $(3,940) | | State and Local Income Taxes | $5,226 | $5,418 | | Other - Net | $2,218 | $2,835 | | Income Tax Expense | $34,011 | $40,183 | | Effective Tax Rate | 24.0% | 23.5% | Unaudited Consolidating Statements of Income Q2 2023 Consolidating Statements of Income (USD thousands) | Indicator | VITAS | Roto-Rooter | Corporate | Chemed Consolidated | | :--- | :--- | :--- | :--- | :--- | | Service Revenue and Sales | $320,861 | $232,955 | $0 | $553,816 | | Operating Income | $30,128 | $55,710 | $(16,332) | $69,506 | | Net Income/(Loss) | $26,128 | $44,374 | $(17,125) | $53,377 | Q2 2022 Consolidating Statements of Income (USD thousands) | Indicator | VITAS | Roto-Rooter | Corporate | Chemed Consolidated | | :--- | :--- | :--- | :--- | :--- | | Service Revenue and Sales | $297,781 | $233,507 | $0 | $531,288 | | Operating Income | $41,819 | $59,860 | $(9,741) | $91,938 | | Net Income/(Loss) | $35,212 | $47,072 | $(15,828) | $66,456 | First Six Months 2023 Consolidating Statements of Income (USD thousands) | Indicator | VITAS | Roto-Rooter | Corporate | Chemed Consolidated | | :--- | :--- | :--- | :--- | :--- | | Service Revenue and Sales | $631,339 | $482,634 | $0 | $1,113,973 | | Operating Income | $58,620 | $115,998 | $(32,293) | $142,325 | | Net Income/(Loss) | $50,892 | $92,027 | $(35,421) | $107,498 | First Six Months 2022 Consolidating Statements of Income (USD thousands) | Indicator | VITAS | Roto-Rooter | Corporate | Chemed Consolidated | | :--- | :--- | :--- | :--- | :--- | | Service Revenue and Sales | $596,970 | $464,867 | $0 | $1,061,837 | | Operating Income | $85,890 | $115,728 | $(20,306) | $181,312 | | Net Income/(Loss) | $71,694 | $91,009 | $(32,078) | $130,625 | Unaudited Consolidating Summary and Reconciliation of Adjusted EBITDA Q2 2023 Adjusted EBITDA Reconciliation (USD thousands) | Indicator | VITAS | Roto-Rooter | Corporate | Chemed Consolidated | | :--- | :--- | :--- | :--- | :--- | | Net Income/(Loss) | $26,128 | $44,374 | $(17,125) | $53,377 | | EBITDA | $39,974 | $68,783 | $(22,494) | $86,263 | | Healthcare Worker Retention Bonuses | $12,833 | - | - | $12,833 | | Stock-Based Compensation Expense | - | - | $8,400 | $8,400 | | Adjusted EBITDA | $47,918 | $65,880 | $(4,665) | $109,133 | Q2 2022 Adjusted EBITDA Reconciliation (USD thousands) | Indicator | VITAS | Roto-Rooter | Corporate | Chemed Consolidated | | :--- | :--- | :--- | :--- | :--- | | Net Income/(Loss) | $35,212 | $47,072 | $(15,828) | $66,456 | | EBITDA | $52,709 | $71,230 | $(21,697) | $102,242 | | Stock-Based Compensation Expense | - | - | $7,216 | $7,216 | | Adjusted EBITDA | $47,966 | $69,016 | $(6,075) | $110,907 | First Six Months 2023 Adjusted EBITDA Reconciliation (USD thousands) | Indicator | VITAS | Roto-Rooter | Corporate | Chemed Consolidated | | :--- | :--- | :--- | :--- | :--- | | Net Income/(Loss) | $50,892 | $92,027 | $(35,421) | $107,498 | | EBITDA | $78,287 | $141,643 | $(46,152) | $173,778 | | Healthcare Worker Retention Bonuses | $23,750 | - | - | $23,750 | | Stock-Based Compensation Expense | - | - | $16,882 | $16,882 | | Adjusted EBITDA | $92,380 | $137,723 | $(9,936) | $220,167 | First Six Months 2022 Adjusted EBITDA Reconciliation (USD thousands) | Indicator | VITAS | Roto-Rooter | Corporate | Chemed Consolidated | | :--- | :--- | :--- | :--- | :--- | | Net Income/(Loss) | $71,694 | $91,009 | $(32,078) | $130,625 | | EBITDA | $107,047 | $138,373 | $(43,010) | $202,410 | | Stock-Based Compensation Expense | - | - | $14,667 | $14,667 | | Adjusted EBITDA | $98,001 | $134,909 | $(11,796) | $221,114 | Reconciliation of Adjusted Net Income Adjusted Net Income Reconciliation (USD thousands, except per share data) | Indicator | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Reported Net Income | $53,377 | $66,456 | $107,498 | $130,625 | | Healthcare Worker Retention Bonuses (pre-tax) | $12,833 | - | $23,750 | - | | Stock-Based Compensation Expense (pre-tax) | $8,400 | $7,216 | $16,882 | $14,667 | | Total Pre-Tax Adjustments | $25,335 | $11,171 | $51,356 | $23,634 | | Total After-Tax Adjustments | $(18,309) | $(6,634) | $(37,055) | $(15,245) | | Adjusted Net Income | $71,686 | $73,090 | $144,553 | $145,870 | | Diluted Earnings Per Share (reported) | $3.51 | $4.40 | $7.09 | $8.62 | | Adjusted Diluted Earnings Per Share | $4.71 | $4.84 | $9.53 | $9.63 | Operating Statistics VITAS Operating Statistics | Indicator | Q2 2023 | Q2 2022 | First Six Months 2023 | First Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Patient Days | 1,673,710 | 1,575,702 | 3,278,391 | 3,133,879 | | Average Daily Census (ADC) | 18,392 | 17,315 | 18,114 | 17,314 | | Total Admissions | 15,611 | 14,735 | 31,790 | 31,265 | | Total Discharges | 15,104 | 14,603 | 30,509 | 31,465 | | Average Length of Stay | 99.5 | 103.7 | 99.7 | 104.3 | | Median Length of Stay | 16.0 | 17.0 | 15.0 | 16.0 | | Days Sales Outstanding (excluding unapplied Medicare payments) | 35.2 | 33.7 | N/A | N/A | | Days Sales Outstanding (including unapplied Medicare payments) | 22.6 | 28.2 | N/A | N/A | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company primarily faces interest rate risk through its floating-rate credit facilities, continuously evaluating this exposure and the costs versus benefits of hedging techniques - As of June 30, 2023, the company had no outstanding floating-rate debt. For every $10 million borrowed under the credit facility, a 100 basis points (1%) increase or decrease in interest rates would increase or decrease the company's annual interest expense by $100 thousand[102] Item 4. Controls and Procedures Management has assessed the effectiveness of disclosure controls and procedures as of the end of the reporting period, concluding they are effective, with no significant internal control changes this quarter - Under the supervision of the President and Chief Executive Officer, and with the participation of the Executive Vice President and Chief Financial Officer and the Vice President and Controller, the company evaluated the effectiveness of its disclosure controls and procedures as of the end of the reporting period. Based on this evaluation, management concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period. No significant changes in internal control occurred during the reporting period[126] Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information This report contains forward-looking statements based on current expectations and assumptions, involving known and unknown risks, uncertainties, contingencies, and other factors that may cause actual results to differ materially - Forward-looking statements are identified by words such as "believe," "expect," "hope," "anticipate," "plan," and similar expressions, based on current expectations and assumptions, involving risks, uncertainties, contingencies, and other factors that could cause actual results to differ materially from those expressed. Investors should be aware that such forward-looking statements carry inherent risks, and there is no assurance that the matters contained therein will be achieved. The company undertakes no obligation to publicly update or revise any forward-looking statements[101] PART II. OTHER INFORMATION Item 1. Legal Proceedings - For information regarding legal proceedings involving the company, please refer to Note 10, "Legal and Regulatory Matters," in Part I, Item 1 of this Form 10-Q quarterly report[103] Item 1A. Risk Factors - There have been no other material changes to the risk factors disclosed in the company's most recent Annual Report on Form 10-K[104] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Purchases of Equity Securities by Issuer and Affiliated Purchasers Stock Repurchase Plan Activity for the First Six Months of 2023 | Period | Total Shares Repurchased | Weighted Average Price Per Share | Total Shares Repurchased Under Plan | Remaining Authorized Amount Under Plan | | :--- | :--- | :--- | :--- | :--- | | January 1 to January 31, 2023 | - | $0 | 10,458,154 | $87,867,735 | | February 1 to February 28, 2023 | - | $0 | 10,458,154 | $87,867,735 | | March 1 to March 31, 2023 | - | $0 | 10,458,154 | $87,867,735 | | Total for Q2 2023 | 25,000 | $536.98 | N/A | N/A | | April 1 to April 30, 2023 | - | $0 | 10,458,154 | $87,867,735 | | May 1 to May 31, 2023 | 16,620 | $537.12 | 10,474,774 | $78,940,805 | | June 1 to June 30, 2023 | 8,380 | $536.71 | 10,483,154 | $74,443,156 | Item 3. Defaults Upon Senior Securities - None[143] Item 4. Mine Safety Disclosures - None[131] Item 5. Other Information - None[132] Item 6. Exhibits - Exhibits include iXBRL-formatted materials for Chemed Corporation's Form 10-Q quarterly report as of June 30, 2023, and various certifications filed under Exchange Act Rule 13a-14(a)/15d-14(a) and Section 906 of the Sarbanes-Oxley Act[107][133] SIGNATURES This report has been signed by authorized representatives of Chemed Corporation in accordance with the Securities Exchange Act of 1934 - This report was signed by Kevin J. McNamara, President and Chief Executive Officer, David P. Williams, Executive Vice President and Chief Financial Officer, and Michael D. Witzeman, Vice President and Controller, on behalf of Chemed Corporation, as required by the Securities Exchange Act of 1934, on July 28, 2023[146][135][147]