# CHEMED CORP (CHE) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CHEMED CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/19584/000156276222000060/che-20211231x10k.htm
Accession: 0001562762-22-000060
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/CHE/
All MD&A years: /company/CHE/mda/
Next year: /company/CHE/mda/fy2022/ (FY 2022)

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 (“VITAS”) and Roto-Rooter Group, Inc. (“Roto-Rooter”). VITAS focuses on hospice care that helps make terminally ill patients' final days as comfortable as possible. Through its team 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 is 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 approximately 90% of the U.S. population.

The following is a summary of the key operating results for the years ended December 31, 2021, 2020 and 2019 (in thousands except percentages and per share amounts):

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","2019"],["Consolidated service revenues and sales","$","2,139,261","","$","2,079,583","","$","1,938,555"],["Consolidated net income","$","268,550","","$","319,466","","$","219,923"],["Diluted EPS","$","16.85","","$","19.48","","$","13.31"],["Adjusted net income","$","308,007","","$","296,413","","$","230,473"],["Adjusted diluted EPS","$","19.33","","$","18.08","","$","13.95"],["Adjusted EBITDA","$","461,414","","$","444,823","","$","350,927"],["Adjusted EBITDA as a % of revenue","","21.6","","%","21.4","","%","18.1","%"]]
[[/GREPCENT_TABLE]]

Adjusted net income, adjusted diluted EPS, earnings before interest, taxes and depreciation and amortization (“EBITDA”) and Adjusted EBITDA are not measures derived in accordance with GAAP. We use Adjusted EPS as a measure of earnings for certain long-term incentive awards. We use adjusted EBITDA to determine compliance with certain debt covenants. We provide non-GAAP measures to help readers evaluate our operating results and 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. Reconciliations of our non-GAAP measures are presented in tables following the Critical Accounting Policies section.

2021 versus 2020

The increase in consolidated service revenues and sales from 2020 to 2021 was a result of a 17.9% increase at Roto-Rooter offset by a 5.5% decrease at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines. The decrease in service revenues at VITAS is comprised primarily of a 5.7% decrease in days-of-care, a 1.7% decrease in acuity mix shift offset by a 1.7% increase in geographically weighted reimbursement rates. The combination of a lower Medicare cap revenue reduction and other contra revenue changes offset a portion of the revenue decline by approximately 20 basis points.

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 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. To date, we have seen shifts in demand and mix of services, changes in referral patterns, an increase in usage and reliance on our technology infrastructure, difficulties hiring and retaining workforce and vaccine mandates imposed on our frontline healthcare workers, among other changes. 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.

Chemed and its subsidiaries had deferred $36.4 million of certain employer payroll taxes as permitted by the CARES Act during 2020. $18.2 million was paid during 2021 and the remaining $18.2 million is in other current liabilities.

During the period from May 1, 2020 through March 31, 2022, the 2% Medicare sequestration reimbursement cut was suspended. For the year ended December 31, 2021, approximately $23.9 million was recognized as revenue due to the suspension of sequestration. Sequestration will be phased back into place at 1% from April 1, 2022 to June 30, 2022 and the full 2% thereafter.

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2020 versus 2019

The increase in consolidated service revenues and sales from 2019 to 2020 was a result of a 13.3% increase at Roto-Rooter and a 4.2% increase at VITAS. The increase in service revenues at Roto-Rooter was driven by an increase in all major service lines. The increase in service revenues at VITAS is comprised primarily of a 4.5% geographically weighted average Medicare reimbursement rate increase, a 1.0% increase in days of care, $6.7 million in Medicare cap revenue reduction (compared to $12.4 million for 2019), and acuity mix shift.

The current COVID-19 pandemic had a material impact on our results of operations, cash flow and financial position for 2020.

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 received $80.2 million from the Relief Fund based upon VITAS’s 2019 Medicare fee-for-service 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 5,700 COVID positive patients through December 31, 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 $36.4 million of certain employer payroll taxes as permitted by the CARES Act. $18.2 million is classified as a short-term liability and $18.2 million is classified as long-term liability.

During the period from May 1, 2020 through December 31, 2020, the 2% Medicare sequestration reimbursement cut is suspended. For the year ended December 31, 2020 approximately $16.8 million was recognized as revenue due to the suspension of sequestration.

All CARES Act funds received were fully recognized during the year ended December 31, 2020. The Company analogized to International Accounting Standard 20 – Accounting for Government Grants and Disclosures (“IAS 20”) to account for the CARES Act grant received. 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 lost revenue. The portal to report utilization of CARES Act funds opened on July 1, 2021. We completed our reporting by the September 30, 2021 deadline.

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

[[GREPCENT_TABLE]]
[["Lost revenue","$","44,784"],["Incremental PTO","","21,425"],["Hard costs","","14,016"],["Other operating income","$","80,225"]]
[[/GREPCENT_TABLE]]

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 (“PTO”) to all frontline workers.

During the year ended December 31, 2020, VITAS recognized $44.8 million for estimated lost revenue as a result of the pandemic. The December 27, 2020 COVID-19 relief bill gave providers multiple options to calculate lost revenue including budget to actual comparisons or other systematic methods of calculation. We calculated lost revenue using the budget to actual method. Our

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2020 budget was compiled, reviewed and approved prior to the start of the pandemic. Lost revenues for 2020 based on our calculation was $61.4 million, however only $44.8 million was recognized for use under the grant received.

All CARES Act funds received have been fully recognized as of December 31, 2020. However, the rules concerning utilization of the funds continue to evolve and we will continue to comply with those applicable to us. The portal to report utilization of CARES Act funds opened on July 1, 2021. We completed our reporting by the September 30, 2021 deadline.

Impact of Current Market Conditions

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. 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 COVID-19 pandemic has made accurate modeling and providing meaningful earnings guidance exceptionally challenging. Since the start of the pandemic, 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 earnings guidance for the 2022 calendar year. However, this guidance should be taken with the recognition the pandemic will continue to disrupt our healthcare system and general economy to such an extent that future rules, regulations and government mandates could materially impact the company’s ability to achieve this guidance.

