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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549 
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 0-24260 
 
399005905_image0.jpg
AMEDISYS, INC.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
 
 
Delaware
 
11-3131700
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3854 American Way, Suite A, Baton Rouge, LA 70816
(Address of principal executive offices, including zip code)
(225) 292-2031 or (800) 467-2662
(Registrant’s telephone number, including area code)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
AMED
 
The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
 
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
  
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, is as follows: Common stock, $0.001 par value, 32,174,921 shares outstanding as of July 26, 2019.
 





TABLE OF CONTENTS
 
 
 
;;;
 
PART I.
 
ITEM 1.
 
 
 
 
 
ITEM 2.
ITEM 3
ITEM 4.
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.





SPECIAL CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
When included in this Quarterly Report on Form 10-Q, or in other documents that we file with the Securities and Exchange Commission (“SEC”) or in statements made by or on behalf of the Company, words like “believes,” “belief,” “expects,” “plans,” “anticipates,” “intends,” “projects,” “estimates,” “may,” “might,” “would,” “should” and similar expressions are intended to identify forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a variety of risks and uncertainties that could cause actual results to differ materially from those described therein. These risks and uncertainties include, but are not limited to the following: changes in or our failure to comply with existing federal and state laws or regulations or the inability to comply with new government regulations on a timely basis, changes in Medicare and other medical payment levels, our ability to open care centers, acquire additional care centers and integrate and operate these care centers effectively, competition in the healthcare industry, changes in the case mix of patients and payment methodologies, changes in estimates and judgments associated with critical accounting policies, our ability to maintain or establish new patient referral sources, our ability to consistently provide high-quality care, our ability to attract and retain qualified personnel, changes in payments and covered services by federal and state governments, future cost containment initiatives undertaken by third-party payors, our access to financing, our ability to meet debt service requirements and comply with covenants in debt agreements, business disruptions due to natural disasters or acts of terrorism, our ability to integrate, manage and keep our information systems secure, our ability to realize the anticipated benefits of the acquisition of Compassionate Care Hospice ("CCH"), our ability to comply with requirements stipulated in the CCH corporate integrity agreement, and changes in law or developments with respect to any litigation relating to the Company, including various other matters, many of which are beyond our control.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking and we do not intend to release publicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or circumstances upon which any forward-looking statement may be based, except as required by law. For a discussion of some of the factors discussed above as well as additional factors, see our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019, particularly, Part I, Item 1A - Risk Factors therein, which are incorporated herein by reference and Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. Additional risk factors may also be described in reports that we file from time to time with the SEC.
Available Information
Our company website address is www.amedisys.com. We use our website as a channel of distribution for important company information. Important information, including press releases, analyst presentations and financial information regarding our company, is routinely posted on and accessible on the Investor Relations subpage of our website, which is accessible by clicking on the tab labeled “Investors” on our website home page. Visitors to our website can also register to receive automatic e-mail and other notifications alerting them when new information is made available on the Investor Relations subpage of our website. In addition, we make available on the Investor Relations subpage of our website (under the link “SEC filings”), free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, ownership reports on Forms 3, 4 and 5 and any amendments to those reports as soon as reasonably practicable after we electronically file or furnish such reports with the SEC. Further, copies of our Certificate of Incorporation and Bylaws, our Code of Ethical Business Conduct, our Corporate Governance Guidelines and the charters for the Audit, Compensation, Quality of Care, Compliance and Ethics and Nominating and Corporate Governance Committees of our Board are also available on the Investor Relations subpage of our website (under the link “Governance”). Reference to our website does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document. Our electronically filed reports can also be obtained on the SEC’s internet site at http://www.sec.gov.

1



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMEDISYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)

June 30, 2019
(unaudited)
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
13,902

 
$
20,229

Patient accounts receivable
239,674

 
188,972

Prepaid expenses
8,957

 
7,568

Other current assets
13,252

 
7,349

Total current assets
275,785

 
224,118

Property and equipment, net of accumulated depreciation of $98,936 and $95,472
29,762

 
29,449

Operating lease right of use assets
85,026

 

Goodwill
664,822

 
329,480

Intangible assets, net of accumulated amortization of $35,402 and $33,050
61,966

 
44,132

Deferred income taxes
30,213

 
35,794

Other assets
58,288

 
54,145

Total assets
$
1,205,862

 
$
717,118

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
35,690

 
$
28,531

Payroll and employee benefits
111,660

 
92,858

Accrued expenses
131,860

 
99,475

Current portion of long-term obligations
7,610

 
1,612

Current portion of operating lease liabilities
26,187

 

Total current liabilities
313,007

 
222,476

Long-term obligations, less current portion
266,468

 
5,775

Operating lease liabilities, less current portion
57,392

 

Other long-term obligations
6,053

 
6,234

Total liabilities
642,920

 
234,485

Commitments and Contingencies—Note 6

 
 
Equity:
 
 
 
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued or outstanding

 

Common stock, $0.001 par value, 60,000,000 shares authorized; 36,445,591 and 36,252,280 shares issued; and 32,130,184 and 31,973,505 shares outstanding
36

 
36

Additional paid-in capital
623,309

 
603,666

Treasury stock, at cost 4,315,407 and 4,278,775 shares of common stock
(246,175
)
 
(241,685
)
Accumulated other comprehensive income
15

 
15

Retained earnings
184,596

 
119,550

Total Amedisys, Inc. stockholders’ equity
561,781

 
481,582

Noncontrolling interests
1,161

 
1,051

Total equity
562,942

 
482,633

Total liabilities and equity
$
1,205,862

 
$
717,118

The accompanying notes are an integral part of these condensed consolidated financial statements.

