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LHC Group, Inc - Quarter Report: 2013 June (Form 10-Q)

FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

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.)

420 West Pinhook Road, Suite A

Lafayette, LA 70503

(Address of principal executive offices including zip code)

(337) 233-1307

(Registrant’s telephone number, including area code)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of common stock, par value $0.01, outstanding as of August 1, 2013: 17,594,266 shares.

 

 

 


Table of Contents

LHC GROUP, INC.

INDEX

 

 

         Page  

Part I. Financial Information

  
Item 1.  

Condensed Consolidated Financial Statements (Unaudited)

  

Condensed Consolidated Balance Sheets — June 30, 2013 and December 31, 2012

     3   

Condensed Consolidated Statements of Income — Three and six months ended June  30, 2013 and 2012

     4   

Condensed Consolidated Statement of Changes in Equity — Six months ended June  30, 2013

     5   

Condensed Consolidated Statements of Cash Flows — Six months ended June  30, 2013 and 2012

     6   

Notes to Condensed Consolidated Financial Statements

     7   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     17   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     29   
Item 4.  

Controls and Procedures

     29   
Part II. Other Information   
Item 1.  

Legal Proceedings

     29   
Item 1A.  

Risk Factors

     29   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     29   
Item 6.  

Exhibits

     30   
Signatures      31   

 

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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)

 

     June 30,
2013
    December 31,
2012
 
ASSETS   

Current assets:

    

Cash

   $ 7,046      $ 9,720   

Receivables:

    

Patient accounts receivable, less allowance for uncollectible accounts of $13,602 and $11,863, respectively

     87,677        83,951   

Other receivables

     575        589   

Amounts due from governmental entities

     1,223        1,596   
  

 

 

   

 

 

 

Total receivables, net

     89,475        86,136   

Deferred income taxes

     9,898        7,671   

Prepaid income taxes

     3,912        7,436   

Prepaid expenses

     7,383        6,818   

Other current assets

     3,942        2,949   
  

 

 

   

 

 

 

Total current assets

     121,656        120,730   

Property, building and equipment, net of accumulated depreciation of $37,558 and $34,331, respectively

     30,062        29,531   

Goodwill

     190,258        169,150   

Intangible assets, net of accumulated amortization of $3,263 and $2,985, respectively

     63,535        62,042   

Other assets

     9,877        5,441   
  

 

 

   

 

 

 

Total assets

   $ 415,388      $ 386,894   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable and other accrued liabilities

   $ 20,249      $ 14,897   

Salaries, wages, and benefits payable

     31,676        29,890   

Self insurance reserve

     6,261        5,444   

Amounts due to governmental entities

     4,174        4,979   
  

 

 

   

 

 

 

Total current liabilities

     62,360        55,210   

Deferred income taxes

     28,626        25,129   

Income tax payable

     3,415        3,415   

Revolving credit facility

     25,000        19,500   

Note payable

     567        —    
  

 

 

   

 

 

 

Total liabilities

     119,968        103,254   

Noncontrolling interest — redeemable

     11,826        11,426   

Stockholders’ equity:

    

LHC Group, Inc. stockholders’ equity:

    

Common stock — $0.01 par value; 40,000,000 shares authorized; 21,763,097 and 21,578,772 shares issued in 2013 and 2012, respectively

     217        216   

Treasury stock — 4,688,693 and 4,653,039 shares at cost, respectively

     (34,601     (33,846

Additional paid-in capital

     101,865        100,619   

Retained earnings

     213,268        201,192   
  

 

 

   

 

 

 

Total LHC Group, Inc. stockholders’ equity

     280,749        268,181   

Noncontrolling interest — non-redeemable

     2,845        4,033   
  

 

 

   

 

 

 

Total equity

     283,594        272,214   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 415,388      $ 386,894   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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LHC GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share and per share data)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Net service revenue

   $ 166,302      $ 158,055      $ 328,255      $ 316,816   

Cost of service revenue

     97,009        92,218        190,257        182,077   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     69,293        65,837        137,998        134,739   

Provision for bad debts

     3,208        2,647        7,125        5,408   

General and administrative expenses

     54,157        50,967        105,780        101,849   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     11,928        12,223        25,093        27,482   

Interest expense

     (700     (208     (1,125     (567

Non-operating income (loss)

     65        (51     130        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and noncontrolling interest

     11,293        11,964        24,098        26,929   

Income tax expense

     3,918        4,092        8,454        9,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     7,375        7,872        15,644        17,611   

Less net income attributable to noncontrolling interests

     1,585        1,909        3,568        3,907   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 5,790      $ 5,963      $ 12,076      $ 13,704   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share — basic:

        

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

   $ 0.34      $ 0.32      $ 0.71      $ 0.75   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share — diluted:

        

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

   $ 0.34      $ 0.32      $ 0.71      $ 0.74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     17,055,619        18,385,783        17,011,306        18,357,362   

Diluted

     17,127,017        18,423,258        17,088,463        18,396,453   

See accompanying notes to the condensed consolidated financial statements.

 

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LHC GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts in thousands, except share data)

(Unaudited)

 

     Common Stock     Additional
Paid-In
Capital
    Retained
Earnings
     Non-controlling
Interest Non
Redeemable
    Total
Equity
 
     Issued      Treasury           
     Amount      Shares      Amount     Shares           

Balances as of December 31, 2012

   $ 216         21,578,772       $ (33,846     (4,653,039   $ 100,619      $ 201,192       $ 4,033      $ 272,214   

Net income

     —           —           —          —          —          12,076         593        12,669 (1) 

Transfer of noncontrolling interest

     —           —           —          —          —          —           (1,342     (1,342

Purchase of additional controlling interest

     —           —           —          —          (1,006     —           —          (1,006

Noncontrolling interest distributions

     —           —           —          —          —          —           (439     (439

Nonvested stock compensation

     —           —           —          —          1,895        —           —          1,895   

Issuance of vested stock

     —           165,095         —          —          —          —           —          —     

Treasury shares surrendered to pay income tax

     —           —           (755     (35,654     —          —           —          (755

Excess tax benefits —   vesting nonvested stock

     —           —           —          —          (34     —           —          (34

Issuance of common stock under Employee Stock Purchase Plan

     1         19,230         —          —          391        —           —          392   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balances as of June 30, 2013

   $ 217         21,763,097       $ (34,601     (4,688,693   $ 101,865      $ 213,268       $ 2,845      $ 283,594   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Net income excludes net income attributable to noncontrolling interest-redeemable of $3.0 million during the six months ending June 30, 2013. Noncontrolling interest-redeemable is reflected outside of permanent equity on the condensed consolidated balance sheets. See Note 9 of the Notes to Condensed Consolidated Financial Statements.

See accompanying notes to condensed consolidated financial statements.

 

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LHC GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2013     2012  

Operating activities

    

Net income

   $ 15,644      $ 17,611   

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

    

Depreciation and amortization expense

     3,830        3,836   

Provision for bad debts

     7,125        5,408   

Stock-based compensation expense

     1,895        2,387   

Deferred income taxes

     1,270        1,803   

(Gain) loss on sale of assets

     15        113   

Changes in operating assets and liabilities, net of acquisitions:

    

Receivables

     (10,837     (4,875

Prepaid expenses and other assets

     (1,519     2,090   

Prepaid income taxes

     3,479        10,802   

Accounts payable and accrued expenses

     7,600        416   

Net amounts due to/from governmental entities

     (432     132   
  

 

 

   

 

 

 

Net cash provided by operating activities

     28,070        39,723   
  

 

 

   

 

 

 

Investing activities

    

Purchases of property, building and equipment

     (3,569     (3,314

Proceeds from sale of assets

     —          23   

Cash paid for acquisitions, primarily goodwill and intangible assets and advanced payment on acquisitions

     (26,920     (1,700
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (30,489     (4,991
  

 

 

   

 

 

 

Financing activities

    

Proceeds from line of credit

     55,000        66,446   

Payments on line of credit

     (49,500     (92,957

Proceeds from employee stock purchase plan

     392        407   

Proceeds from debt issuance

     567        —     

Noncontrolling interest distributions

     (4,352     (4,452

Excess tax benefits from vesting of restricted stock

     11        —     

Redemption of treasury shares

     (755     —     

Purchase of additional controlling interest

     (1,618     (126

Payments on repurchase of common stock

     —          (4,001

Sale of noncontrolling interest

     —          80   
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (255     (34,603
  

 

 

   

 

 

 

Change in cash

     (2,674     129   

Cash at beginning of period

     9,720        256   
  

 

 

   

 

 

 

Cash at end of period

   $ 7,046      $ 385   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Interest paid

   $ 1,125      $ 567   
  

 

 

   

 

 

 

Income taxes paid

   $ 14,376      $ 8,203   
  

 

 

   

 

 

 

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 primarily for Medicare beneficiaries. The Company provides home-based services, primarily through home nursing agencies and hospices, and facility-based services, primarily through long-term acute care hospitals (“LTACHs”). As of June 30, 2013, the Company, through its wholly- and majority-owned subsidiaries, equity joint ventures and controlled affiliates, operated in Alabama, Arkansas, California, Florida, Georgia, Idaho, Illinois, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, Washington and West Virginia.

Unaudited Interim Financial Information

The condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012, and the related condensed consolidated statements of income for the three and six months ended June 30, 2013 and 2012, condensed consolidated statement of changes in equity for the six months ended June 30, 2013, condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012 and related notes (collectively, these financial statements and 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 six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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, 2012 as filed with the Securities and Exchange Commission (the “SEC”) on March 18, 2013, which includes information and disclosures not included herein.

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 and 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 the principles of consolidation, revenue recognition and accounts receivable and allowances for uncollectible accounts.