Statistically, patients residing in senior housing are identified as hospice appropriate earlier into their terminal prognosis and have a much greater probability of having a length of stay in excess of 90 days. Hospice patients referred from hospitals, oncology practices and similar referral sources are generally more acute and have a significantly lower probability of lengths-of-stay exceeding 90 days. According to data released by the National Investment Center for Seniors Housing & Care, COVID-19 continues to adversely affect senior housing occupancy. This reduced occupancy in senior housing has had a corresponding reduction in VITAS nursing home admissions. Nursing home patients represented 15.6% of VITAS’ fourth-quarter 2021 patient census. This compares to nursing home patients averaging 18.2% of total census just prior to the pandemic.

A November 2021 article in US News and World Report estimated that approximately 20% of all health care workers in the US have left the industry since the start of the pandemic. This shortage of licensed healthcare workers will generate short-term to medium-term pressure on VITAS’ labor costs and related margins.

Medicare hospice reimbursement rate increases are based on a government formula that utilizes the Bureau of Labor and Statistics’ measurement of healthcare wage inflation reflected in the hospital wage index basket. However, this formulaic methodology is based upon healthcare wage inflation and increased CPI measured from April 1 through March 31 to determine the following October 1 reimbursement rates. This methodology effectively delays actual wage inflation from impacting hospice reimbursement by 12 to 18 months.

VITAS anticipates that senior housing will continue to have weak occupancy rates at least through the first half of 2022. Accordingly, VITAS anticipates senior housing hospice referrals will not have meaningful growth until the second half of 2022. Labor cost increases and related margin pressure are anticipated to continue through all of 2022 with some moderation starting with the next reimbursement increase on October 1, 2022.

Based upon the above discussion, VITAS 2022 revenue, prior to Medicare Cap, is estimated to decline 1.5% to 2.5% when compared to 2021. A portion of the estimated revenue reduction, approximately $15 million, is the result of the phase out of sequestration relief over the first half of 2022 compared to a full year of sequestration relief in 2021. ADC is estimated to decline 1.0% to 1.5%. Full year adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 15.5% to 16.0%. We are currently estimating $12 million for Medicare Cap billing limitations in calendar year 2022.

Roto-Rooter is forecasted to achieve full-year 2022 revenue growth of 8.0% to 9.5%. Roto-Rooter’s adjusted EBITDA margin for 2022 is expected to be 28.5% to 29.5%.

Based upon the above, full-year 2022 earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock option exercises, costs related to litigation and other discrete items, is estimated to be in the range of $19.10 to $19.50. This 2022 guidance assumes an effective corporate tax rate on adjusted earnings of 25.1% and a diluted share count of 15.25 million shares. Chemed’s 2021 reported adjusted earnings per diluted share was $19.33.

‎

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LIQUIDITY AND CAPITAL RESOURCES

Significant factors affecting our cash flows during 2021 and financial position at December 31, 2021, include the following:

Our operations generated cash of $308.6 million.

We repurchased $576.0 million of our stock.

We spent $58.7 million on capital expenditures.

We paid $22.0 million in dividends.

We borrowed $185.0 million of long-term debt from our existing credit agreement.

The ratio of total debt to total capital was 22.9% at December 31, 2021. The Company had no debt outstanding at December 31, 2020. Our current ratio was 0.76 and 1.10 at December 31, 2021 and 2020, respectively.

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 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. For December 31, 2021 and 2020, respectively, the interest rate is LIBOR plus 100 basis points. The 2018 Credit Agreement includes transition provisions in the instance LIBOR is no longer published or used as an industry-accepted rate.

The 2018 Credit Agreement contains the following quarterly financial covenants effective as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","","","","Chemed"],["Description","","Requirement","","December 31, 2021"],["Leverage Ratio (Consolidated Indebtedness/Consolidated Adj. EBITDA)",""," 3.50 to 1.00","","0.52 to 1.00"],["Fixed Charge Coverage Ratio (Consolidated Free Cash Flow/Consolidated"],["Fixed Charges",""," 1.50 to 1.00","","3.12 to 1.00"]]
[[/GREPCENT_TABLE]]

We forecast to be in compliance with all debt covenants through fiscal 2022.

We have issued $46.2 million in standby letters of credit as of December 31, 2021, mainly for insurance purposes. Issued letters of credit reduce our available credit under the revolving credit agreement. As of December 31, 2021, we have approximately $218.8 million of unused lines of credit available and eligible to be drawn down under our revolving credit facility. We believe our cash flow from operating activities and our unused eligible lines of credit are sufficient to fund our obligations and operate our business in the near and long term. We continually evaluate cash utilization alternatives, including share repurchase, debt repayment, acquisitions, and increased dividends to determine the most beneficial use of available capital resources.

‎

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CASH FLOW

Our cash flows for 2021, 2020 and 2019 are summarized as follows (in millions):

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,"],["","","2021","","","2020","","","2019"],["Net cash provided by operating activities","$","308.6","","$","489.3","","$","301.2"],["Capital expenditures","","(58.7)","","","(58.8)","","","(53.0)"],["Net cash provided for operating activities after capital expenditures","","249.9","","","430.5","","","248.2"],["Purchase of treasury stock in the open market","","(576.0)","","","(175.6)","","","(92.6)"],["Net increase/(decrease) in long-term debt","","185.0","","","(90.0)","","","0.8"],["Proceeds from exercise of stock options","","35.8","","","50.4","","","34.4"],["Dividends paid","","(22.0)","","","(21.1)","","","(19.8)"],["Capital stock surrendered to pay taxes on"],["on stock-based compensation","","(15.1)","","","(25.3)","","","(28.5)"],["Change in cash overdraft payable","","11.9","","","(9.8)","","","(3.9)"],["Business combinations","","-","","","(3.6)","","","(138.0)"],["Other--net","","0.7","","","1.0","","","0.7"],["(Decrease)/increase in cash and cash equivalents","$","(129.8)","","$","156.5","","$","1.3"]]
[[/GREPCENT_TABLE]]

2021 versus 2020

Net cash provided by operating activities decreased $180.7 million from December 31, 2020 to December 31, 2021. The main driver of the decrease relates to decreased earnings of $50.9 million, a $33.9 million decrease in income taxes payable as well as by a $18.2 decrease in deferred payroll taxes. We deferred $36.4 million of payroll tax payments as permitted by the CARES Act in 2020. We repaid $18.2 million of these deferred payroll taxes in 2021. Additionally, significant changes in our accounts receivable balances are driven mainly 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 from hospice services every other Friday. The timing of year 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. The swing in accounts receivable reduced cash flow by $21.2 million between 2021 and 2020.

