Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-33989
 
LHC GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
71-0918189
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
901 Hugh Wallis Road South
Lafayette, LA 70508
(Address of principal executive offices including zip code)
(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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
  
ý
 
Accelerated filer
 
¨

 
 
 
 
Non-accelerated filer
  
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company  
 
¨
 
 
 
 
Emerging growth company
 
¨




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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Number of shares of common stock, par value $0.01, outstanding as of July 30, 2018: 31,333,150 shares.


Table of Contents

LHC GROUP, INC.
INDEX
 
 
 
Page
Part I. Financial Information
 
Item 1.
 
Condensed Consolidated Balance Sheets — June 30, 2018 and December 31, 2017

Condensed Consolidated Statements of Income — Three and six months ended June 30, 2018 and 2017

Condensed Consolidated Statement of Changes in Equity — Six months ended June 30, 2018

Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2018 and 2017


Item 2.
26

Item 3.

Item 4.

Part II. Other Information
 
Item 1.

Item 1A.

Item 2.

Item 6.



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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)
 
June 30, 
 2018
 
December 31, 
 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
15,370

 
$
2,849

Receivables:
 
 
 
Patient accounts receivable
280,490

 
161,898

Other receivables
7,647

 
3,163

Amounts due from governmental entities
830

 
830

Total receivables
288,967

 
165,891

Prepaid income taxes
5,086

 
7,006

Prepaid expenses
23,713

 
13,042

Other current assets
17,300

 
12,177

Total current assets
350,436

 
200,965

Property, building and equipment, net of accumulated depreciation of $49,173 and $43,565, respectively
64,898

 
46,453

Goodwill
1,118,777

 
392,601

Intangible assets, net of accumulated amortization of $14,094 and $13,041, respectively
325,137

 
134,610

Assets held for sale
2,850

 

Other assets
19,572

 
19,073

Total assets
$
1,881,670

 
$
793,702

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
76,800

 
$
39,750

Salaries, wages, and benefits payable
99,881

 
44,747

Self-insurance reserve
26,332

 
12,450

Current portion of long-term debt
12,617

 
286

Amounts due to governmental entities
4,375

 
5,019

Total current liabilities
220,005

 
102,252

Deferred income taxes
34,022

 
27,466

Income taxes payable
3,851

 

Revolving credit facility
242,000

 
144,000

Long term notes payable
265

 

Total liabilities
500,143

 
273,718

Noncontrolling interest — redeemable
17,032

 
13,393

Stockholders’ equity:
 
 
 
LHC Group, Inc. stockholders’ equity:
 
 
 
Preferred stock – $0.01 par value; 5,000,000 shares authorized; none issued or outstanding

 

Common stock — $0.01 par value; 60,000,000 and 40,000,000 shares authorized in 2018 and 2017, respectively; 35,592,424 and 22,640,046 shares issued in 2018 and 2017, respectively
355

 
226

Treasury stock — 4,953,665 and 4,890,504 shares at cost, respectively
(46,344
)
 
(42,249
)
Additional paid-in capital
923,655

 
126,490

Retained earnings
386,193

 
364,401

Total LHC Group, Inc. stockholders’ equity
1,263,859

 
448,868

Noncontrolling interest — non-redeemable
100,636

 
57,723

Total equity
1,364,495

 
506,591

Total liabilities and equity
$
1,881,670

 
$
793,702

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,
 
2018
 
2017
 
2018
 
2017
Net service revenue
$
502,024

 
$
257,535

 
$
793,078

 
$
501,784

Cost of service revenue
329,646

 
161,158

 
518,264

 
315,528

Gross margin
172,378

 
96,377

 
274,814

 
186,256

General and administrative expenses
141,350

 
73,552

 
233,381

 
145,563

Operating income
31,028

 
22,825

 
41,433

 
40,693

Interest expense
(3,202
)
 
(840
)
 
(4,652
)
 
(1,620
)
Income before income taxes and noncontrolling interest
27,826

 
21,985

 
36,781

 
39,073

Income tax expense
7,170

 
7,792

 
8,147

 
12,965

Net income
20,656

 
14,193

 
28,634

 
26,108

Less net income attributable to noncontrolling interests
3,859

 
2,889

 
6,842

 
5,337

Net income attributable to LHC Group, Inc.’s common stockholders
$
16,797

 
$
11,304

 
$
21,792

 
$
20,771

Earnings per share attributable to LHC Group, Inc.'s common stockholders:
 
 
 
 
 
 
 
Basic
$
0.55

 
$
0.64

 
$
0.90

 
$
1.17

Diluted
$
0.55

 
$
0.63

 
$
0.89

 
$
1.16

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
30,497,501

 
17,728,567

 
24,178,781

 
17,686,134

Diluted
30,742,293

 
17,964,387

 
24,403,310

 
17,911,723

 




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
 
Noncontrolling
Interest Non
Redeemable
 
Total
Equity
Issued
 
Treasury
 
Amount
 
Shares
 
Amount
 
Shares
 
Balance as of December 31, 2017
$
226

 
22,640,046

 
$
(42,249
)
 
(4,890,504
)
 
$
126,490

 
$
364,401

 
$
57,723

 
$
506,591

Net income (1)

 

 

 

 

 
21,792

 
1,987

 
23,779

Acquired noncontrolling interest

 

 

 

 

 

 
36,474

 
36,474

Noncontrolling interest distributions

 

 

 

 

 

 
(1,119
)
 
(1,119
)
NCI activity

 

 

 

 
(2,664
)
 

 
5,571

 
2,907

Nonvested stock compensation

 

 

 

 
3,919

 

 

 
3,919

Restricted stock vesting
2

 
176,385

 

 

 
(2
)
 

 

 

Treasury shares redeemed to pay income tax

 

 
(4,095
)
 
(63,161
)
 

 

 

 
(4,095
)
Merger consideration
127

 
12,765,288

 

 

 
795,278

 

 

 
795,405

Issuance of common stock under Employee Stock Purchase Plan

 
10,705

 

 

 
634

 

 

 
634

Balance as of June 30, 2018
$
355

 
35,592,424

 
$
(46,344
)
 
(4,953,665
)
 
$
923,655

 
$
386,193

 
$
100,636

 
$
1,364,495

 
(1)
Net income excludes net income attributable to noncontrolling interest-redeemable of $4.9 million during the six months ending June 30, 2018. 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,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
28,634

 
$
26,108

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
7,548

 
6,348

Stock-based compensation expense
3,919

 
3,077

Deferred income taxes
1,714

 
2,522

(Loss) gain on disposal of assets
(126
)
 
154

    Impairment of intangibles and other
778

 

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(18,897
)
 
(1,926
)
Prepaid expenses and other assets
(6,521
)
 
(2,329
)
Prepaid income taxes
4,624

 
(3,296
)
Accounts payable and accrued expenses
8,729

 
15,119

Income taxes payable

 
(3,499
)
Net amounts due to/from governmental entities
(704
)
 
498

Net cash provided by operating activities
29,698

 
42,776

Investing activities:
 
 
 
Purchases of property, building and equipment
(13,760
)
 
(5,341
)
Cash acquired from business combination, net of cash paid
13,086

 
(22,704
)
Advanced payments on acquisitions

 
(523
)
Net cash used in investing activities
(674
)
 
(28,568
)
Financing activities:
 
 
 
Proceeds from line of credit
270,084

 
19,000

Payments on line of credit
(278,884
)
 
(22,000
)
Proceeds from employee stock purchase plan
634

 
469

Payments on debt
135

 
(129
)
  Payments on deferred financing fees
(1,881
)
 

Noncontrolling interest distributions
(5,763
)
 
(5,167
)
Withholding taxes paid on stock-based compensation
(4,095
)
 
(2,744
)
Purchase of additional controlling interest
(55
)
 
(184
)
Sale of noncontrolling interest
3,322

 
251

Net cash used in financing activities
(16,503
)
 
(10,504
)
Change in cash
12,521

 
3,704

Cash at beginning of period
2,849

 
3,264

Cash at end of period
$
15,370

 
$
6,968

Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
3,112

 
$
1,762

Income taxes paid
$
2,139

 
$
17,320

See accompanying notes to condensed consolidated financial statements.


