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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________
FORM 10-Q
______________________________
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
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)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value of $0.01 | | LHCG | | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ý | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
Number of shares of common stock, par value $0.01, outstanding as of November 1, 2022: 31,033,002 shares.
LHC GROUP, INC.
INDEX
| | | | | | | | | | | |
Part I. Financial Information | | Page |
Item 1. | | | |
Condensed Consolidated Balance Sheets — September 30, 2022 and December 31, 2021 | | |
Condensed Consolidated Statements of Income — Three and nine months ended September 30, 2022 and 2021 | | |
Condensed Consolidated Statements of Stockholders' Equity — Three and nine months ended September 30, 2022 and 2021 | | |
Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2022 and 2021 | | |
| | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Part II. Other Information | | |
Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
| | |
PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data) (Unaudited)
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash | $ | 10,522 | | | $ | 9,809 | |
Receivables: | | | |
Patient accounts receivable | 331,524 | | | 348,820 | |
Other receivables | 30,217 | | | 13,780 | |
| | | |
Total receivables | 361,741 | | | 362,600 | |
| | | |
Prepaid income taxes | 19,303 | | | 7,531 | |
Prepaid expenses | 23,128 | | | 28,401 | |
Other current assets | 25,687 | | | 24,801 | |
Total current assets | 440,381 | | | 433,142 | |
Property, building and equipment, net of accumulated depreciation of $110,600 and $98,394, respectively | 153,806 | | | 153,959 | |
Goodwill | 1,750,420 | | | 1,748,426 | |
Intangible assets, net of accumulated amortization of $22,865 and $19,152, respectively | 395,309 | | | 400,002 | |
Operating lease right of use asset | 108,975 | | | 113,399 | |
Other assets | 65,263 | | | 46,693 | |
Total assets | $ | 2,914,154 | | | $ | 2,895,621 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable and other accrued liabilities | $ | 108,748 | | | $ | 98,118 | |
Salaries, wages, and benefits payable | 84,412 | | | 100,532 | |
Self-insurance reserves | 38,734 | | | 33,784 | |
| | | |
Contract liabilities - deferred revenue | 4,840 | | | 106,489 | |
Current operating lease payable | 36,998 | | | 37,630 | |
Amounts due to governmental entities | 2,499 | | | 5,447 | |
Current liabilities - deferred employer payroll tax | 26,790 | | | 26,790 | |
Total current liabilities | 303,021 | | | 408,790 | |
Deferred income taxes | 87,661 | | | 70,026 | |
Income taxes payable | 7,988 | | | 7,320 | |
Revolving credit facility | 738,000 | | | 661,197 | |
Long-term operating lease liabilities | 74,992 | | | 78,688 | |
Total liabilities | 1,211,662 | | | 1,226,021 | |
Noncontrolling interest — redeemable | 16,978 | | | 17,501 | |
Commitments and contingencies | | | |
Stockholders’ equity: | | | |
LHC Group, Inc. stockholders’ equity: | | | |
Preferred stock – $0.01 par value; 5,000,000 shares authorized; none issued or outstanding | — | | | — | |
Common stock — $0.01 par value; 60,000,000 shares authorized; 36,733,790 and 36,549,524 shares issued, and 30,587,735 and 30,634,414 shares outstanding, respectively | 367 | | | 365 | |
Treasury stock — 6,146,055 and 5,915,110 shares at cost, respectively | (195,447) | | | (164,790) | |
Additional paid-in capital | 997,115 | | | 979,642 | |
Retained earnings | 798,372 | | | 751,025 | |
Total LHC Group, Inc. stockholders’ equity | 1,600,407 | | | 1,566,242 | |
Noncontrolling interest — non-redeemable | 85,107 | | | 85,857 | |
Total stockholders' equity | 1,685,514 | | | 1,652,099 | |
Total liabilities and stockholders' equity | $ | 2,914,154 | | | $ | 2,895,621 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net service revenue | $ | 576,913 | | | $ | 565,451 | | | $ | 1,724,601 | | | $ | 1,636,193 | |
Cost of service revenue (excluding depreciation and amortization) | 347,772 | | | 343,862 | | | 1,052,093 | | | 972,006 | |
Gross margin | 229,141 | | | 221,589 | | | 672,508 | | | 664,187 | |
General and administrative expenses | 189,051 | | | 176,444 | | | 569,800 | | | 506,754 | |
Impairment of intangibles and other | 2,059 | | | — | | | 4,130 | | | 937 | |
Operating income | 38,031 | | | 45,145 | | | 98,578 | | | 156,496 | |
Interest expense | (9,053) | | | (1,135) | | | (19,631) | | | (1,541) | |
| | | | | | | |
Income before income taxes and noncontrolling interest | 28,978 | | | 44,010 | | | 78,947 | | | 154,955 | |
Income tax expense | 6,966 | | | 10,150 | | | 17,014 | | | 32,909 | |
Net income | 22,012 | | | 33,860 | | | 61,933 | | | 122,046 | |
Less net income attributable to noncontrolling interests | 4,703 | | | 6,126 | | | 14,586 | | | 22,010 | |
Net income attributable to LHC Group, Inc.’s common stockholders | $ | 17,309 | | | $ | 27,734 | | | $ | 47,347 | | | $ | 100,036 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 0.57 | | | $ | 0.89 | | | $ | 1.55 | | | $ | 3.21 | |
Diluted | $ | 0.56 | | | $ | 0.88 | | | $ | 1.55 | | | $ | 3.18 | |
Weighted average shares outstanding: | | | | | | | |
Basic | 30,565 | | | 31,238 | | | 30,527 | | | 31,205 | |
Diluted | 30,706 | | | 31,434 | | | 30,639 | | | 31,422 | |
See accompanying Notes to the Condensed Consolidated Financial Statements.
LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2022 | |
| 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, 2021 | $ | 365 | | | 36,549,524 | | | $ | (164,790) | | | 5,915,110 | | | $ | 979,642 | | | $ | 751,025 | | | $ | 85,857 | | | $ | 1,652,099 | | |
Net income (1) | — | | | — | | | — | | | — | | | — | | | 19,454 | | | 2,760 | | | 22,214 | | |
Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (2,970) | | | (2,970) | | |
Nonvested stock compensation | — | | | — | | | — | | | — | | | 4,376 | | | — | | | — | | | 4,376 | | |
Issuance of vested stock | 2 | | | 132,651 | | | — | | | — | | | — | | | — | | | — | | | 2 | | |
Treasury shares redeemed to pay income tax | — | | | — | | | (3,208) | | | 23,022 | | | 68 | | | — | | | — | | | (3,140) | | |
Repurchase of common stock | — | | | — | | | (25,472) | | | 190,622 | | | — | | | — | | | — | | | (25,472) | | |
Issuance of common stock under Employee Stock Purchase Plan | — | | | 5,353 | | | — | | | — | | | 698 | | | — | | | — | | | 698 | | |
Balance as of March 31, 2022 | $ | 367 | | | 36,687,528 | | | $ | (193,470) | | | 6,128,754 | | | $ | 984,784 | | | $ | 770,479 | | | $ | 85,647 | | | $ | 1,647,807 | | |
Net income (1) | — | | | — | | | — | | | — | | | — | | | 10,584 | | | 2,124 | | | 12,708 | | |
Acquired noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | 707 | | | 707 | | |
Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (3,281) | | | (3,281) | | |
Purchase of additional controlling interest | — | | | — | | | — | | | — | | | (209) | | | — | | | (167) | | | (376) | | |
Nonvested stock compensation | — | | | — | | | — | | | — | | | 4,943 | | | — | | | — | | | 4,943 | | |
Issuance of vested stock | — | | | 7,556 | | | — | | | — | | | — | | | — | | | — | | | — | | |
Treasury shares redeemed to pay income tax | — | | | — | | | (852) | | | 5,144 | | | 344 | | | — | | | — | | | (508) | | |
Exercise of options | — | | | 5,124 | | | (68) | | | 2,319 | | | (150) | | | — | | | — | | | (218) | | |
Issuance of common stock under Employee Stock Purchase Plan | — | | | 3,342 | | | — | | | — | | | 535 | | | — | | | — | | | 535 | | |
Balance as of June 30, 2022 | $ | 367 | | | 36,703,550 | | | $ | (194,390) | | | 6,136,217 | | | $ | 990,247 | | | $ | 781,063 | | | $ | 85,030 | | | $ | 1,662,317 | | |
Net income (1) | — | | | — | | | — | | | — | | | — | | | 17,309 | | | 2,711 | | | 20,020 | | |
| | | | | | | | | | | | | | | | |
Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (2,581) | | | (2,581) | | |
Purchase of additional controlling interest | — | | | — | | | — | | | — | | | (4) | | | — | | | (53) | | | (57) | | |
Nonvested stock compensation | — | | | — | | | — | | | — | | | 5,971 | | | — | | | — | | | 5,971 | | |
Issuance of vested stock | — | | | 17,274 | | | — | | | — | | | — | | | — | | | — | | | — | | |
Treasury shares redeemed to pay income tax | — | | | — | | | (927) | | | 5,908 | | | 512 | | | — | | | — | | | (415) | | |
Exercise of options | — | | | 8,862 | | | (130) | | | 3,930 | | | (218) | | | — | | | — | | | (348) | | |
| | | | | | | | | | | | | | | | |
Issuance of common stock under Employee Stock Purchase Plan | — | | | 4,104 | | | — | | | — | | | 607 | | | — | | | — | | | 607 | | |
Balance as of September 30, 2022 | $ | 367 | | | 36,733,790 | | | $ | (195,447) | | | 6,146,055 | | | $ | 997,115 | | | $ | 798,372 | | | $ | 85,107 | | | $ | 1,685,514 | | |
(1) Net income excludes net income attributable to noncontrolling interest-redeemable of $2.0 million and $7.0 million during the three and nine months ended September 30, 2022. Noncontrolling interest-redeemable is reflected outside of permanent equity on the condensed consolidated balance sheets. See Note 8 of the Notes to Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2021 |
