Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.02M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 23K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 23K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 20K
11: R1 Cover page HTML 71K
12: R2 Condensed Consolidated Balance Sheets HTML 161K
13: R3 Condensed Consolidated Balance Sheets HTML 43K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Income HTML 103K
15: R5 Condensed Consolidated Statements of Changes in HTML 121K
Equity
16: R6 Condensed Consolidated Statements of Cash Flows HTML 136K
17: R7 Basis of Presentation and Significant Events HTML 33K
18: R8 Significant Accounting Policies HTML 92K
19: R9 Acquisitions, Divestiture and Joint Venture HTML 43K
Activities
20: R10 Goodwill and Intangibles HTML 87K
21: R11 Debt HTML 29K
22: R12 Stockholder's Equity HTML 48K
23: R13 Commitments and Contingencies HTML 27K
24: R14 Noncontrolling interests HTML 31K
25: R15 Leases HTML 48K
26: R16 Fair Value of Financial Instruments HTML 22K
27: R17 Segment Information HTML 181K
28: R18 Income Taxes HTML 24K
29: R19 Subsequent Events HTML 21K
30: R20 Significant Accounting Policies (Policies) HTML 53K
31: R21 Significant Accounting Policies (Tables) HTML 72K
32: R22 Acquisitions, Divestiture and Joint Venture HTML 37K
Activities (Tables)
33: R23 Goodwill and Intangibles (Tables) HTML 119K
34: R24 Stockholder's Equity (Tables) HTML 40K
35: R25 Noncontrolling interests (Tables) HTML 25K
36: R26 Leases (Tables) HTML 49K
37: R27 Segment Information (Tables) HTML 177K
38: R28 Basis of Presentation and Significant Events - HTML 24K
Organization (Details)
39: R29 Basis of Presentation and Significant Events - HTML 51K
COVID-19 (Details)
40: R30 Significant Accounting Policies - Percentage of HTML 48K
Net Service Revenue Earned by Category of Payor
(Details)
41: R31 Significant Accounting Policies - Additional HTML 61K
Information (Details)
42: R32 Significant Accounting Policies - Shares Used in HTML 29K
Computation of Basic and Diluted Per Share
Information (Details)
43: R33 Acquisitions, Divestiture and Joint Venture HTML 63K
Activities - Additional Information (Details)
44: R34 Acquisitions, Divestiture and Joint Venture HTML 77K
Activities (Details)
45: R35 Goodwill and Intangibles - Schedule of Changes in HTML 72K
Recorded Goodwill by Reporting Unit (Details)
46: R36 Goodwill and Intangibles - Additional Information HTML 44K
(Details)
47: R37 Goodwill and Intangibles - Summary of Changes in HTML 45K
Intangible Assets (Details)
48: R38 Debt - Additional Information (Details) HTML 67K
49: R39 Stockholder's Equity - Additional Information HTML 78K
(Details)
50: R40 Stockholder's Equity - Nonvested Stock Activity HTML 57K
(Details)
51: R41 Stockholder's Equity - Shares of Common Stock HTML 26K
Issued Under Employee Stock Purchase Plan
(Details)
52: R42 Commitments and Contingencies - Additional HTML 22K
Information (Details)
53: R43 Noncontrolling interests - Summary of Activity of HTML 31K
Noncontrolling Interest-Redeemable (Details)
54: R44 Leases (Details) HTML 30K
55: R45 Leases - Right of Use and Liabilities (Details) HTML 24K
56: R46 Leases - Lease Cost (Details) HTML 27K
57: R47 Leases - Lease Maturities (Details) HTML 34K
58: R48 Segment Information - Summary of segment HTML 119K
Information (Details)
59: R49 Income Taxes (Details) HTML 23K
60: R50 Subsequent Event (Details) HTML 43K
62: XML IDEA XML File -- Filing Summary XML 112K
10: XML XBRL Instance -- lhcg-20210930_htm XML 2.32M
61: EXCEL IDEA Workbook of Financial Reports XLSX 89K
6: EX-101.CAL XBRL Calculations -- lhcg-20210930_cal XML 195K
7: EX-101.DEF XBRL Definitions -- lhcg-20210930_def XML 469K
8: EX-101.LAB XBRL Labels -- lhcg-20210930_lab XML 1.52M
9: EX-101.PRE XBRL Presentations -- lhcg-20210930_pre XML 822K
5: EX-101.SCH XBRL Schema -- lhcg-20210930 XSD 157K
63: JSON XBRL Instance as JSON Data -- MetaLinks 360± 504K
64: ZIP XBRL Zipped Folder -- 0001303313-21-000072-xbrl Zip 291K
(Address of principal executive offices including zip code)
(i337) i233-1307
(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
iCommon
Stock, par value of $0.01
iLHCG
iNASDAQ 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. iYesý 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). iYesý 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.
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 i☐ No ý
Number of shares of common stock, par value $0.01, outstanding as of November 2, 2021: i31,671,200
shares.
Current
liabilities - deferred employer payroll tax
i26,774
i25,928
Total
current liabilities
i441,103
i681,436
Deferred
income taxes
i70,593
i47,237
Income
taxes payable
i6,848
i6,203
Revolving
credit facility
i355,000
i20,000
Other
long term liabilities
i26,774
i25,928
Long-term
operating lease liabilities
i78,445
i70,275
Total
liabilities
i978,763
i851,079
Noncontrolling
interest — redeemable
i17,730
i18,921
Commitments
and contingencies
i
i
Stockholders’ equity:
LHC
Group, Inc. stockholders’ equity:
Preferred stock – $ii0.01/
par value; ii5,000,000/ shares
authorized; iiiinone///
issued or outstanding
i—
i—
Common
stock — $ii0.01/ par value; ii60,000,000/
shares authorized; i36,540,219 and i36,355,497 shares issued, and i31,263,385
and i31,139,840 shares outstanding, respectively
i365
i364
Treasury
stock — i5,276,834 and i5,215,657 shares at cost, respectively
(i80,605)
(i69,011)
Additional
paid-in capital
i974,680
i962,120
Retained
earnings
i735,333
i635,297
Total
LHC Group, Inc. stockholders’ equity
i1,629,773
i1,528,770
Noncontrolling
interest — non-redeemable
i86,420
i84,584
Total
stockholders' equity
i1,716,193
i1,613,354
Total
liabilities and stockholders' equity
$
i2,712,686
$
i2,483,354
See
accompanying Notes to Condensed Consolidated Financial Statements.
(1) Net
income excludes net income attributable to noncontrolling interest-redeemable of $i2.9 million and $i9.1
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.