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LHC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
LHC Group, Inc. (the “Company”) is a health care provider specializing in the post-acute continuum of care. The Company provides home health services, hospice services, home and community-based services, facility-based services, the latter primarily through long-term acute care hospitals (“LTACHs”), and healthcare innovations services ("HCI").
On April 1, 2018, the Company completed its previously announced "merger of equals" business combination (the "Merger") with Almost Family, Inc. ("Almost Family"). See Note 3 of the Notes to Condensed Consolidated Financial Statements.
As of June 30, 2018, the Company, through its wholly- and majority-owned subsidiaries, equity joint ventures, controlled affiliates, and management agreements (including, as a result of the Merger, those owned and operated by Almost Family), operated 777 service providers in 37 states within the continental United States.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017, and the related unaudited condensed consolidated statements of income for the three and six months ended June 30, 2018 and 2017, condensed consolidated statement of changes in equity for the six months ended June 30, 2018, condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017, and related notes (collectively, these financial statements are referred to as the "interim financial statements" and together with the related notes are referred to herein as the “interim financial information”) have been prepared by the Company. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
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, 2017. The report was filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2018, and includes information and disclosures not included herein.    
The accompanying unaudited condensed consolidated statements of income for the three and six months ended June 30, 2018, include the results of operations for Almost Family for the period April 1, 2018 to June 30, 2018. The accompanying unaudited condensed consolidated balance sheet at June 30, 2018 includes the preliminary valuation of the assets acquired and liabilities assumed in connection with the Merger. See Note 3 of the Notes to Condensed Consolidated Financial Statements.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenue and expenses during the reporting period. Actual results could differ from those estimates.
Critical Accounting Policies
The Company’s most critical accounting policies relate to the principles of consolidation and revenue recognition.
Principles of Consolidation
The interim financial information includes all subsidiaries and entities controlled by the Company through direct ownership of majority interest or controlling member ownership of such entities (including, as a result of the Merger, those owned and operated by Almost Family). Third party equity interests in the consolidated joint ventures are reflected as

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noncontrolling interests in the Company’s interim financial information. See Note 9 of the Notes to 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,
Ownership type
 
2018
 
2017
 
2018
 
2017
Wholly-owned subsidiaries
 
59.5
%
 
53.3
%
 
55.5
%
 
53.5
%
Equity joint ventures
 
39.4

 
45.1

 
43.0

 
44.8

Other
 
1.1

 
1.6

 
1.5

 
1.7

 
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
All significant intercompany accounts and transactions have been eliminated in the Company’s accompanying interim financial information. Business combinations accounted for under the acquisition method have been included in the interim financial information from the respective dates of acquisition.
The Company consolidates equity joint venture entities as the Company has controlling interests in the entities, has voting control over these entities, or has ability to exercise significant influence in the entities. The members of the Company's equity joint ventures participate in profits and losses in proportion to their equity interests. The Company also consolidates entities which have license leasing arrangements as the Company owns 100% of the equity of these subsidiaries.
The Company has various management services agreements under which the Company manages certain operations of agencies. The Company does not consolidate these agencies if the Company does not have an ownership interest in, nor does it have an obligation to absorb losses of, or right to receive benefits from the entities that own the agencies.
Revenue Recognition
Basis of Presentation
The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, ("ASU 2014-09") on January 1, 2018 on a full retrospective basis, which required the Company to present the prior comparable period as adjusted. The adoption of the standard did not have a material impact on the Company's interim financial statements. The Company did not adjust the opening balance of retained earnings to account for the implementation of the requirements of this standard as there are no timing differences related to the recognition of implicit price concessions as part of net service revenue. All amounts previously classified as provision for bad debts are now classified within the Company's net service revenue. For the three and six months ended June 30, 2018, the Company recorded $7.7 million and $12.6 million, respectively, of implicit price concessions as a direct reduction of net service revenue that would have been recorded as provision for bad debts prior to the adoption of ASU 2014-09.
Adoption of the standard impacted the Company's previously reported results as follows (amounts in thousands):


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As previously reported
 
Adjustment for ASU 2014-09
 
As adjusted
 
As of December 31, 2017
Condensed Consolidated Balance Sheets
 
 
 
 
 
Patient accounts receivable
$
161,898

 
$

 
$
161,898

Allowance for uncollectible accounts
23,556

 
(23,556
)
 

 
Three Months Ended June 30, 2017
Condensed Consolidated Statements of Income:
 
 
 
 
 
Net service revenue
260,210

 
(2,675
)
 
257,535

Provision for bad debts
2,675

 
(2,675
)
 

Net income attributable to LHC Group, Inc.'s common
 stockholders
11,304

 

 
11,304

 
Six Months Ended June 30, 2017
Condensed Consolidated Statements of Income:
 
 
 
 
 
Net service revenue
506,828

 
(5,044
)
 
501,784

Provision for bad debts
5,044

 
(5,044
)
 

Net income attributable to LHC Group, Inc.'s common
 stockholders
20,771

 

 
20,771

Condensed Consolidated Statements of Cash Flows:
 
 
 
 
 
Provision for bad debts
5,044

 
(5,044
)
 

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
Receivables
(6,970
)
 
5,044

 
(1,926
)
Net service revenue is reported at the amount that reflects the consideration to which the Company expects to receive in exchange for providing services. These amounts are due from Medicare, Medicaid, Managed Care, Commercial, and others for services rendered, and they include implicit price concessions for retroactive revenue adjustments due to actual receipts from third-party payors, settlement of audits, and reviews. The estimated uncollectible amounts due from these payors are considered implicit price concessions that are a direct reduction to net service revenue. The Company assesses the patient's ability to pay for their healthcare services at the time of patient admission based on the Company's verification of the patient's insurance coverage under the Medicare, Medicaid, and other commercial or managed care insurance programs. Medicare contributes to the net service revenue of the Company’s home health, hospice, facility-based, and healthcare innovations services. Medicaid and other payors contribute to the net service revenue of all of the Company's segments.
Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company's performance obligation is to provide services to each patient based on medical necessity and identifies the bundle of services to be provided to achieve the goals established in the contract, while the healthcare innovations segment's performance obligation is largely to provide services under customer contracts. Revenue for performance obligations is satisfied over time and recognized based on actual charges incurred in relation to total expected charges over the measurement period of the performance obligation, which depicts the transfer of services and related benefits received by the patient and customers over the term of the contract to satisfy the obligations. The Company measures the satisfaction of the performance obligation as services are provided.
The Company's performance obligations relate to contracts with a duration of less than one year; therefore, the Company has elected to apply the optional exemption provided by ASC 606 - Revenue Recognition, and is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations are generally completed when the patients are discharged.
The Company determines the transaction price based on gross charges for services provided, reduced by contractual adjustments provided to third-party payors and implicit price concessions. The Company determines estimates of contractual adjustments and implicit price concessions based on historical collection experience. Estimates of contractual allowance and implicit price concessions are periodically reviewed to ensure they encompass the Company's current contract terms, are reflective of the Company's current patient mix, and are indicative of the Company's historic collections to ensure net service revenue is recognized at its net realizable value.

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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, 2018 and 2017:
 
 
Three Months Ended  
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Home health:
 
 
 
 
 
 
 
Medicare
72.9
%
 
72.4
%
 
72.3
%
 
73.0
%
Medicaid
1.5

 
1.2

 
1.3

 
1.2

Managed Care, Commercial, and Other
25.6

 
26.4

 
26.4

 
25.8

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Hospice:
 
 
 
 
 
 
 
Medicare
91.1
%
 
92.9
%
 
91.7
%
 
93.5
%
Medicaid
0.6

 
0.9

 
0.6

 
0.6

Managed Care, Commercial, and Other
8.3

 
6.2

 
7.7

 
5.9

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Home and Community-Based Services:
 
 
 
 
 
 
 
Medicaid
24.7
%
 
18.0
%
 
23.1
%
 
17.3
%
Managed Care, Commercial, and Other
75.3

 
82.0

 
76.9

 
82.7

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Facility-Based Services:
 
 
 
 
 
 
 
Medicare
58.7
%
 
65.0
%
 
61.4
%
 
64.4
%
Medicaid

 

 

 

Managed Care, Commercial, and Other
41.3

 
35.0

 
38.6

 
35.6

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
HCI:
 
 
 
 
 
 
 
Medicare
26.7
%
 
%
 
26.7
%
 
%
Medicaid
0.4

 

 
0.4

 

Managed Care, Commercial, and Other
72.9

 

 
72.9

 

 
100.0
%
 
%
 
100.0
%
 
%
Medicare
Home Health Services
The home health segment's Medicare patients, including certain Medicare Advantage patients, are classified into one of 153 home health resource groups prior to receiving services. Based on the patient’s home health resource group, the Company is entitled to receive a standard prospective Medicare payment for delivering care over a 60-day period referred to as an episode. The Company elects to use the same 60-day length of episode that Medicare recognizes as standard but accelerates revenue upon discharge to align with a patient's episode length, if less than the expected 60 days, which depicts the transfer of services and related benefits received by the patient over the term of the contract necessary to satisfy the obligations. The Company recognizes revenue based on the number of days elapsed during an episode of care within the reporting period.
Final payments from Medicare will reflect base payment adjustments for case-mix and geographic wage differences and 2% sequestration reduction. In addition, final payments may reflect one of four retroactive adjustments to the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider before completing the episode; or (d) a payment adjustment based upon the level of therapy services required. The retroactive adjustments outlined above are recognized in net service revenue when the event causing the adjustment occurs and during the period in which the services are provided to the patient. The Company reviews these adjustments to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently resolved. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered.

