Chemed(CHE) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Chemed Corporation's unaudited consolidated financial statements for Q3 and nine months ended September 30, 2023 Consolidated Financial Highlights (Q3 2023 vs Q3 2022) | Financial Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Service Revenues and Sales | $564,532 | $526,472 | +7.2% | | Income from Operations | $86,850 | $80,857 | +7.4% | | Net Income | $74,958 | $56,873 | +31.8% | | Diluted EPS | $4.93 | $3.78 | +30.4% | Consolidated Financial Highlights (Nine Months Ended Sep 30, 2023 vs 2022) | Financial Metric | Nine Months 2023 (in thousands) | Nine Months 2022 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Service Revenues and Sales | $1,678,505 | $1,588,309 | +5.7% | | Net Income | $182,456 | $187,498 | -2.7% | | Diluted EPS | $12.02 | $12.41 | -3.1% | Key Balance Sheet Data (as of Sep 30, 2023 vs Dec 31, 2022) | Balance Sheet Item | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $394,539 | $272,612 | | Total Assets | $1,562,079 | $1,442,012 | | Total Current Liabilities | $297,219 | $297,205 | | Total Liabilities | $542,836 | $643,297 | | Total Stockholders' Equity | $1,019,243 | $798,715 | Cash Flow Summary (Nine Months Ended Sep 30, 2023 vs 2022) | Cash Flow Activity | Nine Months 2023 (in thousands) | Nine Months 2022 (in thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $221,736 | $209,687 | | Net Cash used by Investing Activities | $(48,972) | $(39,914) | | Net Cash used by Financing Activities | $(73,740) | $(194,887) | | Increase/(Decrease) in Cash | $99,024 | $(25,114) | Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations for consolidated financial statement line items, including revenue recognition, debt, and legal matters Note 2. Revenue Recognition This note details the company's revenue recognition policies under ASC 606 for both VITAS and Roto-Rooter segments - VITAS revenue is recognized over time based on the level of care provided (Routine Home Care, Continuous Home Care, Inpatient Care), with adjustments for Medicare caps and implicit price concessions[95][31][32] - Roto-Rooter recognizes revenue for its primary services (plumbing, drain cleaning, water restoration) at a point in time when the service is completed and accepted by the customer[22][23] Disaggregated Revenue - Roto-Rooter (Nine Months Ended Sep 30) | Service Line | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Short term core | $509,044 | $504,688 | | Water restoration | $141,176 | $127,678 | | Independent contractors | $65,684 | $62,897 | | Net Revenue | $713,439 | $694,803 | Disaggregated Revenue - VITAS (Nine Months Ended Sep 30) | Level of Care | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Routine home care | $832,554 | $771,520 | | Continuous care | $63,054 | $57,717 | | Inpatient care | $84,312 | $75,714 | | Net Revenue | $965,066 | $893,506 | Note 5. Long-Term Debt and Lines of Credit This note details the company's 2022 Credit Facilities, including the full repayment of its term loan and compliance with debt covenants - In Q1 2023, the company made prepayments of $75.0 million on its term loan and paid the remaining $21.3 million balance on April 28, 2023, reducing total borrowing capacity to $450.0 million[41] - As of September 30, 2023, the company is in compliance with all debt covenants and has approximately $404.8 million of unused lines of credit available under its revolving credit facility[42] Note 10. Legal and Regulatory Matters This note describes ongoing legal and regulatory matters, primarily concerning the VITAS segment, including an OIG audit and a repayment demand - On June 22, 2023, the OIG confirmed that VITAS satisfied its requirements under the five-year Corporate Integrity Agreement (CIA) that began in 2017, and the CIA was concluded[186] - VITAS received a demand letter from its MAC for $50.3 million following an OIG audit, and VITAS has deposited this amount to preserve its appeal rights and is actively appealing the claims[188] Note 17. Acquisitions This note outlines the company's acquisition activities during 2023, with the Roto-Rooter segment completing two franchise acquisitions - In 2023, Roto-Rooter acquired one franchise in South Carolina for $305,000 and one in Georgia for $3.689 million in cash[195] Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides an overview of the company's performance, financial condition, and future outlook, including liquidity and segment analysis - The company updated its full-year 2023 adjusted earnings per diluted share guidance to be in the range of $19.82 to $20.02[231] - VITAS implemented a hiring and retention bonus program for licensed healthcare workers starting July 1, 2022, with $43.4 million accrued since inception and $28.6 million paid in July 2023[229] Updated Full-Year 2023 Guidance | Segment/Metric | 2023 Forecast | | :--- | :--- | | VITAS Revenue Growth (pre-Medicare Cap) | 9.3% to 9.5% | | VITAS Adjusted EBITDA Margin (pre-Medicare Cap) | 15.4% to 15.7% | | Roto-Rooter Revenue Growth | 1.6% to 