Principles of Consolidation

The condensed consolidated financial statements include all subsidiaries and entities controlled by the Company. Control is defined by the Company as ownership of a majority of the voting interest of an entity. The condensed consolidated financial statements include entities in which the Company receives a majority of the entities’ expected residual returns, absorbs a majority of the entities’ expected losses, or both, as a result of ownership, contractual or other financial interests in the entity. Third party equity interests in the consolidated joint ventures are reflected as noncontrolling interests in the Company’s condensed consolidated financial statements.

The following table summarizes the percentage of net service revenue earned by type of ownership or relationship the Company had with the operating entity:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Equity joint ventures

     48.3     48.2     49.3     48.5

Wholly-owned subsidiaries

     49.0     49.0     47.9     48.4

License leasing arrangements

     1.9     1.9     1.9     2.2

Management services

     0.8     0.9     0.9     0.9
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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All significant intercompany accounts and transactions have been eliminated in the Company’s accompanying condensed consolidated financial statements. Business combinations accounted for under the acquisition method have been included in the condensed consolidated financial statements from the respective dates of acquisition.

The following describes the Company’s consolidation policy with respect to its various ventures excluding wholly-owned subsidiaries:

Equity Joint Ventures

The members of the Company’s equity joint ventures participate in profits and losses in proportion to their equity interests. The Company consolidates these entities as the Company has voting control over the entities. The Company typically owns a majority equity interest ranging from 51% to 91% in these joint ventures.

License Leasing Arrangements

The Company, through wholly-owned subsidiaries, leases home health licenses necessary to operate certain of its home nursing agencies. As with its wholly-owned subsidiaries, the Company owns 100% of the equity of these entities and consolidates them based on such ownership.

Management Services

The Company has various management services agreements under which the Company manages certain operations of agencies and facilities. The Company does not consolidate these agencies or facilities because the Company does not have an ownership interest and does not have an obligation to absorb losses of the entities or the right to receive the benefits from the entities.

Revenue Recognition

The Company reports net service revenue at the estimated net realizable amount due from Medicare, Medicaid, commercial insurance, managed care payors, patients and others for services rendered. All payors contribute to both the home-based services and facility-based services.

The following table sets forth the percentage of net service revenue earned by category of payor for the three and six months ended June 30, 2013 and 2012:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Payor:

        

Medicare

     79.7     77.8     79.5     78.1

Medicaid

     1.5     1.9     1.5     2.0

Other

     18.8     20.3     19.0     19.9
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The percentage of net service revenue contributed from each reporting segment for the three and six months ended June 30, 2013 and 2012 was as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Home-based services

     88.1     88.6     87.9     88.3

Facility-based services

     11.9     11.4     12.1     11.7
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Medicare

Home-Based Services

Home Nursing Services. The Company’s home nursing Medicare patients are classified into one of 153 home health resource groups prior to receiving services. Based on this 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 recognizes revenue based on the number of days elapsed during an episode of care within the reporting period.

 

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Final payments from Medicare may reflect one of four retroactive adjustments to ensure the adequacy and effectiveness of 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 in the population base. In calculating net service revenue, management estimates the impact of these payment adjustments based on historical experience and records this estimate as the services are rendered using the expected level of services that will be provided and the schedule of those services or a historical average of prior adjustments.

Hospice Services. The Company is paid by Medicare under a per diem payment system. The Company receives one of four predetermined daily or hourly rates based upon the level of care the Company furnished. The Company records net service revenue from hospice services based on the daily or hourly rate and recognizes revenue as hospice services are provided.

Hospice payments are also subject to an inpatient cap and an overall payment cap. Inpatient cap relates to individual programs receiving more than 20% of its total Medicare reimbursement from inpatient care services and the overall payment cap relates to individual programs receiving reimbursements in excess of a “cap amount,” calculated by multiplying the number of beneficiaries during the period by a statutory amount that is 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 program-by-program basis and records an estimate of its liability for reimbursements received in excess of the cap amount. Annually, the Company receives notification of whether any of its hospices have exceeded the cap. Adjustments resulting from these notifications have not been material.

Facility-Based Services

Long-Term Acute Care Services. The Company is reimbursed by Medicare for services provided under the 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 patient classified in that particular long-term care diagnosis-related group. For selected 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 claims paid. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Revenue is recognized for the Company’s LTACHs as services are provided.

Medicaid, managed care and other payors

The Company’s Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as services are provided based on this fee schedule. The Company’s managed care and other payors reimburse the Company in a manner similar to either Medicare or Medicaid. Accordingly, the Company recognizes revenue from managed care and other payors in the same manner as the Company recognizes revenue from Medicare or Medicaid.

Management Services

The Company records management services revenue as services are provided in accordance with the various management services agreements to which the Company is a party. As described in the agreements, the Company provides billing, management and other consulting services suited to and designed for the efficient operation of the applicable home nursing agency. The Company is responsible for the costs associated with the locations and personnel required for the provision of services. The Company is compensated based on two management fee structures. One management fee structure is based on a percentage of cash collections, while the second management fee structure is based on reimbursement of operating expenses plus a percentage of operating net income.

Accounts Receivable and Allowances for Uncollectible Accounts

The Company reports accounts receivable net of estimated allowances for uncollectible accounts and adjustments. Accounts receivable are uncollateralized and primarily consist of amounts due from Medicare, other third-party payors, and patients. To provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for uncollectible accounts to reduce the carrying amount of such receivables to their estimated net realizable value. The credit risk for other concentrations of receivables 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 60% 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 Company does not believe that there are any other concentrations of receivables from any particular payor that would subject it to any significant credit risk in the collection of accounts receivable.

 

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The provision for bad debts 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 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. The RAP received for that particular episode is deducted from the 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 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% instead of 60% of the estimated reimbursement.

The Company’s Medicare population is paid at a prospectively set amount that can be determined at the time services are rendered. The Company’s Medicaid reimbursement is based on a predetermined fee schedule applied to each individual service it provides. The Company’s managed care contracts and contracts with other payors are structured similar to either the Medicare or Medicaid payment methodologies. Because of its payor mix, the Company is able to calculate its actual amount due at the patient level and adjust the gross charges down to the actual amount at the time of billing. This negates the need to record an estimated contractual allowance 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:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Weighted average number of shares outstanding for basic per share calculation

     17,055,619         18,385,783         17,011,306         18,357,362   

Effect of dilutive potential shares:

           

Options

     4,032         1,867         3,937         1,781   

Nonvested stock

     67,366         35,608         73,220         37,310   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average shares for diluted per share calculation

     17,127,017         18,423,258         17,088,463         18,396,453   
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive shares

     39,756         342,949         180,966         373,288   

3. Acquisitions and Disposals

Pursuant to the Company’s strategy for becoming the leading provider of post-acute health care services in the United States, the Company acquired the home-based service line of Addus HomeCare, which consisted of 19 home health agencies and one hospice agency, plus one additional hospice agency, during the six months ended June 30, 2013, and maintains an ownership interest in the entities as set forth below:

 

Acquired Entity

   Ownership
Percentage
    State of Operations    Acquisition
Date
 

LHCG XXXVII, LLC (d/b/a Addus HealthCare)

     90   Illinois      03/01/2013   

LHCG XXXVIII, LLC (d/b/a Addus HealthCare)

     90   California      03/01/2013   

LHCG XLII, LLC (d/b/a/ Arkansas HomeCare)

     100   Arkansas      03/01/2013   

LHCG XLI, LLC (d/b/a CarePro Home Health)

     100   South Carolina      03/01/2013   

LHCG XXXIX, LLC (d/b/a Addus HealthCare)

     100   Nevada      03/01/2013   

LHCG XXXIV, LLC (d/b/a Infirmary Hospice Care)

     100   Alabama      04/01/2013   

Each of the acquisitions was accounted for under the acquisition method of accounting, and accordingly, the accompanying condensed consolidated financial statements include the results of operations of each acquired entity from the date of acquisition.

 

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The total aggregate purchase price for the Company’s acquisitions was $22.8 million, of which $22.4 million was paid in cash and $355,000 in assumed liabilities. The purchase prices are determined based on the Company’s analysis of comparable acquisitions and the target market’s potential future cash flows.

The Company’s home-based services segment recognized aggregate goodwill of $21.1 million for the acquisitions, including $583,000 of noncontrolling goodwill. 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 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 the fair value at the acquisition dates of the noncontrolling interest acquired (all amounts are in thousands):

 

Consideration

  

Cash

   $ 22,445   
  

 

 

 

Fair value of total consideration transferred

   $ 22,445   
  

 

 

 

Acquisition-related costs (included in general and administrative expenses)

   $ 459   
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

  

Trade name

   $ 1,177   

Certificate of need/license

     627   

Other identifiable intangible assets

     276   

Other assets and (liabilities)

     (135
  

 

 

 

Total identifiable assets

   $ 1,945   
  

 

 

 

Noncontrolling interest

   $ 608   

Goodwill, including noncontrolling interest of $583

   $ 21,108   

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. The other identifiable assets include non-compete agreements that are amortized over the life of the agreements ranging from two to five years. Noncontrolling interest is valued at fair value by applying a discount to the value of the acquired entity for lack of control. The fair value of the acquired intangible assets is preliminary pending the final valuation of those assets.

On June 28, 2013, the Company paid $4.5 million in cash for an acquisition with a July 1, 2013 acquisition date. Control was not assumed until July 1, 2013; therefore, the $4.5 million cash payment is recorded in other assets on the balance sheet as of June 30, 2013.

Purchase of Membership Interest in Companys Subsidiary

During the six months ended June 30, 2013, the Company purchased additional membership interests in five of its joint ventures. The total purchase price for the additional ownership from these equity transactions was $1.6 million, resulting in the Company reducing noncontrolling interest-redeemable by $612,000 and additional paid in capital by $1.0 million.

