CHEMED CORPORATION Executive Summary
We operate through our two wholly-owned subsidiaries,VITAS Healthcare Corporation andRoto-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 theU.S. population. The following is a summary of the key operating results (in thousands except per share amounts): Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Service revenues and sales$ 502,199 $ 473,584 $ 1,017,997 $ 935,618 Net income$ 82,101 $ 50,729 $ 137,992 $ 95,396 Diluted EPS $ 5.01 $ 3.08 $ 8.39$ 5.79 Adjusted net income$ 72,223 $ 55,215 $ 132,938 $ 103,390 Adjusted diluted EPS $ 4.41 $ 3.36 $ 8.08$ 6.27 Adjusted EBITDA$ 108,741 $ 85,089 $ 201,770 $ 159,888 Adjusted EBITDA as a % of revenue 21.7 % 18.0 %
19.8 % 17.1 %
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 June 30, 2020 , the increase in consolidated service
revenues and sales was driven by an 8.6% increase at Roto-Rooter and a 4.7%
increase at VITAS. The increase in service revenues at Roto-Rooter was driven by
an increase mainly in excavation, water restoration, and drain cleaning 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 average
Medicare rate increase approximately 3.0%. See page 42 for additional VITAS
operating metrics.
For the six months ended June 30, 2020 , the increase in consolidated service
revenues and sales was driven by a 11.6% increase at Roto-Rooter and a 7.4%
increase at VITAS. The increase in service revenues at Roto-Rooter was driven by
an increase in almost all major service lines as well as a result of
acquisitions completed in 2019. The increase in service revenues at VITAS is
comprised primarily of a 4.3% increase in days-of-care, a geographically
weighted average Medicare reimbursement rate increase of approximately 5.2%, and
acuity mix shift which reduced the blended Medicare rate increase by
approximately 2.0%. 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 six months ended June 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.
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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 1,500 COVID positive patients through June 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 deferred its first and second quarter 2020 income tax payments totaling
$19.0 million to the Federal government until July 15, 2020 , as permitted by the
CARES Act. In addition, Chemed and its subsidiaries deferred $10.7 million of
certain employer payroll taxes and $2.9 million of certain state tax payments,
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 six month period
ended June 30, 2020 approximately $4.2 million 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.
For the three and six months ended June 30, 2020 , the Company recognized $41.0
million in other operating income. The components of the amount recognized are
as follows, (in thousands):
Hard costs $ 3,814
Incremental Medicare Cap 2,250
Incremental PTO 21,425
Lost revenue 13,500
Other operating income $ 40,989
Hard costs are primarily expenses paid to outside vendors for personal
protection equipment and deep cleaning of in-patient facilities. The incremental
Medicare Cap is the result of lower admissions in certain programs combined with
the additional 2% sequestration revenue. In April, VITAS provided an extra two
weeks of paid time off to all frontline workers. Lost revenue was calculated
based on a comparison of historical Average Daily Census ("ADC") growth rates by
service-line to actual growth rates experienced between April and June of 2020
reduced for uncertainties related to the ultimate affect the pandemic will have
on our business.
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%
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and inpatient care by 34.7%. Respite care is not material to our operations. The
rebasing of these levels of care was effective on
OnAugust 2, 2019 , we entered into an Asset Purchase Agreement (the "Agreement") to purchase substantially all of the assets ofHSW RR, Inc. , aDelaware corporation ("HSW") and certain related assets of its affiliates, for$120 million , subject to a working capital adjustment. HSW owned and operated fourteenRoto-Rooter franchises mainly in the southwestern section ofthe United States , includingLos Angeles ,Dallas andPhoenix . Included in the assets purchased were the assets ofWestern 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. OnSeptember 16, 2019 , we completed the acquisition.
On
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 June 30, Six months ended June 30,
2020 2019 2020 2019
$ 2,352 $ 331 $ 4,704 $ 772
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 affecting our
healthcare system, labor pools and general economy. These governmental decisions
have the potential for immediate and material impact on VITAS and Roto-Rooter
operating results.
Over the past four 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 provide guidance for the remainder of the
calendar year. However, this guidance should be taken with the recognition the
pandemic will continue to materially disrupt all aspects of our healthcare
system and general economy and thus materially impact our ability to achieve
this guidance.
Revenue growth for VITAS in 2020, prior to Medicare cap, is estimated to be in
the range of 5% to 7%. Average Daily Census in 2020 is estimated to expand
approximately 2% to 4%. Full-year Adjusted EBITDA margin, prior to Medicare cap,
is estimated to be 19% to 20%. We are currently estimating $17 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 VITAS 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
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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 9% to 10%.