2.0% | | Roto-Rooter Adjusted EBITDA Margin | 28.4% to 28.6% | Financial Condition, Liquidity and Capital Resources The company's financial condition remains strong, marked by increased cash, full repayment of long-term debt, and improved operating cash flow - The company fully repaid its $97.5 million in long-term debt during the first nine months of 2023[209][205] - Net cash provided by operating activities increased by $12.0 million to $221.7 million for the first nine months of 2023, largely due to a $44.0 million positive change in accounts receivable timing[210] - Management believes operating income and cash flows are sufficient to operate the business and meet commitments for the foreseeable future[206] Results of Operations - Three Months Ended Sep 30, 2023 vs 2022 Consolidated revenue increased in Q3 2023, driven by VITAS's growth and improved gross margin, leading to a significant rise in net income Q3 2023 vs Q3 2022 Revenue by Segment | Segment | Q3 2023 Revenue (in thousands) | Q3 2022 Revenue (in thousands) | % Change | | :--- | :--- | :--- | :--- | | VITAS | $333,728 | $296,536 | +12.5% | | Roto-Rooter | $230,804 | $229,936 | +0.4% | | Total | $564,532 | $526,472 | +7.2% | - VITAS's revenue growth was driven by a 9.4% increase in days-of-care and a ~2.7% increase in the Medicare reimbursement rate[240] - The consolidated gross margin improved to 35.8% from 34.1% in Q3 2022, primarily due to margin expansion at VITAS as the licensed healthcare worker retention bonus program expired[270] - The company's effective tax rate for Q3 2023 was 19.6%, down from 25.6% in Q3 2022, due to a one-time $4.2 million benefit from realigning its state and local corporate tax structure[243][272] Results of Operations - Nine Months Ended Sep 30, 2023 vs 2022 Consolidated revenue grew for the first nine months of 2023, but net income decreased due to lower gross margin at VITAS, impacted by retention bonus expenses Nine Months 2023 vs 2022 Revenue by Segment | Segment | Nine Months 2023 Revenue (in thousands) | Nine Months 2022 Revenue (in thousands) | % Change | | :--- | :--- | :--- | :--- | | VITAS | $965,066 | $893,506 | +8.0% | | Roto-Rooter | $713,439 | $694,803 | +2.7% | | Total | $1,678,505 | $1,588,309 | +5.7% | - VITAS's revenue increase was driven by a 6.2% increase in days-of-care and a ~2.8% increase in the Medicare reimbursement rate[246] - The consolidated gross margin decreased to 34.0% from 35.8% in the prior-year period, mainly caused by the VITAS gross margin falling to 20.2% from 22.3% due to the retention bonus program expense[247] - The effective tax rate for the first nine months of 2023 was 22.3%, compared to 24.2% in the same period of 2022, reflecting the benefit from the state and local tax structure realignment[134] Quantitative and Qualitative Disclosures about Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk associated with its variable-rate debt - The company's primary market risk is interest rate risk from its variable interest line of credit[262] - As of September 30, 2023, the company had no variable rate debt outstanding, minimizing its current exposure to interest rate fluctuations[262] Controls and Procedures Management confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes to internal controls - Based on an evaluation, the President and CEO, EVP and CFO, and VP and Controller concluded that the company's disclosure controls and procedures were effective as of the end of the period[294] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[294] PART II. OTHER INFORMATION Legal Proceedings This section refers to Note 10 of the financial statements for detailed information regarding the company's material legal matters - For information regarding the Company's legal proceedings, see Note 10, Legal and Regulatory Matters, under Part I, Item 1 of this report[301] Risk Factors The company states that there have been no material changes from the risk factors previously disclosed in its most recent Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the Company's most recent Annual Report on Form 10-K[295] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activities, including Q3 2023 repurchases and the remaining authorization Share Repurchase Activity (Q3 2023) | Period | Total Shares Repurchased | Weighted Average Price Paid Per Share | | :--- | :--- | :--- | | July 2023 | 0 | N/A | | August 2023 | 11,206 | $508.01 | | September 2023 | 17,251 | $501.52 | | Q3 Total | 28,457 | $504.07 | - As of September 30, 2023, the company had $60.1 million remaining under its share repurchase authorization[181][159] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by key executives and financial data in iXBRL format - The report includes certifications from Kevin J. McNamara (CEO), David P. Williams (CFO), and Michael D. Witzeman (Controller) pursuant to Rule 13a-14(a)/15d-14(a) and Section 906 of the Sarbanes-Oxley Act[297] - Financial statements and notes are provided in iXBRL (Inline eXtensible Business Reporting Language) format as Exhibit 101[266]