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Hospice Services
The Company's hospice services segment is reimbursed by Medicare under a per diem payment system based on the determined need for the patient on a daily basis. The hospice segment receives one of four predetermined daily rates based upon the level of care the Company furnishes. Each level of care is contingent upon the patient's medical necessity and is distinct under contracted performance obligation, which depicts the transfer of services and related benefits received by the patient over the term of the contract to satisfy the obligations. The Company records net service revenue for hospice services based on the contracted per diem rate over time as services are provided, satisfying the performance obligation.
Hospice payments are subject to variable consideration through an inpatient cap and an overall Medicare payment cap. The inpatient cap relates to individual programs receiving more than 20% of their total Medicare reimbursement from inpatient care services, and the overall Medicare payment cap relates to individual providers receiving reimbursements in excess of a “cap amount,” determined by Medicare to be payment equal to six months of hospice care for the aggregate base of hospice patients, indexed for inflation. The determination for each cap is made annually based on the 12-month period ending on October 31 of each year. The Company monitors its limits on a provider-by-provider basis and records an estimate of its liability for reimbursements received in excess of the cap amount in the reporting period. The Company reviews these estimates to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently resolved.
Facility-Based Services
The Company's facility-based services segment is reimbursed primarily by Medicare for services provided under the LTACH prospective payment system. Each LTACH patient is assigned a long-term care diagnosis-related group. The Company is paid a predetermined fixed amount intended to reflect the average cost of treating a Medicare LTACH patient classified in that particular long-term care diagnosis-related group. For selected LTACH patients, the amount may be further adjusted based on length of stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted, among other factors. The Company calculates the adjustment based on a historical average of these types of adjustments for LTACH claims paid. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Net service revenue adjustments resulting from reviews and audits of Medicare cost report settlements are considered implicit price concessions for LTACHs and are measured at expected value. The Company reviews these estimates to ensure that it is probable that a significant reversal in the amount of LTACH services cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently resolved. Net service revenue for the Company’s LTACH services are satisfied over time and recognized based on actual charges incurred in relation to total expected charges, which depicts the transfer of services and related benefits received by the customer over the term of the contract to satisfy the obligations.
Non-Medicare Revenues
Substantially all remaining revenues are derived from services provided under a per visit, per hour or unit basis, per assessment or per member per month basis for which revenues are calculated and recorded using payor-specific or patient-specific fee schedules based on the contracted rates in each underlying third party payor or services agreement. Net service revenue is recognized as such services are provided and costs for delivery of such services are incurred.
Contingent Service Revenues
The Company’s Healthcare Innovations segment provides strategic health management services to Accountable Care Organizations (“ACOs”) that have been approved to participate in the Medicare Shared Savings Program (“MSSP.”)  The HCI segment has service agreements with ACOs that provide for sharing of MSSP payments received by the ACO, if any.  ACOs are legal entities that contract with Centers for Medicare and Medicaid Services ("CMS") to provide services to the Medicare fee-for-service population with the goal of providing better care for individuals, improving health for populations and lowering costs.  ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved.  The MSSP is relatively new and therefore has limited historical experience, which impacts the Company’s ability to accurately accumulate and interpret the data available for calculating an ACOs’ shared savings, if any.  No net service revenue has been recognized related to potential MSSP payments for savings generated for the program periods ended December 31, 2017 or 2018, if any.


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Accounts Receivable

The Company reports accounts receivable at amounts ultimately expected to be collected. Accounts receivable are uncollateralized and consist of amounts due from Medicare, Medicaid, other third-party payors, and patients. 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 50% of its patient accounts receivable, is limited due to (i) the historical collection rate from Medicare and (ii) the fact that Medicare is a U.S. government payor. The 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.
    
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 is recouped and the payment for the entire episode is paid. 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 prospectively set amounts 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 are structured similarly to either the Medicare or Medicaid payment methodologies. 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 and, with respect to the data provided for the three and six months ended June 30, 2018, includes shares of the Company issued to former stockholders of Almost Family in connection with the Merger. See Note 3 of the Notes to Condensed Consolidated Financial Statements:
 
 
Three Months Ended  
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Weighted average number of shares outstanding for basic per share calculation
30,497,501

 
17,728,567

 
24,178,781

 
17,686,134

Effect of dilutive potential shares:
 
 
 
 
 
 
 
Nonvested stock
244,792

 
235,820

 
224,529

 
225,589

Adjusted weighted average shares for diluted per share calculation
30,742,293

 
17,964,387

 
24,403,310

 
17,911,723

Anti-dilutive shares
20,200

 

 
236,037

 
149,100


Effective April 1, 2018, in conjunction with the Merger, the Company increased the authorized number of common shares to 60.0 million.



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Assets Held for Sale
As of June 30, 2018, assets held for sale includes the land and building and all related equipment and fixtures of one closed hospice facility, which was acquired in the Merger that the Company is actively marketing and intends to sell.

Recently Adopted Accounting Pronouncements
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, ("ASU 2014-09") which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 replaced most existing revenue recognition guidance in U.S. GAAP. The Company adopted the new standard on January 1, 2018, and elected to adopt it using the full retrospective method.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which addresses eight classification issues related to the statement of cash flows. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. Entities should apply this ASU using a retrospective transition method to each period presented. There is no material impact to the Company's interim financial statements upon adoption of ASU 2016-15.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, which assist entities with evaluating whether a set of transferred assets and activities is a business. This ASU is effective for annual and interim period in fiscal years beginning after December 15, 2017. The impact on the Company's consolidated financial statements and related disclosures will depend on facts and circumstances of any specific future transactions as evaluated under the new guidance.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases, ("ASU 2016-02") which requires lessees to recognize qualifying leases on the statement of financial position. Qualifying leases will be classified as right-of-use assets and lease liabilities. The new standard is effective on January 1, 2019. Early adoption is permitted. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company anticipates that the adoption of ASU 2016-02 will result in a significant increase in total assets and total liabilities. The Company continues to evaluate the effect that ASU 2016-02 will have on its related disclosures.     
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests with measurement dates on or after January 1, 2017.

3. Almost Family Merger

On April 1, 2018, the Company completed its previously announced merger of equals business combination with Almost Family as contemplated by that certain Agreement and Plan of Merger, dated as of November 15, 2017 by merging Hammer Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), with and into Almost Family, with Almost Family continuing as the surviving entity in the Merger and as a wholly owned subsidiary of the Company. At the effective time of the Merger on April 1, 2018, each outstanding share of common stock of Almost Family, other than certain canceled shares, was converted into the right to receive 0.9150 shares of the Company’s common stock and cash in lieu of any fractional shares of any Company common stock that Almost Family shareholders would otherwise have been entitled to receive. As a result, the Company issued approximately 12.8 million shares of its common stock to former stockholders of Almost Family. The Company was determined to be the accounting acquirer in the Merger.
The following table summarizes the consideration transferred in connection with the Merger (amounts in thousands, except share data):

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Outstanding shares of Almost Family common stock as of April 1, 2018
13,951,134

Exchange ratio
0.9150

Shares of the Company issued
12,765,288

Price per share as of April 1, 2018
$
61.56

Fair value of the Company common stock issued
$
785,831

Fair value of vested Almost Family equity awards exchanged for equity awards in the Company
$
9,581

Preliminary merger consideration
$
795,412

The Company's preliminary valuation analysis of identifiable assets and liabilities assumed for the Merger is in accordance with the requirements of ASC Topic 805, Business Combinations, the preliminary estimates of which are presented in the table below (amounts in thousands). The final determination of the fair value of assets acquired and liabilities assumed will be completed in accordance with the applicable accounting guidance. Due to the significance of the Merger, the Company may use all of the measurement period to adequately analyze and assess the fair values of assets acquired and liabilities assumed.     
Preliminary merger consideration
 
 
  Stock
 
$
795,412

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

  Patient accounts receivable
 
101,933

Prepaid income taxes
 
2,705

  Prepaid expenses and other current assets
 
9,540

  Property and equipment
 
11,144

  Trade name
 
116,679

  Certificates of need/licenses
 
58,861

  Other identifiable intangible assets
 
15,856

  Assets held for sale
 
2,850

  Accounts payable
 
(38,202
)
  Accrued other liabilities
 
(59,041
)
  Deferred income taxes
 
(4,842
)
  Seller notes payable
 
(12,461
)
  NCI- Redeemable
 
(2,256
)
  Long term income taxes payable
 
(3,786
)
  Line of credit
 
(106,800
)
NCI- Nonredeemable
 
(34,990
)
  Other assets and (liabilities), net
 
252

Total identifiable assets and liabilities
 
73,989

Preliminary goodwill
 
$
721,423

The following unaudited pro forma financial information reflects the consolidated results of operations of the Company had the Merger occurred on January 1, 2017. Almost Family’s financial information has been compiled in a manner consistent with the accounting policies adopted by LHC Group. The unaudited pro forma financial information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the merger occurred on January 1, 2017, nor are they indicative of any future results (amounts in thousands, except per share amount).