2



AMEDISYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
 
 
For the Three-Month 
Periods Ended June 30
 
For the Six-Month 
Periods Ended June 30
 
2019
 
2018
 
2019
 
2018
Net service revenue
$
492,984

 
$
411,603

 
$
960,324

 
$
810,865

Cost of service, excluding depreciation and amortization
290,752

 
242,564

 
566,026

 
480,873

General and administrative expenses:
 
 
 
 
 
 
 
Salaries and benefits
98,356

 
77,215

 
193,186

 
152,846

Non-cash compensation
5,538

 
3,767

 
12,153

 
7,811

Other
48,408

 
42,104

 
91,810

 
83,784

Depreciation and amortization
5,179

 
3,125

 
8,074

 
6,718

Operating expenses
448,233

 
368,775

 
871,249

 
732,032

Operating income
44,751

 
42,828

 
89,075

 
78,833

Other income (expense):
 
 
 
 
 
 
 
Interest income
20

 
114

 
44

 
234

Interest expense
(4,332
)
 
(2,140
)
 
(7,681
)
 
(3,843
)
Equity in earnings from equity method investments
3,716

 
2,976

 
4,932

 
4,836

Miscellaneous, net
193

 
359

 
429

 
960

Total other (expense) income, net
(403
)
 
1,309

 
(2,276
)
 
2,187

Income before income taxes
44,348

 
44,137

 
86,799

 
81,020

Income tax expense
(10,308
)
 
(10,596
)
 
(21,186
)
 
(20,159
)
Net income
34,040

 
33,541

 
65,613

 
60,861

Net income attributable to noncontrolling interests
(298
)
 
(192
)
 
(567
)
 
(353
)
Net income attributable to Amedisys, Inc.
$
33,742

 
$
33,349

 
$
65,046

 
$
60,508

Basic earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Amedisys, Inc. common stockholders
$
1.05

 
$
1.00

 
$
2.03

 
$
1.80

Weighted average shares outstanding
32,075

 
33,439

 
32,038

 
33,705

Diluted earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Amedisys, Inc. common stockholders
$
1.02

 
$
0.98

 
$
1.98

 
$
1.76

Weighted average shares outstanding
32,933

 
34,179

 
32,913

 
34,391

The accompanying notes are an integral part of these condensed consolidated financial statements.

3



AMEDISYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands, except common stock shares)
(Unaudited)
 
For the Three-Months Ended June 30, 2019
 
Total
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
ComprehensiveIncome
 
Retained
Earnings
 
Noncontrolling
Interests
Shares
 
Amount
 
Balance, March 31, 2019
$
521,200

 
36,337,743

 
$
36

 
$
613,714

 
$
(244,373
)
 
$
15

 
$
150,854

 
$
954

Issuance of stock – employee stock purchase plan
752

 
7,181

 

 
752

 

 

 

 

Issuance of stock – 401(k) plan
2,318

 
18,811

 

 
2,318

 

 

 

 

Issuance/(cancellation) of non-vested stock

 
46,019

 

 

 

 

 

 

Exercise of stock options
987

 
35,837

 

 
987

 

 

 

 

Non-cash compensation
5,538

 

 

 
5,538

 

 

 

 

Surrendered shares
(1,802
)
 

 

 

 
(1,802
)
 

 

 

Noncontrolling interest distribution
(91
)
 

 

 

 

 

 

 
(91
)
Net income
34,040

 

 

 

 

 

 
33,742

 
298

Balance, June 30, 2019
$
562,942

 
36,445,591

 
$
36


$
623,309

 
$
(246,175
)
 
$
15

 
$
184,596

 
$
1,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three-Months Ended June 30, 2018
 
Total
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
ComprehensiveIncome
 
Retained
Earnings
 
Noncontrolling
Interests
 
Shares
 
Amount
 
Balance, March 31, 2018
$
549,558

 
35,861,469

 
$
35

 
$
575,925

 
$
(55,018
)
 
$
15

 
$
27,363

 
$
1,238

Issuance of stock – employee stock purchase plan
560

 
10,913

 

 
560

 

 

 

 

Issuance of stock – 401(k) plan
2,402

 
39,810

 

 
2,402

 

 

 

 

Issuance/(cancellation) of non-vested stock

 
53,462

 
1

 
(1
)
 

 

 

 

Exercise of stock options
2,484

 
78,523

 

 
2,484

 

 

 

 

Non-cash compensation
3,767

 

 

 
3,767

 

 

 

 

Surrendered shares
(1,527
)
 

 

 

 
(1,527
)
 

 

 

Shares repurchased
(181,402
)
 

 

 

 
(181,402
)
 

 

 

Noncontrolling interest distribution
(322
)
 

 

 

 

 

 

 
(322
)
Net income
33,541

 

 

 

 

 

 
33,349

 
192

Balance, June 30, 2018
$
409,061

 
36,044,177

 
$
36

 
$
585,137

 
$
(237,947
)
 