| 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, 2020 | $ | 364 | | | 36,355,497 | | | $ | (69,011) | | | 5,215,657 | | | $ | 962,120 | | | $ | 635,297 | | | $ | 84,584 | | | $ | 1,613,354 | |
Net income (1) | — | | | — | | | — | | | — | | | — | | | 34,659 | | | 4,469 | | | 39,128 | |
| | | | | | | | | | | | | | | |
Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (2,417) | | | (2,417) | |
Purchase of additional controlling interest | — | | | — | | | — | | | — | | | (81) | | | — | | | (61) | | | (142) | |
Sale of noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | 138 | | | 138 | |
Nonvested stock compensation | — | | | — | | | — | | | — | | | 3,513 | | | — | | | — | | | 3,513 | |
Issuance of vested stock | 1 | | | 148,447 | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Treasury shares redeemed to pay income tax | — | | | — | | | (9,541) | | | 51,221 | | | — | | | — | | | — | | | (9,541) | |
| | | | | | | | | | | | | | | |
Issuance of common stock under Employee Stock Purchase Plan | — | | | 3,204 | | | — | | | — | | | 649 | | | — | | | — | | | 649 | |
Balance as of March 31, 2021 | $ | 365 | | | 36,507,148 | | | $ | (78,552) | | | 5,266,878 | | | $ | 966,201 | | | $ | 669,956 | | | $ | 86,713 | | | $ | 1,644,683 | |
Net income (1) | — | | | — | | | — | | | — | | | — | | | 37,643 | | | 5,232 | | | 42,875 | |
| | | | | | | | | | | | | | | |
Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4,660) | | | (4,660) | |
Purchase of additional controlling interest | — | | | — | | | — | | | — | | | (870) | | | — | | | (728) | | | (1,598) | |
Nonvested stock compensation | — | | | — | | | — | | | — | | | 3,993 | | | — | | | — | | | 3,993 | |
Issuance of vested stock | — | | | 15,531 | | | — | | | — | | | — | | | — | | | — | | | — | |
Treasury shares redeemed to pay income tax | — | | | — | | | (1,213) | | | 6,024 | | | — | | | — | | | — | | | (1,213) | |
| | | | | | | | | | | | | | | |
Issuance of common stock under Employee Stock Purchase Plan | — | | | 3,152 | | | — | | | — | | | 573 | | | — | | | — | | | 573 | |
Balance as of June 30, 2021 | $ | 365 | | | 36,525,831 | | | $ | (79,765) | | | 5,272,902 | | | $ | 969,897 | | | $ | 707,599 | | | $ | 86,557 | | | $ | 1,684,653 | |
Net income (1) | — | | | — | | | — | | | — | | | — | | | 27,734 | | | 3,182 | | | 30,916 | |
| | | | | | | | | | | | | | | |
Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (5,052) | | | (5,052) | |
| | | | | | | | | | | | | | | |
Sale of noncontrolling interest | — | | | — | | | — | | | — | | | (83) | | | — | | | 1,733 | | | 1,650 | |
Nonvested stock compensation | — | | | — | | | — | | | — | | | 4,211 | | | — | | | — | | | 4,211 | |
Issuance of vested stock | — | | | 10,943 | | | — | | | — | | | — | | | — | | | — | | | — | |
Treasury shares redeemed to pay income tax | — | | | — | | | (840) | | | 3,932 | | | — | | | — | | | — | | | (840) | |
| | | | | | | | | | | | | | | |
Issuance of common stock under Employee Stock Purchase Plan | — | | | 3,445 | | | — | | | — | | | 655 | | | — | | | — | | | 655 | |
Balance as of September 30, 2021 | $ | 365 | | | 36,540,219 | | | $ | (80,605) | | | 5,276,834 | | | $ | 974,680 | | | $ | 735,333 | | | $ | 86,420 | | | $ | 1,716,193 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | |
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(1) Net income excludes net income attributable to noncontrolling interest-redeemable of $2.9 million and $9.1 million during the three and nine months ended September 30, 2021. Noncontrolling interest-redeemable is reflected outside of permanent equity on the condensed consolidated balance sheets. See Note 8 of the Notes to Condensed Consolidated Financial Statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) (Unaudited)
| | | | | | | | | | | | |
