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Acquisitions
9 Months Ended
Sep. 30, 2019
Acquisitions [Abstract]  
Acquisitions 17.    Acquisitions

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

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

The acquisitions were made as a continuation of Roto-Rooter’s strategy to re-acquire franchises in large markets in the United States. The allocation of the fair value of the acquired business was based upon a preliminary valuation. Mainly as a result of the timing of the HSW acquisition, our estimates and assumptions are subject to change as we obtain additional information for our estimates during the fourth quarter of 2019. The primary areas of the allocation of the fair value consideration transferred that are not yet finalized relate to the fair value of working capital. The allocation for the two acquisitions completed in the third quarter of 2019 is as follows (in thousands):

HSW

Oakland

Total

Goodwill

$

55,448

$

10,535

$

65,983

Reacquired franchise rights

52,980

6,190

59,170

Property, plant, and equipment

5,699

675

6,374

Working capital

3,574

22

3,596

Customer relationships

2,220

500

2,720

Non-compete agreements

140

100

240

Other assets and liabilities - net

(96)

23

(73)

$

119,965

$

18,045

$

138,010

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

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

Annualized

Valuation

Amortization of

2018 Franchise

of Reacquired

Reacquired

Revenue

Franchise Rights

Franchise Rights

HSW

$

1,782

$

52,980

$

7,258

Oakland

95

6,190

825

Subtotal

1,877

$

59,170

$

8,083

All other franchise territories

4,505

$

6,382

Amortization of acquired and cancelled franchise agreements comprises the following (in thousands):

Three months ended September 30,

Nine months ended September 30,

2019

2018

2019

2018

$

331 

$

-

$

1,103 

$

-

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

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


The revenue and earnings included in the Company’s results of financial operation since the acquisition date of the transactions completed in the third quarter of 2019 are not material.

During 2018, we completed four business combinations of former franchisees within the Roto-Rooter segment for $42.2 million in cash to increase our market penetration. The VITAS segment completed one business combination in Florida for $11.0 million to increase our market penetration.

The pro forma revenue and earnings of the Company, as if all acquisitions made in fiscal 2018 and 2019 were completed on January 1, 2018, are as follows (in thousands, except per share data):

Three months ended September 30,

Nine months ended September 30,

2019

2018

2019

2018

Service revenues and sales

$

500,108 

$

472,090 

$

1,479,859 

$

1,420,535 

Net income

$

62,154 

$

56,408 

$

164,562 

$

166,640 

Earnings per share

$

3.89 

$

3.51 

$

10.32 

$

10.37 

Diluted earnings per share

$

3.75 

$

3.36 

$

9.96 

$

9.90 

There are no material pro forma adjustments directly attributable to the acquisition included in the reported pro-forma revenue and earnings.

Shown below is movement in Goodwill (in thousands):

VITAS

Roto-Rooter

Total

Balance at December 31, 2018

$

333,331 

$

177,239 

$

510,570 

Business combinations

-

65,983 

65,983 

Foreign currency adjustments

-

47 

47 

Balance at September 30, 2019

$

333,331 

$

243,269 

$

576,600