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Section 1: 10-Q (10-Q)

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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________
FORM 10-Q
______________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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: 001-33989
LHC Group, Inc
(Exact name of registrant as specified in its charter)
Delaware
 
71-0918189
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
901 Hugh Wallis Road South
Lafayette, LA 70508
(Address of principal executive offices including zip code)
(337233-1307
(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 of $0.01
 
LHCG
 
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  ý    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    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.


Table of Contents

Large accelerated filer
  
ý
 
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  ý
Number of shares of common stock, par value $0.01, outstanding as of November 4, 2019: 31,510,944 shares.


Table of Contents

LHC GROUP, INC.
INDEX
 
 
 
Page
Part I. Financial Information
 
Item 1.
 
Condensed Consolidated Balance Sheets — September 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Income — Three and nine months ended September 30, 2019 and 2018
Condensed Consolidated Statements of Changes in Equity — Nine months ended September 30, 2019 and 2018
Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2019 and 2018
Item 2.
Item 3.
Item 4.
Part II. Other Information
 
Item 1.
Item 1A.
Item 2.
Item 6.

3

Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
(Unaudited)
 
September 30, 
 2019
 
December 31, 
 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
29,302

 
$
49,363

Receivables:
 
 
 
Patient accounts receivable
288,114

 
252,592

Other receivables
11,205

 
6,658

Amounts due from governmental entities
963

 
830

Total receivables
300,282

 
260,080

Prepaid income taxes
1,316

 
11,788

Prepaid expenses
19,994

 
24,775

Other current assets
22,140

 
20,899

Total current assets
373,034

 
366,905

Property, building and equipment, net of accumulated depreciation of $66,219 and $55,253, respectively
84,288

 
79,563

Goodwill
1,216,227

 
1,161,717

Intangible assets, net of accumulated amortization of $16,127 and $15,176, respectively
304,517

 
297,379

Assets held for sale
2,500

 
2,850

Operating lease right of use asset
95,427

 

Other assets
21,871

 
20,301

Total assets
$
2,097,864

 
$
1,928,715

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
76,458

 
$
77,135

Salaries, wages, and benefits payable
105,582

 
84,254

Self-insurance reserves
31,798

 
32,776

Current operating lease liabilities
29,362

 

Current portion of long-term debt

 
7,773

Amounts due to governmental entities
1,249

 
4,174

Total current liabilities
244,449

 
206,112

Deferred income taxes
50,200

 
43,306

Income taxes payable
3,582

 
4,297

Revolving credit facility
232,000

 
235,000

Long term notes payable

 
930

Operating lease payable
70,109

 

                                   Total liabilities
600,340

 
489,645

Noncontrolling interest — redeemable
15,594

 
14,596

Stockholders’ equity:

 
 
LHC Group, Inc. stockholders’ equity:

 
 
Preferred stock – $0.01 par value; 5,000,000 shares authorized; none issued or outstanding

 

Common stock — $0.01 par value; 60,000,000 shares authorized; 35,857,938 and 35,636,414 shares issued in 2019 and 2018, respectively
359

 
356

Treasury stock — 5,060,266 and 4,958,721 shares at cost, respectively
(58,796
)
 
(49,374
)
Additional paid-in capital
945,575

 
937,968

Retained earnings
501,898

 
427,975

Total LHC Group, Inc. stockholders’ equity
1,389,036

 
1,316,925

Noncontrolling interest — non-redeemable
92,894

 
107,549

Total equity
1,481,930

 
1,424,474

Total liabilities and equity
$
2,097,864

 
$
1,928,715

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Net service revenue
$
528,499


$
507,043


$
1,548,926


$
1,300,121

Cost of service revenue
334,768


322,196


981,620


831,818

Gross margin
193,731


184,847


567,306


468,303

General and administrative expenses
146,829


149,572


440,634


390,817

Other intangible impairment charge
197


345


7,534


1,123

Operating income
46,705


34,930


119,138


76,363

Interest expense
(2,596
)

(3,264
)

(8,533
)