(1) Net
income excludes net income attributable to noncontrolling interest-redeemable of $i0.7 million and $i10.4
million during the three and nine months ended September 30, 2020. 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iBasis
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 ifive 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, 2021, the Company, through its wholly- and majority-owned subsidiaries, equity joint ventures, controlled affiliates, and management agreements operated i868 service locations in i35
states within the continental United States and the District of Columbia.
COVID-19 Update
SARS-CoV-2 ("COVID-19") continues to spread and various responses related to stay-at-home restrictions, travel restrictions, and other public health and safety measures continue to evolve. We communicate with our clinicians and other employees all updated policies and procedures as we monitor changes related to the pandemic. Policies and procedures related to social distancing and cleaning procedures remain in place as the safety of our patients and employees are vital. 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, 2021 may not be indicative of the results that may be expected for the year ending December
31, 2021, and operating results for the three and nine months ended September 30, 2021 may not be directly comparable to operating results for the three and nine months ended September 30, 2020.
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 was passed to provide $100 billion of Provider Relief Funds for distribution to eligible providers who provided diagnoses, testing, or care for individuals with a possible or actual case of COVID-19, specifically to reimburse providers for health care related expenses related to the prevention of the spread of COVID-19, preparations for treating cases of COVID-19 positive
patients, and for lost revenues attributable to COVID-19. 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 October 18, 2021, the U.S. Department of Health and Human Services extended the PHE until January 16, 2022.
Provider Relief Fund
During the twelve months ended December 31, 2020, the Company received $i93.3 million
in payments from the Provider Relief Fund, which was recorded as a short-term liability in government stimulus advance in our condensed consolidated balance sheets. The Company recognized $i44.4 million of these funds during the six months ended June 30, 2020, which was recorded in government stimulus income in our condensed consolidated statements of income. The amount recognized of $i44.4 million
was subsequently reversed during the third quarter of 2020, such that the Company recognized ino income from the Provider Relief Fund. The Company returned all Provider Relief Funds received of $i93.3 million
to the government during the nine months ended September 30, 2021.
CAAP
As of December 31, 2020, the Company had $i318.0 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 begin one year starting from the date the CAAP funds were issued and continues 11 months, with CMS recouping the initial 25% of Medicare payments otherwise owed to the Company. During the nine months ended September 30, 2021, $i141.6 million was recouped by CMS and $i176.3 million
of contract liabilities - deferred revenue remains on our condensed consolidated balance sheets as of September 30, 2021.
If any amount of CAAP funds that we received from CMS remain unpaid after the initial 11 month period, CMS will recoup 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.
Other
During the three months ended September 30, 2021 and 2020, the Company recognized $i6.8 million
and $i6.5 million of net service revenue, respectively, due to the suspension of the 2% sequestration payment adjustment.During the nine months ended September 30, 2021 and 2020, the Company recognized $i19.7 million
and $i11.5 million of net service revenue, respectively, due to the suspension of the 2% sequestration payment adjustment.During the three months ended September 30, 2021, the Company recognized $i5.7 million
and $i6.4 million of net service revenue, respectively, due to the suspension of LTACH site-neutral payments. During the nine months ended September 30, 2021 and 2020, the Company recognized $i18.2 million
and $i11.1 million of net service revenue, respectively, due to the suspension of LTACH site-neutral payments.As of September 30, 2021, the Company deferred $i51.8 million
of employer social security taxes, $i25.9 million of which was recorded in current liabilities - deferred employer payroll tax and $i25.9 million
of which was recorded in other long term liabilities on our condensed consolidated balance sheets.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, the related unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020, the unaudited condensed consolidated statements of changes in equity for the three and nine months ended September 30, 2021 and 2020, the unaudited condensed consolidated statements of
cash flows for the nine months ended September 30, 2021 and 2020, 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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31,
2021.
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, 2020 (the "2020 Form 10-K"). The 2020 Form 10-K was filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2021, and includes information and disclosures not included herein.
2. iSignificant Accounting Policies
i
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenue and expenses during the reporting period. Actual results could differ from those estimates.
Critical Accounting Policies
The Company’s most critical accounting policies relate to revenue recognition.
i
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 606andASU 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.
i
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, 2021 and 2020:
The
following describes the payment models in effect during the nine months ended September 30, 2021. Such payment models have been 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 i2% sequestration reduction adjustment was suspended for patient claims with dates of service that began May 1, 2020 through December 31, 2021.
Home Health
Services
The Company records revenue as services are provided under the Patient Driven Groupings Model ("PDGM"). For each i30-day period, the patient is classified into one of i432
home health resource groups prior to receiving services. Each i30-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 i30-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 ione
of ifour 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 i20% 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 i12-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, 2021 and 2020, the
Company recorded in its HCI segment $i12.1 million and $i9.6 million,
respectively, related to 2020 and 2019 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.
i
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.
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.
i
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, 2021 and 2020 (amounts in thousands):
Weighted average number of shares outstanding for basic per share calculation
i31,238
i31,121
i31,205
i31,080
Effect
of dilutive potential shares:
Nonvested stock
i196
i290
i217
i254
Adjusted
weighted average shares for diluted per share calculation
i31,434
i31,411
i31,422
i31,334
Anti-dilutive
shares
i6
i—
i118
i5
/
Assets
Held for Sale
As of December 31, 2020, the Company's assets held for sale was $i1.9 million, which consisted of ione
hospice facility in Knoxville, Tennessee. The Company sold the property during the third quarter of 2021 for $i3.2 million. The gain on the sale of the property of $i1.2 million
was recorded in general and administrative expenses in our condensed consolidated statements of income.
Investments
During the nine months ended September 30, 2021, the Company invested $i10.0 million and became a minority owner in a healthcare analytics company and invested $i0.1 million
in an investment fund focused on minority-owned businesses, which were 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.
i
Recently Adopted Accounting Pronouncements
In
December 2019, the FASB issued ASU 2019-12, Simplifications to accounting for income taxes, which removes certain exceptions to the general principles of Topic 740 and adds guidance to reduce complexity in accounting for income taxes. The Company adopted the new guidance effective January 1, 2021. The adoption of the new guidance did not have a material impact to the Company.
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and
other transactions affected by the transition away from reference rates expected to be discontinued to alternative reference rates. The pronouncement is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. The adoption of the new guidance did not have an effect on the Company's condensed consolidated financial statements.
3. iAcquisitions,
Divestiture and Joint Venture Activities
Acquisitions
On July 1, 2021, the Company purchased Heart n' Home Hospice for $i50.1 million, which included iseven
wholly-owned hospice locations in Idaho and itwo wholly-owned hospice locations in Oregon. In addition, the Company purchased Casa de la Luz on July 1, 2021 for $i48.0 million,
which included itwo wholly-owned hospice and palliative care locations in Arizona.