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Pro forma - unaudited
 
Six months ended June 30,
 
2018
 
2017
Net service revenue
$
997,043

 
$
896,827

Net income attributable to the Company
37,652

 
29,181

Diluted earnings per share
$
1.22

 
$
0.95

The pro forma financial information contained in this report, including the above, is based on the Company's preliminary assignment of consideration given and therefore subject to adjustment. These pro forma amounts were calculated after applying the Company’s accounting policies and adjusting Almost Family’s and LHC Group's results to reflect adjustments that are directly attributable to the Merger. These adjustments mainly exclude transaction costs incurred by Almost Family and LHC Group in the fiscal quarter preceding the consummation of the Merger, together with the consequential tax effects at the statutory rate.
The unaudited pro forma financial information contained in this report, including the above, has been prepared for informational purposes only and does not include any anticipated synergies or other potential benefits of the Merger. Pro forma information is not presented for any other acquisitions or joint venture transactions, as the aggregate operations of the acquired businesses were not significant to the overall operations of the Company. It also does not give effect to certain future charges that the Company expects to incur in connection with the Merger, including, but not limited to, additional professional fees, legal expenses, severance, retention and other employee-related costs, contract breakage costs, and costs related to consolidation of technology systems and corporate facilities.
Transaction costs associated with the Merger that were incurred by the Company during the six months ended June 30, 2018 are being expensed as incurred and are presented in the condensed consolidated statements of income as general and administrative expenses. These expenses include investment banking, legal, accounting, and other third party transaction costs associated with the Merger, including preparation for regulatory filings and shareholder approvals. During the six months ended June 30, 2018, the Company incurred $11.7 million of transaction costs related to the Merger.
4. Other Acquisitions and Joint Venture Activities

The Company acquired the majority-ownership of three home health agencies Nason Home Health in Roaring Springs, Pennsylvania, 1st Choice Home Health Care in Denton, Texas, and Prime Healthcare Services in Reno, Nevada during the six months ended June 30, 2018. The total aggregate purchase price for these transactions was $3.6 million, of which $3.5 million was primarily paid in cash. The purchase prices were determined based on the Company’s analysis of comparable acquisitions and the target market’s potential future cash flows. Substantially all of the preliminary allocation of the purchase price for the acquisitions were allocated to goodwill of $4.3 million, indefinite lived intangibles-trade names of $0.6 million, and Certificates of need/licenses of $0.5 million. Acquired noncontrolling interest was $2.1 million.

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

During the six months ended June 30, 2018, the Company sold ownership interests in four of its wholly-owned subsidiaries. The total purchase prices for the sale of such ownership interests were $3.8 million, all of which were accounted for as equity transactions, resulting in the Company reducing additional paid in capital by $2.7 million.
5. Goodwill and Intangibles
The changes in recorded goodwill by reporting unit for the six months ended June 30, 2018 were as follows (amounts in thousands):

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Home health reporting unit
 
Hospice
reporting
unit
 
Home and community-based services
reporting
 unit
 
Facility-based
reporting
 unit
 
HCI reporting unit
 
Total
Balance as of December 31, 2017
$
261,456

 
$
88,814

 
$
28,541

 
$
13,790

 
$

 
$
392,601

Acquisitions
525,654

 
25,176

 
137,882

 

 
35,484

 
724,196

Noncontrolling interests
1,576

 

 

 

 

 
1,576

Prior period adjustments and disposals............................................

 

 

 
404

 

 
404

Balance as of June 30, 2018
$
788,686

 
$
113,990

 
$
166,423

 
$
14,194

 
$
35,484

 
$
1,118,777

    The allocation of goodwill from acquisitions for each reporting unit is preliminary and subject to change once the valuation analysis required by ASC 805, Business Combinations is finalized.     
Intangible assets consisted of the following as of June 30, 2018 and December 31, 2017 (amounts in thousands): 
 
 Indefinite lived assets

 
 Definite lived assets
 
 
 
Trade Names
 
Certificates of Need
 
Trade Names
 
Customer Relationships
 
Non-compete
 
Total
Balance as of December 31, 2017
$
78,299

 
$
53,493

 
$
2,580

 
$

 
$
238

 
$
134,610

Acquisitions
117,349

 
59,056

 

 
15,856

 
91

 
192,352

Amortization

 

 
(739
)
 
(127
)
 
(188
)
 
(1,054
)
Adjustments & disposals

 
(771
)
 

 

 

 
(771
)
Balance as of June 30, 2018
$
195,648

 
$
111,778

 
$
1,841

 
$
15,729

 
$
141

 
$
325,137

     
Remaining useful lives for trade names, customer relationships, and non-compete agreements were 9.3, 19.8 and 3.1 years, respectively, at June 30, 2018. Similar amounts at December 31, 2017 were 10.3 and 2.1 years for trade names and non-compete agreements, respectively.
    
Intangible assets (net of accumulated amortization) in the amount of $249.1 million were related to the home health services segment, $35.4 million were related to the hospice services segment, $20.7 million were related to the community-based services segment, $4.2 million were related to the facility-based services segment, and $15.7 million were related to the HCI services segment as of June 30, 2018. Amortization expense was recorded in general and administrative expenses.
6. Debt
Credit Facility
During the period from January 1, 2018 through April 1, 2018, the Company maintained its revolving line of credit through a credit facility agreement with Capital One, National Association, which had a scheduled maturity of June 18, 2019 (the "Prior Credit Facility").
On March 30, 2018, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A., which was effective on April 2, 2018 following the Merger (the "New Credit Agreement"). The New Credit Agreement provides a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $500.0 million,which includes an additional $200.0 million accordion expansion feature, and a letter of credit sub-limit equal to $50.0 million. The expiration date of the New Credit Agreement is March 30, 2023. The New Credit Agreement replaced the Prior Credit Facility with Capital One, National Association, which was set to mature on June 18, 2019. The Company’s obligations under the New Credit Agreement are secured by substantially all of the assets of the Company and its wholly-owned subsidiaries (subject to customary exclusions), which assets include the Company’s equity ownership of its wholly-owned subsidiaries and its equity ownership in joint venture entities. The Company’s wholly-owned subsidiaries also guarantee the obligations of the Company under the New Credit Agreement.  Debt issuance costs of $1.9 million were capitalized with the New Credit Agreement and will be amortized through March 30, 2023, the termination date for the New Credit Agreement. 

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Revolving loans under the New Credit Agreement with JPMorgan Chase Bank, N.A. bear interest at, as selected by the Company, either a (a) Base Rate, which is defined as a fluctuating rate per annum equal to the highest of (1) the Federal Funds Rate in effect on such day plus 0.5% (2) the Prime Rate in effect on such day and (3) the Eurodollar Rate for a one month interest period on such day plus 1.5%, plus a margin ranging from 0.50% to 1.25% per annum or (b) Eurodollar rate plus a margin ranging from 1.50% to 2.25% per annum, with pricing varying based on the Company's quarterly consolidated Leverage Ratio (as defined in the New Credit Agreement). Swing line loans bear interest at the Base Rate. The Company is limited to 15 Eurodollar borrowings outstanding at any time. The Company is required to pay a commitment fee for the unused commitments at rates ranging from 0.20% to 0.35% per annum depending upon the Company’s quarterly consolidated Leverage Ratio. The Base Rate as of June 30, 2018 was 5.75% and the LIBOR rate was 3.88%. As of June 30, 2018, the effective interest rate on outstanding borrowings under the New Credit Agreement was 3.85%.
On April 2, 2018, in connection with the consummation of the Merger, the Company borrowed approximately $247.4 million under the New Credit Agreement to (i) repay the approximately $107.3 million of outstanding borrowings under Almost Family’s $350.0 million credit facility, which was terminated in connection with the Merger, (ii) repay the approximately $125.1 million of outstanding borrowings under Prior Credit Facility, which was also terminated in connection with the Merger, and (iii) pay certain debt issuance and repayment costs and Merger related fees and expenses.
As of June 30, 2018, the Company had $242.0 million drawn, letters of credit issued in the amount of $25.1 million, and $232.9 million of remaining borrowing capacity available under the New Credit Agreement. At December 31, 2017, the Company had $144.0 million drawn and letters of credit issued in the amount of $9.6 million under the Prior Credit Facility.
Under the terms of the New Credit Agreement, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The new Credit Agreement permits the Company to make certain restricted payments, such as purchasing shares of its stock, within certain parameters, provided the Company maintains compliance with those financial ratios and covenants after giving effect to such restricted payments. The Company was in compliance with debt covenants at June 30, 2018.
7. Stockholder’s Equity
Equity Based Awards
At the LHC Group, Inc. 2018 Annual Meeting of Stockholders held on June 7, 2018, the stockholders of the Company approved the adoption of the LHC Group, Inc. 2018 Incentive Plan (the "2018 Incentive Plan") to replace the Company's 2010 Long Term Incentive Plan. The 2018 Incentive Plan will be administered by the Compensation Committee of the Company’s Board of Directors. The total number of shares of the Company's common stock originally reserved and available for issuance pursuant to awards granted under the 2018 Incentive Plan was 2,000,000, plus an additional number of shares (not to exceed 300,000) underlying stock awards granted under the Company's 2010 Long-Term Incentive Plan (the "Prior Plan") that terminate, expire or forfeited. As of June 30, 2018, there were approximately 210,544 shares of our common stock subject to outstanding awards, and approximately 2,000,000 shares of our common stock reserved and available for future awards, under the 2018 Incentive Plan. A variety of discretionary awards for employees, officers, directors, and consultants are authorized under the 2018 Incentive Plan, including incentive or non-qualified stock options and restricted stock, restricted stock units and performance-based awards. 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 stock options, which cannot be less than the fair market value of the Company’s common stock as of the date of grant.
Almost Family had Stock and Incentive Compensation Plans that provided for stock awards of the Company’s common stock to employees, non-employee directors or independent contractors. Almost Family issued restricted share and/or option awards to employees and non-employee directors. Under the change in control provisions of the Almost Family plans, all outstanding restricted stock, performance restricted stock, and options became non-forfeitable in conjunction with the Merger.  
Each unvested restricted share award issued by Almost Family that was outstanding immediately prior to the Merger converted into a restricted stock award to acquire shares of the Company on the same terms and conditions rounded up or down to the nearest whole share, determined by multiplying the number of shares of Almost Family common stock subject to such restricted share award by the exchange ratio. Each stock option to purchase shares of Almost Family that was outstanding immediately prior to the Merger converted into an option to purchase shares of the Company on the same terms and conditions, (A) the number of shares of LHC common stock, rounded down to the nearest whole share, determined by multiplying (I) the total number of shares of Almost Family common stock by (II) the exchange ratio, and (B) at a per-share exercise price, rounded up to the nearest whole cent, equal to the quotient determined by dividing (I) the exercise price per share of Almost Family common stock by (II) the exchange ratio.