| Nine months ended September 30, | |
| 2022 | | 2021 | |
Operating activities: | | | | |
Net income | $ | 61,933 | | | $ | 122,046 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization expense | 17,483 | | | 14,899 | | |
Amortization of operating lease right of use asset | 30,769 | | | 27,526 | | |
Stock-based compensation expense | 15,290 | | | 11,717 | | |
Deferred income taxes | 17,635 | | | 23,356 | | |
Loss (gain) on disposal of assets | 484 | | | (1,190) | | |
Impairment of intangibles and other | 4,130 | | | 937 | | |
Changes in operating assets and liabilities, net of acquisitions: | | | | |
Receivables | (684) | | | (27,038) | | |
Prepaid expenses | 5,273 | | | 397 | | |
Other assets | (4,208) | | | (6,368) | | |
Prepaid income taxes | (11,772) | | | (11,575) | | |
| | | | |
Prepaid taxes | — | | | (12,509) | | |
Accounts payable and accrued expenses | 16,282 | | | 6,626 | | |
Salaries, wages, and benefits payable | (11,251) | | | (9,687) | | |
| | | | |
Contract liabilities - deferred revenue | (101,649) | | | (141,629) | | |
| | | | |
Operating lease liabilities | (30,568) | | | (27,472) | | |
Income taxes payable | 668 | | | (20,819) | | |
Net amounts due to/from governmental entities | 223 | | | (833) | | |
Net cash provided by (used in) operating activities | 10,038 | | | (51,616) | | |
Investing activities: | | | | |
Purchases of property, building and equipment | (14,074) | | | (23,548) | | |
Proceeds from sale of property, building and equipment | — | | | 3,350 | | |
Cash paid for acquisitions, net of cash acquired | (2,570) | | | (383,475) | | |
Purchase of intangible assets | (100) | | | — | | |
Proceeds from sale of an entity | — | | | 1,531 | | |
Minority interest investments | (15,250) | | | (10,100) | | |
Net cash used in investing activities | (31,994) | | | (412,242) | | |
Financing activities: | | | | |
Proceeds from line of credit | 815,155 | | | 544,056 | | |
Payments on line of credit | (738,352) | | | (209,056) | | |
Government stimulus advance | — | | | (93,257) | | |
Proceeds from employee stock purchase plan | 1,840 | | | 1,877 | | |
Payments on deferred financing fees | — | | | (2,855) | | |
Payments on repurchasing common stock | (34,565) | | | — | | |
| | | | |
Noncontrolling interest distributions | (16,346) | | | (22,187) | | |
Withholding taxes paid on stock-based compensation | (4,630) | | | (11,594) | | |
Purchase of additional controlling interest | (433) | | | (2,113) | | |
| | | | |
Sale of noncontrolling interest | — | | | 1,934 | | |
Net cash provided by financing activities | 22,669 | | | 206,805 | | |
Change in cash | 713 | | | (257,053) | | |
Cash at beginning of period | 9,809 | | | 286,569 | | |
Cash at end of period | $ | 10,522 | | | $ | 29,516 | | |
| | | | | | | | | | | |
| | | |
| | | |
Supplemental disclosures of cash flow information: | | | |
Interest paid | $ | 18,049 | | | $ | 1,532 | |
Income taxes paid | $ | 10,701 | | | $ | 42,036 | |
Non-Cash Operating Activity: | | | |
Operating right of use assets in exchange for lease obligations | $ | 28,435 | | | $ | 41,776 | |
Reduction to right of use assets and liabilities | $ | 2,089 | | | $ | 2,746 | |
Non-Cash Investing Activity: | | | |
Net working capital adjustment | $ | 1,440 | | | $ | — | |
Accrued capital expenditures | $ | 126 | | | $ | 1,807 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
LHC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Events
Organization
LHC Group, Inc. (the “Company”) is a health care provider specializing in the post-acute continuum of care. The Company provides services through five segments: home health, hospice, home and community-based services, facility-based services, the latter primarily through long-term acute care hospitals (“LTACHs”), and healthcare innovations services ("HCI").