On September 1, 2021, the Company purchased Heart of Hospice for $i277.1 million,
which included i24 wholly-owned hospice locations in Arkansas, Louisiana, Mississippi, Oklahoma, and South Carolina. In separate acquisitions, the Company acquired the majority-ownership of itwo
home health agencies and ione hospice agency during the nine months ended September 30, 2021
for an aggregate purchase price $i10.3 million. The
purchase prices were determined based on the Company's analysis of comparable acquisitions and the target market's potential future cash flows.
Goodwill generated from the acquisitions was recognized based on the expected contributions of each acquisition to the overall corporate strategy. The Company expects its portion of goodwill to be fully tax deductible. The acquisitions were accounted for under the acquisition method of accounting. Accordingly, the accompanying interim financial information includes the results of operations of the acquired entities from the date of acquisition.
Transaction costs associated with acquisitions are expensed as incurred. During the nine months ended September
30, 2021, the Company incurred $i6.1 million in acquisition-related transaction costs, which was recorded in the consolidated statements of income as general and administrative expenses.
The Company's preliminary valuation analysis of identifiable assets and liabilities assumed for Heart n'
Home Hospice and Heart of Hospice is in accordance with the requirements of ASC Topic 805, Business Combinations. The final determination of the fair value of assets acquired and liabilities assumed will be completed in accordance with the applicable accounting guidance. iThe following table summarizes the preliminary amounts of the assets acquired and liabilities assumed at their acquisition dates, as well as their fair value at the acquisition dates and the noncontrolling interest
acquired during the nine months ended September 30, 2021 (amounts in thousands):
Consideration
Cash
$
i384,827
Fair
value of total consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash
$
i1,352
Patient
accounts receivable
i14,657
Other receivables
i205
Prepaid
expenses
i387
Other current assets
i155
Property
and equipment
i1,976
Trade names
i22,070
Certificates
of need/licenses
i13,604
Non-compete agreements
i1,821
Operating
lease right of use asset
i7,933
Other assets
i84
Accounts
payable and other accrued liabilities
(i9,764)
Salaries, wages, and benefits payable
(i4,045)
Current
operating lease liabilities
(i2,527)
Amounts due to government entities
(i102)
Deferred
employer payroll tax
(i1,692)
Long-term operating lease liabilities
(i5,407)
Total
identifiable assets and liabilities
$
i40,707
Noncontrolling interest
$
i113
Goodwill,
including noncontrolling interest of $i78
$
i344,233
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.
During the nine months ended September 30, 2021, the Company sold its controlling membership interests in a home health agency previously operated as an equity joint venture and sold its pharmacy location which was wholly-owned. The total consideration for these controlling interest sales was $i1.5 million and resulted
in a loss of $i0.1 million, which was accounted for as a loss on the sale of entities and recorded in general and administrative expenses.
Joint Venture Activities
During the nine months ended September 30, 2021, the Company purchased additional controlling membership interest in ifour
of our equity joint venture partnerships, whereby the agencies became wholly-owned subsidiaries of the Company. The total consideration for these additional controlling interest purchases was $i2.1 million. The transactions were accounted for as equity transactions.
During the nine months ended September 30, 2021,
the Company sold noncontrolling membership interest in itwo home health agencies. The total consideration of the sales of noncontrolling membership interest was $i1.9 million. The
transactions were accounted for as equity transactions.
4. iGoodwill and Intangibles
i
The
changes in recorded goodwill and intangible assets by reporting unit for the nine months ended September 30, 2021 were as follows (amounts in thousands):
The
Company did record impairments of goodwill and intangible assets related to the closure of underperforming locations. Goodwill impairment of $i0.02 million and Medicare licenses impairment of $i0.9 million
was recorded during the nine months ended September 30, 2021. This was recorded in impairment of intangibles and other on the Company's condensed consolidated statements of income. The amount of disposal of goodwill was determined using prices of comparable businesses in the market. The amount of disposal of the Medicare licenses was its carrying value at the time of closure. In addition, the Company divested a certificate of need of $i0.4 million,
which was accounted for as a loss on the sale of an entity and recorded in general and administrative expenses.
iiThe
following tables summarize the changes in intangible assets during the nine months ended September 30, 2021 and December 31, 2020 (amounts in thousands): /
Remaining
useful lives for trade names, customer relationships, and non-compete agreements were i8.1, i16.5, and i2.8
years, respectively, at September 30, 2021. Similar periods at December 31, 2020 were i8.8, i17.3, and i2.9
years for trade names, customer relationships, and non-compete agreements, respectively. Amortization expense was $i0.4 million and $i0.3 million
for the three months ended September 30, 2021 and 2020, respectively, and $i1.0 million and $i0.9 million
during the nine months ended September 30, 2021 and 2020, respectively. Amortization expense was recorded in general and administrative expenses.
5. iDebt
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 (the "Credit Agreement"). The Credit Agreement provided a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $i500.0 million, which included an additional $i200.0
million accordion expansion feature, and a letter of credit sub-limit equal to $i50.0 million. The expiration date of the Credit Agreement was March 30, 2023. On August 3, 2021, the Company entered into an Amended and Restated Senior Credit Facility (the "2021 Amended Credit Agreement"), which amends and restates in its entirety the Credit Agreement. The 2021 Amended Credit Agreement provides
a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $i800.0 million, which includes an additional $i500.0 million
accordion expansion, and a letter of credit sub-limit equal to $i75.0 million. The expiration date of the 2021 Amended Credit Agreement is August 3, 2026.
The Company’s obligations under the 2021 Amended 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 2021 Amended Credit Agreement.
Revolving loans under the 2021 Amended Credit Agreement bear interest at, as selected by the Company, at either (i) the prevailing London Interbank Offered Rate ("LIBOR") (with interest periods of one, three or six months at the Company's option) plus a spread of i1.25% to i2.0%
based on the Company's quarterly consolidated Leverage Ratio or (ii) the prevailing prime or base rate plus a spread of i0.25% to i1.00%
based on the Company's quarterly consolidated Leverage Ratio. Swing line loans bear interest at the Base Rate. The Company is limited to i15 Eurodollar borrowings outstanding at any time. The Company is required to pay a commitment fee for the unused commitments at rates ranging from i0.15%
to i0.30% per annum depending upon the Company’s quarterly consolidated Leverage Ratio. The Base Rate as of September 30, 2021 was i3.75%
and the LIBOR rate was i1.63%. As of September 30, 2021, the effective interest rate on outstanding borrowings under the 2021 Amended Credit Agreement was i1.63%.