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Share Based Compensation
Nonvested Stock
During the six months ended June 30, 2018, the Company’s independent directors were granted 13,600 nonvested shares of common stock under the Second Amended and Restated 2005 Non-Employee Directors Compensation Plan. The shares vest 100% on the one year anniversary date. During the six months ended June 30, 2018, four new directors were granted 14,000 nonvested shares of common stock under the Second Amended and Restated 2005 Non-Employee Directors Compensation Plan. The shares vest 33% at the grant date, then 33% each year on the anniversary date until the third year. The shares were drawn from the 2,300,000 shares of common stock reserved for issuance under the 2018 Incentive Plan. During the six months ended June 30, 2018, employees were granted 213,105 nonvested shares of common stock pursuant to the 2010 Incentive Plan. The shares vest over a period of five years, conditioned on continued employment. 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, 2018 was $62.35.
The following table represents the nonvested stock activity for the six months ended June 30, 2018: 
 
Restricted stock
 
Options
 
Number of
shares
 
Weighted
average grant
date fair value
 
Number of shares
 
Weighted
average grant
date fair value
Nonvested shares outstanding as of December 31, 2017
529,465

 
$
37.34

 

 
$

Granted
240,705

 
$
62.35

 

 
$

Acquired

 
$

 
270,710

 
$
36.48

Vested or exercised
(176,385
)
 
$
34.93

 
(10,727
)
 
$
29.08

Nonvested shares outstanding as of June 30, 2018
593,785

 
$
48.20

 
259,983

 
$
36.66

As of June 30, 2018, there was $23.4 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 3.40 years. 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 $3.9 million and $3.1 million of compensation expense related to nonvested stock grants for each of the six months ended June 30, 2018 and 2017.
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. In 2013, the Company adopted the Amended and Restated Employee Stock Purchase Plan, which reserved an additional 250,000 shares of common stock to the plan.
The table below details the shares of common stock issued during 2018: 
 
Number of
shares
 
Per share
price
Shares available as of December 31, 2017
171,069

 
 
Shares issued during the three months ended March 31, 2018
5,534

 
$
58.19

Shares issued during the three months ended June 30, 2018
5,171

 
$
58.48

Shares available as of June 30, 2018
160,364

 
 
Treasury Stock
In conjunction with the vesting of the nonvested 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, 2018, the Company redeemed 63,161 shares of common stock valued at $3.9 million, related to

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these tax obligations. In addition, the Company redeemed 5,485 shares of common stock valued at $0.2 million, related to the exercise of Almost Family options. Such shares are held as treasury stock and are available for reissuance by the Company.
Additionally, shares were submitted by employees in lieu of exercise price that would have otherwise been due on exercise of stock options, which shares are held in treasury stock and are available for reissuance by the Company.
8. Commitments and Contingencies
Contingencies
Regulatory Matters
The Company provides services in a highly regulated industry and is a party to various proceedings and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including audits by Zone Program Integrity Contractors ("ZPICs") and Recovery Audit Contractors ("RACs") and investigations resulting from the Company's obligation to self-report suspected violations of law). Management cannot predict the ultimate outcome of any regulatory and other governmental and internal audits and investigations. While such audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company's businesses. These audits and investigations have caused and could potentially continue to cause delays in collections, recoupments from governmental payors. Currently, the Company has recorded $16.9 million in other assets, which are from government payors related to the disputed finding of pending appeals of ZPIC audits. Additionally, these audits may subject the Company to sanctions, damages, extrapolation of damage findings, additional recoupments, fines, and other penalties (some of which may not be covered by insurance), which may, either individually or in the aggregate, have a material adverse effect on the Company's business and financial condition.
Merger Related Litigation
On January 18, 2018, Jordan Rosenblatt, a purported shareholder of Almost Family filed a complaint for violations of the Securities Exchange Act of 1934 in the United States District Court for the Western District of Kentucky, styled Rosenblatt v. Almost Family, Inc., et al., Case No. 3:18-cv-40-TBR (the “Rosenblatt Action”). The Rosenblatt Action was filed against the Company, Almost Family, Almost Family’s board of directors, and Hammer Merger Sub. The complaint in the Rosenblatt Action (“Rosenblatt Complaint”) asserts, among other things, that the Form S-4 Registration Statement (“Registration Statement”) filed on December 21, 2017 in connection with the Merger contained false and misleading statements with respect to the Merger. The Rosenblatt Action sought, among other things, an injunction enjoining the Merger from closing and an award of attorneys’ fees and costs.
In addition to the Rosenblatt Action, two additional complaints were filed against Almost Family in the United States District Court for the District of Delaware (the "Delaware Actions") alleging similar violations as the Rosenblatt Action. These Delaware Actions also sought, among other things, an injunction to enjoin both the vote of the Almost Family stockholders with respect to the Merger and the closing of the Merger, monetary damages and an award of attorneys’ fees and costs from Almost Family.
On February 22, 2018, plaintiffs in the Delaware Actions moved for a preliminary injunction to enjoin the merger of Almost Family and Merger Sub. Then, on March 2, 2018, the Delaware Actions were transferred to the United States District Court for the Western District of Kentucky. Shortly thereafter, on March 12, 2018, Almost Family, LHC and Merger Sub opposed the plaintiffs’ motion for a preliminary injunction, and the court heard oral argument on the plaintiffs’ motion for a preliminary injunction on March 19, 2018. On March 22, 2018, the court denied plaintiffs’ motion for preliminary injunction. The next day, on March 23, 2018, one of the plaintiffs in the Delaware Actions moved to consolidate the Delaware Actions with the Rosenblatt Action and for the appointment of a lead plaintiff, and that motion is pending before the court.
We believe that the claims asserted in these lawsuits are entirely without merit and intend to defend these lawsuits vigorously.
Other Litigation
We are involved in various other legal proceedings arising in the ordinary course of business. Although the results of litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse effect, after considering the effect of our insurance coverage, on our consolidated financial information.

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Joint Venture Buy/Sell Provisions
Most 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. The Company has not received notice from any joint venture partners of their intent to exercise the terms of the buy/sell agreement nor has the Company notified any joint venture partners of its intent to exercise the terms of the buy/sell agreement.
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
The Company classifies noncontrolling interests of its joint venture parties based upon a review of the legal provisions governing the redemption of such interests. In each of the Company’s joint ventures, those provisions are embodied within the joint venture’s operating agreement. For joint ventures with operating agreement provisions that establish an obligation for the Company to purchase the third party partners’ noncontrolling interests other than as a result of events that lead to a liquidation of the joint venture, such noncontrolling interests are classified as redeemable noncontrolling interests in temporary equity. For joint ventures with operating agreement provisions that establish an obligation that the Company purchase the third party partners’ noncontrolling interests, but which obligation is triggered by events that lead to a liquidation of the joint venture, such noncontrolling interests are classified as nonredeemable noncontrolling interests in permanent equity. Additionally, for joint ventures with operating agreement provisions that do not establish an obligation for the Company to purchase the third party partners’ noncontrolling interests (e.g., where the Company has the option, but not the obligation, to purchase the third party partners’ noncontrolling interests), such noncontrolling interests are classified as nonredeemable noncontrolling interests in permanent equity.
The Company’s equity joint ventures that are classified as redeemable noncontrolling interests are subject to operating agreement provisions that require the Company to purchase the noncontrolling partner’s interest upon the occurrence of certain triggering events, which are defined as the 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 redeemable equity joint venture, since the triggering of a repurchase obligation for any one redeemable noncontrolling interest in an equity joint venture does not necessarily impact any of the other redeemable noncontrolling interests in other equity joint ventures. Upon the occurrence of a triggering event requiring the purchase of a redeemable noncontrolling interest, the Company would be required to purchase the noncontrolling partner’s interest based upon a valuation methodology set forth in the applicable joint venture agreement.
Redeemable noncontrolling interests and nonredeemable noncontrolling interests are initially recorded at their fair value as of the closing date of the transaction establishing the joint venture. Such fair values are determined using various accepted valuation methods, including the income approach, the market approach, the cost approach, and a combination of one or more of these approaches. A number of facts and circumstances concerning the operation of the joint venture are evaluated for each transaction, including (but not limited to) the ability to choose management, control over acquiring or liquidating assets, and controlling the joint venture’s strategy and direction, in order to determine the fair value of the noncontrolling interest.
Based upon the Company’s evaluation of the redemption provisions concerning redeemable noncontrolling interests as of June 30, 2018, the Company determined in accordance with authoritative accounting guidance that it was not probable that an

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event otherwise requiring redemption of any redeemable noncontrolling interest would occur (i.e., the date for such event was not set or such event is not certain to occur). Therefore, none of the redeemable noncontrolling interests were identified as mandatorily redeemable interests at such times, and the Company did not record any values in respect of any mandatorily redeemable interests.
Subsequent to the closing date of the transaction establishing the joint venture, the Company records adjustments to the carrying amounts of noncontrolling interests during each reporting period to reflect (a) comprehensive income (loss) attributed to each noncontrolling interest, which is calculated by multiplying the noncontrolling interest percentage by the comprehensive income (loss) of the joint venture’s operations, (b) dividends paid to the noncontrolling interest partner, and (c) any other transactions that increase or decrease the Company’s ownership interest in each joint venture, as a result of which the Company retains its controlling interest. If the Company determines that, based upon its analysis as of the end of each reporting period in accordance with authoritative accounting guidance, that it is not probable that an event would occur to otherwise require the redemption of a redeemable noncontrolling interest (i.e., the date for such event is not set or such event is not certain to occur), then the Company does not adjust the recorded amount of such redeemable noncontrolling interest.