In 2021, we repurchased 1,195,529 shares of Chemed capital stock at a weighted average price of $482.20 per share. In 2020, we repurchased approximately 384,552 shares of Chemed stock at a weighted average price of $456.98 per share. Based on our current operations and our current sources of capital, we believe we have the ability to continue our current share repurchase program into the foreseeable future.

2020 versus 2019

Net cash provided by operating activities increased $188.0 million from December 31, 2019 to December 31, 2020. The main driver of the increase relates to increased earnings which includes the receipt of $80.2 million in CARES Act grant funds. We deferred $36.4 million of payroll tax payments as permitted by the CARES Act. Additionally, significant changes in our accounts receivable balances are driven mainly 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 from hospice services every other Friday. The timing of year 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. The swing in accounts receivable improved cash flow by $32.0 million between 2020 and 2019.

In 2020, we repurchased 384,252 shares of Chemed capital stock at a weighted average price of $456.98 per share. In 2019, we repurchased approximately 269,009 shares of Chemed stock at a weighted average price of $344.34 per share. Based on our current operations and our current sources of capital, we believe we have the ability to continue our current share repurchase program into the foreseeable future.

The Company made two large acquisitions in 2019, the magnitude of which were not repeated in 2020.

‎

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COMMITMENTS AND CONTINGENCIES

We are subject to various lawsuits and claims in the normal course of our business. In addition, we periodically receive communications from governmental and regulatory agencies concerning compliance with Medicare and Medicaid billing requirements at our VITAS subsidiary. We establish reserves for specific, uninsured liabilities in connection with regulatory and legal action that we deem to be probable and estimable. We disclose the existence of regulatory and legal actions when we believe it is reasonably possible that a loss could occur in connection with the specific action. In most instances, we are unable to make a reasonable estimate of any reasonably possible liability due to the uncertainty of the outcome and stage of litigation. We record legal fees associated with legal and regulatory actions as the costs are incurred.

Please see Note 17 in the Notes to the Consolidated Financial Statements for a description of current material legal matters.

CONTRACTUAL OBLIGATIONS

The table below summarizes our debt and contractual obligations as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","Less than","","","","","","","","","After"],["","","","Total","","","1 year","","","1-3 Years","","","3-5 Years","","","5 Years"],["Long-term debt obligations (a)","","$","185,000","","$","-","","$","185,000","","$","-","","$","-"],["Interest on long-term debt","","","3,053","","","2,035","","","1,018","","","-","","","-"],["Lease liabilities","","","138,542","","","37,896","","","56,291","","","29,010","","","15,345"],["Purchase obligations (b)","","","73,024","","","73,024","","","-","","","-","","","-"],["Other long-term obligations (c)","","","106,104","","","1,877","","","3,754","","","1,876","","","98,597"],["Total contractual cash obligations","","$","505,723","","$","114,832","","$","246,063","","$","30,886","","$","113,942"],["(a) Represents the face value of the obligation."],["(b) Purchase obligations consist of accounts payable at December 31, 2021."],["(c) Other long-term obligations comprise largely excess benefit obligations."]]
[[/GREPCENT_TABLE]]

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RESULTS OF OPERATIONS

2021 Versus 2020 – Consolidated Results

Set forth below are the year-to-year changes in the components of the statement of operations relating to income for 2021 versus 2020 (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","Favorable/(Unfavorable)"],["","","Amount","","","Percent"],["Service revenues and sales"],["Roto-Rooter","$","133,099","","","18"],["VITAS","","(73,421)","","","(6)"],["Total","","59,678","","","3"],["Cost of services provided and goods sold","","8,739","","","1"],["Selling, general and administrative expenses","","(36,509)","","","(11)"],["Depreciation","","(2,415)","","","(5)"],["Amortization","","(53)","","","(1)"],["Other operating expenses","","(76,082)","","","(101)"],["Income from operations","","(46,642)","","","(12)"],["Interest expense","","487","","","21"],["Other income - net","","479","","","6"],["Income before income taxes","","(45,676)","","","(12)"],["Income taxes","","(5,240)","","","(7)"],["Net income","$","(50,916)","","","(16)"]]
[[/GREPCENT_TABLE]]

The VITAS segment revenue is as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["Routine homecare","$","1,069,766","","$","1,106,358"],["Continuous care","","94,338","","","136,011"],["Inpatient care","","113,187","","","114,956"],["Other","","12,142","","","11,164"],["Medicare cap adjustment","","(6,597)","","","(6,678)"],["Implicit price concessions","","(11,530)","","","(14,970)"],["Room and board, net","","(10,060)","","","(12,174)"],["Net revenue","$","1,261,246","","$","1,334,667"]]
[[/GREPCENT_TABLE]]

Days of care are as follows:

[[GREPCENT_TABLE]]
[["","","Days of Care","","Increase/(Decrease)"],["","","2021","","","2020","","Percent"],["","Routine homecare","5,347,170","","","5,597,213","","(4)"],["","Nursing home","993,322","","","1,097,493","","(9)"],["","Respite","21,403","","","20,387","","5"],["","Subtotal routine homecare and respite","6,361,895","","","6,715,093","","(5)"],["","Continuous care","101,539","","","141,693","","(28)"],["","General inpatient","107,685","","","112,718","","(4)"],["","Total days of care","6,571,119","","","6,969,504","","(6)"]]
[[/GREPCENT_TABLE]]

The decrease in service revenues at VITAS is comprised primarily of a 5.7% decrease in days-of-care, a 1.7% decrease in acuity mix shift offset by a 1.7% increase in geographically weighted reimbursement rates. The combination of a lower Medicare cap revenue reduction and other contra revenue changes offset a portion of the revenue decline by approximately 20 basis points.