On
March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, announced its intention to cease the publication of LIBOR settings for 1-month, 3-month, 6-month, and 12-month LIBOR borrowings immediately on June 30, 2023. Effective October 25, 2021, JPMorgan Chase Bank, N.A transitioned our 2021 Amended Credit Agreement to an alternate rate to CME Term SOFR Reference Rate ("SOFR"), which is administered by CME Group Benchmark Administration Ltd ("CME"). Due to the differences observed between LIBOR rates and SOFR published rates, JPMorgan Chase Bank, N.A. will use a credit spread adjustment ("CSA") in order to minimize value transfer and leave the existing margin applicable to our 2021 Amended Credit Agreement. The CSA used by JPMorgan Chase Bank, N.A. is based on the average of the
differences between LIBOR and SOFR over a 12-month period and will be added to SOFR.
As of September 30, 2021, the Company had $i355.0 million drawn, letters of credit issued in the amount of $i25.4
million, and $i419.6 million of remaining borrowing capacity available under the 2021 Amended Credit Agreement. At December 31, 2020, the Company had $i20.0
million drawn and letters of credit issued in the amount of $i25.4 million under the Credit Facility.
Under the terms of the 2021 Amended Credit Agreement, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The 2021 Amended 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 its debt covenants under the 2021 Amended Credit Agreement at September 30, 2021.
6. iStockholder’s
Equity
Equity Based Awards
The 2018 Incentive Plan is 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 were i2,210,544
shares and a total of i1,747,099 shares are currently available for issuance. 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.
Share Based Compensation
Nonvested Stock
Independent directors are granted shares of common stock under the Second Amended and Restated 2005 Non-Employee Directors Compensation Plan. During the nine months ended September 30, 2021, the Company granted i7,200
nonvested shares of common stock to independent directors, which shares will vest i100% on the ione
year anniversary date. In addition, the Company granted i3,500 nonvested shares of common stock to the Company's Lead Director, which shares will vest one-third on the date of grant and one-third on each of the first two anniversaries of the grant date.
During the nine months ended September 30,
2021, employees and a consultant were granted i109,665 and i5,735 shares, respectively, of nonvested shares of common stock pursuant to the
2018 Incentive Plan. The shares vest over a period of ifive years, conditioned on continued employment and in accordance with the consulting agreement. 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.
iThe
following table represents the share grants activity for the nine months ended September 30, 2021:
As
of September 30, 2021, there was $i41.4 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 i3.03
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 estimates forfeitures at the time of grant and revises the estimate in subsequent periods if actual forfeitures differ to ensure that total compensation expense recognized is at least equal to the value of vested awards. The Company recorded $i11.7
million and $i11.1 million of compensation expense related to nonvested stock grants for the nine months ended September 30, 2021 and 2020, respectively.
Employee Stock Purchase Plan
In 2006, the Company adopted the Employee Stock Purchase Plan whereby eligible employees
may purchase the Company’s common stock at i95% of the market price on the last day of the calendar quarter. There were i250,000
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 i250,000 shares of common stock to the plan.
i
The
table below details the shares of common stock issued during 2021:
In
conjunction with the vesting of the nonvested shares of common stock or the exercise of stock options, 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 nine months ended September 30, 2021, the Company redeemed i61,177
shares of common stock valued at $i11.6 million, related to share vesting tax obligations. Such shares are held as treasury stock and are available for reissuance by the Company.
7. iCommitments
and Contingencies
Contingencies
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"), Unified Program Integrity Contractors ("UPICs"), 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 $ii16.9/
million in its condensed consolidated balance sheets in other assets as of September 30, 2021 and December 31, 2020, which are due 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.
We are involved in various 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.
Legal fees related to all legal matters are expensed as incurred.
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 i30 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.
8. iNoncontrolling
interests
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 September 30, 2021, the Company determined in accordance with authoritative accounting guidance that it was not probable that an 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 nine months ended September 30, 2021 is not less than the initial amount reported for each instrument.
i
The following table summarizes the activity of noncontrolling interest-redeemable for the nine months ended September 30, 2021 (amounts
in thousands):
The
Company determines if a contract contains a lease at inception date. The Company's leases are operating leases, primarily for office and office equipment, that expire at various dates over the next ifive years. The facility-based leases have renewal options for periods ranging from one to inine
years. As it is not reasonably certain these renewal options will be exercised, the options were not considered in the lease term, and payments associated with the option years are excluded from lease payments.
Payments due under operating leases include fixed and variable payments. These variable payments for the Company's office leases can include operating expenses, utilities, property taxes, insurance, common area maintenance, and other facility-related expense. Additionally, any leases with terms less than one year were not recognized as operating lease right of use assets or payables for short term leases in accordance with the election of ‘package of practical expedient’ under ASU 2016-02.
The
Company recognizes operating lease right of use assets and operating lease payable based on the present value of the future minimum lease payments at the lease commencement date. The Company's leases do not provide implicit rates. Therefore, the Company used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. As of September 30, 2021, the weighted-average remaining lease term was i3.97
years and weighted-average discount rate was i4.24%.
iThe following table summarizes the operating lease
right of use assets and related lease payables in our condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020 (amounts in thousands):
The
components of lease costs for operating leases for the three and nine months ended September 30, 2021 and 2020 were as follows (amounts in thousands):
The carrying amounts of the Company’s cash, receivables, accounts payable and accrued liabilities approximate their fair values because of their short maturity.
11. iSegment
Information
The Company's reporting segments include (1) home health services, (2) hospice services, (3) home and community-based services, (4) facility-based services, and (5) HCI. 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.
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.
iThe
following tables summarize the Company’s segment information for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands):
Cost
of service revenue (excluding depreciation and amortization)
i631,109
i112,485
i113,864
i64,340
i11,362
i933,160
General
and administrative expenses
i345,024
i49,560
i33,520
i31,984
i9,815
i469,903
Impairment
of intangibles and other
i22
i600
i—
i—
i—
i622
Government
stimulus (income) expense
i—
i—
i—
i—
i—
i—
Operating
income (loss)
i104,988
i18,742
(i2,858)
i340
i5,978
i127,190
Interest
expense
(i2,804)
(i451)
(i382)
(i288)
(i115)
(i4,040)
Income
(loss) before income taxes and noncontrolling interest
i102,184
i18,291
(i3,240)
i52
i5,863
i123,150
Income
tax expense (benefit)
i19,499
i3,294
(i658)
(i261)
i1,307
i23,181
Net
income (loss)
i82,685
i14,997
(i2,582)
i313
i4,556
i99,969
Less
net income (loss) attributable to noncontrolling interests
i14,371
i3,452
(i275)
i1,228
(i23)
i18,753
Net
income (loss) attributable to LHC Group, Inc.'s common stockholders
$
i68,314
$
i11,545
$
(i2,307)
$
(i915)
$
i4,579
$
i81,216
12. iIncome
Taxes
The effective tax rate for each of the nine months ended September 30, 2021 and 2020 benefited from $ii2.4/
million of excess tax benefits associated with stock-based compensation arrangements.