The carrying amount of each redeemable equity instrument presented in temporary equity for the six months ended June 30, 2018 is not less than the initial amount reported for each instrument. The following table summarizes the activity of noncontrolling interest-redeemable for the six months ended June 30, 2018 (amounts in thousands):
Balance as of December 31, 2017
$
13,393

Net income attributable to noncontrolling interest-redeemable
4,855

Noncontrolling interest-redeemable distributions
(4,644
)
Acquired noncontrolling interest-redeemable
3,428

Balance as of June 30, 2018
$
17,032

10. Fair Value of Financial Instruments
The carrying amounts of the Company’s cash, receivables, accounts payable and accrued liabilities approximate their fair values because of their short maturity. The estimated fair value of intangible assets acquired was calculated using level 3 inputs based on the present value of anticipated future benefits. For the six months ended June 30, 2018, the carrying value of the Company’s long-term debt approximates fair value as the interest rates approximate current rates.
11. Segment Information
In the second quarter of 2018, in recognition of the changes to the Company's business segments resulting from the addition of Almost Family and its subsidiaries through the Merger, the Company redefined its reporting segments to include (1) home health services, (2) hospice services, (3) home and community-based services, formerly referred to by the Company as community-based services, (4) facility-based services and (5) healthcare innovations (“HCI”).  In management’s opinion, this approach provides investors clarity and best aligns with the Company’s internal decision-making processes as viewed by the chief operating decision maker. Reportable segments have been identified based upon how management has organized the business by services provided to customers and how the chief operating decision maker manages the business and allocates resources, consistent with the criteria in ASC 280, Segment Reporting.
The home health segment provides skilled medical services in patients’ homes largely to enable recipients to reduce or avoid periods of hospitalization and/or nursing home care.  Approximately 72.9% of the home health services segment revenues were generated from the Medicare program, while the balance is generated from Medicaid and private insurance programs. 
The hospice segment services are largely provided in patients’ homes and generally require specialized hospice nursing skills.  Hospice services segment revenues are generated on a per diem basis and are primarily from Medicare, which account for approximately 91.1% of hospice services segment revenues.
The home and community-based segment services includes traditional home and community-based services (generally provided by paraprofessional staff such as home health aides) which are generally of a custodial rather than skilled nature.  Home and community-based services segment revenues are generated on an hourly basis and are primarily from Medicaid, which account for approximately 24.7% of home and community-based services segment revenues.  

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The facility-based segment services includes services provided through LTACHs, a family health center, two pharmacies, a rural health clinic, and two physical therapy clinics. The facility-based services segment is reimbursed primarily by Medicare under the LTACH prospective payment system, which accounts for approximately 58.7% of facility-based services segment revenue.
The HCI segment combines reporting on the Company’s developmental activities outside its other business segments.  The HCI segment includes (a) Imperium Health Management, LLC, an ACO enablement company, (b) Long Term Solutions, Inc., an in-home assessment company serving the long-term care insurance industry, and certain assets operated by Advanced Care House Calls, which provides primary medical care for home-bound or home-limited patients with chronic and acute illnesses who have difficulty traveling to a doctor’s office, (c) Ingenios Health Co., a Nurse-Practitioner-oriented and mobile technology-enabled health risk assessment company primarily serving managed care organizations, and (d) an investment in Care Journey (formerly NavHealth, Inc.), a population-health analytics company. These activities are intended ultimately, whether directly or indirectly, to benefit the Company’s patients and payors through the enhanced provision of services in the Company’s other segments.  The activities all share a common goal of improving patient experiences and quality outcomes, while lowering costs.  They include, but are not limited to, items such as: technology, information, population health management, risk-sharing, care-coordination and transitions, clinical advancements, enhanced patient engagement and informed clinical decision and technology enabled in-home clinical assessments.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies, as described in Note 2 of the Notes to Condensed Consolidated Financial Statements, including the adoption of ASU 2014-09.
The following tables summarize the Company’s segment information for the three and six months ended June 30, 2018 and 2017 (amounts in thousands):
 
Three Months Ended June 30, 2018
 
Home health services
 
Hospice services
 
Home and community-based services
 
Facility-based services
 
HCI
 
Total
Net service revenue
$
360,276

 
$
50,554

 
52,753

 
$
28,304

 
$
10,137

 
$
502,024

Cost of service revenue
230,293

 
33,493

 
40,349

 
19,307

 
6,204

 
329,646

General and administrative expenses
99,162

 
14,613

 
11,777

 
11,088

 
4,710

 
141,350

Operating income (loss)
30,821

 
2,448

 
627

 
(2,091
)
 
(777
)
 
31,028

Interest expense
(2,256
)
 
(473
)
 
(158
)
 
(159
)
 
(156
)
 
(3,202
)
Income (loss) before income taxes and noncontrolling interest
28,565

 
1,975

 
469

 
(2,250
)
 
(933
)
 
27,826

Income tax expense
7,091

 
483

 
139

 
(313
)
 
(230
)
 
7,170

Net income (loss)
21,474

 
1,492

 
330

 
(1,937
)
 
(703
)
 
20,656

Less net income (loss) attributable to noncontrolling interests
3,810

 
412

 
(90
)
 
(207
)
 
(66
)
 
3,859

Net income (loss) attributable to LHC Group, Inc.’s common stockholders
$
17,664

 
$
1,080

 
$
420

 
$
(1,730
)
 
$
(637
)
 
$
16,797

Total assets
$
1,306,773

 
$
189,447

 
$
255,456

 
$
66,665

 
$
63,329

 
$
1,881,670

 

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Three Months Ended June 30, 2017
 
(as adjusted)
 
Home health services
 
Hospice services
 
Home and community-based services
 
Facility-based services
 
HCI
 
Total
Net service revenue
$
192,409

 
$
37,851

 
$
10,746

 
$
16,529

 
$

 
$
257,535

Cost of service revenue
117,606

 
24,473

 
7,986

 
11,093

 

 
161,158

General and administrative expenses
55,268

 
10,743

 
2,261

 
5,280

 

 
73,552

Operating income
19,535

 
2,635

 
499

 
156

 

 
22,825

Interest expense
(630
)
 
(126
)
 
(42
)
 
(42
)
 

 
(840
)
Income before income taxes and noncontrolling interest
18,905

 
2,509

 
457

 
114

 

 
21,985

Income tax expense
6,757

 
849

 
180

 
6

 

 
7,792

Net income
12,148

 
1,660

 
277

 
108

 

 
14,193

Less net income attributable to noncontrolling interests
2,266

 
480

 
5

 
138

 

 
2,889

Net income (loss) attributable to LHC Group, Inc.’s common stockholders
$
9,882

 
$
1,180

 
$
272

 
$
(30
)
 
$

 
$
11,304

Total assets
$
466,308

 
$
138,519

 
$
33,292

 
$
34,547

 
$

 
$
672,666

 
 
Six Months Ended 
 June 30, 2018
 
Home health services
 
Hospice services
 
Home and community-based services
 
Facility-based services
 
HCI
 
Total
Net service revenue
$
564,463

 
$
93,180

 
66,844

 
$
58,454

 
$
10,137

 
$
793,078

Cost of service revenue
360,453

 
61,512

 
51,139

 
38,956

 
6,204

 
518,264

General and administrative expenses
165,452

 
27,910

 
15,075

 
20,234

 
4,710

 
233,381

Operating income
38,558

 
3,758

 
630

 
(736
)
 
(777
)
 
41,433

Interest expense
(3,343
)
 
(690
)
 
(230
)
 
(232
)
 
(157
)
 
(4,652
)
Income (loss) before income taxes and noncontrolling interest
35,215

 
3,068

 
400

 
(968
)
 
(934
)
 
36,781

Income tax expense
7,813

 
594

 
124

 
(154
)
 
(230
)
 
8,147

Net income (loss)
27,402

 
2,474

 
276

 
(814
)
 
(704
)
 
28,634

Less net income (loss) attributable to noncontrolling interests
6,047

 
829

 
(70
)
 