(7,916
)
Income before income taxes and noncontrolling interest
44,109


31,666


110,605


68,447

Income tax expense
9,508


6,685


22,665


14,832

Net income
34,601


24,981


87,940


53,615

Less net income attributable to noncontrolling interests
4,534


3,751


14,017


10,593

Net income attributable to LHC Group, Inc.’s common stockholders
$
30,067


$
21,230


$
73,923


$
43,022

 







Earnings per share:







Basic
$
0.97


$
0.69


$
2.39


$
1.63

Diluted
$
0.96


$
0.68


$
2.37


$
1.61

Weighted average shares outstanding:







Basic
30,971


30,750


30,919


26,393

Diluted
31,247


31,084


31,203


26,641

 




See accompanying notes to the condensed consolidated financial statements.


5

Table of Contents

LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands, except share data)
(Unaudited)
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Noncontrolling
Interest Non
Redeemable
 
Total
Equity
Issued
 
Treasury
 
Amount
 
Shares
 
Amount
 
Shares
 
Balance as of December 31, 2018
$
356

 
35,636,414

 
$
(49,374
)
 
4,958,721

 
$
937,968

 
$
427,975

 
$
107,549

 
$
1,424,474

Net income

 

 

 

 

 
18,856

 
1,686

 
20,542

Acquired noncontrolling interest

 

 

 

 

 

 
820

 
820

Noncontrolling interest distributions

 

 

 

 

 

 
(6,799
)
 
(6,799
)
NCI acquired, net of sales

 

 

 

 

 

 
(18,000
)
 
(18,000
)
Nonvested stock compensation

 

 

 

 
1,804

 

 

 
1,804

Restricted share grants
2

 
174,562

 

 

 

 

 

 
2

Treasury shares redeemed to pay income tax

 

 
(7,577
)
 
85,509

 
(115
)
 

 

 
(7,692
)
Issuance of common stock under Employee Stock Purchase Plan

 
5,357

 

 

 
478

 

 

 
478

Balance as of March 31, 2019
$
358

 
35,816,333

 
$
(56,951
)
 
5,044,230

 
$
940,135

 
$
446,831

 
$
85,256

 
$
1,415,629

Net income

 

 

 

 

 
25,000

 
1,897

 
26,897

Acquired noncontrolling interest

 

 

 

 

 

 
6,170

 
6,170

Noncontrolling interest distributions

 

 

 

 

 

 
(2,026
)
 
(2,026
)
NCI acquired, net of sales

 

 

 

 
(1,283
)
 

 
531

 
(752
)
Nonvested stock compensation

 

 

 

 
2,588

 

 

 
2,588

Restricted share grants

 
17,145

 

 

 

 

 

 

Treasury shares redeemed to pay income tax

 

 
(942
)
 
8,697

 
30

 

 

 
(912
)
Issuance of common stock under Employee Stock Purchase Plan

 
4,301

 

 

 
453

 

 

 
453

Balance as of June 30, 2019
$
358

 
35,837,779

 
$
(57,893
)
 
5,052,927

 
$
941,923

 
$
471,831

 
$
91,828

 
$
1,448,047

Net income

 

 

 

 

 
30,067

 
1,479

 
31,546

Acquired noncontrolling interest

 

 

 

 

 

 
1,868

 
1,868

Noncontrolling interest distributions

 

 

 

 

 

 
(2,162
)
 
(2,162
)
NCI acquired, net of sales

 

 

 

 
819

 

 
(119
)
 
700

Nonvested stock compensation

 

 

 

 
1,990

 

 

 
1,990

Restricted share grants
1

 
14,799

 

 

 

 

 

 
1

Treasury shares redeemed to pay income tax

 

 
(903
)
 
7,339

 
234

 

 

 
(669
)
Issuance of common stock under Employee Stock Purchase Plan

 
5,360

 

 

 
609

 

 

 
609

Balance as of September 30, 2019
$
359

 
35,857,938

 
$
(58,796
)
 
5,060,266

 
$
945,575

 
$
501,898

 
$
92,894

 
$
1,481,930



See accompanying notes to condensed consolidated financial statements.