Roto-Rooter's Adjusted EBITDA margin for 2020 is estimated to be in the range of
23% to 25%. We anticipate that our operating income and cash flows will be
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
?A
?A
?A
?A$9.7 million increase in accrued compensation due to accrual of additional paid time off for VITAS front line works offset by the payments of cash bonuses in the first quarter of 2020.
?A
?A
?A
?A
Net cash provided by operating activities increased$168.9 million fromJune 30, 2019 toJune 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 certain income and 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. OnJune 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 ofJune 30, 2020 , mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As ofJune 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
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.
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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 current employee of Roto-Rooter Services Company ("RRSC"),
was hired in RRSC's Menlo Park branch in 2007. On November 30, 2018 , Lax filed a
class action lawsuit in Santa Clara County Superior Court 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 seeks 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 intends to
defend vigorously against the allegations in the Lax lawsuit.
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
?
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Results of Operations
Three months ended
Our service revenues and sales for the second quarter of 2020 increased 6.0% versus services and sales revenues for the second quarter of 2019. Of this increase, a$14.7 million increase was attributable to VITAS and$13.9 million increase was attributable toRoto-Rooter . The following chart shows the components of revenue by operating segment (in thousands): Three months ended June 30, 2020 2019 VITAS Routine homecare$ 276,345 $ 266,461 Continuous care 34,582 30,786 General inpatient 25,868 22,894 Other 2,109 2,237 Medicare cap adjustment (5,750) (3,198) Room and board - net (2,647) (2,710) Implicit price concessions (3,042) (3,720) Roto-Rooter Drain cleaning - short term core 49,455 46,039 Plumbing - short term core 32,022 34,171 Subtotal 81,477 80,210 Excavation - short term core 44,678 35,422 Water restoration 31,426 29,955 Contractor operations 15,193 14,595 Outside franchisee fees 1,210 1,623 Other - short term core 386 579 Other 2,971 2,973 Implicit price concessions (2,607) (4,523) Total$ 502,199 $ 473,584
Days of care at VITAS during the quarter ended
Days of Care Increase/(Decrease)
2020 2019 Percent
Routine homecare 1,401,744 1,317,854 6.4
Nursing home 279,462 303,983 (8.1)
Respite 4,158 6,669 (37.7)
Subtotal routine homecare and respite 1,685,364 1,628,506 3.5
Continuous care 35,814 41,804 (14.3)
General inpatient 25,542 29,663 (13.9)
Total days of care 1,746,720 1,699,973 2.8
This 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 average Medicare rate increase by approximately 3.1%.
During the quarter endedJune 30, 2020 , we recorded$5.8 million in net Medicare cap revenue reduction related to five programs for the 2020 government fiscal year. During the quarter endedJune 30, 2019 , we recorded$2.4 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. The decrease in plumbing revenues for the second quarter of 2020 versus 2019 is attributable to a 4.7% decrease in price and service mix shift and a 1.6% decrease in job count. The increase in excavation revenues for the second quarter of 2020 versus 2019 is attributable to a 10.1% increase in price and service mix shift and a 16.0% increase in job count. Drain cleaning revenues for the second quarter of 2020 versus 2019 reflect a 1.7% increase in price and service mix shift and a 5.7% increase in job count. Water restoration revenue increased for the second quarter of 2020 versus 2019 due to a 4.1% increase in job count and an 0.8% increase in price. Contractor operations increased 4.1% mainly due to their continued expansion into water restoration. The consolidated gross margin was 29.9% in the second quarter of 2020 as compared with 31.7% in the second quarter of 2019. On a segment basis, VITAS' gross margin was 18.5% in the second quarter of 2020 as compared with 22.9%, in the second quarter of -29-
-------------------------------------------------------------------------------- 2019. The decline in gross margin is attributable mainly to increased costs related to COVID-19. The CARES Act grant amount that offsets these higher costs is recorded in other operating income. TheRoto-Rooter segment's gross margin was 51.2% for the second quarter of 2020 as compared with 48.7% in the second quarter of 2019 primarily due to increased revenue and expense management. Selling, general and administrative expenses ("SG&A") comprise (in thousands): Three months endedJune 30, 2020 2019
SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts
$ 75,176 $
70,300