U.S. 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 income taxes payable in noncurrent liabilities in the Company's condensed 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. As of September 30, 2021 and December 31, 2020, the Company recognized $i6.8
million and $i6.2 million, respectively, in unrecognized tax benefits.
13. iSubsequent
Events
On October 1, 2021, the Company purchased ione wholly- owned home health agency and ithree
wholly-owned hospice agencies for total consideration of $i7.5 million.
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, Inc. The wholly-owned purchased agencies included i23
home health locations, i11 hospice locations, and i13 therapy agencies across i22
states. Total consideration for this acquisition was $i197.0 million, which was funded on November 1, 2021.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain statements, including the potential future impact of COVID-19 on our results of operations and liquidity, the potential impact of actions we have taken to mitigate the impact of COVID-19, the potential impact on supply chain disruptions and increased costs associated with obtaining personal protective equipment, the expected benefit of the CARES Act on our liquidity, 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 September 30, 2021;
•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, including changes in reimbursement resulting from regulatory changes;
•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;
•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; and
•the
impact of changes in future interpretations of fraud, anti-kickback, or other laws.
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 2020 Form 10-K, as
updated by our subsequent filings with the SEC. This report should be read in conjunction with the 2020 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.
OVERVIEW
General
We provide quality, cost-effective post-acute health care services to our patients. As of September 30, 2021, we have
868 service providers in 35 states within the continental United States and the District of Columbia. Our services are classified into five segments: (1) home health services, (2) hospice services, (3) home and community-based services, (4) facility-based services primarily offered through our long-term acute care hospitals (“LTACHs”), and (5) healthcare innovations services ("HCI"). 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 September 30, 2021, we operated 532 home health services locations, of which 320 are wholly-owned, 208
are majority-owned through equity joint ventures, two are under license lease arrangements, and the operations of the remaining two 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 September 30, 2021, we operated 155 hospice locations, of which 92 are wholly-owned, 61 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 September 30, 2021, we operated 130 home and community-based services locations, of which 117 are wholly-owned and 13 are majority-owned through equity joint ventures.
We provide facility-based services principally through our LTACHs. As of September 30, 2021, we operated 11 LTACHs with 12 locations, all but three of which are located within host hospitals. We also operate two skilled nursing facilities, a family health center, a rural health clinic,
two physician practices, and 19 therapy clinics. Of these 37 facility-based services locations, 26 are wholly-owned, and 11 are majority-owned through equity joint ventures.
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, and (c) certain assets operated by Advanced Care House Calls, which provides primary medical care for patients with chronic and acute illnesses who have difficulty traveling to a doctor’s office. 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 14 HCI locations, of which 13 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 September 30, 2021, the Joint Commission had accredited 522 of our 532 home health services locations and 110 of our 155 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 nine months ended September 30, 2021 and 2020 was as follows:
Three
Months Ended September 30,
Nine Months Ended September 30,
Reporting segment
2021
2020
2021
2020
Home health services
68.4
%
70.4
%
70.7
%
70.6
%
Hospice
services
14.6
11.2
12.8
11.8
Home and community-based services
8.1
9.1
8.8
9.5
Facility-based
services
5.7
6.3
5.9
6.3
Healthcare innovations services
3.2
3.0
1.8
1.8
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 2020 Form 10-K.
Coronavirus and Coronavirus Aid, Relief, and Economic Security Act
The following portions of the CARES Act impacted us during the nine months ended September 30, 2021:
•Provider Relief Fund: During 2020, we received $93.3 million in payments from the Provider Relief Fund. We returned all funds to the government during the nine months ended September 30, 2021.
•CAAP: During 2020, we received $318.0 million of accelerated payments under the CAAP, of which $141.6 million was recouped by CMS during the nine months ended September 30, 2021 and $176.3 million of contract liabilities - deferred revenue remains on our condensed consolidated balance sheets.
•Suspension of the
2% sequestration payment adjustment: CMS suspended the 2% sequestration payment adjustment for patient claims with dates of services from May 1, 2020 through December 31, 2020, which was subsequently amended to continue through December 31, 2021. During the three months ended September 30, 2021 and 2020, we recognized $6.8 million and $6.5 million of net service revenue, respectively, due to the suspension of the 2% sequestration payment adjustment.During the nine months ended September 30, 2021 and 2020, we recognized $19.7 million and $11.5 million
of net service revenue, respectively, due to the suspension of the 2% sequestration payment adjustment.
•Waiver of the application of site-neutral payment: Under Section 1886(m)(6)(A)(i) of the Act, the claims processing systems was updated to pay all LTACH cases admitted during the COVID-19 PHE period at the LTACH PPS standard federal rate, effective for claims with an admission date occurring on or after January 27, 2020 through the end of the PHE period. During the three months ended September 30, 2021, we recognized $5.7 million and $6.4 million of net service revenue, respectively, due to the suspension of LTACH site-neutral payments. During the nine months ended September 30,
2021 and 2020, we recognized $18.2 million and $11.1 million of net service revenue, respectively, due to the suspension of LTACH site-neutral payments.
During the nine months ended September 30, 2021, we did experience higher costs related to higher contract labor utilization due to an increase in our clinicians being on quarantine from COVID-19 exposure or potential exposure. There is no guarantee that we won’t experience similar impacts in the future or experience a decrease in demand for our services as a result of COVID-19. The rapid development and fluidity of this situation makes it difficult to predict the ultimate impact of COVID-19 on our business and operations. Nevertheless, COVID-19 presents
a material uncertainty which could materially impact our business and results of operations in the future.
Home Health
On November 2, 2021, CMS released the final rule for the calendar year 2022 to update base payment rates by 3.2%, which is based on a payment update of 2.6%, a 0.7% increase due to the reduction of the fixed-dollar loss ratio for outliers, and a 0.1% reduction due to the rural add-on percentages mandated by the Bipartisan Budget Act of 2018. The base 30 day payment rate is increased from $1,901.12 to $2,031.64. The final rule expanded the Home Health Value-Based Purchasing ("HHVBP") model nationally, with the first performance year beginning January 1, 2023. Starting in 2025, fee-for-service payments to home health agencies will be adjusted based on the
quality of care provided to beneficiaries during the calendar year 2023 performance year.