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Table of Contents

 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Noncontrolling
Interest Non
Redeemable
 
Total
Equity
Issued
 
Treasury
 
Amount
 
Shares
 
Amount
 
Shares
 
Balance as of December 31, 2017
$
226

 
22,640,046

 
$
(42,249
)
 
4,890,504

 
$
126,490

 
$
364,401

 
$
57,723

 
$
506,591

Net income

 

 

 

 

 
4,995

 
597

 
5,592

Acquired noncontrolling interest

 

 

 

 

 

 
1,235

 
1,235

Noncontrolling interest distributions

 

 

 

 

 

 
(615
)
 
(615
)
Sale of noncontrolling interest

 

 

 

 
(2,029
)
 

 
5,583

 
3,554

Purchase of additional controlling interest

 

 

 

 
(44
)
 

 
(12
)
 
(56
)
Nonvested stock compensation

 

 

 

 
1,601

 

 

 
1,601

Issuance of vested stock
2

 
165,567

 

 

 
(2
)
 

 

 

Treasury shares redeemed to pay income tax

 

 
(3,467
)
 
56,772

 

 

 

 
(3,467
)
Issuance of common stock under Employee Stock Purchase Plan

 
5,534

 

 

 
332

 

 

 
332

Balance as of March 31, 2018
$
228

 
22,811,147

 
$
(45,716
)
 
4,947,276

 
$
126,348

 
$
369,396

 
$
64,511

 
$
514,767

Net income

 

 

 

 

 
16,797

 
1,390

 
18,187

Acquired noncontrolling interest

 

 

 

 

 

 
35,239

 
35,239

Noncontrolling interest distributions

 

 

 

 

 

 
(504
)
 
(504
)
Sale of noncontrolling interest

 

 

 

 
(591
)
 

 

 
(591
)
Nonvested stock compensation

 

 

 

 
2,318

 

 

 
2,318

Issuance of vested stock

 
10,818

 

 

 

 

 

 

Treasury shares redeemed to pay income tax

 

 
(628
)
 
6,389

 

 

 

 
(628
)
Merger consideration
127

 
12,765,288

 

 

 
795,278

 

 

 
795,405

Issuance of common stock under Employee Stock Purchase Plan

 
5,171

 

 

 
302

 

 

 
302

Balance as of June 30, 2018
$
355

 
35,592,424

 
$
(46,344
)
 
4,953,665

 
$
923,655

 
$
386,193

 
$
100,636

 
$
1,364,495

Net income

 

 

 

 

 
21,230

 
1,321

 
22,551

Acquired noncontrolling interest

 

 

 

 

 

 
1,671

 
1,671

Noncontrolling interest distributions

 

 

 

 

 

 
(544
)
 
(544
)
Purchase of additional controlling interest

 

 

 

 
7,705

 

 
(359
)
 
7,346

Nonvested stock compensation

 

 

 

 
3,417

 

 

 
3,417

Issuance of vested stock

 
34,970

 

 

 

 

 

 

Treasury shares redeemed to pay income tax

 

 
(2,624
)
 
4,758

 

 

 

 
(2,624
)
Issuance of common stock under Employee Stock Purchase Plan
1

 
4,682

 

 

 
381

 

 

 
382

Balance as of September 30, 2018
$
356

 
35,632,076

 
$
(48,968
)
 
4,958,423

 
$
935,158

 
$
407,423

 
$
102,725

 
$
1,396,694


 
See accompanying notes to condensed consolidated financial statements.


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Table of Contents

LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)  
 
Nine Months Ended 
 September 30,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
87,940

 
$
53,615

Adjustments to reconcile net income to net cash provided by operating activities:


 
 
Depreciation and amortization expense
12,812

 
11,986

Amortization of operating lease right of use asset
22,952

 

Stock-based compensation expense
6,382

 
7,336

Deferred income taxes
8,102

 
2,915

Loss (gain) on disposal of assets
337

 
4

    Impairment of intangibles and other
7,534

 
1,123

Changes in operating assets and liabilities, net of acquisitions:


 
 
Receivables
(42,928
)
 
(5,693
)
Prepaid expenses and other assets
2,018

 
(7,489
)
Prepaid income taxes
8,258

 
9,710

Accounts payable and accrued expenses
(4,668
)
 
13,862

Income taxes payable
(715
)
 