Impact of market value adjustments related to assets held in deferred compensation trusts
7,408 (130)
Long-term incentive compensation 1,929 1,386 Total SG&A expenses$ 84,513 $ 71,556 SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts for the second quarter of 2020 were up 6.9% when compared to the second 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 second quarter of 2020, increased 17.9% when compared to
the second quarter of 2019, primarily due to new equipment purchased at
Amortization for the second quarter of 2020, increased 512.8% when compared to the second quarter 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:
Three months ended June 30,
2020 2019
CARES Act grant $ (40,989) $ -
(Gain)/loss on disposal of fixed assets (395) 304
Transportation equipment held for sale -
2,266
Total other operating (income)/expenses$ (41,384) $
2,570
Other (expense)/income - net comprise (in thousands):
Three months ended
2020 2019
Market value adjustment on assets held in deferred compensation trusts $ 7,408$ (130) Interest income 116 112 Other (10) 31 Total other income - net $ 7,514 $ 13
Our effective tax rate reconciliation is as follows:
Three months ended June 30,
2020 2019
Income tax provision calculated at the statutory
federal rate $ 20,921 $ 13,504
Stock compensation tax benefits (8,203) (3,212)
State and local income taxes 3,604 2,212
Other--net 1,200 1,071
Income tax provision $ 17,522 $ 13,575
Effective tax rate 17.6 % 21.1 %
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Net income for both periods included the following after-tax items/adjustments that (reduced) or increased after-tax earnings (in thousands):
Three months ended June 30,
2020 2019
VITAS
CARES Act grant $ 30,537 $ -
Direct costs related to COVID-19 (18,101) -
COVID-19 Medicare cap (1,679)
-
Medicare cap sequestration adjustment (594)
(1,253)
Non cash ASC 842 expenses -
(1)
Amortization of reacquired franchise agreements (1,729)
(244)
Direct costs related to COVID-19 (822)
-
Acquisition expenses -
(71)
Corporate
Excess tax benefits on stock compensation 8,203
3,212
Stock option expense (4,209)
(3,197)
Long-term incentive compensation (1,728)
(1,199)
Impairment loss on transportation equipment - (1,733) Acquisition expense - - Total $ 9,878$ (4,486)
Three months ended
Net income/(loss) for the second quarter of 2020 versus the second quarter of 2019 by segment (in thousands):
Three months ended June 30,
2020 2019
VITAS $ 60,245 $ 37,339
Roto-Rooter 29,468 27,175
Corporate (7,612) (13,785)
$ 82,101 $ 50,729
VITAS' after-tax earnings were positively impacted in 2020 compared to 2019 due
to the recognition of $30.5 million of the CARES Act (offset by higher expenses
due to COVID-19), higher revenue and improved labor management and ancillary
costs. After-tax earnings as a percent of revenue at VITAS in the second quarter
of 2020 was 18.4% as compared to 11.9% in the second quarter of 2019.
After-tax Corporate expenses for 2020 decreased 44.8% when compared to 2019 due mainly to a$5.0 million increase in the excess tax benefits on stock compensation and a$1.7 million decrease in impairment loss on transportation equipment that occurred in the second quarter of 2019. ? -31-
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Results of Operations
Six months ended
Our service revenues and sales for the first six months of 2020 increased 8.8% versus services and sales revenues for the first six months of 2019. Of this increase, a$45.9 million increase was attributable to VITAS and$36.5 million increase was attributable toRoto-Rooter . The following chart shows the components of revenue by operating segment (in thousands): Six months ended June 30, 2020 2019 VITAS Routine homecare$ 548,098 $ 525,312 Continuous care 75,137 63,030 General inpatient 58,350 45,464 Other 5,265 4,242 Medicare cap adjustment (8,250) (6,598) Room and board - net (7,192) (5,252) Implicit price concessions (6,028) (6,667) Roto-Rooter Drain cleaning - short term core 103,475 90,692 Plumbing - short term core 68,816 66,589 Subtotal 172,291 157,281 Excavation - short term core 87,738 69,960 Water restoration 60,672 59,163 Contractor operations 31,421 28,627 Outside franchisee fees 2,400 3,245 Other - short term core 936 1,155 Other 6,505 5,980 Implicit price concessions (9,346) (9,324) Total$ 1,017,997 $ 935,618
Days of care at VITAS during the six months ended
Days of Care Increase/(Decrease)
2020 2019 Percent
Routine homecare 2,766,490 2,599,753 6.4
Nursing home 582,836 593,752 (1.8)
Respite 10,850 12,970 (16.3)
Subtotal routine homecare and respite 3,360,176 3,206,475 4.8
Continuous care 77,187 85,727 (10.0)
General inpatient 57,890 58,813 (1.6)
Total days of care 3,495,253 3,351,015 4.3
The revenue increase at VITAS is comprised primarily of the 4.3% increase in
days-of-care, a geographically weighted average Medicare reimbursement rate
increase of approximately 5.2%, and acuity mix shift which then decreased the
blended Medicare rate increase by approximately 2.0%.