As of September 30, 2022, the Company, through its wholly- and majority-owned subsidiaries, equity joint ventures, controlled affiliates, and management agreements operated 942 service locations in 37 states within the continental United States and the District of Columbia.
LHC Group, Inc. and UnitedHealth Group Incorporated Merger
On March 28, 2022, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with UnitedHealth Group Incorporated ("Parent") and Lightning Merger Sub Inc., a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to which Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. At a Special Meeting of Stockholders held on June 21, 2022, the stockholders of the Company approved the Merger. The parties to the Merger continue to work toward the expected consummation of the Merger prior to the end of 2022; however, such consummation remains subject to the satisfaction of the remaining closing conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
COVID-19 Update
SARS-CoV-2 ("COVID-19") continues to cause disruption in the economy, in terms of increased costs and disruptions in the labor market. The impact of COVID-19 is lessened as vaccines have become available in the United States; however, we continue to see periodic increases in the number of cases due to the spread of COVID-19 variants. The effects of COVID-19 continue to materially impact our business. As a result, operating results for the three and nine months ended September 30, 2022 may not be indicative of the results that may be expected for the year ending December 31, 2022, and operating results for the three and nine months ended September 30, 2022 may not be directly comparable to operating results for the three and nine months ended September 30, 2021.
CARES Act
In response to COVID-19, the U.S. Government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") on March 27, 2020. The CARES Act also provided financial hardship relief to Medicare providers impacted by the COVID-19 pandemic in order to provide necessary funds when there is a disruption in Medicare claims submission and/or Medicare claims processing by distributing funds through the Accelerated and Advanced Payments Program ("CAAP").
In addition, the CARES Act suspended the 2% sequestration payment adjustments on Medicare patient claims with dates of service from May 1 through December 31, 2020, suspended the application of site-neutral payment for LTACH admissions that were admitted during the Public Health Emergency ("PHE"), and delayed payment of the employer portion of social security tax. On April 14, 2021, Congress passed legislation to continue the suspension of the 2% sequestration payment adjustments on Medicare patient claims with dates of service through December 31, 2021. On December 10, 2021, the Protecting Medicare and American Farmers from Sequester Cut Act legislation passed, which continued the suspension of the sequestration payment adjustments for Medicare patient claims with dates of service through March 31, 2022. Medicare patient claims with dates of service between April 1 through June 30, 2022 had a 1% sequestration adjustment and Medicare patient claims with dates of service that began on July 1, 2022 had a 2% sequestration adjustment. On October 13, 2022, the U.S. Department of Health and Human Services extended the PHE until January 11, 2023.
CAAP
As of December 31, 2021, the Company had $106.5 million of accelerated payments under the CAAP, which was recorded in contract liabilities - deferred revenue in our condensed consolidated balance sheets in accordance with Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("Topic 606"). On October 1, 2020, the repayment and recoupment terms for CAAP funds were amended by the Continuing Appropriations Act, 2021 and Other Extensions Act, which provides that recoupment will begin one year from the date the CAAP funds were received. Under these revised terms,
recoupment of CAAP will occur under a tiered approach. The repayment terms began one year starting from the date the CAAP funds were issued and continued for 11 months, with CMS recouping the initial 25% of Medicare payments otherwise owed to the Company.
If any amount of CAAP funds that we received from CMS remains unpaid after the initial 11 month period, CMS recoups 50% of Medicare payments otherwise owed to the Company during the following six months. Interest will begin accruing on any amount of the CAAP funds that we received from CMS that remain unpaid following those recoupment periods. CMS will issue a repayment letter to the Company for any such outstanding amounts, which must be paid in full within 30 days from the date of the letter. The Company intends to repay the full amount before any interest accrues. During the nine months ended September 30, 2022, $101.6 million was recouped by CMS and $4.8 million of contract liabilities - deferred revenue remains on our condensed consolidated balance sheets as of September 30, 2022.