(313
)
Net amounts due to/from governmental entities
(3,234
)
 
(722
)
Net cash provided by operating activities
104,790

 
86,334

Investing activities:


 
 
Purchases of property, building and equipment
(15,401
)
 
(18,889
)
Cash paid for acquisitions, net of cash acquired
(54,120
)
 
9,070

Net cash used in investing activities
(69,521
)
 
(9,819
)
Financing activities:


 
 
Proceeds from line of credit
84,000

 
292,084

Payments on line of credit
(87,000
)
 
(300,884
)
Proceeds from employee stock purchase plan
1,540

 
1,015

Payments on debt
(7,650
)
 
(196
)
  Payments on deferred financing fees

 
(1,881
)
Noncontrolling interest distributions
(18,944
)
 
(8,720
)
Withholding taxes paid on stock-based compensation
(9,422
)
 
(6,719
)
Purchase of additional controlling interest
(18,763
)
 
(412
)
Exercise of options
153

 

Sale of noncontrolling interest
756

 
3,322

Net cash used in financing activities
(55,330
)
 
(22,391
)
Change in cash
(20,061
)
 
54,124

Cash at beginning of period
49,363

 
2,849

Cash at end of period
$
29,302

 
$
56,973

Supplemental disclosures of cash flow information:


 
 
Interest paid
$
8,549

 
$
6,127

Income taxes paid
$
8,015

 
$
2,929

Non-cash operating activity: The Company recorded $115.2 million in operating lease right of use assets in exchange for lease obligations.
Non-cash investing activity: The Company accrued $1.5 million for capital expenditures primarily related to the home office expansion project at the nine months ended September 30, 2019.
See accompanying notes to condensed consolidated financial statements.

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LHC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
LHC Group, Inc. (the “Company”) is a health care provider specializing in the post-acute continuum of care. The Company provides home health services, hospice services, home and community-based services, facility-based services, the latter primarily through long-term acute care hospitals (“LTACHs”), and healthcare innovations services ("HCI").
On April 1, 2018, the Company completed a "merger of equals" business combination (the "Merger") with Almost Family, Inc. ("Almost Family"). As a result, the financial results of the Company for the three and nine month periods in 2019 include the operating results of Almost Family, while the financial results of the Company with the addition of Almost Family start to be reflected during the second quarter of 2018. See Note 3 to Condensed Consolidated Financial Statements.
As of September 30, 2019, the Company, through its wholly- and majority-owned subsidiaries, equity joint ventures, controlled affiliates, and management agreements operated 809 service locations in 35 states within the continental United States and the District of Columbia.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, and the related unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2019 and 2018, condensed consolidated statements of changes in equity for the nine months ended September 30, 2019 and 2018, condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, and related notes (collectively, these financial statements are referred to as the "interim financial statements" and together with the related notes are referred to herein as the “interim financial information”) have been prepared by the Company. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from the interim financial information presented. This report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K"). The 2018 Form 10-K was filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2019, and includes information and disclosures not included herein.    
Reclassification
The Company has reclassified certain amounts relating to its prior year results to conform to its current period presentation. These reclassifications have not changed the results of operations of prior years.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenue and expenses during the reporting period. Actual results could differ from those estimates.
Critical Accounting Policies
The Company’s most critical accounting policies relate to revenue recognition and implicit price concessions.
Net Service Revenue

Net service revenue is reported at the amount that reflects the consideration the Company expects to receive in exchange for providing services. Receipts are from Medicare, Medicaid, and other commercial or managed care insurance programs for