4. Goodwill and Intangibles

The changes in recorded goodwill by segment for the six months ended June 30, 2013 were as follows (amounts in thousands):

 

     Six Months Ended
June 30,
2013
 

Home-based services segment:

  

Balance at beginning of period

   $ 157,559   

Goodwill from acquisitions

     20,525   

Goodwill related to noncontrolling interest

     583   
  

 

 

 

Balance as of June 30, 2013

   $ 178,667   
  

 

 

 

Facility-based services segment:

  

Balance at beginning of period

   $ 11,591   
  

 

 

 

Balance as of June 30, 2013

   $ 11,591   
  

 

 

 

Consolidated balance as of June 30, 2013

   $ 190,258   
  

 

 

 

 

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The following table summarizes the changes in intangible assets during the six months ended June 30, 2013 (amounts in thousands):

 

     Trade Names     Certificate of
Need/
License
     Other
Intangibles
    Total  

Balance as of December 31, 2012

   $ 51,408      $ 10,100       $ 534      $ 62,042   

Additions

     1,177       627         276        2,080   

Amortization

     (317     —          (270     (587
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance as of June 30, 2013

   $ 52,268      $ 10,727       $ 540      $ 63,535   
  

 

 

   

 

 

    

 

 

   

 

 

 

Intangible assets of $62.4 million, net of accumulated amortization, were related to the home-based services segment and $1.1 million were related to the facility-based services segment as of June 30, 2013.

5. Credit Facility

As of June 30, 2013 and December 31, 2012, respectively, the Company had $25.0 million and $19.5 million drawn and letters of credit totaling $6.2 million and $6.0 million outstanding under the Credit Facility. The interest rate for borrowings under the Credit Facility is a function of the prime rate (base rate) or Eurodollar rate, as elected by the Company, plus the applicable margin based on the Leverage Ratio, as defined in the agreement. The interest rate at June 30, 2013 was 4.25%.

6. Income Taxes

As of June 30, 2013, $3.4 million was recorded in income tax payable as an unrecognized tax benefit which, if recognized, would decrease the Company’s effective tax rate. All of the Company’s unrecognized tax benefit is due to the settlement with the United States of America, which was announced September 30, 2011.

7. Stockholder’s Equity

Equity Based Awards

At the 2010 Annual Meeting, the stockholders of the Company approved the Company’s 2010 Long Term Incentive Plan (the “2010 Incentive Plan”). The 2010 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors. A total of 1,500,000 shares of the Company’s common stock is reserved and available for issuance pursuant to awards granted under the 2010 Incentive Plan. A variety of discretionary awards for employees, officers, directors and consultants are authorized under the 2010 Incentive Plan, including incentive or non-qualified statutory stock options and nonvested stock. All awards must be evidenced by a written award certificate which will include the provisions specified by the Compensation Committee of the Board of Directors. The Compensation Committee determines the exercise price for non-statutory stock options. The exercise price for any option cannot be less than the fair market value of the Company’s common stock as of the date of grant.

Share Based Compensation

Nonvested Stock

During the six months ended June 30, 2013, the Company’s independent directors were granted 24,300 nonvested shares of common stock under the 2005 Director Compensation Plan. The shares were drawn from the 1,500,000 shares of common stock reserved and available for issuance under the 2010 Incentive Plan. The shares vest 100% on the one year anniversary date. During the six months ended June 30, 2013, employees were granted 156,648 nonvested shares of common stock pursuant to the 2010 Incentive Plan. The shares generally vest over a five year period, conditioned on continued employment for the full incentive period. The fair value of nonvested shares of common stock is determined based on the closing trading price of the Company’s common stock on the grant date. The weighted average grant date fair value of nonvested shares of common stock granted during the six months ended June 30, 2013 was $21.01.

The following table represents the nonvested stock activity for the six months ended June 30, 2013:

 

     Number of
Shares
    Weighted
average grant
date fair value
 

Nonvested shares outstanding as of December 31, 2012

     486,061      $ 22.33   

Granted

     180,948      $ 21.01   

Vested

     (165,095   $ 21.67   
  

 

 

   

Nonvested shares outstanding as of June 30, 2013

     501,914      $ 22.07   
  

 

 

   

During the six months ended June 30, 2013, an independent director of the Company received a share based award, which will be settled in cash at March 1, 2014, the amount of such cash payment will equal the fair market value of 2,700 shares on the settlement date.

 

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As of June 30, 2013, there was $9.0 million of total unrecognized compensation cost related to nonvested shares of common stock granted. That cost is expected to be recognized over the weighted average period of 3.32 years. The total fair value of shares of common stock vested during the six months ended June 30, 2013 and 2012 was $3.6 million and $3.3 million, respectively. The Company records compensation expense related to nonvested stock awards at the grant date for shares of common stock that are awarded fully vested, and over the vesting term on a straight line basis for shares of common stock that vest over time. The Company recorded $1.9 and $2.4 million of compensation expense related to nonvested stock grants in the six months ended June 30, 2013 and 2012, respectively.

Employee Stock Purchase Plan

In 2006, the Company adopted the Employee Stock Purchase Plan whereby eligible employees may purchase the Company’s common stock at 95% of the market price on the last day of the calendar quarter. There were 250,000 shares of common stock initially reserved for the plan.

On June 20, 2013, the Amended and Restated Employee Stock Purchase Plan was approved by the Company’s stockholders.

As a result of the amendment, the Employee Stock Purchase Plan was modified as follows:

 

   

An additional 250,000 shares of common stock were authorized for issuance over the term of the Employee Stock Purchase Plan.

 

   

The term of the Employee Stock Purchase Plan was extended from January 1, 2016 to January 1, 2023.

The table below details the shares of common stock issued during 2013:

 

     Number of
Shares
     Per share
price
 

Shares available as of December 31, 2012

     61,247      

Additional shares authorized for issuance

     250,000      

Shares issued during three months ended March 31, 2013

     8,845       $ 20.24   

Shares issued during three months ended June 30, 2013

     10,385       $ 20.43   
  

 

 

    

Shares available as of June 30, 2013

     292,017      
  

 

 

    

Stock Options

As of June 30, 2013, 15,000 options were issued and exercisable. During the six months ended June 30, 2013, no options were exercised or forfeited and no options were granted.

Treasury Stock

In conjunction with the vesting of the non-vested shares of common stock, recipients incur personal income tax obligations. The Company allows the recipients to turn in shares of common stock to satisfy minimum tax obligations. During the six months ended June 30, 2013, the Company redeemed 35,654 shares of common stock valued at $755,000, related to these tax obligations.

Stock Repurchase Program

In October 2010, the Company’s Board of Directors authorized a share repurchase program to repurchase shares of the Company’s common stock, par value $0.01 per share, from time to time, in an amount not to exceed $50.0 million (“the Stock Repurchase Program”). The Company anticipates that it will finance the Stock Repurchase Program with cash from general corporate funds or draws under the Credit Facility. The Company may repurchase shares of common stock in open market purchases or in privately negotiated transactions in accordance with applicable securities laws, rules and regulations. The timing and extent to which the Company repurchases its shares will depend upon market conditions and other corporate considerations.

The Company uses the cost method to account for the repurchase of common stock and the average cost method to account for reissuance of treasury shares. During the six months ended June 30, 2013, no shares have been repurchased or reissued from treasury shares. The remaining dollar value of shares authorized to be purchased under the Stock Repurchase Program was $22.5 million as of June 30, 2013.

8. Commitments and Contingencies

Contingencies

The Company is involved in various legal proceedings arising in the ordinary course of business. Although the results of litigation cannot be predicted with certainty, management believes the outcome of pending litigation will not have a material adverse effect, after considering the effect of the Company’s insurance coverage, on the Company’s condensed consolidated financial statements.

 

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On October 17, 2011, the Company received a subpoena from the Department of Health and Human Services Office of Inspector General (the “OIG”). The subpoena requests documents related to the Company’s agencies in Oregon, Washington and Idaho. The Company is continuing to produce the requested documents and is cooperating with the OIG’s review in this matter. The Company cannot predict the outcome or effect of this review, if any, on the Company’s business.

On June 13, 2012, a putative shareholder securities class action was filed against the Company and its Chairman and Chief Executive Officer in the United States District Court for the Western District of Louisiana, styled City of Omaha Police & Fire Retirement System v. LHC Group, Inc., et al., Case No. 6:12-cv-01609-JTT-CMH. The action was filed on behalf of LHC shareholders who purchased shares between July 30, 2008 and October 26, 2011. Plaintiff generally alleges that the defendants caused false and misleading statements to be issued in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder and that the Company’s Chairman and Chief Executive Officer is a control person under Section 20(a) of the Exchange Act. On November 2, 2012, Lead Plaintiff City of Omaha Police & Fire Retirement System filed an Amended Complaint for Violations of the Federal Securities Laws (“Amended Complaint”) on behalf of the same putative class of LHC shareholders as the original Complaint. In addition to claims under Sections 10(b) and 20(a) of the Exchange Act, the Amended Complaint added a claim against the Chairman and Chief Executive Officer for violation of Section 20A of the Exchange Act. The Company believes these claims are without merit and intends to defend this lawsuit vigorously. On December 17, 2012, the Company and the Chairman and Chief Executive Officer filed a motion to dismiss the Amended Complaint, which was denied by Order dated March 15, 2013. The Company cannot predict the outcome or effect of this lawsuit, if any, on the Company’s financial condition and results of operations.

Except as discussed above, the Company is not aware of any pending or threatened investigations involving allegations of potential wrongdoing.

Any negative findings in the investigations or lawsuits could result in substantial financial penalties or awards against the Company or exclusion from future participation in the Medicare and Medicaid programs. At this time, the Company cannot predict the ultimate outcome of these inquiries or the potential range of damages, if any.