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The Roto-Rooter segment revenue is as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["Drain cleaning - short term core","$","254,773","","$","218,500"],["Plumbing - short term core","","176,051","","","147,326"],["Subtotal","","430,824","","","365,826"],["Excavation - short term core","","215,190","","","184,960"],["Water restoration","","153,115","","","126,378"],["Contractor operations","","76,858","","","64,727"],["Outside franchisee fees","","5,068","","","4,893"],["Other - short term core","","1,138","","","1,714"],["Other","","15,576","","","13,537"],["Implicit price concessions and credit memos","","(19,754)","","","(17,119)"],["Total","$","878,015","","$","744,916"]]
[[/GREPCENT_TABLE]]

The increase in drain cleaning revenues for 2021 versus 2020 is attributable to a 10.1% increase in price and service mix shift and a 6.5% increase in job count. The increase in plumbing revenues for 2021 versus 2020 is attributable to a 10.1% increase in price and service mix shift and a 9.4% increase in job count. The increase in excavation revenues for 2021 versus 2020 is attributable to a 12.6% increase in price and service mix shift and an 3.7% increase in job count. Water restoration revenue for 2021 versus 2020 is attributable to a 14.5% increase in price and service mix shift and a 6.7% increase in job count. Contractor operations increased 18.7%. The increase in job count for all service lines was driven by both residential and commercial customers.

The consolidated gross margin excluding depreciation was 36.0% in 2021 versus 33.7% in 2020. On a segment basis, VITAS’ gross margin excluding depreciation was 24.4% in 2021 and 24.3% in 2020. Roto-Rooter’s gross margin excluding depreciation was 52.6% in 2021 and 50.7% in 2020. The increase is primarily due to increased revenue and improved labor costs.

Selling, general and administrative expenses (“SG&A”) for 2021 and 2020 comprise (in thousands):

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["SG&A expenses before long-term incentive compensation, and the impact of market"],["value adjustments related to deferred compensation trusts","$","349,250","","$","313,348"],["Long-term incentive compensation","","9,167","","","8,937"],["Impact of market value adjustments related to assets held in deferred compensation trusts","","8,310","","","7,933"],["Total SG&A expenses","$","366,727","","$","330,218"]]
[[/GREPCENT_TABLE]]

SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts for 2021 were up 11.5% when compared to 2020. This increase was mainly a result of the increase in variable selling and general administrative expenses at Roto-Rooter and increased variable bonus expense at Roto-Rooter caused by increased income.

Other operating (income)/expense for 2021 and 2020 comprise (in thousands):

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["Loss on disposal of property and equipment","$","987","","$","541"],["CARES Act grant income","","-","","","(80,225)"],["Litigation settlements","","-","","","4,589"],["Total other operating expenses","$","987","","$","(75,095)"]]
[[/GREPCENT_TABLE]]

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Other income-net for 2021 and 2020 comprise (in thousands):

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["Market value gains on assets held in deferred"],["compensation trusts","$","8,310","","$","7,933"],["Interest income","","377","","","757"],["Other","","457","","","(25)"],["Total other income","$","9,144","","$","8,665"]]
[[/GREPCENT_TABLE]]

Our effective tax rate reconciliation is as follows:

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["Income tax provision calculated using the statutory rate","$","73,566","","$","83,158"],["State and local income taxes, less federal income tax effect","","10,025","","","13,855"],["Excess stock compensation tax benefits","","(9,884)","","","(26,089)"],["Nondeductible expenses","","7,443","","","5,377"],["Other--net","","614","","","223"],["Income tax provision","$","81,764","","$","76,524"],["Effective tax rate","","23.3","%","","19.3","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["VITAS"],["COVID-19 expense","$","(12,157)","","$","(26,430)"],["Facility relocation expenses","","(1,384)","","","-"],["CARES Act grant income","","-","","","59,848"],["Medicare cap sequestration adjustment","","-","","","(462)"],["Roto-Rooter"],["Amortization of reacquired franchise agreements","","(6,915)","","","(6,914)"],["Direct costs related to COVID-19","","(1,789)","","","(2,808)"],["Litigation settlements","","72","","","(2,675)"],["Corporate"],["Stock option expense","","(18,879)","","","(15,700)"],["Excess tax benefits on stock compensation","","9,884","","","26,089"],["Long-term incentive compensation","","(8,094)","","","(7,895)"],["Direct costs related to COVID-19","","(29)","","","-"],["Other","","(166)","","","-"],["Total","$","(39,457)","","$","23,053"]]
[[/GREPCENT_TABLE]]

2021 Versus 2020– Segment Results

Net income/(loss) for 2021 versus 2020 (in thousand):

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["VITAS","$","162,431","","$","238,782"],["Roto-Rooter","","166,333","","","120,394"],["Corporate","","(60,214)","","","(39,710)"],["","$","268,550","","$","319,466"]]
[[/GREPCENT_TABLE]]

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VITAS’ after-tax earnings decreased primarily due to lower revenue. After-tax earnings as a percent of revenue at VITAS in 2021 was 12.9% as compared to 17.9% in 2020.

Roto-Rooter’s net income was impacted in 2021 compared to 2020 primarily by higher revenue and improved labor costs. After-tax earnings as a percent of revenue at Roto-Rooter in 2021 was 18.9% as compared to 16.2% in 2020.

After-tax Corporate expenses for 2021 increased 51.6% when compared to 2020 due mainly to a $16.2 million decrease in excess tax benefits on stock compensation and a $3.2 million increase in after-tax stock option expense.