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services rendered, are subject to adjustment based upon implicit price concessions for retroactive revenue adjustments by third-party payors, settlements of audits, and claims reviews. The estimated uncollectible amounts due from these payors are considered implicit price concessions that are a direct reduction to net service revenue. The Company assesses the patient's ability to pay for their healthcare services at the time of patient admission based on the Company's verification of the patient's insurance coverage under the Medicare, Medicaid, and other commercial or managed care insurance programs. Medicare contributes to the net service revenue of the Company’s home health, hospice, facility-based, and healthcare innovations services. Medicaid and other payors contribute to the net service revenue of all of the Company's segments.
Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company's performance obligations are to provide services to patients based on medical necessity and the bundle of services to be provided to achieve the goals established in the contract, while the healthcare innovations segment's performance obligations are largely to provide care, assessments and management services under various customer contracts. Revenue for performance obligations that are satisfied over time is recognized based on actual charges incurred in relation to total expected charges over the measurement period of the performance obligation, which depicts the transfer of services and related benefits received by the patient and customers over the term of the contract to satisfy the obligations. The Company measures the satisfaction of the performance obligations as services are provided.
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 - Revenue Recognition, 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. Any unsatisfied or partially unsatisfied performance obligations at the end of a reporting period are generally completed prior to the patient being discharged.
The Company determines the transaction price for the majority of its performance obligations based on gross charges for services provided, reduced by contractual adjustments provided to third-party payors and implicit price concessions. The Company determines estimates of explicit price concessions, principally contractual adjustments based on established agreements with payors, and implicit price concessions based on historical collection experience. Estimates of explicit and implicit price concessions are periodically reviewed to ensure they encompass the Company's current contract terms, are reflective of the Company's current patient mix, and are indicative of the Company's historic collections to ensure net service revenue is recognized at the expected transaction price. As a result, revenue is recorded in amounts equal to expected cash receipts for services when rendered.
The following table sets forth the percentage of net service revenue earned by category of payor for the three and nine months ended September 30, 2019 and 2018:
 

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Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Home health:
 
 
 
 
 
 
 
Medicare
69.7
%
 
72.0
%
 
70.6
%
 
72.2
%
Managed Care, Commercial, and Other
30.3

 
28.0

 
29.4

 
27.8

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Hospice:
 
 
 
 
 
 
 
Medicare
89.8
%
 
88.4
%
 
91.6
%
 
90.5
%
Managed Care, Commercial, and Other
10.2

 
11.6

 
8.4

 
9.5

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Home and Community-Based Services:
 
 
 
 
 
 
 
Medicaid
21.8
%
 
23.8
%
 
23.7
%
 
23.4
%
Managed Care, Commercial, and Other
78.2

 
76.2

 
76.3

 
76.6

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Facility-Based Services:
 
 
 
 
 
 
 
Medicare
59.3
%
 
56.7
%
 
56.6
%
 
59.9
%
Managed Care, Commercial, and Other
40.7

 
43.3

 
43.4

 
40.1

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
HCI:
 
 
 
 
 
 
 
Medicare
17.1
%
 
16.8
%
 
20.7
%
 
21.1
%
Managed Care, Commercial, and Other
82.9

 
83.2

 
79.3

 
78.9

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

Medicare
The Company's home health, hospice, and facility-based segments recognize revenue under their respective Medicare programs, which are discussed in more detail below.
The home health segment's Medicare patients, including certain Medicare Advantage patients, are classified into one of 153 home health resource groups prior to receiving services. Based on the patient’s home health resource group, the Company is entitled to receive a standard prospective Medicare payment for delivering care over a 60-day period referred to as an episode. The Company elects to use the same 60-day length of episode that Medicare recognizes as standard but accelerates revenue upon discharge to align with a patient's episode length, if less than the expected 60 days, which depicts the transfer of services and related benefits received by the patient over the term of the contract necessary to satisfy the obligations. The Company recognizes revenue based on the number of days elapsed during an episode of care within the reporting period.
Final payments from Medicare will reflect base payment adjustments for case-mix and geographic wage differences and a 2% sequestration reduction. In addition, final payments may reflect one of four retroactive adjustments to the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider before completing the episode; or (d) a payment adjustment based upon the level of therapy services required. The retroactive adjustments outlined above are recognized in net service revenue when the event causing the adjustment occurs and during the period in which the services are provided to the patient. The Company reviews these adjustments to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently resolved. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered.
The Company's hospice services segment is reimbursed by Medicare under a per diem payment system based on the daily needs determined for patients' basis. The hospice segment receives one of four predetermined daily rates based upon the level of care the Company furnishes. Each level of care is contingent upon the patient's medical necessity and is a separate and distinct performance obligation, which depicts the transfer of services and related benefits received by the patient over the term of the contract to satisfy such obligations. The Company records net service revenue for hospice services based on the promulgated per diem rate over time as services are provided, in satisfaction of performance obligation.