$
15

 
$
60,712

 
$
1,108

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six-Months Ended June 30, 2019
 
Total
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
ComprehensiveIncome
 
Retained
Earnings
 
Noncontrolling
Interests
 
Shares
 
Amount
 
Balance, December 31, 2018
$
482,633

 
36,252,280

 
$
36

 
$
603,666

 
$
(241,685
)
 
$
15

 
$
119,550

 
$
1,051

Issuance of stock – employee stock purchase plan
1,534

 
15,037

 

 
1,534

 

 

 

 

Issuance of stock – 401(k) plan
4,613

 
38,402

 

 
4,613

 

 

 

 

Issuance/(cancellation) of non-vested stock

 
97,181

 

 

 

 

 

 

Exercise of stock options
1,343

 
42,691

 

 
1,343

 

 

 

 

Non-cash compensation
12,153

 

 

 
12,153

 

 

 

 

Surrendered shares
(4,490
)
 

 

 

 
(4,490
)
 

 

 

Noncontrolling interest distribution
(457
)
 

 

 

 

 

 

 
(457
)
Net income
65,613

 

 

 

 

 

 
65,046

 
567

Balance, June 30, 2019
$
562,942

 
36,445,591

 
$
36


$
623,309

 
$
(246,175
)
 
$
15

 
$
184,596

 
$
1,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six-Months Ended June 30, 2018
 
Total
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
ComprehensiveIncome
 
Retained
Earnings
 
Noncontrolling
Interests
 
Shares
 
Amount
 
Balance, December 31, 2017
$
516,426

 
35,747,134

 
$
35

 
$
568,780

 
$
(53,713
)
 
$
15

 
$
204

 
$
1,105

Issuance of stock – employee stock purchase plan
1,157

 
24,236

 

 
1,157

 

 

 

 

Issuance of stock – 401(k) plan
4,781

 
84,959

 

 
4,781

 

 

 

 

Issuance/(cancellation) of non-vested stock

 
106,713

 
1

 
(1
)
 

 

 

 

Exercise of stock options
2,609

 
81,135

 

 
2,609

 

 

 

 

Non-cash compensation
7,811

 

 

 
7,811

 

 

 

 

Surrendered shares
(2,832
)
 

 

 

 
(2,832
)
 

 

 

Shares repurchased
(181,402
)
 

 

 

 
(181,402
)
 

 

 

Noncontrolling interest distribution
(350
)
 

 

 

 

 

 

 
(350
)
Net income
60,861

 

 

 

 

 

 
60,508

 
353

Balance, June 30, 2018
$
409,061

 
36,044,177

 
$
36

 
$
585,137

 
$
(237,947
)
 
$
15

 
$
60,712

 
$
1,108

The accompanying notes are an integral part of these condensed consolidated financial statements.

4



AMEDISYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
For the Six-Month 
Periods Ended June 30
 
2019
 
2018
Cash Flows from Operating Activities:
 
 
 
Net income
$
65,613

 
$
60,861

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,074

 
6,718

Non-cash compensation
12,153

 
7,811

401(k) employer match
4,686

 
4,894

Amortization and impairment of operating lease right of use assets
17,495

 

(Gain) loss on disposal of property and equipment
(2
)
 
650

Deferred income taxes
5,875

 
9,145

Equity in earnings from equity method investments
(4,932
)
 
(4,836
)
Amortization of deferred debt issuance costs/debt discount
433

 
355

Write off of deferred debt issuance costs

 
38

Return on equity investment
842

 
2,204

Changes in operating assets and liabilities, net of impact of acquisitions:
 
 
 
Patient accounts receivable
(24,165
)
 
3,604

Other current assets
(8,343
)
 
(11,680
)
Other assets
(56
)
 
688

Accounts payable
(9,475
)
 
3,623

Accrued expenses
29,262

 
4,548

Other long-term obligations
(181
)
 
2,347

Operating lease liabilities
(16,200
)
 

Operating lease right of use assets
(1,754
)
 

Net cash provided by operating activities
79,325

 
90,970

Cash Flows from Investing Activities:
 
 
 
Proceeds from sale of deferred compensation plan assets
213

 
471

Proceeds from the sale of property and equipment
146

 
11

Investments in equity method investees
(210
)
 

Purchases of property and equipment
(2,693
)
 
(1,611
)
Acquisitions of businesses, net of cash acquired
(345,414
)
 
(4,074
)
Net cash used in investing activities
(347,958
)
 
(5,203
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of stock upon exercise of stock options
1,343

 
2,609

Proceeds from issuance of stock to employee stock purchase plan
1,534

 
1,157

Shares withheld upon stock vesting
(4,490
)
 
(2,832
)
Noncontrolling interest distribution
(457
)
 
(350
)
Proceeds from borrowings under term loan
175,000

 

Proceeds from borrowings under revolving line of credit
184,500

 
127,500

Repayments of borrowings under revolving line of credit
(92,000
)
 

Principal payments of long-term obligations
(2,277
)
 
(90,475
)
Debt issuance costs
(847
)
 
(2,433
)
Purchase of company stock

 
(181,402
)
Net cash provided by (used in) financing activities
262,306

 
(146,226
)
Net decrease in cash and cash equivalents
(6,327
)
 
