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Acquisitions | 9 Months Ended
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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

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