Hospice
On July 29, 2021, CMS released the final rule for fiscal year 2022 to update payment rates and the wage index. The final hospice payment update is a 2.0% increase to the payment rates. The final rule will apply a 2.7% market basket update and a 0.7 percentage point cut for productivity. In addition, the final rule increases the aggregate cap value of $31,297.61 for fiscal year 2022, as compared to $30,683.93 for fiscal year 2021.
The following are the final fiscal year 2022 base payment rates for various levels of care, which began on October 1, 2021 and will end September 30, 2022 and
final fiscal year 2021 base payment rates for various levels of care, which began on October 1, 2020 and ended September 30, 2021 (payment rates for hospice providers not complying with the hospice quality reporting requirements will be 2% lower than the values referenced below):
$59.68 = hourly rate for 2021 $60.94 = hourly rate for 2022
Inpatient Respite Care
$
473.75
$
461.09
General
Inpatient Care
$
1,068.28
$
1,045.66
Facility-based
On August 2, 2021, CMS issued a final rule for the fiscal year 2022 Long-Term Care Hospital Prospective Payment System ("LTACH-PPS"), which described that LTACH-PPS payments for fiscal year 2022 will increase by 1.1%. LTACH-PPS payments for fiscal year 2022 for discharges paid using the standard LTACH payment rate will increase by 0.9% due primarily to the annual standard Federal rate update for fiscal year 2022 of 1.9% and 0.8% decrease in
high cost outlier payments. LTACH-PPS payments for fiscal year 2022 for discharges paid using the site neutral payment rate will increase by 3%.
The following table summarizes our consolidated results of operations for the three months ended September 30, 2021 and 2020 (amounts in thousands, except percentages, which are
percentages of consolidated net service revenue, unless indicated otherwise):
2021
2020
Increase (Decrease)
Net
service revenue
$
565,451
$
530,684
$
34,767
Cost of service revenue (excluding depreciation and amortization)
343,862
60.8
%
305,246
57.5
%
38,616
General
and administrative expenses
176,444
31.2
161,463
30.4
14,981
Impairment of intangibles and other
—
22
(22)
Government
stimulus (income) expense
—
44,435
44,435
Interest expense
(1,135)
(431)
704
Income
tax expense
10,150
27.5
(1)
4,595
27.7
(1)
5,555
Net income attributable to noncontrolling interests
6,126
(8)
6,134
Net
income attributable to LHC Group, Inc.’s common stockholders
$
27,734
$
14,500
$
13,234
(1) Effective tax rate as a percentage of income from continuing operations attributable to our common stockholders, excluding the excess tax benefits realized of $0.3 million and $0.7 million during the three months ended September 30, 2021 and
2020, respectively.
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 September 30, 2021 and the related change from the same period in 2020 (amounts in thousands, except admissions, census, episode data, patient days and billable hours, which are actual amounts; net service revenue excludes implicit price concessions):
The
below data for the three months ended September 30, 2021 was impacted by the COVID-19 pandemic.
Organic (1)
Organic Growth (Loss) %
Acquired (2)
Total
Total Growth (Loss) %
Home health services
Revenue
$
389,670
4.5
%
$
3,014
$
392,684
4.7
%
Revenue
Medicare
$
238,603
(2.6)
$
2,351
$
240,954
(2.2)
Admissions
107,442
3.6
1,050
108,492
4.0
Medicare
Admissions
52,341
(5.7)
186
52,527
(6.0)
Average Census
83,777
2.5
481
84,258
2.4
Average
Medicare Census
43,359
(7.4)
316
43,675
(7.3)
Home Health Episodes
83,635
(4.0)
915
84,550
(5.0)
Hospice
services
Revenue
$
63,902
0.9
$
20,744
$
84,646
34.4
Revenue
Medicare
$
59,326
2.4
$
19,146
$
78,472
36.2
Admissions
5,140
0.1
1,326
6,466
27.4
Medicare
Admissions
4,606
0.1
1,146
5,752
25.9
Average Census
4,293
(2.5)
1,404
5,697
29.7
Average
Medicare Census
4,057
(1.0)
1,277
5,334
30.4
Patient days
395,917
(2.2)
128,182
524,099
29.7
Home
and community-based services
Revenue
$
46,278
(8.9)
$
79
$
46,357
(9.3)
Billable
hours
1,813,284
(6.0)
4,427
1,817,711
(6.4)
Facility-based services
LTACHs
Revenue
$
31,241
(4.3)
$
245
$
31,486
(3.7)
Patient
days
22,187
(8.4)
535
22,722
(6.4)
Other facility-based services
Revenue
$
1,303
(37.4)
$
—
$
1,303
(37.4)
HCI
Revenue
$
18,213
12.6
$
—
$
18,213
12.6
Consolidated
Revenue
$
550,607
2.7
$
24,082
$
574,689
6.4
(1)
Organic - combination of same store, a location that has been in service with us for greater than 12 months, and de novo, an internally developed location that has been in service for 12 months or less.
(2) Acquired - purchased location that has been in service with us 12 months or less.
Our home health and hospice segment received the benefit of the suspension of the 2% sequestration payment adjustment for Medicare claims and the LTACHs received the benefit of the suspension of the 2% sequestration payment adjustment and the waiver of site-neutral payments for LTACH Medicare claims.
Cost of service revenue
The following table summarizes cost of service revenue (amounts in thousands, except percentages, which are percentages of the segment’s respective net service
revenue):
During
2021, cost of service revenue in our home health segment was impacted by the use of nursing contract labor due to the high number of our clinicians in quarantine for COVID-19. Cost of service revenue in our home and community-based segment declined due to the lower patient volumes resulting in a decrease in billable hours and a decrease in total costs. Supplies associated with COVID-19 decreased in all same-store locations in 2021 as compared to 2020 as we incurred substantial costs in 2020 to acquire needed personal protective equipment to protect our clinicians during the start of the global pandemic. We continue to purchase additional personal protective equipment; however, we are observing an overall decline in utilization and an overall price per unit decline for these supplies.
General and administrative expenses
The
following table summarizes general and administrative expenses (amounts in thousands, except percentages, which are percentages of the segment’s respective net service revenue):
During
2021, consolidated general and administrative expenses increased as a percentage of revenue from 30.4% to 31.2%. We incurred $5.2 million of acquisition transaction expenses during the third quarter of 2021. Our consolidated general and administrative expenses, excluding the acquisition transaction expenses, remained flat comparing third quarter of 2021 to third quarter of 2020.