Joint Venture Buy/Sell Provisions

Several of the Company’s joint ventures include a buy/sell option that grants to the Company and its joint venture partners the right to require the other joint venture party to either purchase all of the exercising member’s membership interests or sell to the exercising member all of the non-exercising member’s membership interest, at the non-exercising member’s option, within 30 days of the receipt of notice of the exercise of the buy/sell option. In some instances, the purchase price is based on a multiple of the historical or future earnings before income taxes and depreciation and amortization of the equity joint venture at the time the buy/sell option is exercised. In other instances, the buy/sell purchase price will be negotiated by the partners and subject to a fair market valuation process.

Compliance

The laws and regulations governing the Company’s operations, along with the terms of participation in various government programs, regulate how the Company does business, the services offered and its interactions with patients and the public. These laws and regulations and their interpretations, are subject to frequent change. Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations could materially and adversely affect the Company’s operations and financial condition.

The Company is subject to various routine and non-routine governmental reviews, audits and investigations. In recent years, federal and state civil and criminal enforcement agencies have heightened and coordinated their oversight efforts related to the health care industry, including referral practices, cost reporting, billing practices, joint ventures and other financial relationships among health care providers. Violation of the laws governing the Company’s operations, or changes in the interpretation of those laws, could result in the imposition of fines, civil or criminal penalties, and/or termination of the Company’s rights to participate in federal and state-sponsored programs and suspension or revocation of the Company’s licenses. The Company believes that it is in material compliance with all applicable laws and regulations.

9. Noncontrolling interest

Noncontrolling Interest-Redeemable

A majority of the Company’s joint venture agreements include a provision that requires the Company to purchase the noncontrolling partner’s interest upon the occurrence of certain triggering events, such as death or bankruptcy of the partner or the partner’s exclusion from the Medicare or Medicaid programs. These triggering events and the related repurchase provisions are specific to each individual joint venture; if the repurchase provision is triggered in any one joint venture, the remaining joint ventures would not be impacted. Upon the occurrence of a triggering event, the Company would be required to purchase the noncontrolling partner’s interest at either the fair value or the book value at the time of purchase as stated in the agreement. Historically, no triggering event has occurred, and the Company believes the likelihood of a triggering event occurring is remote. The Company has never been required to purchase the noncontrolling interest of any of its joint venture partners. According to authoritative guidance, redeemable noncontrolling interests must be reported outside of permanent equity on the consolidated balance sheet in instances where there is a repurchase provision with a triggering event that is outside the control of the Company.

 

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The following table summarizes the activity of noncontrolling interest-redeemable for the six months ended June 30, 2013 (amounts in thousands):

 

Balance as of December 31, 2012

   $ 11,426   

Net income attributable to noncontrolling interest-redeemable

     2,975   

Noncontrolling interest-redeemable distributions

     (3,913

Transfer of noncontrolling interest

     1,342   

Acquired noncontrolling interest (1)

     608   

Purchase of additional controlling interest

     (612
  

 

 

 

Balance as of June 30, 2013

   $ 11,826   
  

 

 

 

 

(1) The noncontrolling interest balance at December 31, 2012 included a preliminary fair value of the noncontrolling interest acquired in 2012. The valuation was finalized and recorded during the six months ended June 30, 2013.

10. Allowance for Uncollectible Accounts

The following table summarizes the activity and ending balances in the allowance for uncollectible accounts (amounts in thousands):

 

Balance as of December 31, 2012

   $ 11,863   

Additions and expenses

     7,125   

Deductions

     (5,386
  

 

 

 

Balance as of June 30, 2013

   $ 13,602   
  

 

 

 

11. Fair Value of Financial Instruments

The carrying amounts of the Company’s cash, receivables, accounts payable and accrued liabilities approximate their fair values. For the six months ended June 30, 2013, the carrying value of the Company’s long-term debt approximates fair value as the interest rates approximate current rates.

12. Segment Information

The Company’s segments consist of home-based services and facility-based services. Home-based services include home nursing services and hospice services. Facility-based services include long-term acute care services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

The following tables summarize the Company’s segment information for the three and six months ending June 30, 2013 and 2012 (amounts in thousands):

 

     Three Months Ended June 30, 2013  
     Home-
Based
Services
    Facility-
Based
Services
    Total  

Net service revenue

   $ 146,544      $ 19,758      $ 166,302   

Cost of service revenue

     86,252        10,757        97,009   

Provision for bad debts

     2,868        340        3,208   

General and administrative expenses

     48,767        5,390        54,157   
  

 

 

   

 

 

   

 

 

 

Operating income

     8,657        3,271        11,928   
  

 

 

   

 

 

   

 

 

 

Interest expense

     (630     (70     (700

Non-operating income (loss)

     38        27        65   
  

 

 

   

 

 

   

 

 

 

Income before income taxes and noncontrolling interest

     8,065        3,228        11,293   

Income tax expense

     3,553        365        3,918   
  

 

 

   

 

 

   

 

 

 

Net income

     4,512        2,863        7,375   

Less net income attributable to noncontrolling interests

     1,216        369        1,585   
  

 

 

   

 

 

   

 

 

 

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

   $ 3,296      $ 2,494      $ 5,790   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 378,687      $ 36,701      $ 415,388   

 

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Table of Contents
     Three Months Ended June 30, 2012  
     Home-
Based
Services
    Facility-
Based
Services
    Total  

Net service revenue

   $ 139,996      $ 18,059      $ 158,055   

Cost of service revenue

     80,707        11,511        92,218   

Provision for bad debts

     2,334        313        2,647   

General and administrative expenses

     45,566        5,401        50,967   
  

 

 

   

 

 

   

 

 

 

Operating income

     11,389        834        12,223   
  

 

 

   

 

 

   

 

 

 

Interest expense

     (187     (21     (208

Non-operating income (loss)

     (50     (1     (51
  

 

 

   

 

 

   

 

 

 

Income before income taxes and noncontrolling interest

     11,152        812        11,964   

Income tax expense

     3,697        395        4,092   
  

 

 

   

 

 

   

 

 

 

Net income

     7,455        417        7,872   

Less net income attributable to noncontrolling interests

     1,826        83        1,909   
  

 

 

   

 

 

   

 

 

 

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

   $ 5,629      $ 334      $ 5,963   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 348,788      $ 34,568      $ 383,356   
  

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2013  
     Home-
Based
Services
    Facility-
Based
Services
    Total  

Net service revenue

   $ 288,531      $ 39,724      $ 328,255   

Cost of service revenue

     167,842        22,415        190,257   

Provision for bad debts

     6,145        980        7,125   

General and administrative expenses

     94,939        10,841        105,780   
  

 

 

   

 

 

   

 

 

 

Operating income

     19,605        5,488        25,093   
  

 

 

   

 

 

   

 

 

 

Interest expense

     (1,017     (108     (1,125

Non-operating income (loss)

     79        51        130   
  

 

 

   

 

 

   

 

 

 

Income before income taxes and noncontrolling interest

     18,667        5,431        24,098   

Income tax expense

     7,640        814        8,454   
  

 

 

   

 

 

   

 

 

 

Net income

     11,027        4,617        15,644   

Less net income attributable to noncontrolling interests

     2,815        753        3,568   
  

 

 

   

 

 

   

 

 

 

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

   $ 8,212      $ 3,864      $ 12,076   
  

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2012  
     Home-
Based
Services
    Facility-
Based
Services
    Total  

Net service revenue

   $ 279,591      $ 37,225      $ 316,816   

Cost of service revenue

     159,768        22,309        182,077   

Provision for bad debts

     4,957        451        5,408   

General and administrative expenses

     90,792        11,057        101,849   
  

 

 

   

 

 

   

 

 

 

Operating income

     24,074        3,408        27,482   
  

 

 

   

 

 

   

 

 

 

Interest expense

     (510     (57     (567

Non-operating income (loss)

     3        11        14   
  

 

 

   

 

 

   

 

 

 

Income before income taxes and noncontrolling interest

     23,567        3,362        26,929   

Income tax expense

     8,428        890        9,318   
  

 

 

   

 

 

   

 

 

 

Net income

     15,139        2,472        17,611   

Less net income attributable to noncontrolling interests

     3,518        389        3,907   
  

 

 

   

 

 

   

 

 

 

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

   $ 11,621      $ 2,083      $ 13,704   
  

 

 

   

 

 

   

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

  CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain statements and information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to future plans and strategies, anticipated events or trends, future financial performance and expectations and beliefs concerning matters that are not historical facts or that necessarily depend upon future events. The words “may,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” or other similar expressions are intended to identify forward-looking statements. Specifically, this report contains, among others, forward-looking statements about:

 

   

our expectations regarding financial condition or results of operations for periods after June 30, 2013;

 

   

our critical accounting policies;

 

   

our participation in the Medicare and Medicaid programs;

 

   

the impact of healthcare reform;

 

   

the reimbursement levels of Medicare and other third-party payors;

 

   

the prompt receipt of payments from Medicare and other third-party payors;

 

   

the outcomes of various routine and non-routine governmental reviews, audits and investigations;

 

   

the impact of legal proceedings;

 

   

our compliance with health care laws and regulations;

 

   

our compliance with Securities and Exchange Commission (“SEC”) laws and regulations and Sarbanes-Oxley requirements;

 

   

the impact of federal and state government regulation on our business; and

 

   

the impact of changes in our future interpretations of fraud, anti-kickback or other laws.

The forward-looking statements contained in this report reflect our current views about future events and are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in the Part II, Item 1A. “Risk Factors,” included in this report and in other of our filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”), as updated by subsequent filings with the SEC. This report should be read in conjunction with that annual report on Form 10-K, and all of our other filings, including quarterly reports on Form 10-Q and current reports on Form 8-K made with the SEC through the date of this report.