(60,459
)
Cash and cash equivalents at beginning of period
20,229

 
86,363

Cash and cash equivalents at end of period
$
13,902

 
$
25,904

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
4,187

 
$
2,080

Cash paid for income taxes, net of refunds received
$
7,849

 
$
6,149

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)





1. NATURE OF OPERATIONS, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS
Amedisys, Inc., a Delaware corporation, (together with its consolidated subsidiaries, referred to herein as “Amedisys,” “we,” “us,” or “our”) is a multi-state provider of home health, hospice and personal care services with approximately 74% of our revenue derived from Medicare for the three and six-month periods ended June 30, 2019 and 2018. As of June 30, 2019, we owned and operated 322 Medicare-certified home health care centers, 137 Medicare-certified hospice care centers and 12 personal-care care centers in 38 states within the United States and the District of Columbia.
Basis of Presentation
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly our financial position, our results of operations, and our cash flows in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting. Our results of operations for the interim periods presented are not necessarily indicative of the results of our operations for the entire year and have not been audited by our independent auditors.
This report should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019 (the “Form 10-K”), which includes information and disclosures not included herein. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from the interim financial information presented, as allowed by such SEC rules and regulations.
Recently Adopted Accounting Pronouncements
On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842); ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements (collectively, "Topic 842") using a modified retrospective transition approach, which requires the new standards to be applied to all leases existing at the date of initial application. Under Topic 842, lessees are required to recognize a lease liability and right-of-use asset ("ROU asset") for all leases with a term greater than twelve months and to disclose key information about leasing arrangements. Additionally, leases will be classified as either financing or operating; the classification will determine the pattern of expense recognition and classification within the statement of operations.
We are using the standards' effective date as our date of initial application. Consequently, our financial information was not updated and the disclosures required under the new standard are not provided for dates and periods prior to January 1, 2019.
The new standard provides several optional practical expedients that can be adopted at transition. We have elected the "package of practical expedients," which allows us to not reassess our prior conclusions regarding lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
The most significant effects related to this adoption relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate and fleet operating leases; and (2) significant new disclosures about our leasing activities. Upon adoption, we recognized approximately $80 million in additional operating lease liabilities with corresponding ROU assets of approximately the same amount.
The new standard also provides practical expedients for an entity's ongoing accounting. We have elected the practical expedient that allows us to not separate lease and non-lease components for all of our leases. We are applying the short-term lease recognition exemption to certain information technology leases; therefore, we did not recognize ROU assets and lease liabilities for these leases.
Use of Estimates
Our accounting and reporting policies conform with U.S. GAAP. In preparing the unaudited condensed consolidated financial statements, we are required to make estimates and assumptions that impact the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

6


AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Principles of Consolidation
These unaudited condensed consolidated financial statements include the accounts of Amedisys, Inc. and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in our accompanying unaudited condensed consolidated financial statements, and business combinations accounted for as purchases have been included in our unaudited condensed consolidated financial statements from their respective dates of acquisition. In addition to our wholly owned subsidiaries, we also have certain equity investments that are accounted for as set forth below.
Investments
We consolidate investments when the entity is a variable interest entity and we are the primary beneficiary or if we have controlling interests in the entity, which is generally ownership in excess of 50%. Third party equity interests in our consolidated joint ventures are reflected as noncontrolling interests in our condensed consolidated financial statements.
We account for investments in entities in which we have the ability to exercise significant influence under the equity method if we hold 50% or less of the voting stock and the entity is not a variable interest entity in which we are the primary beneficiary. The book value of investments that we account for under the equity method of accounting was $39.4 million and $35.1 million as of June 30, 2019 and December 31, 2018, respectively, and is reflected in other assets within our condensed consolidated balance sheets.
We account for investments in entities in which we have less than a 20% ownership interest under the cost method of accounting if we do not have the ability to exercise significant influence over the investee.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
We account for revenue from contracts with customers in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (collectively, "ASC 606"), and as such, we recognize revenue in the period in which we satisfy our performance obligations under our contracts by transferring our promised services to our customers in amounts that reflect the consideration to which we expect to be entitled in exchange for providing patient care, which are the transaction prices allocated to the distinct services. The Company's cost of obtaining contracts is not material.

Revenues are recognized as performance obligations are satisfied, which varies based on the nature of the services provided. Our performance obligation is the delivery of patient care services in accordance with the nature and frequency of services outlined in physicians' orders, which are determined by a physician based on a patient's specific goals.

The Company's performance obligations relate to contracts with a duration of less than one year; therefore, the Company has elected to apply the optional exemption provided by 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 as of the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations are generally completed when the patients are discharged, which generally occurs within days or weeks of the end of the reporting period.

We determine the transaction price based on gross charges for services provided, reduced by estimates for explicit and implicit price concessions. Explicit price concessions include contractual adjustments provided to patients and third-party payors. Implicit price concessions include discounts provided to self-pay, uninsured patients or other payors, adjustments resulting from payment reviews and adjustments arising from our inability to obtain appropriate billing documentation, authorizations or face-to-face documentation. Subsequent changes to the estimate of the transaction price are recorded as adjustments to net service revenue in the period of change. Subsequent changes that are determined to be the result of an adverse change in the patient's ability to pay (i.e. change in credit risk) are recorded as a provision for doubtful accounts.

Explicit price concessions are recorded for the difference between our standard rates and the contractual rates to be realized from patients, third party payors and others for services provided.