The following table summarizes our consolidated results of operations for the nine months ended September 30, 2021 and 2020
(amounts in thousands, except percentages, which are percentages of consolidated net service revenue, unless indicated otherwise):
Cost of service revenue (excluding depreciation and amortization)
972,006
59.4
%
933,160
61.0
%
38,846
General
and administrative expenses
506,754
31.0
469,903
30.7
36,851
Impairment of intangibles and other
937
622
315
Government
stimulus (income) expense
—
—
—
Interest expense
(1,541)
(4,040)
(2,499)
Income
tax expense
32,909
26.6
(1)
23,181
26.5
(1)
9,728
Net income attributable to noncontrolling interests
22,010
18,753
3,257
Net
income attributable to LHC Group, Inc.’s common stockholders
$
100,036
$
81,216
$
18,820
(1) Effective tax rate as a percentage of income from continuing operations attributable to our common stockholders, excluding the excess tax benefits realized of $2.4 million during each of the nine months ended September 30, 2021 and 2020. The
effective tax rate for the nine months ended September 30, 2020 also benefited from a $2.2 million impact from the enactment of the CARES Act.
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 nine months ended September 30, 2021 and the related change from the same period in 2020 (amounts in thousands, except admissions, census, episode data, patient days and billable hours, which are actual amounts; net service revenue excludes implicit price concessions):
The below data for the nine months ended September 30, 2021 was impacted by the COVID-19
pandemic.
Organic (1)
Organic Growth (Loss) %
Acquired (2)
Total
Total Growth (Loss) %
Home health services
Revenue
$
1,168,752
8.0
%
$
7,194
$
1,175,946
7.7
%
Revenue
Medicare
$
725,516
1.2
$
5,915
$
731,431
1.0
Admissions
321,812
6.1
3,684
325,496
6.4
Medicare
Admissions
160,598
(2.5)
1,332
161,930
(2.6)
Average Census
84,183
7.7
400
84,583
7.2
Average
Medicare Census
44,381
(2.6)
301
44,682
(2.9)
Home Health Episodes
251,987
(0.5)
2,836
254,823
(2.1)
Hospice
services
Revenue
$
187,073
1.5
$
26,098
$
213,171
15.6
Revenue
Medicare
$
173,416
2.3
$
24,439
$
197,855
16.7
Admissions
15,411
2.9
1,599
17,010
13.4
Medicare
Admissions
13,771
3.4
1,366
15,137
13.3
Average Census
4,270
(1.9)
600
4,870
11.9
Average
Medicare Census
4,003
(1.2)
554
4,557
12.5
Patient days
1,166,618
(2.2)
163,939
1,330,557
11.5
Home
and community-based services
Revenue
$
143,510
(3.4)
$
950
$
144,460
(4.5)
Billable
hours
5,550,772
(3.1)
46,357
5,597,129
(4.3)
Facility-based services
LTACHs
Revenue
$
93,394
2.9
$
1,758
$
95,152
2.6
Patient
days
60,849
(9.6)
3,232
64,081
(7.0)
Other facility-based services
Revenue
$
3,895
(44.8)
$
—
$
3,895
(44.8)
HCI
Revenue
$
30,436
6.1
$
—
$
30,436
6.1
Consolidated
Revenue
$
1,627,060
5.8
$
36,000
$
1,663,060
6.8
(1)
Organic - combination of same store, a location that has been in service with us for greater than 12 months, and de novo, an internally developed location that has been in service for 12 months or less.
(2) Acquired - purchased location that has been in service with us 12 months or less.
Our home health and hospice segment received the benefit of the suspension of the 2% sequestration payment adjustment for Medicare claims and the LTACHs received the benefit of the suspension of the 2% sequestration payment adjustment and the waiver of site-neutral payments for LTACH Medicare claims.
Cost of service revenue
The following table summarizes cost of service revenue (amounts in thousands, except percentages, which are percentages of the segment’s respective net service
revenue):
During
2021, cost of service revenue in our home health segment was impacted by the effective cost mitigation strategies associated with the implementation of PDGM. Cost of service revenue in our home and community-based segment declined due to the lower patient volumes resulting in a decrease in billable hours and a decrease in total costs. Supplies associated with COVID-19 decreased in all same-store locations in 2021 as compared to 2020 as we incurred substantial costs in 2020 to acquire needed personal protective equipment to protect our clinicians during the start of the global pandemic. We continue to purchase additional personal protective equipment; however, we are observing an overall decline in utilization and an overall price per unit decline for these supplies.
General and administrative expenses
The following table summarizes general
and administrative expenses (amounts in thousands, except percentages, which are percentages of the segment’s respective net service revenue):
During
2021, consolidated general and administrative expenses increased as a percentage of revenue from 30.7% to 31.0%. We incurred $6.1 million of acquisition transaction expenses during the nine months ended September 30, 2021. Our consolidated general and administrative expenses, excluding acquisition transaction expenses, remained flat comparing 2021 to 2020.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our cash balance at September 30, 2021 was $29.5 million and we have $243.3 million of available liquidity from cash and our revolving credit facility, net of $176.3 million liabilities associated
with the CAAP. We have additional capacity in our revolving credit facility of $500.0 million per our accordion expansion. Based on our current plan of operations, including acquisitions, we believe this amount, when combined with expected cash flows from operations, will be sufficient to fund our growth strategy and to meet our anticipated operating expenses, capital expenditures, and debt service obligations for at least the next 12 months.
Our principal source of liquidity for operating activities is the collection of patient accounts receivable, most of which are collected from governmental and third-party commercial payors. We also have the ability to obtain additional liquidity, if necessary, through our credit facility, which provides for aggregate borrowings, including outstanding letters of credit.
The following table summarizes changes in cash (amounts in thousands):
The CARES Act provided additional cash during the nine months ended September 30, 2020 and increased our net cash provided by operating activities by $317.9 million of Accelerated and Advance Payments and $33.6 million payment deferral of our portion of social security payroll tax. The initial impact of COVID-19 in 2020 also increased our prepaid medical supplies due to the need of obtaining personal protective equipment to our clinicians and increased our salaries, wages and benefits associated with the increased staffing demands associated with our response to COVID-19.
In
2021, CMS recouped $141.6 million of the Accelerated and Advance Payments and we returned $93.3 million of Provider Relief Funds back to the government. We paid $42.0 million in income taxes, of which $17.3 million related to the CARES Act legislation. In addition, we acquired businesses of $383.5 million and utilized our credit agreement for funding of these acquisitions. These cash outflows were offset by a reduction in our days sales outstanding and stabilized costs for needed personal protective equipment.