Other
The Company recognized the following amounts of net service revenue due to the suspension of the 2% sequestration payment adjustment and suspension of LTACH site-neutral payments (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Suspension of 2% sequestration payment adjustment | | $ | — | | | $ | 6,811 | | | $ | 9,952 | | | $ | 19,665 | |
Suspension of LTACH site-neutral payment | | 4,918 | | | 5,749 | | | 17,070 | | | 18,230 | |
As of September 30, 2022, the Company deferred $26.8 million of employer social security taxes, which was recorded in current liabilities - deferred employer payroll tax on our condensed consolidated balance sheets.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, the related unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2022 and 2021, the unaudited condensed consolidated statements of stockholders' equity for the three and nine months ended September 30, 2022 and 2021, the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021, and related notes (collectively, these financial statements are referred to as the "interim financial statements" and together with the related notes are referred to herein as the “interim financial information”) have been prepared by the Company. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
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, 2021 (the "2021 Form 10-K"), which was filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2022, as amended by Amendment No. 1 filed on Form 10-K/A filed by the Company on April 27, 2022 (the "Form 10-K Amendment"). The 2021 Form 10-K and Form 10-K Amendment include information and disclosures not included herein.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.
Net Service Revenue
Net service revenue from contracts with customers is recognized in the period the performance obligations are satisfied under the Company's contracts by transferring the requested services to patients in amounts that reflect the consideration to which is
expected to be received in exchange for providing patient care, which is the transaction price allocated to the services provided in accordance with Topic 606 and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (collectively, "ASC 606").
Net service revenue is recognized as performance obligations are satisfied, which can vary depending on the type of services provided. The performance obligation is the delivery of patient care in accordance with the requested services outlined in physicians' orders, which are based on specific goals for each patient.
The performance obligations are associated with contracts in duration of less than one year; therefore, the optional exemption provided by ASC 606 was elected resulting in the Company not being required to disclose the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. The Company's unsatisfied or partially unsatisfied performance obligations are primarily completed when the patients are discharged and typically occur within days or weeks of the end of the period.
The Company determines the transaction price based on gross charges for services provided, reduced by estimates for explicit and implicit price concessions. Explicit price concessions include contractual adjustments provided to patients and third-party payors. Implicit price concessions include discounts provided to self-pay, uninsured patients or other payors, adjustments resulting from regulatory reviews, audits, billing reviews and other matters. Subsequent changes to the estimate of the transaction price are recorded as adjustments to net service revenue in the period of change. Subsequent changes that are determined to be the result of an adverse change in the patient's ability to pay (i.e., change in credit risk) are recorded as a provision for doubtful accounts within general and administrative expenses.
Explicit price concessions are recorded for the difference between our standard rates and the contracted rates to be realized from patients, third-party payors and others for services provided.
Implicit price concessions are recorded for self-pay, uninsured patients and other payors by major payor class based on historical collection experience and current economic conditions, representing the difference between amounts billed and amounts expected to be collected. The Company assesses the ability to collect for the healthcare services provided at the time of patient admission based on the verification of the patient's insurance coverage under Medicare, Medicaid, and other commercial or managed care insurance programs.
Amounts due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), include variable consideration for retroactive revenue adjustments due to settlements of audits and reviews. The Company has determined estimates for price concessions related to regulatory reviews based on historical experience and success rates in the claim appeals and adjudication process. Revenue is recorded at amounts estimated to be realizable for services provided.
The following table sets forth the percentage of net service revenue earned by category of payor for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Home health: | | | | | | | |
Medicare | 59.7 | % | | 62.1 | % | | 59.4 | % | | 62.8 | % |
Managed Care, Commercial, and Other | 40.3 | | | 37.9 | | | 40.6 | | | 37.2 | |
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Hospice: | | | | | | | |
Medicare | 92.7 | % | | 94.6 | % | | 92.8 | % | | 94.3 | % |
Managed Care, Commercial, and Other | 7.3 | | | 5.4 | | | 7.2 | | | 5.7 | |
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Home and community-based services: | | | | | | | |
Medicaid | 38.3 | % | | 32.1 | % | | 36.8 | % | | 31.1 | % |
Managed Care, Commercial, and Other | 61.7 | | | 67.9 | | | 63.2 | | | 68.9 | |
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Facility-based services: | | | | | | | |
Medicare | 53.0 | % | | 45.8 | % | | 53.0 | % | | 49.5 | % |
Managed Care, Commercial, and Other | 47.0 | | | 54.2 | | | 47.0 | | | 50.5 | |
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
HCI: | | | | | | | |
Medicare | 2.8 | % | | 6.0 | % | | 5.4 | % | | 11.4 | % |
Managed Care, Commercial, and Other | 97.2 | | | 94.0 | | | 94.6 | | | 88.6 | |
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Medicare
The following describes the payment models in effect during the nine months ended September 30, 2022. Such payment models were subject to temporary adjustments made by CMS in response to COVID-19 pandemic as described elsewhere in this Quarterly Report on Form 10-Q. The 2% sequestration reduction adjustment was suspended for patient claims with dates of service through March 31, 2022. Medicare patient claims with dates of service between April 1 through June 30, 2022 had a 1% sequestration payment adjustment. Medicare patient claims with dates of service beginning July 1, 2022 had the full 2% sequestration payment adjustment.