7


AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Implicit price concessions are recorded for self-pay, uninsured patients and other payors by major payor class based on our historical collection experience, aged accounts receivable by payor and current economic conditions. The implicit price concession represents the difference between amounts billed and amounts we expect to collect based on our collection history with similar payors. The Company assesses its ability to collect for the healthcare services provided at the time of patient admission based on the Company's verification of the patient's insurance coverage under Medicare, Medicaid, and other commercial or managed care insurance programs. Medicare represents approximately 74% of the Company's consolidated net service revenue for the three and six-month periods ended June 30, 2019 and 2018.

Amounts due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), include variable consideration for retroactive revenue adjustments due to settlements of audits and payment reviews. We determine our estimates for price concessions related to payment reviews based on our historical experience and success rates in the claim appeals and adjudication process. Revenue is recorded at amounts we estimate to be realizable for services provided.

We determine our estimates for implicit price concessions related to our inability to obtain appropriate billing documentation, authorizations, or face-to-face documentation based on our historical experience, which primarily includes a historical collection rate of over 99% on Medicare claims.

Revenue by payor class as a percentage of total net service revenue is as follows:
 
For the Three-Month Periods Ended June 30
 
For the Six-Month
Periods Ended June 30
 
2019
 
2018
 
2019
 
2018
Home Health:
 
 
 
 
 
 
 
     Medicare
44
%
 
50
%
 
45
%
 
51
%
     Non-Medicare - Episodic-based
9
%
 
8
%
 
9
%
 
8
%
     Non-Medicare - Non-episodic based
12
%
 
12
%
 
12
%
 
12
%
Hospice (1):
 
 
 
 
 
 
 
     Medicare
30
%
 
24
%
 
29
%
 
23
%
     Non-Medicare
1
%
 
1
%
 
1
%
 
1
%
Personal Care
4
%
 
5
%
 
4
%
 
5
%
 
100
%
 
100
%
 
100
%
 
100
%
(1) Acquired Compassionate Care Hospice on February 1, 2019 and RoseRock Healthcare on April 1, 2019.


Home Health Revenue Recognition
Medicare Revenue
Net service revenue is recorded under the Medicare prospective payment system (“PPS”) based on an established Federal Medicare home health episode payment rate, that is subject to adjustment based on certain variables, including, but not limited to (a) an outlier payment if our patient’s care was unusually costly (capped at 10% of total reimbursement per provider number); (b) a low utilization payment adjustment (“LUPA”) if the number of visits was four or fewer; (c) a partial payment if a patient transferred to another provider or we admitted a patient transferring from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required (with various incremental adjustments made for additional visits, with larger payment increases associated with the sixth, fourteenth and twentieth visit thresholds); (e) the number of episodes of care provided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare Program; and (g) adjustments to the base episode payments for case mix and geographic wages. Medicare rates are based on the severity of the patient's condition, service needs and goals, and other factors relating to the cost of providing services and supplies, bundled into an episode of care, not to exceed 60 days. An episode starts the first day a billable visit is performed and ends 60 days later or upon discharge, if earlier, with multiple continuous episodes allowed.
The Medicare home health benefit requires that beneficiaries be homebound (meaning that the beneficiary is unable to leave their home without a considerable and taxing effort), require intermittent skilled nursing, physical therapy or speech therapy services, and receive treatment under a plan of care established and periodically reviewed by a physician. All Medicare contracts are required