Indebtedness
On March 30, 2018, we entered into a Credit Agreement with JPMorgan Chase Bank, N.A., which was effective on April 2, 2018 (the "Credit Agreement"). The Credit Agreement provided a senior, secured revolving line of credit commitment with a maximum principal borrowing
limit of $500.0 million, which included 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 Credit Agreement was March 30, 2023. On August 3, 2021, we entered into an Amended and Restated Senior Credit Facility (the "2021 Amended Credit Agreement"), which amends and restates in its entirety the Credit Agreement. The 2021 Amended Credit Agreement provides a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $800.0 million, which includes an additional $500.0 million accordion expansion, and a letter of credit sub-limit equal to $75.0 million. The expiration date of the 2021 Amended Credit Agreement is August 3, 2026.
Our
obligations under the 2021 Amended Credit Agreement are secured by substantially all of our assets and our wholly-owned subsidiaries (subject to customary exclusions), which assets include our equity ownership of our wholly-owned subsidiaries and our equity ownership in joint venture entities. Our wholly-owned subsidiaries also guarantee the obligations of the Company under the 2021 Amended Credit Agreement.
Revolving loans under the 2021 Amended Credit Agreement bear interest at, as selected us, at either (i) the prevailing London Interbank Offered
Rate ("LIBOR") (with interest periods of one, three or six months at our option) plus a spread of 1.25% to 2.0% based on our quarterly consolidated Leverage Ratio or (ii) the prevailing prime or base rate plus a spread of 0.25% to 1.00% based on our quarterly consolidated Leverage Ratio. Swing line loans bear interest at the Base Rate. We are limited to 15 Eurodollar borrowings outstanding at any time. We are required to pay a commitment fee for the unused commitments at rates ranging from 0.15% to 0.30% per annum depending upon our quarterly consolidated Leverage Ratio. The Base Rate as of September 30, 2021 was 3.75% and the LIBOR rate was 1.63%. As of September 30, 2021, the effective interest rate on outstanding borrowings under the 2021 Amended Credit Agreement was 1.63%.
On March
5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, announced its intention to cease the publication of LIBOR settings for 1-month, 3-month, 6-month, and 12-month LIBOR borrowings immediately on June 30, 2023. Effective October 25, 2021, JPMorgan Chase Bank, N.A transitioned our 2021 Amended Credit Agreement to an alternate rate to CME Term SOFR Reference Rate ("SOFR"), which is administered by CME Group Benchmark Administration Ltd ("CME"). Due to the differences observed between LIBOR rates and SOFR published rates, JPMorgan Chase Bank, N.A. will use a credit spread adjustment ("CSA") in order to minimize value transfer and leave the existing margin applicable to our 2021 Amended Credit Agreement. The CSA used by JPMorgan Chase Bank, N.A. is based on the average of the differences between LIBOR and SOFR over a 12-month period
and will be added to SOFR.
As of September 30, 2021, we had $355.0 million drawn, letters of credit issued in the amount of $25.4 million, and $419.6 million of remaining borrowing capacity available under the 2021 Amended Credit Agreement. At December 31, 2020, we had $20.0 million drawn and letters of credit issued in the amount of $25.4 million under the Credit Facility.
Under the 2021 Amended Credit Agreement with JPMorgan
Chase Bank, N.A., a letter of credit fee shall be equal to the applicable Eurodollar rate on the average daily amount of the letter of credit exposure. The agent’s standard up-front fee and other customary administrative charges will also be due upon issuance of the letter of credit along with a renewal fee on each anniversary date of such issuance while the letter of credit is outstanding. Borrowings accrue interest under the 2021 Amended Credit Agreement at either the Base Rate or the Eurodollar rate, and are subject to the applicable margins set forth below:
Leverage
Ratio
Eurodollar Margin
Base Rate Margin
Commitment Fee Rate
≤1.00:1.00
1.25
%
0.25
%
0.15
%
>1.00:1.00 ≤ 2.00:1.00
1.50
%
0.50
%
0.20
%
>2.00:1.00
≤ 3.00:1.00
1.75
%
0.75
%
0.25
%
>3.00:1.00
2.00
%
1.00
%
0.30
%
Our
2021 Amended Credit Agreement contains customary affirmative, negative and financial covenants, which are subject to customary carve-outs, thresholds, and materiality qualifiers. The Credit Facility allows us to make certain restricted payments within certain parameters provided we maintain compliance with those financial ratios and covenants after giving effect to such restricted payments or, in the case of repurchasing shares of its stock, so long as such repurchases are within certain specified baskets.
Our 2021 Amended Credit Agreement also contains customary events of default, which are subject to customary carve-outs, thresholds, and materiality qualifiers. These include bankruptcy and other insolvency events, cross-defaults to other debt agreements, a change in control involving us or any subsidiary guarantor, and the failure to comply with certain covenants.
For a discussion of contingencies, see Note 7 of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As
such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in these relationships.
Critical Accounting Policies
For a discussion of critical accounting policies, see Note 2 of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference. For a full description of the Company's other critical accounting policies, see Note 2 of the Notes to Consolidated Financial Statements in the 2020 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our
exposure to market risk relates to changes in interest rates for borrowings under our credit facility. Our letter of credit fees and interest accrued on our debt borrowings are subject to the applicable Eurodollar or Base Rate. A hypothetical basis point increase in interest rates on the average daily amounts outstanding under the credit facility would have increased our interest expense by $1.2 million for the nine months ended September 30, 2021.
We established disclosure controls and procedures which are designed to provide reasonable assurance of achieving their objectives and to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934 as amended (the “Exchange Act”) is recorded, processed, summarized, disclosed and reported within the time periods specified in the SEC’s rules and forms. This information is also accumulated and communicated to our management and Board of Directors to allow timely decisions regarding required disclosure.
In connection with the preparation of this Quarterly Report on Form 10-Q, as of September 30, 2021, under the supervision and with the participation of management, including the principal executive officer
and principal financial officer, management conducted an evaluation of the effectiveness of the disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act.
Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2021, the end of the period covered by this Quarterly Report.
Changes in Internal Controls Over Financial Reporting
We, including the principal executive officer and principal financial officer, do not expect that our disclosure controls or our internal controls over financial reporting will prevent or detect all errors
and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and, based on an evaluation of the controls and procedures, the principal executive officer and principal financial officer concluded the disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2021, the end of the period covered by this Quarterly Report.
For a discussion of legal proceedings, see Note 7 of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS.
There have been no material changes in the Company’s risk factors from those in Part
I, Item 1A, “Risk Factors” of our 2020 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
XBRL Instance - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL
Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” or “unreviewed.”
*This exhibit is furnished to the SEC as an accompanying document
and is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and the document will not be deemed incorporated by reference into any filing under the Securities Act of 1933.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