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Hospice payments are subject to variable consideration through an inpatient cap and an overall Medicare payment cap. The inpatient cap relates to individual programs receiving more than 20% of their total Medicare reimbursement from inpatient care services, and the overall Medicare payment cap relates to individual programs receiving reimbursements in excess of a “cap amount,” determined by Medicare to be payment equal to six months of hospice care for the aggregate base of hospice patients, indexed for inflation. The determination for each cap is made annually based on the 12-month period ending on October 31 of each year. The Company monitors its limits on a provider-by-provider basis and records an estimate of its liability for reimbursements received in excess of the cap amount, if any, in the reporting period. The Company reviews these estimates to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently resolved.
The Company's facility-based services segment is reimbursed primarily by Medicare for services provided under the long-term acute care hospital ("LTACH") prospective payment system. Each patient is assigned a long-term care diagnosis-related group. The Company is paid a predetermined fixed amount intended to reflect the average cost of treating a Medicare LTACH patient classified in that particular long-term care diagnosis-related group. For selected LTACH patients, the amount may be further adjusted based on length-of-stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted, among other factors. The Company calculates the adjustment based on a historical average of these types of adjustments for LTACH claims paid. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Net service revenue adjustments resulting from reviews and audits of Medicare cost report settlements are considered implicit price concessions for LTACHs and are measured at expected value. The Company reviews these estimates to ensure that it is probable that a significant reversal in the amount of LTACH services cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently resolved. Net service revenue for the Company’s LTACH services that are satisfied over time is recognized based on actual charges incurred in relation to total expected charges, which depicts the transfer of services and related benefits received by the customer over the service period to satisfy the obligations.
Non-Medicare Revenues
Each of the Company's segments recognize revenue from various non-Medicare payor sources. Revenue from these payor sources are derived from services provided under a per visit, per hour or per unit basis, per assessment or per member per month basis. Such fee for service revenues are calculated and recorded using payor-specific or patient-specific fee schedules based on the contracted rates in each underlying third party payor or services agreement or out of network rates, as applicable. Net service revenue is recognized as such services are provided and costs for delivery of such services are incurred.
Contingent Service Revenues
The Company’s Healthcare Innovations ("HCI") segment provides strategic health management services to Accountable Care Organizations (“ACOs”) that have been approved to participate in the Medicare Shared Savings Program (“MSSP”).  The HCI segment maintains service agreements with ACOs that provide for sharing of MSSP payments received by the ACO, if any.  ACOs are legal entities that contract with Centers for Medicare and Medicaid Services ("CMS") to provide services to the Medicare fee-for-service population for a specified annual period with the goal of providing better care for the individual, improving health for populations and lowering costs.  ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved.  The generation of shared savings is the performance obligation of each ACO, which only become certain upon the final issuance of unembargoed calculations by CMS, generally in the third quarter of each calendar year. As of September 30, 2019, the Company recognized $2.9 million related to potential MSSP payments for savings generated for the program periods that ended December 31, 2018, if any, as it remains unclear as to if performance obligations have been met by any ACO served by the HCI segment.
Patient Accounts Receivable

The Company reports patient accounts receivable net of estimates of variable consideration and implicit price concessions. Patient accounts receivable are uncollateralized and primarily consist of amounts due from Medicare, Medicaid, other third-party payors, and to a lesser degree patients. The Company establishes allowances for explicit and implicit price concessions to reduce the carrying amount of such receivables to their estimated net realizable value. The credit risk associated with receivables from other payors is limited due to the significance of Medicare as the primary payor. The Company believes the credit risk associated with its Medicare accounts, which have historically exceeded 50% of its patient accounts receivable, is limited due to (i) the historical collection rate from Medicare and (ii) the fact that Medicare is a U.S. government payor. The C

12

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ompany does not believe that there are any other significant concentrations of receivables from any particular payor that would subject it to any significant credit risk in the collection of patient accounts receivable.