You should read this report, the information incorporated by reference into this report and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may be materially different from what we expect or anticipate.

The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Unless the context otherwise requires, “we,” “us,” “our,” and the “Company” refer to LHC Group, Inc. and its consolidated subsidiaries.

 

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OVERVIEW

We provide post-acute health care services by providing quality cost-effective health care services to our patients. As of June 30, 2013, we had 306 service providers in 23 states: Alabama, Arkansas, California, Florida, Georgia, Idaho, Illinois, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, Washington and West Virginia. Our services are classified into two segments: (1) home-based services offered through our home nursing agencies and hospices; and (2) facility-based services offered through our long-term acute care hospitals (“LTACHs”).

Through our home-based services segment we offer a wide range of services, including skilled nursing, private duty nursing, medically-oriented social services, hospice care and physical, occupational and speech therapy. As of June 30, 2013, the home-based services segment was comprised of the following:

 

Type of Service

   Locations  

Home Health

     251   

Hospice

     34   

Private Duty

     4   

Specialty Services

     3   

Management Companies

     3   
  

 

 

 
     295   
  

 

 

 

Of our 295 home-based services locations, 156 are wholly-owned by us, 129 are majority-owned by us through joint ventures, seven are license lease arrangements and we manage the operations of the remaining three locations. We intend to increase the number of home nursing agencies and hospice locations that we operate through continued acquisitions and development.

We provide facility-based services through our LTACHs. As of June 30, 2013, we owned and operated nine LTACH locations, of which all but one are located within host hospitals. We also owned and operated a health club and a pharmacy. Of these 11 facility-based services locations, six are wholly-owned by us and five are majority-owned through joint ventures.

The percentage of net service revenue contributed from each reporting segment for the three and six months ended June 30, 2013 and 2012 was as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Home-based services

     88.1     88.6     87.9     88.3

Facility-based services

     11.9     11.4     12.1     11.7
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Recent Developments

Home-based services

Home Nursing. In 2010, the Patient Protection and Affordable Care Act (“PPACA”) was enacted, which made a number of changes to Medicare payment rates, including the reinstatement of the 3% home health rural add-on, which began on April 1, 2010 (expiring January 1, 2016). Other changes from PPACA that began on or after January 1, 2011 are:

 

   

a reduction in the market basket adjustment to be determined by Centers for Medicare and Medicaid Services (“CMS”) for the calendar years (“CY”) 2011, 2012 and 2013 by 1%;

 

   

a full productivity adjustment beginning in 2015; and

 

   

rebasing of the base payment rate for Medicare beginning in 2014 and phasing in over a four year period.

On November 2, 2012, CMS issued the final rule effective January 1, 2013 regarding payment rates for home health services in CY 2013. Under the CY 2013 rule, CMS is:

 

   

Decreasing the base payment rate to $2,137.73 in 2013 as compared to $2,138.52 in 2012. The decrease is made up of a market basket increase of 2.3% less a reduction of 1% to the market basket as defined by PPACA and less a 1.32% case mix adjustment carried over from 2012.

 

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Adjustment of the wage index and increasing the labor related portion of the base payment rate from 77.082% to 78.535% which decreases payments to the home health industry an aggregate of 0.37%.

 

   

Face to Face—CMS will allow non-physician practitioners in an acute or post-acute setting to perform the encounter and inform the certifying physician.

 

   

Therapy—CMS will also revise the regulation to state that in cases where multiple therapy disciplines are involved, if the required reassessment visit was missed for any one of the therapy disciplines for which therapy services were being provided, therapy coverage would cease only for that particular therapy discipline. Therefore, as long as the required therapy reassessments were completed timely for the remaining therapy disciplines, therapy services would continue to be covered for those therapy disciplines. With respect to the timing of therapy assessments, CMS revised the regulations to clarify that in cases where the patient is receiving more than one type of therapy, qualified therapists could complete their reassessment visits during the 11th, 12th, or 13th visit for the required 13th visit reassessment and the 17th, 18th, or 19th visit for the required 19th visit reassessment.

 

   

Sanctions—CMS will have additional sanctions for enforcement of survey deficiencies that will include the following (These are not mutually exclusive. CMS can impose any or all of the following, including termination.) Each of these sanctions requires a prior 15 day notice:

 

  (a) Civil money penalties;

 

  (b) Suspension of payment for all new admissions and new payment episodes;

 

  (c) Temporary management of the home health agency;

 

  (d) Directed plan of correction;

 

  (e) Directed in-service training.

On June 27, 2013, CMS issued the proposed rule for the Medicare Home Health Prospective Payment System (“HH PPS”) for 2014. If adopted, the rule will affect reimbursement for services provided by home health agencies to Medicare beneficiaries beginning January 1, 2014. As required by the PPACA, the proposed rule would rebase Medicare home health reimbursement amounts by a negative 3.5% each year for four years beginning on January 1, 2014. CMS projects that as a result of its proposed policies overall Medicare payments to home health agencies in 2014 will be reduced by 1.5%.

Under the proposed CY 2014 rule:

 

   

CMS proposes to establish the rebased base payment rate at $2,860.20 in 2014 as compared to $2,137.73 in 2013. However, CMS is simultaneously proposing to reset the average home health case-mix weight from the 2012 average case mix of 1.357 to 1.000 in 2014.

 

   

The final 2014 base payment rate was affected by a positive budget neutrality adjustment (to account for resetting of the case-mix weight), a positive technical variation adjustment of 0.17%, a negative 2.5% outlier adjustment, a negative 3.5% rebasing adjustment and a 2.4% increase due to the market basket adjustment.

 

   

CMS proposes to remove a total of 170 International Classification of Diseases (“ICD”) ICD-9 codes from the HH PPS Grouper: diagnosis codes that reflect severely acute patients that are not treated in the home health setting; and diagnosis codes for conditions that would not impact the home health plan of care. These codes will not be included in the update to ICD-10, which is effective October 1, 2014. CMS estimates the impact of these changes will be 0.5%.

Hospice. On July 24, 2012, CMS issued its final rule for hospice for fiscal year (“FY”) 2013, which increases Medicare reimbursement payments by 0.9% over FY 2012 rates. The 0.9% increase consists of a 2.6% inflationary market basket update offset by a 0.6% reduction for the fourth year of CMS’ seven-year phase-out of its wage index budget neutrality adjustment factor (“BNAF”), a 0.7% reduction for the productivity adjustment, a 0.3% reduction to the market basket as defined by PPACA, and a 0.1% reduction related to the wage index changes. The 0.9% does not include the deficit reduction sequester approved earlier by Congress.

The final rule also provides:

 

   

Clarification regarding diagnosis reporting on hospice claims:

CMS is concerned that hospices reporting a single diagnosis on claims are not providing an accurate description of the patients’ conditions, and believes that providers should code and report coexisting or additional diagnoses in order to more fully describe the Medicare patients they are treating.

 

   

Hospice payment reform update:

CMS indicates that it is moving forward with hospice payment reform efforts and will continue to investigate Medicare Payment Advisory Commission, Office of the Inspector General, and Government Accountability Office recommendations, as well as other payment options, as part of this comprehensive effort. CMS does not, however, provide an anticipated timeline for public release of information about proposals to alter the current hospice payment system.

The following table shows the hospice Medicare payment rates for FY 2013, which began on October 1, 2012 and will end September 30, 2013 (the payment rates do not reflect the 2% sequestration cut):

 

Description

   Rate per patient day  

Routine Home Care

   $ 153.45   

Continuous Home Care

   $ 895.56   

Full Rate = 24 hours of care

  

$37.32 = hourly rate

  

Inpatient Respite Care

   $ 158.72   

General Inpatient Care

   $ 682.59   

 

 

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On August 2, 2013, CMS released its final rule for hospice for FY 2014, which increases Medicare reimbursement payments by 1.0% over FY 2013. The 1.0% increase consists of a 2.5% inflationary market basket update offset by a 0.7% reduction related to the wage index changes and the fifth year of CMS’s seven-year phase-out of its wage index BNAF, a 0.5% reduction for the productivity adjustment, and a 0.3% reduction to the market basket as defined by PPACA.

Facility-Based Services

LTACHs. On August 1, 2012 CMS released its final rule for LTACH Medicare reimbursement for FY 2013 which spans from October 1, 2012 through September 30, 2013. In the aggregate, payments for FY 2013 will increase by 1.8% over FY 2012 rates. The 1.8% increase consists of a 2.6% inflationary market basket update offset by a 0.7% reduction for the productivity adjustment, a 0.1% reduction to the market basket as defined by PPACA. LTACH payment rates will also be reduced by approximately 1.3% to 0.5% for the “one-time” BNAF for discharges on or after December 29, 2012. The 0.5% does not include the deficit reduction sequester approved earlier by Congress.

The FY 2013 rule also includes:

 

   

A one-year extension of the existing moratorium on the “25 Percent threshold” policy, pending results of an on-going research initiative to re-define the role of LTACHs in the Medicare program.

 

   

A reduction to Medicare payments for very short stay cases in LTACHs to the Inpatient Prospective Payment System (“IPPS”) comparable per diem amount payment option for discharges occurring on or after December 29, 2012 and an increase to the high cost outlier payment.

On August 2, 2013, CMS released its final rule for LTACH Medicare reimbursement for FY 2014, which spans from October 1, 2013 through September 30, 2014. In the aggregate, payments for FY 2014 will increase by 1.3% over FY 2013 rates. The 1.3% increase consists of a 2.5% inflationary market basket update offset by a 0.5% reduction for the productivity adjustment, a 0.3% reduction to the market basket as defined by PPACA. LTACH payment rates will also be reduced by approximately 1.3% for the “one-time” BNAF and projected increases in estimated high cost outlier payments as compared to FY 2013.