8


AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




to have a signed plan of care which represents a single performance obligation, comprised of the delivery of a series of distinct services that are substantially similar and have a similar pattern of transfer to the customer. Accordingly, the Company accounts for the series of services ("episode") as a single performance obligation satisfied over time, as the customer simultaneously receives and consumes the benefits of the goods and services provided. Expected Medicare revenue per episode is recognized based on a pro-rated service output method, utilizing our historical average length of episode prior to discharge.
The base episode payment can be adjusted based on each patient's health including clinical condition, functional abilities and service needs, as well as for the applicable geographic wage index, low utilization, patient transfers and other factors. The services covered by the episode payment include all disciplines of care in addition to medical supplies. Medicare can also make various adjustments to payments received if we are unable to produce appropriate billing documentation or acceptable authorizations. In addition, we make adjustments to Medicare revenue if we find we are unable to obtain appropriate billing documentation, authorizations or face-to-face documentation. We estimate the impact of such adjustments based on our historical experience, which primarily includes a historical collection rate of over 99% on Medicare claims, and record this estimate during the period in which services are rendered as an estimated price concession and a corresponding reduction to patient accounts receivable.
A portion of reimbursement from each Medicare episode is billed near the start of each episode, and cash is typically received before all services are rendered. The amount of revenue recognized for episodes of care which are incomplete at period end is based on the company's average percentage of days complete on episodes as of the end of the year. As of June 30, 2019, the difference between the cash received from Medicare for a request for anticipated payment (“RAP”) on episodes in progress and the associated estimated revenue was recorded to accrued expenses within our condensed consolidated balance sheets.
Non-Medicare Revenue
Episodic-based Revenue. We recognize revenue in a similar manner as we recognize Medicare revenue for episodic-based rates that are paid by other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms which generally range from 90% to 100% of Medicare rates.
Non-episodic based Revenue. Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to our established or estimated per-visit rates. Explicit price concessions are recorded for the difference between our standard rates and the contracted rates to be realized from patients, third parties and others for services provided and are deducted from gross revenue to determine net service revenue. We also make adjustments to non-episodic revenue for any implicit price concessions, based on historical experience, to reflect the estimated transaction price. We receive a minimal amount of our net service revenue from patients who are either self-insured or are obligated for an insurance co-payment.
Hospice Revenue Recognition
Hospice Medicare Revenue
Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. The estimated payment rates are predetermined daily or hourly rates for each of the four levels of care we deliver. The four levels of care are routine care, general inpatient care, continuous home care and respite care. Routine care accounted for 99% and 98% of our gross Medicare hospice service revenue for three and six-month periods ended June 30, 2019, respectively, and 98% of our gross Medicare hospice service revenue for the three and six-month periods ended June 30, 2018. There are two separate payment rates for routine care: payments for the first 60 days of care and care beyond 60 days. In addition to the two routine rates, we may also receive a service intensity add-on (“SIA”). The SIA is based on visits made in the last seven days of life by a registered nurse (“RN”) or medical social worker (“MSW”) for patients in a routine level of care.
The performance obligation is the delivery of hospice services to the patient, as determined by a physician, each day the patient is on hospice care.
We make adjustments to Medicare revenue for implicit price concessions, which include our inability to obtain appropriate billing documentation or acceptable authorizations and other reasons unrelated to credit risk. We estimate the impact of these adjustments based on our historical experience, which primarily includes a historical collection rate of over 99% on Medicare claims, and record it during the period services are rendered.
Additionally, our hospice service revenue is subject to certain limitations on payments from Medicare which are considered variable consideration. We are subject to an inpatient cap limit and an overall Medicare payment cap for each provider number. We monitor these caps on a provider-by-provider basis and estimate amounts due back to Medicare if we estimate a cap has been exceeded. We

9


AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




record these adjustments as a reduction to revenue and an increase in accrued expenses within our condensed consolidated balance sheet. Beginning for the cap year ending October 31, 2017, providers are required to self-report and pay their estimated cap liability by February 28th of the following year. As of June 30, 2019, we have settled our Medicare hospice reimbursements for all fiscal years through October 31, 2012. As of June 30, 2019, we have recorded $3.7 million in accrued expenses for estimated amounts due back to Medicare for the Federal cap years ended October 31, 2013 through September 30, 2019; approximately $1.5 million of this amount is related to the cap liability acquired as part of the Compassionate Care Hospice ("CCH") acquisition. As of December 31, 2018, we had recorded $1.7 million for estimated amounts due back to Medicare in accrued expenses for the Federal cap years ended October 31, 2013 through September 30, 2019.

Hospice Non-Medicare Revenue
Gross revenue is recorded on an accrual basis based upon the date of service at amounts equal to our established rates or estimated per day rates, as applicable. Explicit price concessions are recorded for the difference between our standard rates and the contractual rates to be realized from patients, third party payors and others for services provided and are deducted from gross revenue to determine our net service revenue. We also make adjustments to non-Medicare revenue for any implicit price concessions, based on historical experience, to reflect the estimated transaction price.
Personal Care Revenue Recognition
Personal Care Revenue
We generate net service revenues by providing our services directly to patients based on authorized hours, visits or units determined by the relevant agency, at a rate that is either contractual or fixed by legislation. Net service revenue is recognized at the time services are rendered based on gross charges for the services provided, reduced by estimates for price concessions. We receive payment for providing such services from payors, including state and local governmental agencies, managed care organizations, commercial insurers and private consumers. Payors include the following elder service agencies: Aging Services Access Points (ASAPs), Senior Care Options (SCOs), Program of All-Inclusive Care for the Elderly (PACE) and the Veterans Administration (VA).
Patient Accounts Receivable
We report accounts receivable from services rendered at their estimated transaction price, which includes price concessions based on the amounts expected to be due from payors. Our patient accounts receivable are uncollateralized and consist of amounts due from Medicare, Medicaid, other third-party payors and patients. As of June 30, 2019, there is no single payor, other than Medicare, that accounts for more than 10% of our total outstanding patient receivables. Thus, we believe there are no other significant concentrations of receivables that would subject us to any significant credit risk in the collection of our patient accounts receivable. We write off accounts on a monthly basis once we have exhausted our collection efforts and deem an account to be uncollectible. We believe the collectibility risk associated with our Medicare accounts, which represent 59% and 56% of our patient accounts receivable at June 30, 2019 and December 31, 2018, respectively, is limited due to our historical collection rate of over 99% from Medicare and the fact that Medicare is a U.S. government payor.
We do not believe there are any significant concentrations of revenues from any payor that would subject us to any significant credit risk in the collection of our accounts receivable.
Medicare Home Health
For our home health patients, our pre-billing process includes verifying that we are eligible for payment from Medicare for the services that we provide to our patients. Our Medicare billing begins with a process to ensure that our billings are accurate through the utilization of an electronic Medicare claim review. We submit a RAP for 60% of our estimated payment for the initial episode at the start of care or 50% of the estimated payment for any subsequent episodes of care contiguous with the first episode for a particular patient. The full amount of the episode is billed after the episode has been completed (“final billed”). The RAP received for that particular episode is then deducted from our final payment. If a final bill is not submitted within the greater of 120 days from the start of the episode, or 60 days from the date the RAP was paid, any RAPs received for that episode will be recouped by Medicare from any other claims in process for that particular provider number. The RAP and final claim must then be resubmitted.