The amount of the provision for implicit price concessions is based upon the Company's assessment of historical and expected net collections, business and economic conditions, and trends in government reimbursement. Uncollectible accounts are written off when the Company has determined that the account will not be collected.
    
A portion of the estimated Medicare prospective payment system reimbursement from each submitted home nursing episode is received in the form of a request for anticipated payment (“RAP”). The Company submits a RAP for 60% of the estimated reimbursement for the initial episode at the start of care. The full amount of the episode is billed after the episode has been completed. 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 RAP received for that episode will be recouped by Medicare from any other Medicare claims in process for that particular provider. The RAP and final claim must then be resubmitted. For subsequent episodes of care contiguous with the first episode for a particular patient, the Company submits a RAP for 50% of the estimated reimbursement.
The Company’s services to the Medicare population are paid at prospectively set amounts that can be determined at the time services are rendered. The Company’s Medicaid reimbursements are based on a predetermined fee schedule applied to each individual service it provides. The Company’s managed care contracts and other in or out of network payors provide for payments based upon a predetermined fee schedule or an episodic basis. The Company is able to calculate actual amounts to be received at the patient level and to adjust the gross charges down to the actual amount at the time of billing. This negates the need to record an estimated explicit price concessions when reporting net service revenue for each reporting period.
Other Significant Accounting Policies
Earnings Per Share
Basic per share information is computed by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding during the period, under the treasury stock method. Diluted per share information is also computed using the treasury stock method, by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding plus potentially dilutive shares.
The following table sets forth shares used in the computation of basic and diluted per share information and, with respect to the data provided for the three and nine months ended September 30, 2019 (amounts in thousands).  
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Weighted average number of shares outstanding for basic per share calculation
30,971

 
30,750

 
30,919

 
26,393

Effect of dilutive potential shares:
 
 
 
 
 
 
 
Nonvested stock
276

 
334

 
284

 
248

Adjusted weighted average shares for diluted per share calculation
31,247

 
31,084

 
31,203

 
26,641

Anti-dilutive shares
4

 
16

 
141

 
58



Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases, ("ASU 2016-02"), as modified by ASUs 2018-01, 2018-10, 2018-11 and 2018-20 (collectively, ASU 2016-02), which requires lessees to recognize leases with terms exceeding 12 months on the Company's Consolidated Balance Sheet. Qualifying leases were classified as finance or operating right-of-use ("ROU") assets and lease liabilities. The new standard was effective for the Company on January 1, 2019. ASU 2016-02 provides a number of optional practical expedients in transition and the Company (a) elected the 'package of practical expedients', which permitted the Company not to reassess under the new standard the Company's prior conclusions about lease identification, lease classification and initial direct costs, (b) elected all the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company, and (c) elected all the new standard's available transition practical expedients.

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Adoption of this standard increased total assets and total liabilities by $84.6 million on January 1, 2019, primarily for the Company's operating leased office space for locations in each segment. The adoption did not change the Company's leasing activities. ASU 2016-02 also provides practical expedients for an entity's ongoing accounting. The Company elected the short-term recognition exemption for certain medical devices and storage space leases that qualify, which means it did not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of these assets in transition. See Note 9 of the Notes to Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019, and is not expected to significantly impact the Company.
3. Acquisitions and Joint Venture Activities

The Merger
On April 1, 2018, the Company completed the Merger with Almost Family. At the effective time of the Merger on April 1, 2018, each outstanding share of common stock of Almost Family, other than certain canceled shares, was converted into the right to receive 0.9150 shares of the Company’s common stock and cash in lieu of any fractional shares of any Company common stock that Almost Family shareholders would otherwise have been entitled to receive. As a result, the Company issued approximately 12.8 million shares of its common stock to former stockholders of Almost Family, while also converting outstanding employee share awards, which resulted in total merger consideration of approximately $795.4 million.
The Company was determined to be the accounting acquirer in the Merger. The Company's final valuation analysis of identifiable assets and liabilities assumed for the Merger in accordance with the requirements of ASC Topic 805, Business Combinations, are presented in the table below (amounts in thousands):

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Merger consideration
 
 
Stock
 
$
795,412

Fair value of total consideration transferred
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
 