The LTACH FY 2014 final rule also addresses the 25 Percent rule. Under the 25 Percent patient threshold policy, if an LTACH admits more than 25% of its patients from a single acute care hospital, Medicare will pay it at a rate comparable to IPPS hospitals for those patients above the 25 Percent threshold. A statutory moratorium on application of the 25 Percent rule was in place from December 2007 through December 2012. CMS extended the moratorium for FY 2013 but would allow the policy to go into effect in FY 2014. The imposition of the 25 Percent rule will apply to all LTACHs beginning with their first cost reporting period beginning on or after October 1, 2013.

The estimated changes to Medicare payments for home health, hospice and LTACHs for 2013 and 2014 do not include the deficit reduction sequester approved earlier by Congress. The sequestration cut to Medicare began on April 1, 2013 and reduced Medicare payments for patients whose service dates end on or after April 1, 2013 by 2%.

 

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RESULTS OF OPERATIONS

Three months ended June 30, 2013

Consolidated financial statements

The following table summarizes our consolidated results of operations for the three months ended June 30, 2013 and 2012 (amounts in thousands, except percentages which are percentages of consolidated net service revenue, unless indicated otherwise):

 

     2013           2012           Increase
(Decrease)
    Percentage
Change
 

Net service revenue

   $ 166,302        $ 158,055        $ 8,247        5.2  % 

Cost of service revenue

     97,009        58.3     92,218        58.3     4,791        5.2  % 

Provision for bad debts

     3,208        1.9     2,647        1.7     561        21.2  % 

General and administrative expenses

     54,157        32.6     50,967        32.2     3,190        6.3  % 

Income tax expense

     3,918        40.4 %(1)      4,092        40.7 %(1)      (174     (4.3 )% 

Noncontrolling interest

     1,585          1,909          (324     —     

Total non-operating income (loss)

     (635       (259       (376     —     
  

 

 

     

 

 

     

 

 

   

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

   $ 5,790        $ 5,963        $ (173  
  

 

 

     

 

 

     

 

 

   

 

(1) Percentage of income from continuing operations attributable to LHC Group, Inc.’s common stockholders

Home-based services segment operating results

The following table summarizes our home-based results of operations for the three months ended June 30, 2013 and 2012 (amounts in thousands, except percentages which are percentages of home-based net service revenue):

 

     2013            2012            Increase
(Decrease)
     Percentage
Change
 

Net service revenue

   $ 146,544         $ 139,996         $ 6,548         4.7

Cost of service revenue

     86,252         58.9     80,707         57.6     5,545         6.9

Provision for bad debts

     2,868         2.0     2,334         1.7     534         22.9

General and administrative expenses

     48,767         33.3     45,566         32.5     3,201         7.0
  

 

 

      

 

 

         

Operating income

   $ 8,657         $ 11,389           
  

 

 

      

 

 

         

Net service revenue

The following table sets forth home-based services revenue growth, admissions, census and episodes for the three months ended June 30, 2013 and the related change from the same period in 2012 (amounts in thousands, except admissions, census and episode data):

 

     Same
Store(1)
     De
Novo(2)
     Organic(3)      Organic
Growth
(Loss) %
    Acquired(4)      Total      Total
Growth
(Loss) %
 

Revenue

   $ 136,557       $ —         $ 136,557         (2.5 )%    $ 9,987       $ 146,544         4.7

Revenue Medicare

   $ 109,063       $ —         $ 109,063         (0.1 )%    $ 8,085       $ 117,148         7.3

New Admissions

     28,884         —           28,884         4.8  %      3,121         32,005         16.1

New Medicare Admissions

     19,707         —           19,707         4.8  %      2,087         21,794         15.9

Average Census

     34,000         —           34,000         0.1  %      2,069         36,069         6.3

Average Medicare Census

     25,861         —           25,861         0.4  %      1,614         27,475         6.7

Home Health Episodes

     42,665         —           42,665         0.4  %      1,914         44,579         4.9

 

(1) Same store — location that has been in service with the Company for greater than 12 months.
(2) De Novo — internally developed location that has been in service with the Company for 12 months or less.
(3) Organic — combination of same store and de novo.
(4) Acquired — purchased location that has been in service with the Company for 12 months or less.

Total organic home-based revenue for the three months ended June 30, 2013 decreased 2.5% compared to the three months ended June 30, 2012, while organic Medicare revenue decreased 0.1%. The primary cause for the decrease in organic revenue in the home-based segment was reduced reimbursement caused by Medicare sequestration and wage index adjustments, which became effective in 2013, partially offset by Medicare census growth.

 

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Organic growth is generated by population growth in areas covered by mature agencies, agencies five years old or older, and by increased market share in acquired and developing agencies. Historically, acquired agencies have the highest growth in admissions and average census in the first 24 months after acquisition, and have the highest contribution to organic growth, measured as a percentage, in the second full year of operation after the acquisition.

Cost of service revenue

The following table summarizes home-based services cost of service revenue (amounts in thousands, except percentages):

 

     Three Months Ended June 30,  
     2013            2012         

Salaries, wages and benefits

   $ 74,930         51.1 %(1)    $ 69,666         49.8 %(1) 

Transportation

     6,262         4.3     6,343         4.5

Supplies and services

     5,060         3.5     4,698         3.3
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 86,252         58.9   $ 80,707         57.6
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Percentage of home-based net service revenue

Salaries, wages and benefits increased during the three months ended June 30, 2013 compared to the same period in 2012. The increase was primarily due to an increase in salaries, wages and benefits from agencies acquired since June 30, 2012, partially offset by productivity improvements and efficiencies gained through our Point Of Care (“POC”) initiatives that we have implemented over the past year.

Provision for bad debts

Provision for bad debts increased during the three months ended June 30, 2013 compared to the same period in 2012. The increase was associated with collectability risks identified on a group of self pay claims.

General and administrative expenses

General and administrative expenses increased during the three months ended June 30, 2013 compared to the same period in 2012 due to acquisitions and POC device costs, which were partially offset by reductions of staff resulting from the benefits derived from POC initiatives implemented over the past year.

Facility-based services segment operating results

The following table summarizes our facility-based results of operations for the three months ended June 30, 2013 and 2012 (amounts in thousands, except percentages which are percentages of facility-based net service revenue):

 

     2013            2012            Increase
(Decrease)
    Percentage
Change
 

Net service revenue

   $ 19,758         $ 18,059         $ 1,699        9.4  % 

Cost of service revenue

     10,757         54.4     11,511         63.7     (754     (6.6 )% 

Provision for bad debts

     340         1.7     313         1.7     27        8.6  % 

General and administrative expenses

     5,390         27.3     5,401         29.9     (11     (0.2 )% 
  

 

 

      

 

 

        

Operating income

   $ 3,271         $ 834          
  

 

 

      

 

 

        

Facility-based services net service revenue increased during the three months ended June 30, 2013 compared to the same period in 2012 due to an increase in paid patient days and $614,000 of adjustments from facility cost reports recorded during the three months ended June 30, 2013.

 

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Cost of service revenue

The following table summarizes facility-based services cost of service revenue (amounts in thousands, except percentages):

 

     Three Months Ended June 30,  
     2013            2012         

Salaries, wages and benefits

   $ 7,015         35.5 %(1)    $ 7,067         39.1 %(1) 

Transportation

     83         0.4     60         0.3

Supplies and services

     3,659         18.5     4,384         24.3
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 10,757         54.4   $ 11,511         63.7
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Percentage of facility-based net service revenue

Supplies and services decreased during the three months ended June 30, 2013 compared to the same period in 2012 due to decreases in the use of certain pharmaceutical supplies and lab expenses. This correlates to the decrease in total patient days during the three months ended June 30, 2013 compared to the same period in 2012.

Six months ended June 30, 2013

Consolidated financial statements

The following table summarizes our consolidated results of operations for the six months ended June 30, 2013 and 2012 (amounts in thousands, except percentages which are percentages of consolidated net service revenue, unless indicated otherwise):

 

     2013           2012           Increase
(Decrease)
    Percentage
Change
 

Net service revenue

   $ 328,255        $ 316,816        $ 11,439        3.6  % 

Cost of service revenue

     190,257        58.0     182,077        57.5     8,180        4.5  % 

Provision for bad debts

     7,125        2.2     5,408        1.7     1,717        31.7  % 

General and administrative expenses

     105,780        32.2     101,849        32.1     3,931        3.9  % 

Income tax expense

     8,454        41.2 %(1)      9,318        40.5 %(1)      (864     (9.3 )% 

Noncontrolling interest

     3,568          3,907          (339     —    

Total non-operating income (loss)

     (995       (553       (442     —    
  

 

 

     

 

 

     

 

 

   

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

   $ 12,076        $ 13,704        $ (1,628  
  

 

 

     

 

 

     

 

 

   

 

(1) Percentage of income from continuing operations attributable to LHC Group, Inc.’s common stockholders

Home-based services segment operating results

The following table summarizes our home-based results of operations for the six months ended June 30, 2013 and 2012 (amounts in thousands, except percentages which are percentages of home-based net service revenue):

 

     2013            2012            Increase
(Decrease)
     Percentage
Change
 

Net service revenue

   $ 288,531         $ 279,591         $ 8,940         3.2

Cost of service revenue

     167,842         58.2     159,768         57.1     8,074         5.1

Provision for bad debts

     6,145         2.1     4,957         1.8     1,188         24.0

General and administrative expenses

     94,939         32.9     90,792         32.5     4,147         4.6
  

 

 

      

 

 

         

Operating income

   $ 19,605         $ 24,074           
  

 

 

      

 

 

         

Net service revenue

The following table sets forth home-based services revenue growth, admissions, census and episodes for the six months ended June 30, 2013 and the related change from the same period in 2012 (amounts in thousands, except admissions, census and episode data):

 

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     Same
Store(1)
     De
Novo(2)
     Organic(3)      Organic
Growth
(Loss) %
    Acquired(4)      Total      Total
Growth
(Loss) %
 

Revenue

   $ 274,318       $ —         $ 274,318         (1.9 )%    $ 14,213       $ 288,531         3.2

Revenue Medicare

   $ 218,788       $ —         $ 218,788         —        $ 11,227       $ 230,015         5.1

New Admissions

     58,975         —           58,975         4.6     4,624         63,599         12.8

New Medicare Admissions

     40,559         —           40,559         4.4     2,970         43,529         12.1

Average Census

     34,127         —           34,127         1.3     2,232         36,359         7.9

Average Medicare Census

     25,918         —           25,918         1.3     1,709         27,627         8.0

Home Health Episodes

     84,206         —           84,206         0.5     3,181         87,387         4.3

 

(1) Same store — location that has been in service with the Company for greater than 12 months.
(2) De Novo — internally developed location that has been in service with the Company for 12 months or less.
(3) Organic — combination of same store and de novo.
(4) Acquired — purchased location that has been in service with the Company for 12 months or less.