10


AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Medicare Hospice
For our hospice patients, our pre-billing process includes verifying that we are eligible for payment from Medicare for the services that we provide to our patients. Our Medicare billing begins with a process to ensure that our billings are accurate through the utilization of an electronic Medicare claim review. We bill Medicare on a monthly basis for the services provided to the patient.
Non-Medicare Home Health, Hospice and Personal Care
For our non-Medicare patients, our pre-billing process primarily begins with verifying a patient’s eligibility for services with the applicable payor. Once the patient has been confirmed for eligibility, we will provide services to the patient and bill the applicable payor. Our review and evaluation of non-Medicare accounts receivable includes a detailed review of outstanding balances and special consideration to concentrations of receivables from particular payors or groups of payors with similar characteristics that would subject us to any significant credit risk.
Debt Issuance Costs
During the three-month period ended March 31, 2019, we recorded $0.8 million in deferred debt issuance costs as a reduction to long-term obligations, less current portion in our condensed consolidated balance sheet in connection with our entry into the Amended Credit Agreement (See Note 5 - Long-Term Obligations). As of June 30, 2019 and December 31, 2018, we had unamortized debt issuance costs of $4.0 million and $3.5 million, respectively, recorded as long-term obligations, less current portion in our condensed consolidated balance sheet. We amortize deferred debt issuance costs related to our long-term obligations over the term of the obligation through interest expense, unless the debt is extinguished, in which case unamortized balances are immediately expensed. We amortized $0.2 million and $0.4 million in deferred debt issuance during the three and six-month periods ended June 30, 2019, respectively. The unamortized debt issuance costs of $4.0 million will be amortized over a weighted-average amortization period of 4.6 years.
Fair Value of Financial Instruments
The following details our financial instruments where the carrying value and the fair value differ (amounts in millions):
 
Fair Value at Reporting Date Using
Financial Instrument
Carrying Value as of
June 30, 2019
 
Quoted Prices in Active
Markets for Identical
Items
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Long-term obligations
$
274.8

 
$

 
$
268.5

 
$



The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The three levels of inputs are as follows:

Level 1 – Quoted prices in active markets for identical assets and liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
Our deferred compensation plan assets are recorded at fair value and are considered a level 2 measurement. For our other financial instruments, including our cash and cash equivalents, patient accounts receivable, accounts payable, payroll and employee benefits and accrued expenses, we estimate the carrying amounts approximate fair value.

11


AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Weighted-Average Shares Outstanding
Net income per share attributable to Amedisys, Inc. common stockholders, calculated on the treasury stock method, is based on the weighted average number of shares outstanding during the period. The following table sets forth, for the periods indicated, shares used in our computation of the weighted-average shares outstanding, which are used to calculate our basic and diluted net income attributable to Amedisys, Inc. common stockholders (amounts in thousands):
 
For the Three-
Month Periods
Ended June 30,
 
For the Six-
Month Periods
Ended June 30,
 
2019
 
2018
 
2019
 
2018
Weighted average number of shares outstanding - basic
32,075

 
33,439

 
32,038

 
33,705

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
537

 
425

 
548

 
381

Non-vested stock and stock units
321

 
315

 
327

 
305

Weighted average number of shares outstanding - diluted
32,933

 
34,179

 
32,913

 
34,391

Anti-dilutive securities
159

 
57

 
143

 
88


Business Combinations
We account for acquisitions using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. Acquisitions are accounted for as purchases and are included in our condensed consolidated financial statements from their respective acquisition dates. Assets acquired and liabilities assumed, if any, are measured at fair value on the acquisition date using the appropriate valuation method. Goodwill generated from acquisitions is recognized for the excess of the purchase price over tangible and identifiable intangible assets.

 
3. ACQUISITIONS
We complete acquisitions from time to time in order to pursue our strategy of increasing our market presence by expanding our service base and enhancing our position in certain geographic areas as a leading provider of home health, hospice and personal care services. The purchase price paid for acquisitions is negotiated through arm’s length transactions, with consideration based on our analysis of, among other things, comparable acquisitions and expected cash flows. Acquisitions are accounted for as purchases and are included in our condensed consolidated financial statements from their respective acquisition dates. Goodwill generated from acquisitions is recognized for the excess of the purchase price over tangible and identifiable intangible assets because of the expected contributions of the acquisitions to our overall corporate strategy. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets for significant acquisitions. The preliminary purchase price allocation is adjusted, as necessary, up to one year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.
On February 1, 2019, we acquired Compassionate Care Hospice ("CCH"), a national hospice care provider headquartered in New Jersey, for a purchase price of $327.9 million, net of cash acquired of $6.7 million.
The Company is in the process of finalizing its valuation of the assets acquired and liabilities assumed. During the three-month period ended June 30, 2019, we recorded measurement period adjustments based on changes to management's estimates and assumptions related to the assets acquired and liabilities assumed. Based on the Company's preliminary valuation, the total estimated consideration of $327.9 million has been allocated to assets acquired and liabilities assumed as of the acquisition date as follows (amounts in millions):