Home Health Services
The Company records revenue as services are provided under the Patient Driven Groupings Model ("PDGM"). For each 30-day period, the patient is classified into one of 432 home health resource groups prior to receiving services. Each 30-day period is placed into a subgroup falling under the following categories: (i) timing being early or late, (ii) admission source being community or institutional, (iii) one of 12 clinical groupings based on the patient's principal diagnosis, (iv) functional impairment level of low, medium, or high, and (v) a co-morbidity adjustment of none, low, or high based on the patient's secondary diagnoses.
Each 30-day period payment from Medicare reflects base payment adjustments for case-mix and geographic wage differences. In addition, payments may reflect one of three retroactive adjustments to the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment whereby the number of visits is dependent on the clinical grouping; and/or (c) a partial payment if the patient transferred to another provider or from another provider before completing the episode. 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.
Hospice
The Company records revenue based upon the date of service at amounts equal to the estimated payment rates. The Company receives one of four predetermined daily rates based upon the level of care provided by the Company, which can be routine care, general inpatient care, continuous home care, and respite care. There are two separate payment rates for routine care: payment for the first 60 days of care and care beyond 60 days. In addition to the two routine rates, the Company may also
receive a service intensity add-on ("SIA"). The SIA is based on visits made in the last seven days of life by a registered nurse or medical social worker for patients in a routine level of care.
The performance obligation is the delivery of hospice services to the patient, as determined by a physician, each day the patient is on hospice care.
Adjustments to Medicare revenue are made from regulatory reviews, audits, billing reviews and other matters. The Company estimates the impact of these adjustments based on our historical experience.
Hospice payments are subject to variable consideration through an inpatient cap and an overall Medicare payment cap. The inpatient cap relates to individual programs receiving more than 20% of their total Medicare reimbursement from inpatient care services, and the overall Medicare payment cap relates to individual programs receiving reimbursements in excess of a “cap amount,” determined by Medicare to be payment equal to 12 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 September 30 of each year. The Company monitors its limits on a provider-by-provider basis and records an estimate of its liability for reimbursements received in excess of the cap amount, if any, in the reporting period.
Facility-Based Services
Gross revenue is recorded as services are provided under the LTACH prospective payment system. Each patient is assigned a long-term care diagnosis-related group. The Company is paid a predetermined fixed amount intended to reflect the average cost of treating a Medicare 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.
Non-Medicare Revenues
Other sources of net service revenue for all segments fall into Medicaid, managed care or other payors of the Company's services. Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as services are provided based on this fee schedule. The Company's managed care and other payors reimburse the Company based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. Accordingly, the Company recognizes revenue from managed care and other payors as services are provided, such costs are incurred, and estimates of expected payments are known for each different payor, thus the Company's revenue is recorded at the estimated transaction price.
Contingent Service Revenues
The HCI segment provides strategic health management services to Accountable Care Organizations ("ACOs") that have been approved to participate in the Medicare Shared Savings Program ("MSSP"). The HCI segment 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 CMS to provide services to the Medicare fee-for-service population for a specified annual period with the goal of providing better care for the individual, improving health for populations and lowering costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. The generation of shared savings is the performance obligation of each ACO, which only become certain upon the final issuance of unembargoed calculations by CMS, generally in the third quarter of each year. During the nine months ended September 30, 2022 and 2021, the Company recorded in its HCI segment $15.6 million and $12.1 million, respectively, related to 2021 and 2020 ACO respective service periods, as certain ACOs served by the HCI segment received a MSSP payment from CMS confirming the performance obligation has been met.
Patient Accounts Receivable
The Company reports patient accounts receivable from services rendered at their estimated transaction price, which includes price concessions based on the amounts expected from payors. The Company's patient accounts receivable is uncollateralized and primarily consist of amounts due from Medicare, Medicaid, other third-party payors, and to a lesser degree patients. The credit risk from other payors is limited due to the significance of Medicare as the primary payor. The Company believes the credit risk associated with its Medicare accounts 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 significant concentrations from any particular payor that would subject it to any significant credit risk in the collection of patient accounts receivable.
Earnings Per Share
Basic per share information is computed by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding during the period, under the treasury stock method. Diluted per share information is also computed using the treasury stock method, by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding plus potentially dilutive shares.