Total organic home-based revenue for the six months ended June 30, 2013 decreased 1.9% compared to the six months ended June 30, 2012, while organic Medicare revenue remained consistent. The primary cause for the decrease in organic revenue in the home-based segment was reduced reimbursement caused by Medicare sequestration and wage index adjustments, which became effective in 2013, partially offset by Medicare census growth.

Organic growth is generated by population growth in areas covered by mature agencies, agencies five years old or older, and by increased market share in acquired and developing agencies. Historically, acquired agencies have the highest growth in admissions and average census in the first 24 months after acquisition, and have the highest contribution to organic growth, measured as a percentage, in the second full year of operation after the acquisition.

Cost of service revenue

The following table summarizes home-based services cost of service revenue (amounts in thousands, except percentages):

 

     Six Months Ended June 30,  
     2013            2012         

Salaries, wages and benefits

   $ 145,851         50.6 %(1)    $ 138,326         49.4 %(1) 

Transportation

     12,070         4.2     12,252         4.4

Supplies and services

     9,921         3.4     9,190         3.3
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 167,842         58.2   $ 159,768         57.1
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Percentage of home-based net service revenue

Salaries, wages and benefits increased during the six months ended June 30, 2013 compared to the same period in 2012. The increase was primarily due to an increase in acquisition activity and offset by productivity improvements and efficiencies gained through our Point Of Care (“POC”) initiatives that we have implemented during the past year.

Provision for bad debts

Provision for bad debts increased during the six months ended June 30, 2013 compared to the same period in 2012. The increase was associated with a combination of collectability risks identified on a group of claims from certain commercial insurance payor contracts and self payor claims.

General and administrative expenses

General and administrative expenses increased during the six months ended June 30, 2013 compared to the same period in 2012 due to increased acquisition costs and POC device costs, which were partially offset by reductions of staff resulting from the benefits derived from POC initiatives implemented during the past year.

 

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Facility-based services segment operating results

The following table summarizes our facility-based results of operations for the six months ended June 30, 2013 and 2012 (amounts in thousands, except percentages which are percentages of facility-based net service revenue):

 

 

     2013            2012            Increase
(Decrease)
    Percentage
Change
 

Net service revenue

   $ 39,724         $ 37,225         $ 2,499        6.7  % 

Cost of service revenue

     22,415         56.4     22,309         59.9     106        0.5  % 

Provision for bad debts

     980         2.5     451         1.2     529        >100  % 

General and administrative expenses

     10,841         27.3     11,057         29.7     (216     (2.0 )% 
  

 

 

      

 

 

        

Operating income

   $ 5,488         $ 3,408          
  

 

 

      

 

 

        

Facility-based services net service revenue increased during the six months ended June 30, 2013 compared to the same period in 2012 due to an increase in paid patient days.

Provision for bad debts increased during the six months ended June 30, 2013 compared to the same period in 2012 due to reserves calculated on a third-party pharmacy contract and prior year cost report settlement denials.

Cost of service revenue

The following table summarizes facility-based services cost of service revenue (amounts in thousands, except percentages):

 

     Six Months Ended June 30,  
     2013            2012         

Salaries, wages and benefits

   $ 14,295         36.0 %(1)    $ 13,946         37.4 %(1) 

Transportation

     154         0.4     115         0.3

Supplies and services

     7,966         20.0     8,248         22.2
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 22,415         56.4   $ 22,309         59.9
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Percentage of facility-based net service revenue

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our principal source of liquidity for operating activities is the collection of patient accounts receivable, most of which are collected from governmental and third party commercial payors. We also have the ability to obtain additional liquidity, if necessary, through our Credit Facility, which provides for aggregate borrowings, including outstanding letters of credit, up to $100 million.

Our reported cash flows from operating activities are affected by various external and internal factors, including the following:

 

   

Operating Results — Our net income has a significant effect on our operating cash flows. Any significant increase or decrease in our net income could have a material effect on our operating cash flows.

 

   

Timing of Acquisitions — We use our operating cash flows for acquisitions. When the acquisitions occur at or near the end of a period, our cash outflows significantly increase.

 

   

Timing of Payroll — Our employees are paid bi-weekly on Fridays; therefore, operating cash flows decline in reporting periods that end on a Friday.

 

   

Medical Insurance Plan Funding — We are self-funded for medical insurance purposes. Any significant changes in the amount of insurance claims submitted could have a direct effect on our operating cash flows.

 

   

Medical Supplies — A significant expense associated with our business is the cost of medical supplies. Any increase in the cost of medical supplies, or in the use of medical supplies by our patients, could have a material effect on our operating cash flows.

The following table summarizes changes in cash (amounts in thousands):

 

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     Six Months Ended
June 30,
 
     2013     2012  

Net cash provided by (used in):

    

Operating activities

   $ 28,070      $ 39,723   

Investing activities

     (30,489     (4,991

Financing activities

     (255     (34,603
  

 

 

   

 

 

 

Change in cash

     (2,674     129   

Cash and cash equivalents at beginning of period

     9,720        256   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 7,046      $ 385   
  

 

 

   

 

 

 

Cash provided by operating activities for the six months ended June 30, 2013 decreased from lower net income and other changes in working capital. Additionally, for the six months ended June 30, 2012, cash provided by operations included the benefit from the utilization of previously established prepaid taxes associated with tax loss carrybacks generated from our 2011 settlement with the United States of America.

Cash used in investing activities for the six months ended June 30, 2013 increased due to the acquisition of the home-based service line of Addus HomeCare Corp.

Cash used in financing activities for the six months ended June 30, 2013 decreased due primarily to a reduction in the amount of net repayment activity on the revolving credit facility.

Accounts Receivable and Allowance for Uncollectible Accounts

As of June 30, 2013, our allowance for uncollectible accounts, as a percentage of patient accounts receivable, was approximately 13.4%, or $13.6 million, compared to 12.4% or $11.9 million at December 31, 2012. Days sales outstanding as of June 30, 2013 and December 31, 2012 were each 48 days.

The following table sets forth as of June 30, 2013, the aging of accounts receivable (based on the end of episode date) (amounts in thousands):

 

 

Payor

   0-90      91-180      181-365      Over 365      Total  

Medicare

   $ 52,456       $ 10,124       $ 4,014       $ 493       $ 67,087   

Medicaid

     2,431         434         349         257         3,471   

Other

     17,436         5,650         4,993         2,642         30,721   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 72,323       $ 16,208       $ 9,356       $ 3,392       $ 101,279   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For home-based services, we calculate the allowance for uncollectible accounts as a percentage of total patient receivables. The percentage changes depending on the payor and increases as the patient receivables age. For facility-based services, we calculate the allowance for uncollectible accounts based on a claim by claim review.

The following table sets forth as of December 31, 2012, the aging of accounts receivable (based on the end of episode date) (amounts in thousands):

 

Payor

   0-90      91-180      181-365      Over 365      Total  

Medicare

   $ 48,219       $ 7,955       $ 4,114       $ 672       $ 60,960   

Medicaid

     2,067         531         696         300         3,594   

Other

     18,688         4,695         5,536         2,341         31,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 68,974       $ 13,181       $ 10,346       $ 3,313       $ 95,814   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Indebtedness

As of June 30, 2013 we had $25.0 million drawn and letters of credit totaling $6.2 million outstanding and $68.8 million available under our line of credit. At December 31, 2012, $19.5 million was drawn and letters of credit totaling $6.0 million was outstanding on the line of credit.

Our Credit Facility with Capital One, National Association provides for a maximum aggregate principal borrowing of $100 million. The Credit Facility, which is scheduled to expire on August 31, 2015, is unsecured and has a letter of credit sub-limit of $15 million. A fee of 0.5% is charged for any unused amounts. A letter of credit fee equal to the applicable London Interbank Offered Rate (“LIBOR”) margin times the face amount of the letter of credit is charged upon the issuance and on each anniversary date while the letter of credit is outstanding. The agent’s standard up-front fee and other customary administrative charges will also be due upon

 

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issuance of the letter of credit along with a renewal fee on each anniversary date of such issuance while the letter of credit is outstanding. The interest rate for the borrowings under the Credit Facility, at our election, shall be either at the Base Rate (as defined in the Credit Facility) as a function of the prime rate or the LIBOR Rate (as defined in the Credit Agreement). Borrowings accruing interest under the Credit Facility at either the Base Rate or the LIBOR Rate are subject to the applicable margins set forth below:

 

Leverage Ratio

   LIBOR
Margin
    Base
Rate
Margin
 

<1.00:1.00

     2.25     1.00

>1.00:1.00<1.50:1.00

     2.50     1.25

>1.50:1.00£2.00:1.00

     2.75     1.50

Our Credit Facility contains customary affirmative, negative and financial covenants. For example, we are restricted in incurring additional debt, disposing of assets, making investments, allowing fundamental changes to our business or organization, and making certain payments in respect of stock or other ownership interests, such as dividends and stock repurchases, up to $50 million. Under our Credit Facility, we are also required to meet certain financial covenants with respect to minimum fixed charge coverage, consolidated net worth and leverage ratios.