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RESULTS OF OPERATIONS

2020 Versus 2019 – Consolidated Results

Set forth below are the year-to-year changes in the components of the statement of operations relating to income for 2020 versus 2019 (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","Favorable/(Unfavorable)"],["","","Amount","","","Percent"],["Service revenues and sales"],["VITAS","$","53,483","","","4"],["Roto-Rooter","","87,545","","","13"],["Total","","141,028","","","7"],["Cost of services provided and goods sold","","(57,071)","","","(4)"],["Selling, general and administrative expenses","","(24,506)","","","(8)"],["Depreciation","","(5,726)","","","(14)"],["Amortization","","(5,652)","","","(130)"],["Other operating expenses","","84,227","","","922"],["Income from operations","","132,300","","","51"],["Interest expense","","2,180","","","48"],["Other income - net","","(99)","","","(1)"],["Income before income taxes","","134,381","","","51"],["Income taxes","","(34,838)","","","(84)"],["Net income","$","99,543","","","45"]]
[[/GREPCENT_TABLE]]

The VITAS segment revenue is as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2020","","","2019"],["Routine homecare","$","1,106,358","","$","1,076,025"],["Continuous care","","136,011","","","133,473"],["Inpatient care","","114,956","","","99,920"],["Other","","11,164","","","10,433"],["Medicare cap adjustment","","(6,678)","","","(12,415)"],["Implicit price concessions","","(14,970)","","","(14,893)"],["Room and board, net","","(12,174)","","","(11,359)"],["Net revenue","$","1,334,667","","$","1,281,184"]]
[[/GREPCENT_TABLE]]

Days of care are as follows:

[[GREPCENT_TABLE]]
[["","","Days of Care","","Increase/(Decrease)"],["","","2020","","","2019","","Percent"],["","Routine homecare","5,597,213","","","5,338,664","","5"],["","Nursing home","1,097,493","","","1,224,264","","(10)"],["","Respite","20,387","","","28,857","","(29)"],["","Subtotal routine homecare and respite","6,715,093","","","6,591,785","","2"],["","Continuous care","141,693","","","166,783","","(15)"],["","General inpatient","112,718","","","120,063","","(6)"],["","Total days of care","6,969,504","","","6,878,631","","1"]]
[[/GREPCENT_TABLE]]

The remaining increase in VITAS’ revenues for 2020 versus 2019 was primarily comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 4.5%, $6.7 million in Medicare cap revenue reductions compared to $12.4 million in Medicare cap revenue reductions in the same period of 2019, acuity mix shift, fluctuations in net room and board and contractual adjustments that negatively impacted revenue growth, when compared to the prior-year period.

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The Roto-Rooter segment revenue is as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2020","","","2019"],["Drain cleaning - short term core","$","218,500","","$","195,063"],["Plumbing - short term core","","147,326","","","139,662"],["Subtotal","","365,826","","","334,725"],["Excavation - short term core","","184,960","","","145,540"],["Water restoration","","126,378","","","115,949"],["Contractor operations","","64,727","","","58,086"],["Outside franchisee fees","","4,893","","","6,152"],["Other - short term core","","1,714","","","2,360"],["Other","","13,537","","","12,279"],["Implicit price concessions and credit memos","","(17,119)","","","(17,720)"],["Total","$","744,916","","$","657,371"]]
[[/GREPCENT_TABLE]]

All major lines of business at Roto-Rooter were impacted by the Oakland and HSW acquisitions that occurred during 2019 which increased revenue $49.9 million. The increase in drain cleaning revenues for 2020 versus 2019 is attributable to a 2.5% increase in price and service mix shift and a 9.5% increase in job count. The increase in plumbing revenues for 2020 versus 2019 is attributable to a 0.1% increase in price and service mix shift and a 5.4% increase in job count. The increase in excavation revenues for 2020 versus 2019 is attributable to a 9.0% increase in price and service mix shift and an 18.1% increase in job count. Water restoration revenue for 2020 versus 2019 is attributable to a 2.8% increase in price and service mix shift and a 6.2% increase in job count. Contractor operations increased 11.4% mainly due to the HSW acquisition and their continued expansion into water restoration.

The consolidated gross margin excluding depreciation was 33.7% in 2020 versus 31.8% in 2019. On a segment basis, VITAS’ gross margin excluding depreciation was 24.3% in 2020 and 23.3% in 2019. The increase is primarily due to improved labor management. Roto-Rooter’s gross margin excluding depreciation was 50.7% in 2020 and 48.4% in 2019. The increase is primarily due to increased revenue covering more fixed costs.

Selling, general and administrative expenses (“SG&A”) for 2020 and 2019 comprise (in thousands):

[[GREPCENT_TABLE]]
[["","","2020","","","2019"],["SG&A expenses before long-term incentive compensation, and the impact of market"],["value adjustments related to deferred compensation trusts","$","313,348","","$","289,828"],["Long-term incentive compensation","","8,937","","","7,630"],["Impact of market value adjustments related to assets held in deferred compensation trusts","","7,933","","","8,254"],["Total SG&A expenses","$","330,218","","$","305,712"]]
[[/GREPCENT_TABLE]]

SG&A expenses before long-term incentive compensation and the impact of market value adjustments related to deferred compensation trusts for 2020 were up 8.1% when compared to 2019. This increase was mainly a result of the increase in variable selling expenses caused by increased revenue and increased advertising expense at Roto-Rooter.

Depreciation expense increased $5.7 million when compared to 2019 primarily due to new equipment purchased at Roto-Rooter related to the acquisitions completed in the second half of 2019.

Amortization expense increased $5.7 million mainly as a result of reacquired franchise rights amortization from the Oakland and HSW acquisition completed in the second half of 2019.

Other operating (income)/expense for 2020 and 2019 comprise (in thousands):

[[GREPCENT_TABLE]]
[["","","2020","","","2019"],["CARES Act grant income","$","(80,225)","","$","-"],["Litigation settlements","","4,589","","","6,000"],["Loss on disposal of property and equipment","","541","","","866"],["Loss on sale of transportation equipment","","-","","","2,266"],["Total other operating expenses","$","(75,095)","","$","9,132"]]
[[/GREPCENT_TABLE]]

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Other income-net for 2020 and 2019 comprise (in thousands):

[[GREPCENT_TABLE]]
[["","","2020","","","2019"],["Market value gains on assets held in deferred"],["compensation trusts","$","7,933","","$","8,254"],["Interest income","","757","","","513"],["Other","","(25)","","","(3)"],["Total other income","$","8,665","","$","8,764"]]
[[/GREPCENT_TABLE]]

Our effective tax rate reconciliation is as follows:

[[GREPCENT_TABLE]]
[["","","2020","","","2019"],["Income tax provision calculated using the statutory rate","$","83,158","","$","54,938"],["Excess stock compensation tax benefits","","(26,089)","","","(24,177)"],["State and local income taxes, less federal income tax effect","","13,855","","","7,880"],["Nondeductible expenses","","5,377","","","3,048"],["Other--net","","223","","","(3)"],["Income tax provision","$","76,524","","$","41,686"],["Effective tax rate","","19.3","%","","15.9","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2020","","","2019"],["VITAS"],["CARES Act grant income","$","59,848","","$","-"],["COVID-19 expense","","(26,430)","","","-"],["Medicare cap sequestration adjustment","","(462)","","","(2,965)"],["Litigation settlements","","-","","","(4,476)"],["Non cash ASC 842 expense","","-","","","(490)"],["Roto-Rooter"],["Amortization of reacquired franchise agreements","","(6,914)","","","(2,913)"],["Direct costs related to COVID-19","","(2,808)","","","-"],["Litigation settlements","","(2,675)","","","-"],["Acquisition expense","","-","","","(3,429)"],["Non cash ASC 842 expense","","-","","","(40)"],["Corporate"],["Excess tax benefits on stock compensation","","26,089","","","24,177"],["Stock option expense","","(15,700)","","","(12,237)"],["Long-term incentive compensation","","(7,895)","","","(6,440)"],["Loss on sale of transportation equipment","","-","","","(1,733)"],["Acquisition expense","","-","","","(128)"],["Non cash ASC 842 expense","","-","","","124"],["Total","$","23,053","","$","(10,550)"]]
[[/GREPCENT_TABLE]]

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2020 Versus 2019 – Segment Results

Net income/(loss) for 2020 versus 2019 (in thousand):

[[GREPCENT_TABLE]]
[["","","2020","","","2019"],["VITAS","$","238,782","","$","155,822"],["Roto-Rooter","","120,394","","","103,710"],["Corporate","","(39,710)","","","(39,609)"],["","$","319,466","","$","219,923"]]
[[/GREPCENT_TABLE]]

VITAS’ after-tax earnings were positively impacted in 2020 compared to 2019 due to higher revenue and improved labor management and ancillary costs, the recognition of $59.8 million in CARES Act grant income offset by $26.4 million in direct costs related to COVID-19. After-tax earnings as a percent of revenue at VITAS in 2020 was 17.9% as compared to 12.2% in 2019.

Roto-Rooter’s net income was positively impacted in 2020 compared to 2019 primarily by an increase in revenue offset by increased depreciation and amortization expense. After-tax earnings as a percent of revenue at Roto-Rooter in 2020 was 16.2% as compared to 15.8% in 2019.

After-tax Corporate expenses for 2020 were essentially flat compared to 2019.

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CRITICAL ACCOUNTING ESTIMATES

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 (“ASC606”). 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 includes 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.

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

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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 years ended December 31, 2021, 2020 and 2019, was $8.5 million, $8.1 million and $9.0 million, respectively and is included in cost of services provided and goods sold. The cost of charity care is calculated by taking the ratio of charity care days to total days of care and multiplying by 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 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. Compliance with such laws and regulations may be subject to future government review and interpretation. 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 more than 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 years ended December 31, 2021, 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 December 31, 2021, 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.

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We actively monitor each of our hospice programs, by provider number, as to their specific admission, discharge rate and median length of stay data 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. Because 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.

During the year ended December 31, 2021 we recorded $6.6 million in Medicare cap revenue reduction related to two programs’ projected 2021 measurement period liability and two programs’ 2022 measurement period liability.

During the year ended December 31, 2020 we recorded $6.7 million in Medicare cap revenue reduction related to four programs projected 2020 measurement period liability.

During the years ended December 31, 2019, we recorded $12.4 million in Medicare cap revenue reduction related to four programs’ 2020 measurement period liability and four programs’ projected 2019 measurement period liability.

At December 31, 2021 and 2020, the Medicare cap liability included in other current liabilities on the accompanying balance sheets was $13.5 million and $15.1 million, respectively.

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.

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 30 days or less.

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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 an independent third-party to operate the territory under Roto-Rooter’s registered trademarks. The contract is 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 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 cash collection from their 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. The 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.

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Insurance Accruals

For the Roto-Rooter segment and Chemed’s Corporate Office, we initially self-insure for all casualty insurance claims (workers’ compensation, auto liability and general liability). As a result, we closely monitor and frequently evaluate our historical claims experience to estimate the appropriate level of accrual for self-insured claims. Our third-party administrator (“TPA”) processes and reviews claims on a monthly basis. Currently, our exposure on any single claim is capped at $750,000. In developing our estimates, we accumulate historical claims data for the previous 10 years to calculate loss development factors (“LDF”) by insurance coverage type. LDFs are applied to known claims to estimate the ultimate potential liability for known and unknown claims for each open policy year. LDFs are updated annually. Because this methodology relies heavily on historical claims data, the key risk is whether the historical claims are an accurate predictor of future claims exposure. The risk also exists that certain claims have been incurred and not reported on a timely basis. To mitigate these risks, in conjunction with our TPA, we closely monitor claims to ensure timely accumulation of data and compare claims trends with the industry experience of our TPA.

For the VITAS segment, we initially self-insure for workers’ compensation claims. Currently, VITAS’ exposure on any single claim is capped at $1,000,000. For VITAS’ self-insurance accruals for workers’ compensation, the valuation methods used are similar to those used internally for our other business units. We are also insured for other risks with respect to professional liability with a deductible of $1,000,000.

Our casualty insurance liabilities are recorded gross before any estimated recovery for amounts exceeding our stop loss limits. Estimated recoveries from insurance carriers are recorded as accounts receivable. Claims experience adjustments to our casualty and workers’ compensation accrual for the years ended December 31, 2021, 2020 and 2019, were net pretax credits of ($6,332,000), ($4,578,000), and ($1,664,000) respectively.