12


AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




 
Amount
Patient accounts receivable
$
26.5

Prepaid expenses
0.9

Other current assets
0.2

Property and equipment
0.2

Deferred tax asset
0.3

Intangible assets
18.5

Total assets acquired
46.6

Accounts payable
(15.7
)
Payroll and employee benefits
(11.9
)
Accrued expenses
(10.5
)
Current portion of long-term obligations
(0.1
)
Total liabilities acquired
(38.2
)
Net identifiable assets acquired
8.4

Goodwill
319.5

Total estimated consideration
$
327.9


Intangible assets acquired include Medicare licenses, certificates of need, trade names and non-compete agreements. The trade names and non-compete agreements will be amortized over a weighted-average period of 2.0 and 2.3 years, respectively.
CCH contributed approximately $46.0 million in net service revenue and an operating loss of $3.1 million (inclusive of acquisition and integration costs totaling $4.4 million) during the three-month period ended June 30, 2019 and $78.0 million in net service revenue and an operating loss of $4.9 million (inclusive of acquisition and integration costs totaling $10.0 million) during the six-month period ended June 30, 2019.
The following table contains unaudited pro forma condensed consolidated statement of operations information for the three and six-month periods ended June 30, 2019 and 2018 assuming that the CCH acquisition closed on January 1, 2018 (amounts in millions, except per share data):
 
For the Three-
Month Periods
Ended June 30,
 
For the Six-
Month Periods
Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net service revenue
$
493.0

 
$
459.4

 
$
976.4

 
$
906.1

Operating income (loss)
44.8

 
48.1

 
95.4

 
89.9

Net income attributable to Amedisys, Inc.
33.7

 
34.8

 
68.9

 
63.7

Basic earnings (loss) per share
1.05

 
1.04

 
2.15

 
1.89

Diluted earnings (loss) per share
$
1.02

 
$
1.02

 
$
2.09

 
$
1.85


The pro forma information presented above includes adjustments for (i) amortization of identifiable intangible assets, (ii) interest on additional debt required to fund the CCH acquisition, (iii) non-recurring transaction costs and (iv) income taxes based on the Company’s statutory tax rate. This pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have actually occurred. In addition, future results may vary significantly from the results reflected in the pro forma information.
On April 1, 2019, we acquired RoseRock Healthcare ("RoseRock"), an Oklahoma based hospice provider, for a purchase price of $17.5 million. The purchase price was paid with cash on hand on the date of the transaction. Based on the Company's preliminary valuation, we recorded goodwill of $15.8 million and other intangibles including non-compete agreements of $0.7 million and tradenames of $1.0 million during the three-month period ended June 30, 2019. The non-compete agreement will be amortized over a weighted-average period of 2.8 years. RoseRock contributed approximately $2.5 million in net service revenue and $0.5 million in operating income during the three and six-month periods ended June 30, 2019.

13


AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




4. LEASES
We determine whether an arrangement is a lease at inception. We have operating leases, primarily for offices and fleet, that expire at various dates over the next ten years. We also have finance leases covering certain office equipment that expire at various dates over the next three years. Our leases do not contain any restrictive covenants.

Our office leases generally contain renewal options for periods ranging from one to five years. Because we are not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and payments associated with the option years are excluded from lease payments. Our office leases also generally include termination options, which allow for early termination of the lease after the first one to three years. Because we are not reasonably certain to exercise these termination options, the options are not considered in determining the lease term; payments for the full lease term are included in lease payments. Our office leases do not contain any material residual value guarantees.

Our fleet leases include a term of 367 days with monthly renewal options thereafter. Our fleet leases also include terminal rental adjustment clauses (“TRAC”), which provide for a final rental payment adjustment at the end of the lease, typically based on the amount realized from the sale of the vehicle. The TRAC is structured such that it will almost always result in a significant payment by us to the lessor if the renewal option is not exercised. Based on the significance of the TRAC adjustment at the initial lease expiration, we believe that it is reasonably certain that we will exercise the monthly renewal options; therefore, the renewal options are considered in determining the lease term, and payments associated with the renewal options are included in lease payments.

For our fleet and office equipment leases, we use the implicit rate in the lease as the discount rate. For our office leases, the implicit rate is typically not available, so we use our incremental borrowing rate as the discount rate. Our lease agreements include both lease and non-lease components. We have elected the practical expedient that allows us to not separate lease and non-lease components for all of our leases.

Payments due under our operating and finance leases include fixed payments as well as variable payments. For our office leases, variable payments include amounts for our proportionate share of operating expenses, utilities, property taxes, insurance, common area maintenance and other facility-related expenses. For our vehicle and equipment leases, variable payments consist of sales tax.

The components of lease cost for the three and six-month periods ended June 30, 2019 are as follows (amounts in millions):
 
For the
Three-Month Period Ended June 30, 2019
 
For the
Six-Month Period Ended June 30, 2019
Operating lease cost:
 
 
 
Operating lease cost
$
9.0

 
$
17.2

Impairment of operating lease ROU assets
0.2

 
0.3

Total operating lease cost
9.2

 
17.5

 
 
 
 
Finance lease cost:
 
 
 
Amortization of ROU assets
0.4

 
0.8

Interest on lease liabilities

 
0.1

Total finance lease cost
0.4

 
0.9

 
 
 
 
Variable lease cost
0.7