Our Credit Facility also contains customary events of default. These include bankruptcy and other insolvency events, cross-defaults to other debt agreements, a change in control involving us or any subsidiary guarantor, and the failure to comply with certain covenants.

At June 30, 2013, we believe we were in compliance with all covenants.

Contingencies

For a discussion of contingencies, see Note 8 of the Notes to Condensed Consolidated Financial Statements.

Off-Balance Sheet Arrangements

We do not currently have any off-balance sheet arrangements with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Critical Accounting Policies

For a discussion of critical accounting policies, see Note 2 of the Notes to Condensed Consolidated Financial Statements.

Revenue Recognition

We report net service revenue at the estimated net realizable amount due from Medicare, Medicaid, commercial insurance, managed care payors, patients and other payors for services rendered.

Medicare

Home-Based Services

Home Nursing Services. We are reimbursed by Medicare for delivering care over a 60-day period referred to as an episode. We recognize revenue based on the number of days elapsed during an episode of care within the appropriate reporting period.

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”). We submit 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. Final payments from Medicare may reflect one of four retroactive adjustments to ensure the adequacy and effectiveness of 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 in the population base. We estimate all potential adjustments to an episode based on the best information available as the services are provided and prior to recognizing revenue or presenting the final bill. Therefore, historically, we have recorded little or no adjustments at the time payment is received. Although our estimates are based on historical experience using the best information available at the time we provide service, final payments could differ from our estimates.

 

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Hospice Services. We are paid by Medicare under a per diem payment system. We receive one of four predetermined daily or hourly rates based upon the level of care we furnished. We record net service revenue from hospice services based on the daily or hourly rate and recognize revenue as these hospice services are provided.

Hospice payments are also subject to an inpatient cap and an overall payment cap. The inpatient cap relates to individual programs receiving more than 20% of its total Medicare reimbursement from inpatient care services. The overall payment cap relates to individual programs receiving reimbursements in excess of a “cap amount,” which is calculated by multiplying the number of beneficiaries receiving services during the period by a statutory amount that is indexed for inflation. The determination for each cap is made annually based on the 12-month period ending on October 31 of each year. We monitor our limits on a provider-by-provider basis. Our revenue could be affected if we exceed the cap limits in the future.

Facility-Based Services

Long-Term Acute Care Services. We are reimbursed by Medicare for services provided at our LTACHs based on a predetermined fixed amount intended to reflect the average cost of treating a Medicare patient. The actual amount reimbursed can be adjusted based on length of stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted. Similar to the home health Medicare reimbursement, we estimate the adjustment based on a historical average and record revenue considering such adjustment. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Revenue is recognized for our LTACHs as services are provided. Although our estimates are based on historical experience using the best information available at the time we provide service, final payments could differ from our estimates.

Medicaid, managed care and other payors

Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as the services are provided based on this fee schedule. Managed care and other payors reimburse us in a manner similar to either Medicare or Medicaid. Accordingly, we recognize revenue from managed care and other payors in the same manner as we recognize revenue from Medicare or Medicaid.

Accounts Receivable and Allowances for Uncollectible Accounts

We report accounts receivable net of estimated allowances for uncollectible accounts and adjustments. Accounts receivable are uncollateralized and primarily consist of amounts due from Medicare, other third-party payors, and patients. To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for uncollectible accounts to reduce the carrying amount of such receivables to their estimated net realizable value.

The collection of outstanding receivables is our primary source of cash collections and is critical to our operating performance. Because Medicare is our primary payor, the credit risk associated with receivables from other payors is limited. We believe the credit risk associated with our Medicare accounts, which represent 66.2% and 63.6% of our patient accounts receivable as of June 30, 2013 and December 31, 2012, respectively, is limited due to (i) the historical collections from Medicare and (ii) the fact that Medicare is a U.S. government payor. We do 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 accounts receivable.

The amount of the provision for bad debts is based upon our assessment of historical and expected net collections, business and economic conditions and trends in government reimbursement. Quarterly, we perform a detailed review of historical writeoffs and recoveries as well as recent collection trends. Uncollectible accounts are written off when we have exhausted collection efforts and concluded the account will not be collected.

Although our estimated reserves for uncollectible accounts are based on historical experience and the most current collection trends, this process requires significant judgment and interpretation of the observed trends and the actual collections could differ from our estimates.

Insurance

We retain significant exposure for our employee health insurance, workers compensation, employment practices and professional liability insurance programs. Our insurance programs require us to estimate potential payments on filed claims and/or claims incurred but not reported. Our estimates are based on information provided by the third-party plan administrators, historical claim experience, expected costs of claims incurred but not paid and expected costs associated with settling claims. Each month we review the insurance-related recoveries and liabilities to determine if any adjustments are required.

Our employee health insurance program is self funded, with stop-loss coverage on claims that exceed $150,000 for any individually covered employee or employee family member. We are responsible for workers’ compensation claims up to $350,000 per individual incident.

Malpractice, employment practices and general liability claims for incidents which may give rise to litigation have been asserted against us by various claimants. The claims are in various stages of processing and some may ultimately be brought to trial. We are

 

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aware of incidents that have occurred through June 30, 2013 that may result in the assertion of additional claims. We currently carry professional, general liability and employment practices insurance coverage (on a claims made basis) for this exposure. We also carry D&O coverage (also on a claims made basis) for potential claims against our directors and officers, including securities actions, with a deductible of $750,000 per security claims and $500,000 on other claims.

We estimate our liabilities related to these programs using the most current information available. As claims develop, we may need to change the recorded liabilities and change our estimates. These changes and adjustments could be material to our financial statements, results of operations and financial condition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As of June 30, 2013, we had cash of $7.0 million. In 2013, the FDIC will insure each depositor up to $250,000 in coverage at each separately chartered insured depository institution. At times, cash in banks is in excess of the FDIC insurance limit. The Company has not experienced any loss as a result of those deposits in excess of the FDIC insurance limit and does not expect any in the future.

Our exposure to market risk relates to changes in interest rates for borrowings under our Credit Facility. Our Credit Facility is a revolving credit facility and, as such, we borrow, repay and re-borrow amounts as needed, changing the average daily balance outstanding under our Credit Facility. A hypothetical 100 basis point increase in interest rates on the average daily amounts outstanding under our Credit Facility would have increased interest expense by $3,000 for the three months ended June 30, 2013 and by $13,000 for the six months ended June 30, 2013.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such disclosure controls and procedures are designed also to ensure that such information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.

Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that we maintained effective disclosure controls and procedures at the reasonable assurance level as of June 30, 2013.

Changes in Internal Controls Over Financial Reporting

There have not been any changes in our internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, during the quarterly period ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

For a discussion of legal proceedings, see Note 8 of the Notes to Condensed Consolidated Financial Statements.

ITEM 1A. RISK FACTORS.

There have been no material changes from the information included in Part I, Item 1A. “Risk Factors” of the Company’s 2012 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In October 2010, the Company’s Board of Directors authorized a share repurchase program to repurchase shares of the Company’s common stock, par value $0.01 per share, from time to time, in an amount not to exceed $50.0 million (“Stock Repurchase Program”). The Company anticipates that it will finance the Stock Repurchase Program with cash from general corporate funds, or draws under the Credit Facility. The Company may repurchase shares of common stock in open market purchases or in privately negotiated transactions in accordance with applicable securities laws, rules and regulations. The timing and extent to which the Company repurchases its shares will depend upon market conditions and other corporate considerations. During the six months ended June 30, 2013, no shares were repurchased. The remaining dollar value of shares authorized to be purchased under the share repurchase program was $22.5 million as of June 30, 2013.

 

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ITEM 6. EXHIBITS.

 

  3.1    Certificate of Incorporation of LHC Group, Inc. (previously filed as an Exhibit 3.1 to the Form S-1/A (File No. 333-120792) on February 14, 2005).
  3.2    Bylaws of LHC Group, Inc. as amended on December 31, 2007 (previously filed as Exhibit 3.2 to the Form 10-Q on May 9, 2008).
  4.1    Specimen Stock Certificate of LHC Group’s Common Stock, par value $0.01 per share (previously filed as Exhibit 4.1 to the Form S-1/ A (File No. 333-120792) on February 14, 2005).
10.1    Third Amended and Restated Credit Agreement, by and among LHC Group, Inc., Capital One, National Association, as a lender, administrative agent, sole book runner and sole lead arranger, JPMorgan Chase Bank, N.A., as a lender and syndication agent, Compass Bank, as a lender and documentation agent, and Whitney Bank and Regions Bank, as lenders, dated August 31, 2012 (previously filed as Exhibit 10.1 to the Form 8-K filed on September 4, 2012).
31.1    Certification of Keith G. Myers, Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Peter J. Roman, Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*    Certification of Chief Executive Officer and Chief Financial Officer of LHC Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Schema Document
101.CAL    XBRL Calculation Linkbase Document
101.DEF    XBRL Definition Linkbase Document
101.LAB    XBRL Label Linkbase Document
101.PRE    XBRL Presentation Linkbase Document

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” and “unreviewed.”

 

* This exhibit is furnished to the SEC as an accompanying document and is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and the document will not be deemed incorporated by reference into any filing under the Securities Act of 1933.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    LHC GROUP, INC.
Date: August 8, 2013    

/s/ Peter J. Roman

    Peter J. Roman
   

Executive Vice President and Chief Financial Officer

(Principal financial officer)

 

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