Cash and cash equivalents
 
16,547

Patient accounts receivable
 
88,234

Prepaid income taxes
 
47

Prepaid expenses and other current assets
 
11,490

Property and equipment
 
11,144

Trade names
 
76,090

Certificates of needs/licenses
 
76,505

Customer relationships
 
13,970

Assets held for sale
 
2,500

Deferred income taxes
 
4,821

Accounts payable
 
(43,027
)
Accrued other liabilities
 
(57,243
)
Seller notes payable
 
(12,145
)
NCI - Redeemable
 
(8,034
)
Long term income taxes payable
 
(3,786
)
Line of credit
 
(106,800
)
NCI - Nonredeemable
 
(36,609
)
Other assets and (liabilities), net
 
(178
)
Total identifiable assets and liabilities
 
33,526

Goodwill
 
$
761,886


Acquisitions
The Company acquired the majority-ownership of 14 home health agencies, six hospice agencies, two home and community-based agencies, and one LTACH location during the nine months ended September 30, 2019. The total aggregate purchase price for these transactions was $57.9 million, of which $54.1 million was paid in cash. The purchase prices were determined based on the Company’s analysis of comparable acquisitions and the target market’s potential future cash flows.

Goodwill generated from the acquisitions was recognized based on the expected contributions of each acquisition to the overall corporate strategy. The Company expects its portion of goodwill to be fully tax deductible. The acquisitions were accounted for under the acquisition method of accounting. Accordingly, the accompanying interim financial information includes the results of operations of the acquired entities from the date of acquisition.    

The following table summarizes the aggregate consideration paid for the acquisitions and the amounts of the assets acquired and liabilities assumed at the acquisition dates, as well as their fair value at the acquisition dates and the noncontrolling interest acquired during the nine months ended September 30, 2019:


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Consideration
 
 
Cash
 
$
54,120

Fair value of total consideration transferred
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
 
Trade name
 
6,685

Certificates of need/licenses
 
7,430

Other assets and (liabilities), net
 
(3,235
)
Total identifiable assets
 
10,880

Noncontrolling interest
 
8,858

Goodwill, including noncontrolling interest of $6,367
 
$
52,098



Trade names, certificates of need and licenses are indefinite-lived assets and, therefore, not subject to amortization. Acquired trade names that are not being used actively are amortized over the estimated useful life on the straight line basis. Trade names are valued using the relief from royalty method, a form of the income approach. Certificates of need are valued using the replacement cost approach based on registration fees and opportunity costs. Licenses are valued based on the estimated direct costs associated with recreating the asset, including opportunity costs based on an income approach. In the case of states with a moratorium in place, the licenses are valued using the multi-period excess earnings method.

The other identifiable assets include customer relationships that are amortized over 20.0 years. Customer relationships were valued using the multi-period excess earnings method. Noncontrolling interest is valued at fair value.

Joint Venture Activities

During the nine months ended September 30, 2019, the Company acquired the minority ownership interests associated with certain agencies previously operated within three of its equity joint ventures, whereby such agencies became wholly-owned subsidiaries of the Company. The total consideration for the purchase of such ownership interests was $18.8 million, which was paid in cash. These transactions were accounted for as equity transactions.

During the nine months ended September 30, 2019, the Company sold minority ownership interests associated with three home health agencies. The total consideration for the sale of such ownership interests was $4.2 million. The transaction was accounted for as an equity transaction.
4. Goodwill and Intangibles
The changes in recorded goodwill and intangible assets by reporting unit for the nine months ended September 30, 2019 were as follows (amounts in thousands):

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Home health reporting unit
 
Hospice
reporting
unit
 
Home and community-based services
reporting
 unit
 
Facility-based
reporting
 unit
 
HCI reporting unit
 
Total
Goodwill
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2018
$
822,602

 
$
118,583

 
$
165,583

 
$
14,194

 
$
40,755

 
$
1,161,717

Acquisitions
38,471

 
5,771

 
551

 
938

 

 
45,731

Noncontrolling interests
4,248

 
1,569

 

 
550

 

 
6,367

Adjustments and disposals
595

 
1,215

 
495

 

 
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