As an indication of the sensitivity of the accrued liability to reported claims, our analysis indicates that a 1% across-the-board increase or decrease in the amount of projected losses would increase or decrease the accrued insurance liability at December 31, 2021 by $4.3 million or 7.7%. While the amount recorded represents our best estimate of the casualty and workers’ compensation insurance liability, we have calculated, based on historical claims experience, the actual loss could reasonably be expected to increase or decrease by approximately $1.0 million as of December 31, 2021.

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93

[[GREPCENT_TABLE]]
[["Unaudited Consolidating Summaries and Reconciliations of Adjusted EBITDA (in thousands)"],["Chemed Corporation and Subsidiary Companies"],["","","","","","","","","","","","Chemed"],["2021","","VITAS","","Roto-Rooter","","Corporate","","Consolidated"],["","Net income/(loss)","$","162,431","","$","166,333","","$","(60,214)","","$","268,550"],["","Add/(deduct):"],["","Interest expense","","160","","","595","","","1,113","","","1,868"],["","Income taxes","","52,426","","","51,420","","","(22,082)","","","81,764"],["","Depreciation","","23,114","","","25,816","","","81","","","49,011"],["","Amortization","","71","","","9,969","","","-","","","10,040"],["","EBITDA","","238,202","","","254,133","","","(81,102)","","","411,233"],["","Add/(deduct):"],["","Intercompany interest/(expense)","","(18,125)","","","(7,180)","","","25,305","","","-"],["","Interest income","","(253)","","","(124)","","","-","","","(377)"],["","Stock option expense","","-","","","-","","","22,502","","","22,502"],["","Direct costs related to COVID-19","","16,296","","","2,435","","","38","","","18,769"],["","Long-term incentive compensation","","-","","","-","","","9,167","","","9,167"],["","Litigation settlement","","-","","","(98)","","","-","","","(98)"],["","Medicare cap sequestration adjustment","","-","","","-","","","218","","","218"],["","Adjusted EBITDA","$","236,120","","$","249,166","","$","(23,872)","","$","461,414"],["","","","","","","","","","","","Chemed"],["2020","","VITAS","","Roto-Rooter","","Corporate","","Consolidated"],["","Net income/(loss)","$","238,782","","$","120,394","","$","(39,710)","","$","319,466"],["","Add/(deduct):"],["","Interest expense","","166","","","340","","","1,849","","","2,355"],["","Income taxes","","76,473","","","37,038","","","(36,987)","","","76,524"],["","Depreciation","","22,168","","","24,292","","","136","","","46,596"],["","Amortization","","71","","","9,916","","","-","","","9,987"],["","EBITDA","","337,660","","","191,980","","","(74,712)","","","454,928"],["","Add/(deduct):"],["","Intercompany interest/(expense)","","(19,897)","","","(6,256)","","","26,153","","","-"],["","Interest income","","(668)","","","(76)","","","(13)","","","(757)"],["","CARES Act grant","","(80,225)","","","-","","","-","","","(80,225)"],["","Direct costs related to COVID-19","","35,441","","","3,819","","","-","","","39,260"],["","Stock option expense","","-","","","-","","","18,422","","","18,422"],["","Long-term incentive compensation","","-","","","-","","","8,937","","","8,937"],["","Litigation settlement","","-","","","3,639","","","-","","","3,639"],["","Medicare cap sequestration adjustment","","619","","","-","","","-","","","619"],["","Adjusted EBITDA","$","272,930","","$","193,106","","$","(21,213)","","$","444,823"],["","","","","","","","","","","","","Chemed"],["2019","","VITAS","","Roto-Rooter","","Corporate","","Consolidated"],["","Net income/(loss)","$","155,822","","$","103,710","","$","(39,609)","","$","219,923"],["","Add/(deduct):"],["","Interest expense","","169","","","345","","","4,021","","","4,535"],["","Income taxes","","48,711","","","30,276","","","(37,301)","","","41,686"],["","Depreciation","","19,984","","","20,730","","","156","","","40,870"],["","Amortization","","71","","","4,264","","","-","","","4,335"],["","EBITDA","","224,757","","","159,325","","","(72,733)","","","311,349"],["","Add/(deduct):"],["","Intercompany interest/(expense)","","(18,135)","","","(8,152)","","","26,287","","","-"],["","Interest income","","(380)","","","(133)","","","-","","","(513)"],["","Stock option expense","","-","","","-","","","14,831","","","14,831"],["","Long-term incentive compensation","","-","","","-","","","7,630","","","7,630"],["","Litigation settlement","","6,000","","","-","","","-","","","6,000"],["","Acquisition expense","","-","","","4,664","","","170","","","4,834"],["","Medicare cap sequestration adjustment","","3,982","","","-","","","-","","","3,982"],["","Loss on sale of transportation equipment","","-","","","-","","","2,266","","","2,266"],["","Non cash ASC 842 expenses/(benefit)","","656","","","55","","","(163)","","","548"],["","Adjusted EBITDA","$","216,880","","$","155,759","","$","(21,712)","","$","350,927"]]
[[/GREPCENT_TABLE]]

94

[[GREPCENT_TABLE]]
[["CHEMED CORPORATION AND SUBSIDIARY COMPANIES"],["RECONCILIATION OF ADJUSTED NET INCOME"],["(in thousands, except per share data)(unaudited)"],["","For the Years Ended December 31,"],["","2021","","2020","","2019"],["Net income as reported","$","268,550","","$","319,466","","$","219,923"],["Add/(deduct) pre-tax cost of:"],["Stock option expense","","22,502","","","18,422","","","14,831"],["COVID-19 expenses","","18,769","","","39,260","","","-"],["Amortization of reacquired franchise agreements","","9,408","","","9,408","","","3,964"],["Long-term incentive compensation","","9,167","","","8,937","","","7,630"],["Facility relocation expenses","","1,855","","","-","","","-"],["Other","","218","","","-","","","-"],["Litigation settlements","","(98)","","","3,639","","","6,000"],["CARES Act grant","","-","","","(80,225)","","","-"],["Medicare cap sequestration adjustment","","-","","","619","","","3,982"],["Acquisition expenses","","-","","","-","","","4,834"],["Loss on sale of transportation equipment","","-","","","-","","","2,266"],["Non cash ASC 842 expenses","","-","","","-","","","548"],["Add/(deduct) tax impacts:"],["Tax impact of the above pre-tax adjustments (1)","","(12,480)","","","2,976","","","(9,328)"],["Excess tax benefits on stock compensation","","(9,884)","","","(26,089)","","","(24,177)"],["Adjusted net income","$","308,007","","$","296,413","","$","230,473"],["Diluted Earnings Per Share As Reported"],["Net income","$","16.85","","$","19.48","","$","13.31"],["Average number of shares outstanding","","15,938","","","16,398","","","16,527"],["Adjusted Diluted Earnings Per Share"],["Net income","$","19.33","","$","18.08","","$","13.95"],["Average number of shares outstanding","","15,938","","","16,398","","","16,527"],["(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."],["The \"Footnotes to Financial Statements\" are integral parts of this financial information."]]
[[/GREPCENT_TABLE]]