The following table sets forth shares used in the computation of basic and diluted per share information and, with respect to the data provided for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Weighted average number of shares outstanding for basic per share calculation | 30,565 | | | 31,238 | | | 30,527 | | | 31,205 | |
Effect of dilutive potential shares: | | | | | | | |
Nonvested stock | 141 | | | 196 | | | 112 | | | 217 | |
Adjusted weighted average shares for diluted per share calculation | 30,706 | | | 31,434 | | | 30,639 | | | 31,422 | |
Anti-dilutive shares | 87 | | | 6 | | | 264 | | | 118 | |
Investments
During the nine months ended September 30, 2022, the Company invested $15.0 million and became a minority owner in a post-acute management services company, invested $0.1 million in Jumpstart Nova Fund, LP, and invested $0.2 million in LHCC Aging Innovations Fund I, LP. During the nine months ended September 30, 2021, the Company invested $10.0 million and became a minority owner in a healthcare analytics company and invested $0.1 million in Jumpstart Nova Fund, LP. These investments are recorded in other assets in our condensed consolidated balance sheets. These investments were accounted for under the cost method of accounting as the Company does not have the ability to exercise significant influence in connection with its minority ownership positions.
3. Acquisitions
On September 1, 2021, the Company purchased Heart of Hospice. During the nine months ended September 30, 2022, the Company recorded a decrease in patient accounts receivable of $1.5 million due to information obtained that related to facts and circumstances that existed at the time of acquisition; therefore, it was an adjustment to the provisional amounts previously recognized.
On November 1, 2021, the Company purchased Brookdale Health Care Services' agencies from the recently formed home health, hospice, and outpatient therapy venture between HCA Healthcare and Brookdale Senior Living. The Company's net working capital adjustment was finalized during the nine months ended September 30, 2022 for $3.1 million and recorded in accordance with ASC Topic 805, Business Combinations, as an increase to the consideration transferred. In addition, amounts due to government entities was reduced by $3.2 million to reflect payments made for prior years' hospice cap liability.
On May 1, 2022, the Company purchased the majority ownership of a home health agency from Archbold Medical Center, which included two locations in Georgia. Total consideration for the acquisition was $3.7 million. The purchase price was determined based on the Company's analysis of comparable acquisitions and the target market's potential future cash flows.
Goodwill generated from the acquisitions was recognized based on the expected contributions of each acquisition to the overall corporate strategy. The Company expects its portion of goodwill to be fully tax deductible. The acquisitions were accounted for under the acquisition method of accounting. Accordingly, the accompanying financial information includes the results of operations of the acquired entities from the date of acquisition.
The following table summarizes the preliminary amounts of the assets acquired and liabilities assumed at their acquisition date, as well as their fair value at the acquisition date and the noncontrolling interest acquired during the nine months ended September 30, 2022 (amounts in thousands):
| | | | | | | | |
Consideration | | |
Cash | | $ | 2,570 | |
Fair value of total consideration transferred | | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | | |
Trade name | | $ | 453 | |
Certificates of need/licenses | | 357 |
Other liabilities | | (227) | |
Total identifiable assets and liabilities | | $ | 583 | |
| | |
Noncontrolling interest | | $ | 707 | |
Goodwill, including noncontrolling interest of $504 | | $ | 2,694 | |
Trade names and certificates of need/licenses are indefinite-lived assets and, therefore, not subject to amortization. Acquired trade names that are not being used actively are amortized over the estimated useful life on the straight line basis. Trade names are valued using the relief from royalty method, a form of the income approach. Certificates of need are valued using the replacement cost approach based on registration fees and opportunity costs. Licenses are valued based on the estimated direct costs associated with recreating the asset, including opportunity costs based on an income approach. In the case of states with a moratorium in place, the licenses are valued using the multi-period excess earnings method. Noncontrolling interest is recorded at fair value.
4. Goodwill and Intangibles
The changes in recorded goodwill and intangible assets by reporting unit for the nine months ended September 30, 2022 were as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Home health reporting unit | | Hospice reporting unit | | Home and community-based services reporting unit | | Facility-based reporting unit | | HCI reporting unit | | Total |
Goodwill: | | | | | | | | | | | |
Balance as of December 31, 2021 | $ | 968,435 | | | $ | 556,332 | | | $ | 167,027 | | | $ | 15,770 | | | $ | 40,862 | | | $ | 1,748,426 | |
Net working capital adjustments | — | | | 1,440 | | | — | | | — | | | — | | | 1,440 | |
Acquisitions | 2,190 | | | — | | | |