102

 
(66
)
 
6,842

Net income (loss) attributable to LHC Group, Inc.’s common stockholders
$
21,355

 
$
1,645

 
$
346

 
$
(916
)
 
$
(638
)
 
$
21,792

 

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Six Months Ended 
 June 30, 2017
 
(as adjusted)
 
Home health services
 
Hospice services
 
Home and community-based services
 
Facility-based services
 
HCI
 
Total
Net service revenue
$
373,067

 
$
73,799

 
$
21,287

 
$
33,631

 
$

 
$
501,784

Cost of service revenue
229,692

 
47,746

 
15,934

 
22,156

 

 
315,528

General and administrative expenses
109,190

 
21,149

 
4,572

 
10,652

 

 
145,563

Operating income
34,185

 
4,904

 
781

 
823

 

 
40,693

Interest expense
(1,215
)
 
(243
)
 
(81
)
 
(81
)
 

 
(1,620
)
Income before income taxes and noncontrolling interest
32,970

 
4,661

 
700

 
742

 

 
39,073

Income tax expense
11,010

 
1,508

 
263

 
184

 

 
12,965

Net income
21,960

 
3,153

 
437

 
558

 

 
26,108

Less net income attributable to noncontrolling interests
4,294

 
766

 
13

 
264

 

 
5,337

Net income attributable to LHC Group, Inc.’s common stockholders
$
17,666

 
$
2,387

 
$
424

 
$
294

 
$

 
$
20,771

 
12. Income Taxes

On December 22, 2017, the U.S. enacted significant changes to U.S. tax law following the passage and signing of “Tax Cuts and Jobs Act” or the “TCJA”. The TCJA is complex and significantly changes the U.S. corporate income tax system by, among other things, reducing the Federal corporate income tax rate from 35% to 21%. The effective tax rate for the six months ended June 30, 2018 and 2017 benefited from $0.9 million and $1.1 million, respectively, of excess tax benefits associated with stock-based compensation arrangements, which was offset by the effect of capitalized transaction costs related to the Merger during the six months ended June 30, 2018 of $0.9 million.

US GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return.  The evaluation of a tax position is a two-step process.  The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position.  The second step requires the Company to recognize in the financial statements each tax position that meets the more likely than not criteria, measured at the amount of benefit that has a greater than 50% likelihood of being realized.  The Company’s unrecognized tax benefits would affect the tax rate, if recognized.  The Company includes the full amount of unrecognized tax benefits in other noncurrent liabilities in the consolidated balance sheets.  The Company anticipates it is reasonably possible an increase or decrease in the amount of unrecognized tax benefits could be made in the next twelve months. However, the Company does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the consolidated financial statements. The amounts recognized as of June 30, 2018 was $3.9 million.

13. Subsequent Events

Management has evaluated all events and transactions that occurred after June 30, 2018.  During this period, the Company had no material subsequent events requiring recognition in the consolidated financial statements, except as noted below:
On July 1, 2018, the Company purchased the remaining redeemable noncontrolling interest for one of its joint ventures for $7.0 million, with a short-term earn out provision, which could increase the purchase price to a maximum of $10.0 million.




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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,” and 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, 2018;
our critical accounting policies;
our business strategies and our ability to grow our business;
our participation in the Medicare and Medicaid programs;
the reimbursement levels of Medicare and other third-party payors;
the prompt receipt of payments from Medicare and other third-party payors;
our future sources of and needs for liquidity and capital resources;
the effect of any regulatory changes or anticipated regulatory changes;
the effect of any changes in market rates on our operations and cash flows;
our ability to obtain financing;
our ability to make payments as they become due;
the outcomes of various routine and non-routine governmental reviews, audits and investigations;
our expansion strategy, the successful integration of recent acquisitions and, if necessary, the ability to relocate or restructure our current facilities;
the value of our proprietary technology;
the impact of legal proceedings;
our insurance coverage;
our competitors and our competitive advantages;
our ability to attract and retain valuable employees;
the price of our stock;
our compliance with environmental, health and safety laws and regulations;
our compliance with health care laws and regulations;
our compliance with Securities and Exchange Commission laws and regulations and Sarbanes-Oxley requirements;
the impact of federal and state government regulation on our business;
the impact of changes in future interpretations of fraud, anti-kickback, or other laws;
the integration of the Almost Family and the Company's business;
the cost savings, synergies, growth and other benefits from the Almost Family Merger, which may not be fully realized or may take longer to realize than expected; and

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costs associated with the integration of the businesses of the Company and Almost Family, which could be higher than anticipated.
The forward-looking statements included in this report reflect our current views about future events, 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 our other filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”), as updated by our subsequent filings with the SEC. This report should be read in conjunction with the 2017 Form 10-K, and all of our other filings made with the SEC through the date of this report, including quarterly reports on Form 10-Q and current reports on Form 8-K.
The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is filed with the SEC. 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.
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 differ materially from what we expect or anticipate.
Unless the context otherwise requires, “we,” “us,” “our,” and the “Company” refer to LHC Group, Inc. and its consolidated subsidiaries (including, as a result of the Merger, those owned and operated by Almost Family).
OVERVIEW
General
We provide quality, cost-effective post-acute health care services to our patients. As of June 30, 2018, we have 777 service providers in 37 states within the continental United States. Our services are classified into five segments: (1) home health services, (2) hospice services, (3) home and community-based services, (4) facility-based services offered through our long-term acute care hospitals (“LTACHs”) and (5) healthcare innovations services. We intend to increase the number of service providers within each of our segments that we operate through continued acquisitions, joint ventures, and organic development.
Our home health service locations offer a wide range of services, including skilled nursing, medically-oriented social services, and physical, occupational, and speech therapy. As of June 30, 2018, we operated 568 home health services locations, of which 313 are wholly-owned, 243 are majority-owned through equity joint ventures, three are under license lease arrangements, and the operations of the remaining nine locations are only managed by us.
Our hospices provide end-of-life care to patients with terminal illnesses through interdisciplinary teams of physicians, nurses, home health aides, counselors, and volunteers. We offer a wide range of services, including pain and symptom management, emotional and spiritual support, inpatient and respite care, homemaker services, and counseling. As of June 30, 2018, we operated 106 hospice locations, of which 60 are wholly-owned, 44 are majority-owned through equity joint ventures, and two are under license lease arrangements.
Through our home and community-based services segment, services are performed by skilled nursing and paraprofessional personnel, and include assistance with activities of daily living to the elderly, chronically ill, and disabled patients. As of June 30, 2018, we operated 80 home and community-based services locations: 71 are wholly-owned and nine are majority-owned through an equity joint venture.
We provide facility-based services principally through our LTACHs. As of June 30, 2018, we operated 11 LTACHs with 12 locations, of which all but one are located within host hospitals. Of these facility-based services locations, two are wholly-owned, nine are majority-owned through equity joint ventures, and one location is managed by us. We also wholly-own and operate a family health center, two pharmacies, a rural health clinic, and three physical therapy clinics.

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Our HCI segment reports on our developmental activities outside its other business segments.  The HCI segment includes (a) Imperium Health Management, LLC, an ACO enablement company, (b) Long Term Solutions, Inc., an in-home assessment company serving the long-term care insurance industry, Long Term Solutions, Inc., and certain assets operated by Advanced Care House Calls, which provides primary medical care for home-bound or home-limited patients with chronic and acute illnesses who have difficulty traveling to a doctor’s office, (c) Ingenios Health Co., a Nurse-Practitioner-oriented and mobile technology-enabled health risk assessment company primarily serving managed care organizations, and (d) an investment in Care Journey (formerly NavHealth, Inc.), a population-health analytics company. These activities are intended ultimately, whether directly or indirectly, to benefit our patients and/or payors through the enhanced provision of services in our other segments.  The activities all share a common goal of improving patient experiences and quality outcomes, while lowering costs.  They include, but are not limited to, items such as: technology, information, population health management, risk-sharing, care-coordination and transitions, clinical advancements, enhanced patient engagement and informed clinical decision and technology enabled in-home clinical assessments. We have four HCI locations, of which three are wholly-owned, and one is majority-owned through an equity joint venture.
The Joint Commission is a nationwide commission that establishes standards relating to the physical plant, administration, quality of patient care, and operation of medical staffs of health care organizations. Currently, Joint Commission accreditation of home nursing and hospice agencies is voluntary. However, some managed care organizations use Joint Commission accreditation as a credentialing standard for regional and state contracts. As of June 30, 2018, the Joint Commission had accredited 358 of our 568 home health services locations and 64 of our 106 hospice agencies. Those not yet accredited are working towards achieving this accreditation. As we acquire companies, we apply for accreditation 12 to 18 months after completing the acquisition.
The percentage of net service revenue contributed from each reporting segment for the three and six months ended June 30, 2018 and 2017 was as follows:
 
 
 
Three Months Ended  
 June 30,
 
Six Months Ended 
 June 30,
Reporting segment
 
2018
 
2017
 
2018
 
2017
Home health services
 
71.8
%
 
74.5
%
 
71.2
%
 
74.2
%
Hospice services
 
10.1

 
14.8

 
11.7

 
14.8

Home and community-based services
 
10.5

 
4.2

 
8.4

 
4.3

Facility-based services
 
5.6

 
6.5

 
7.4

 
6.7

Healthcare innovations services
 
2.0

 