During the first six months ended June 30, 2020 , we recorded $8.3 million in net
Medicare cap revenue reduction related to five programs for the 2020 government
fiscal year. During the first six months ended June 30, 2019 , we recorded
$5.8 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 six months of 2020 versus 2019
is attributable to a 3.9% increase in price and service mix shift and an 0.6%
decrease in job count. The increase in excavation revenues for the first six
months of 2020 versus 2019 is attributable to a 7.9% increase in price and
service mix shift and a 17.5% increase in job count. Drain cleaning revenues for
the first six months of 2020 versus 2019 reflect a 5.0% increase in price and
service mix shift and a 9.1% increase in job count. The increase in
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water restoration revenue for the first six months of 2020 versus 2019 is
attributable to a 4.2% increase in job count offset by a 1.6% decrease in price.
Contractor operations increased 9.8% mainly due to their continued expansion
into water restoration.
The consolidated gross margin was 30.9% in the first six months of 2020 as
compared with 31.0% in the first six months of 2019. On a segment basis, VITAS'
gross margin was 20.9% in the first six months of 2020 as compared with 22.4%,
in the first six months of 2019. The decline in VITAS gross margin is
attributable mainly to increased costs related to COVID-19. The CARES Act grant
amount that offsets these higher costs is recorded in other operating income.
The Roto-Rooter segment's gross margin was 49.6% for the first six months of
2020 as compared with 47.9% in the first six months of 2019 primarily due to
increased revenue and expense management.
Selling, general and administrative expenses ("SG&A") comprise (in thousands):
Six months ended June 30,
2020 2019SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts
$ 153,511 $
140,504
Long-term incentive compensation 3,749
2,874
Impact of market value adjustments related to assets held in deferred compensation trusts
(2,164) 2,207
Total SG&A expenses $ 155,096 $ 145,585
SG&A expenses before long-term incentive compensation and the impact of market
value adjustments related to deferred compensation trusts for the first six
months of 2020 were up 9.3% when compared to the first six 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 six months of 2020, increased 17.6% when compared to
the first six months of 2019, primarily due to new equipment purchased at
Amortization for the first six months of 2020, increased 436.8% when compared to the first six 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:
Six months ended June 30,
2020 2019
CARES Act grant $ (40,989) $ -
(Gain)/loss on disposal of fixed assets (153) 657
Transportation equipment held for sale - 2,266
Other - 6,000
Total other operating (income)/expenses $ (41,142) $ 8,923 Other (expense)/income - net comprise (in thousands):
Six months ended
2020 2019
Market value adjustment on assets held in deferred compensation trusts$ (2,164) $ 2,207 Interest income 225 214 Other (13) 31 Total other income - net$ (1,952) $ 2,452
Our effective tax rate reconciliation is as follows:
Six months ended June 30,
2020 2019
Income tax provision calculated at the statutory
federal rate $ 35,394 $ 24,169
Stock compensation tax benefits (12,756) (9,944)
State and local income taxes 6,182 4,538
Other--net 1,733 932
Income tax provision $ 30,553 $ 19,695
Effective tax rate 18.1 % 17.1 %
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Net income for both periods included the following after-tax items/adjustments that (reduced) or increased after-tax earnings (in thousands):
Six Months Ended June 30,
2020 2019
VITAS
CARES Act grant $ 30,537 $ -
Direct costs related to COVID-19 (18,828) -
COVID-19 Medicare cap (1,679)
-
Medicare cap sequestration adjustment (1,097) (1,640) Litigation settlement - (4,476) Non cash ASC 842 benefit - (490)Roto-Rooter Amortization of acquired and cancelled franchise agreements (3,457)
(568)
Direct costs related to COVID-19 (1,455) - Acquisition expenses - (71) Non cash ASC 842 benefit - (40) Corporate Excess tax benefits on stock compensation 12,756
9,944
Stock option expense (8,399)
(6,524)
Long-term incentive compensation (3,324)
(2,429)
Impairment loss on transportation equipment - (1,733) Non cash ASC 842 benefit - 124 Acquisition expenses - (91) Total $ 5,054$ (7,994)
Six months ended
Net income/(loss) for the first six months of 2020 versus the first six months of 2019 by segment (in thousands):
Six months ended June 30,
2020 2019
VITAS $ 101,524 $ 66,626
Roto-Rooter 53,790 50,162
Corporate (17,322) (21,392)
$ 137,992 $ 95,396
VITAS' after-tax earnings were positively impacted in 2020 compared to 2019 due
to the recognition of $30.5 million of the CARES Act (offset by COVID-19 costs)
and to higher revenue and improved labor management and ancillary costs.
After-tax earnings as a percent of revenue at VITAS in the first six months of
2020 was 15.3% as compared to 10.7% in the first six months of 2019.
After-tax Corporate expenses for 2020 decreased 19.0% when compared to 2019 due
mainly to a
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