‎

95

[[GREPCENT_TABLE]]
[["CHEMED CORPORATION AND SUBSIDIARY COMPANIES"],["OPERATING STATISTICS FOR VITAS SEGMENT(unaudited)"],["","Three Months Ended December 31,","","Year Ended December 31,"],["OPERATING STATISTICS","2021","","2020","","2021","","2020"],["Net revenue ($000)"],["Homecare","$","272,949","","$","279,410","","$","1,069,766","","$","1,106,358"],["Inpatient","","27,291","","","28,973","","","113,187","","","114,956"],["Continuous care","","20,680","","","30,175","","","94,338","","","136,011"],["Other","","2,902","","","2,984","","","12,142","","","11,164"],["Subtotal","$","323,822","","$","341,542","","$","1,289,433","","$","1,368,489"],["Room and board, net","","(2,609)","","","(2,858)","","","(10,060)","","","(12,174)"],["Contractual allowances","","(2,101)","","","(3,994)","","","(11,530)","","","(14,970)"],["Medicare cap allowance","","(3,000)","","","(2,500)","","","(6,597)","","","(6,678)"],["Total","$","316,112","","$","332,190","","$","1,261,246","","$","1,334,667"],["Net revenue as a percent of total before Medicare cap allowance"],["Homecare","","84.3","%","","81.8","%","","83.0","%","","80.8","%"],["Inpatient","","8.4","","","8.5","","","8.8","","","8.4"],["Continuous care","","6.4","","","8.8","","","7.3","","","9.9"],["Other","","0.9","","","0.9","","","0.9","","","0.9"],["Subtotal","","100.0","","","100.0","","","100.0","","","100.0"],["Room and board, net","","(0.9)","","","(0.8)","","","(0.8)","","","(0.9)"],["Contractual allowances","","(0.6)","","","(1.2)","","","(0.9)","","","(1.1)"],["Medicare cap allowance","","(0.9)","","","(0.7)","","","(0.5)","","","(0.5)"],["Total","","97.6","%","","97.3","%","","97.8","%","","97.5","%"],["Days of Care"],["Homecare","","1,338,955","","","1,404,532","","","5,347,170","","","5,597,213"],["Nursing home","","257,416","","","253,261","","","993,322","","","1,097,493"],["Respite","","5,894","","","4,971","","","21,403","","","20,387"],["Subtotal routine homecare and respite","","1,602,265","","","1,662,764","","","6,361,895","","","6,715,093"],["Inpatient","","25,556","","","27,811","","","107,685","","","112,718"],["Continuous care","","22,154","","","31,493","","","101,539","","","141,693"],["Total","","1,649,975","","","1,722,068","","","6,571,119","","","6,969,504"],["Number of days in relevant time period","","92","","","92","","","365","","","366"],["Average daily census (\"ADC\") (days)"],["Homecare","","14,554","","","15,267","","","14,649","","","15,293"],["Nursing home","","2,798","","","2,753","","","2,721","","","2,999"],["Respite","","64","","","54","","","59","","","55"],["Subtotal routine homecare and respite","","17,416","","","18,074","","","17,429","","","18,347"],["Inpatient","","278","","","302","","","295","","","308"],["Continuous care","","241","","","342","","","279","","","387"],["Total","","17,935","","","18,718","","","18,003","","","19,042"],["Total Admissions","","16,250","","","17,960","","","68,823","","","71,328"],["Total Discharges","","16,684","","","18,570","","","69,411","","","72,009"],["Average length of stay (days)","","97.9","","","97.2","","","95.7","","","94.0"],["Median length of stay (days)","","15.0","","","14.0","","","13.0","","","14.0"],["ADC by major diagnosis"],["Cerebro","","36.5","%","","35.5","%","","36.7","%","","35.8","%"],["Neurological","","23.0","","","22.4","","","22.6","","","21.9"],["Cancer","","11.5","","","12.3","","","11.9","","","12.5"],["Cardio","","15.6","","","15.9","","","15.5","","","15.8"],["Respiratory","","7.5","","","7.9","","","7.5","","","8.1"],["Other","","5.9","","","6.0","","","5.8","","","5.9"],["Total","","100.0","%","","100.0","%","","100.0","%","","100.0","%"],["Admissions by major diagnosis"],["Cerebro","","22.5","%","","20.9","%","","21.5","%","","21.1","%"],["Neurological","","12.7","","","12.6","","","12.3","","","12.9"],["Cancer","","26.6","","","26.7","","","26.9","","","27.6"],["Cardio","","14.8","","","13.8","","","14.5","","","14.3"],["Respiratory","","11.0","","","10.4","","","10.9","","","10.6"],["Other","","12.4","","","15.6","","","13.9","","","13.5"],["Total","","100.0","%","","100.0","%","","100.0","%","","100.0","%"],["Bad debt expense as a percent of revenues","","0.7","%","","1.2","%","","0.9","%","","1.1","%"],["Accounts receivable --Days of revenue outstanding- excluding unapplied Medicare payments","33.8","","","36.0","","","N.A.","","","N.A."],["Accounts receivable--Days of revenue outstanding- including unapplied Medicare payments","28.1","","","25.6","","","N.A.","","","N.A."]]
[[/GREPCENT_TABLE]]

‎

96