 
1.3

 

 
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Recent Developments
The reader is encouraged to review our detailed discussion of health care legislation and Medicare regulations in the similarly titled section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” along with the discussions in Part I, Item 1, “Business; Government Regulation” and in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 30, 2017, as supplemented in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.
Home Health Services
On July 2, 2018, CMS released the proposed rule regarding payment rates for home health services provided during calendar year 2019. The national, standardized 60-day episode payment rate will increase to $3,151.22 in 2019. The proposed rule estimates an impact of 2.1% increase in payments due to the policy changes proposed in the rule. The rule implements a modified rural safeguard payment varying between 1.5% and 4.0% beginning in 2019 as prescribed by the Bipartisan Budget Act of 2018. The proposed rule also makes policy changes to the home health quality reporting program, the home health value based purchasing demonstration, the home health high cost outlier policy, and simplifies certification and recertification requirements. In addition, effective January 1, 2020, CMS is proposing to implement the Patient Driven Groupings Model ("PDGM"), which is a modification of the Home Health Groupings Model ("HHGM") that was published in the 2018 proposed

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rule but which was not finalized. The PDGM will shift home health payments to a 30-day payment period for which the national standardized rate would be set in the 2019 proposed rule.
Medicare Accountable Care Organizations (ACOs)
The Affordable Care Act established ACOs as a tool to improve quality and lower costs through increased care coordination in the Medicare fee-for-service (“FFS”) program, also known as “Original Medicare.”  The Medicare FFS program covers approximately 70% of the Medicare recipients or approximately 36 million eligible Medicare beneficiaries.  ACOs are typically formed as legal entities by groups of doctors and other healthcare providers who endeavor to work together to provide high quality services and care for their patients through three-year contracts with CMS.  Provider and beneficiary participation in an ACO is purely voluntary and Medicare beneficiaries retain their current ability to seek treatment from any provider they wish.  Beneficiaries are assigned to ACOs using an “attribution” model based on a plurality of services provided by the primary care physician.  Beneficiaries retain the right to use any doctor or hospital who accepts Medicare, at any time.
CMS established the Medicare Shared Savings Program (“MSSP”) to facilitate coordination and cooperation among providers to improve the quality of care for Medicare FFS beneficiaries and to reduce costs.  Eligible providers, hospitals, and suppliers may participate in the MSSP by creating, participating in or contracting with an ACO.  The MSSP is designed to improve beneficiary outcomes and increase value of care by (1) promoting accountability for the care of Medicare FFS beneficiaries, (2) requiring coordinated care for all services provided under Medicare FFS, and (3) encouraging investment in infrastructure and redesigned care processes.  The MSSP will reward ACOs that provide healthcare services at a cost for the ACO’s patients during a relevant measurement year that is below the ACO’s benchmark costs established by CMS, while also meeting performance standards on quality of care.  Under the final MSSP rules, Medicare is to reimburse individual providers and suppliers for specific items and services as Medicare currently does under the FFS payment methodologies.  MSSP rules require CMS to develop a benchmark for savings to be achieved by each ACO, if the ACO is to receive shared savings or for ACOs that have elected to accept responsibility for losses.  An ACO that meets the program’s quality performance standards will be eligible to receive a share of the savings to the extent its assigned beneficiary medical expenditures are below its own medical expenditure benchmark provided by CMS. The Company’s HCI services segment provides specialized management services to ACOs, and in return, the Company shares in any MSSP payments received by the ACO.
Seasonality
Our home health services segment operations in Florida normally experience higher admissions during the first quarter and lower admissions during the third quarter than in the other quarters due to seasonal population fluctuations. In the second quarter of 2018, Florida operations generated approximately 9.7% of our net service revenue. Further, our third quarter falls within the "hurricane season" including the peak months of August and September. Our operations may thus be subject to periods of unexpected disruption, which may lower volumes and increase costs.
RESULTS OF OPERATIONS
Merger with Almost Family
On November 15, 2017, we entered into a definitive Agreement and Plan of Merger with Almost Family, providing for a "merger of equals" business combination between us and Almost Family, which we completed on April 1, 2018. The Merger created the second largest in-home healthcare provider in the country with an expanded geographic service territory of 36 states, which service territory contains over sixty percent (60%) of the U.S. population aged 65 and over and more than 770 locations, including those related to the 76 joint venture partnerships with health systems that consist of 336 hospitals.
Since the Merger was completed April 1, 2018, the first day of the Company’s second fiscal quarter, financial results of the Company for the six months ended June 30, 2018 include only one full fiscal quarter of revenues and operating income with Almost Family and its subsidiaries. The Company’s unaudited revenues and operating income for its second fiscal quarter of 2018, which included the financial results of Almost Family and its subsidiaries, was $502.0 million and $31.0 million, respectively. By comparison, for its second fiscal quarter of 2017, the Company (without combining the financial results of Almost Family and its subsidiaries) reported unaudited revenues and operating income of $257.5 million and $22.8 million, respectively, and Almost Family reported unaudited revenues and operating income of approximately $197.1 million and $9.8 million, respectively. Comparable unaudited pro forma second fiscal quarter operating results for 2017 reflected aggregate unaudited pro forma revenue and operating income of $454.7 million and $16.1 million, respectively. Unaudited pro forma information is for illustrative purposes only and may not be indicative of the results of operations that would have actually

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occurred if the Merger had been completed as of the beginning of 2017. In addition, future results may vary from the results reflected in such information.
Three months ended June 30, 2018 compared to three months ended June 30, 2017
Consolidated financial statements
The following table summarizes our consolidated results of operations for the three months ended June 30, 2018 and 2017 (amounts in thousands, except percentages which are percentages of consolidated net service revenue, unless indicated otherwise):
 
 
2018
 
2017
 
Increase
(Decrease)
Net service revenue
$
502,024

 
 
 
$
257,535

 
 
 
$
244,489

Cost of service revenue
329,646

 
65.7
%
 
161,158

 
62.6
%
 
168,488

General and administrative expenses
141,350

 
28.2

 
73,552

 
28.6

 
67,798

Interest expense
(3,202
)
 
 
 
(840
)
 
 
 
2,362

Income tax expense
7,170

 
27.1

(1
)
7,792

 
41.0

(1)
(622
)
Net income attributable to noncontrolling interests
3,859

 
 
 
2,889

 
 
 
970

Net income attributable to LHC Group, Inc.’s common stockholders
$
16,797

 
 
 
$
11,304

 
 
 
$
5,493



(1)
Effective tax rate as a percentage of income from continuing operations attributable to LHC Group, Inc.’s common stockholders, excluding the excess tax benefits realized during the three months ended June 30, 2018 and 2017, of $0.2 million and $0.3 million, respectively and the effect of capitalized transaction costs related to the Merger during the three months ended June 30, 2018 of $0.9 million. The change in our effective tax rate in 2018 was a result of the passage and signing of the Tax Cuts and Job Act, which reduced the Federal corporate income tax rate.

Net service revenue
The following table sets forth each of our segment’s revenue growth or loss, admissions, census, episodes, patient days, and billable hours for the three months ended June 30, 2018 and the related change from the same period in 2017 (amounts in thousands, except admissions, census, episode data, patient days and billable hours, and revenue excludes implicit price concessions):
 

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Same
Store(1)
 
De
Novo(2)
 
Organic(3)
 
Organic
Growth
(Loss) %
 
Acquired(4)
 
Total
 
Total
Growth
(Loss) %
Home health services
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
206,678

 
$
1,521

 
$
208,199

 
9.0
 %
 
$
157,714

 
$
365,913

 
88.6
 %
Revenue Medicare
$
143,008

 
$
1,344

 
$
144,352

 
5.1

 
$
119,362

 
$
263,714

 
88.8

Admissions
50,024

 
296

 
50,320

 
7.9

 
43,585

 
93,905

 
98.0

Medicare Admissions
30,583

 
236

 
30,819

 
5.4

 
28,193

 
59,012

 
98.3

Average Census
43,207

 
278

 
43,485

 
2.3

 
33,223

 
76,708

 
77.8

Average Medicare Census
28,590

 
239

 
28,829

 
(1.0
)
 
22,450

 
51,279

 
73.5

Home Health Episodes
53,277

 
435

 
53,712

 
2.4

 
42,658

 
96,370

 
81.0

Hospice services
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
39,022

 
$

 
$
39,022

 
1.6

 
$
12,127

 
$
51,149

 
32.8

Revenue Medicare
$
34,652

 
$

 
$
34,652

 
(2.0
)
 
$
11,386

 
$
46,038

 
29.7

Admissions
3,294

 

 
3,294

 
2.5

 
1,234

 
4,528

 
40.4

Medicare Admissions
2,851

 

 
2,851

 
2.4

 
1,091

 
3,942

 
41.3

Average Census
2,822

 

 
2,822

 
(6.5
)
 
837

 
3,659

 
20.8

Average Medicare Census
2,603

 

 
2,603

 
(6.7
)
 
769

 
3,372

 
20.5

Patient days
256,776

 

 
256,776

 
(6.5
)
 
76,202

 
332,978

 
20.8

Home and community-based services