AFAM Almost Family (delisted)

PART I — FINANCIAL INFORMATIO N

See accompanying Notes to Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements.

ALMOST FAMILY, INC. AND SUBSIDIARIES

evaluating whether a set of transferred assets and activities is a business.  The guidance will require an entity to evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, and thus is not a business combination. The guidance is effective for annual and interim impairment tests performed for periods beginning after December 15, 2019.  The Company is currently evaluating the impact of ASU 2017-01.

In January 2017, the FASB issued ASU 2017-04, Intangible – Goodwill and Other, Simplifying the Test for Goodwill Impairment, (“ASU 2017-04”) that simplifies the measurement for goodwill impairment into a single step.  The guidance eliminates Step 2 of the goodwill impairment test that required a hypothetical purchase price allocation of an implied fair value of goodwill to measure a goodwill impairment charge.  Under the new guidance, entities failing Step 1 of the goodwill impairment test will always record an impairment charge based on the excess of a reporting unit’s carrying amount over it fair value.  ASU 2017-04 does not change Step 1 guidance.  The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods in those years.   Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact of ASU 2017-01.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”).  ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows.  It also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows.  ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years.  Early adoption is permitted.  The Company is currently evaluating the impact ASU 2016-15 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”).  ASU 2016-02 requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term.  It will also require disclosures designed to give financial statement users information regarding the amount, timing, and uncertainty of cash flows arising from leases.  The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years.  Early adoption is permitted for all entities. The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements and associated disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”).  Topic 606 affects virtually all aspects of an entity’s revenue recognition, including determining the measurement of revenue and the timing of when it is recognized for the transfer of goods or services to customers.  Topic 606 is effective for annual reporting periods beginning after December 15, 2017.  The Company is continuing to evaluate Topic 606, but does not initially foresee a material impact from the adoption of Topic 606 on its 2018 statement of financial position and results of operations.

Net (Income) Loss Attributable to Noncontrolling Interest

Noncontrolling interest represents the ownership interests of minority shareholders in operating results of the period.  The following details the minority shareholders’ interest that is excluded from the Consolidated Statements of Income.

2. Segment Data

In the first quarter of 2017, the Company redefined its reporting segments to include a) Home Health (“HH”), formerly Visiting Nurse, b) Other Home-Based Services (“OHBS”), which includes all other home care services outside of Home Health services and c) the Healthcare Innovations (“HCI”) segment.  The OHBS segment consists of the historical personal care operations plus hospice services.  Prior year segment information was reclassified to conform to the new segment definitions.  In management’s opinion, this approach provides investors clarity for the largest segment, Home Health, and best aligns with the Company’s internal decision-making processes as viewed by the chief operating decision maker.

Reportable segments have been identified based upon how management has organized the business by services provided to customers and how the chief operating decision maker manages the business and allocates resources, consistent with the criteria in ASC 280, Segment Reporting . 

Consistent with information given to the chief operating decision maker, the Company does not allocate certain expenses to the reportable segments.  The Company evaluates the performance of its business segments based on operating income.  Intercompany and intersegment transactions have been eliminated.

The HH segment provides skilled medical services in patients’ homes largely to enable recipients to reduce or avoid periods of hospitalization and/or nursing home care.  Approximately 95% of the HH segment revenues were generated from the Medicare program, while the balance is generated from Medicaid and private insurance programs. 

The OHBS segment includes traditional personal care services (generally provided by paraprofessional staff such as home health aides) which are generally of a custodial rather than skilled nature.  Personal care revenues are generated on an hourly basis and are primarily from Medicaid (approximately 79% of personal care revenues).  Hospice services are largely provided in patients’ homes and generally require specialized hospice nursing skills.  Hospice revenues are generated on a per diem basis and are primarily from Medicare (approximately 92% of hospice revenues).

The Company’s HCI business segment is used to report on the Company’s developmental activities outside its HH and OHBS businesses.  These activities are intended ultimately, whether directly or indirectly, to benefit the Company’s patients and payors through the enhanced provision of HH and OHBS.  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.

(1)  Allocation of interest for the quarter ended June 30, 2017 was $686, $212 and $160 to the HH, OHBS and HCI segments, respectively, and $440, $440, and $333 to the HH, OHBS and HCI segments, respectively, for the quarter ended  July 1, 2016.  Allocation of interest for the six months ended June 30, 2017 was $1,631, $501 and $354 to the HH, OHBS and HCI segments, respectively, and $798, $798, and $711 to the HH, OHBS and HCI segments, respectively, for the six months ended July 1, 2016. 

3. Goodwill and Other Intangible Assets

The Company conducts annual reviews of goodwill and other indefinite-lived intangible assets for impairment, or more frequently if circumstances indicate impairment may have occurred.  Other intangible assets consist of certificates of need and licenses, trade names and non-compete agreements.  Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Licenses, provider numbers, certificates of need and trade names have indefinite lives and are reviewed at least annually for possible impairment, or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.  The Company completed its most recent annual impairment test of goodwill and other indefinite-lived intangible assets as of December 30, 2016 and determined that no impairment existed.

The following table summarizes the activity related to goodwill and other intangible assets for 2017:

Acquisitions in the table primarily relate to the CHS-JV acquisition discussed further in Note 8, “Acquisitions.”

The following table summarizes the Company’s goodwill and other intangible assets at June 30, 2017 by segment:

4. Revolving Credit Facility

The Company has a senior secured revolving credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent, and certain other lenders (the “Facility”).  The Facility provides a credit line of up to $350 million with a maturity date of December 3, 2021, and an “accordion” feature providing for potential future expansion of the Facility up to $150 million of additional borrowings upon further request and approval by a lender or lenders willing to extend such borrowings.  Borrowings, other than letters of credit, under the Facility generally will bear interest at a varying rate equal to the London Interbank Offered Rate (“LIBOR”) plus a margin which varies from 1.50% to 2.75%, depending on the Company’s leverage ratio.  The Facility is secured by substantially all assets and the assets and stock of the Company’s subsidiaries. The subsidiaries have also guaranteed the Facility.  Debt issuance costs of $4.7 million were capitalized with the Facility and are being amortized to interest expense through December 2021.

Borrowings under the Facility are subject to various covenants, including a maximum leverage ratio for all calculation dates ending on or before December 31, 2017, of 4.0 times earnings before interest, taxes, depreciation and amortization, as adjusted (“EBITDA”) plus “Acquired EBITDA” from pro-forma acquisitions as defined.  The maximum leverage ratio steps down, to a maximum leverage ratio of 3.75 times EBITDA plus Acquired EBITDA for calculation dates after December 31, 2017, and on or before June 30, 2018, and to a maximum leverage ratio of 3.5 times EBITDA plus Acquired EBITDA for calculation dates on and after September 30, 2018.  Borrowings under the revolving credit facility may be used for general corporate purposes, including acquisitions. 

On December 30, 2016, the Company borrowed approximately $128.9 million from the Facility to finance the CHS-JV transaction, which was classified as a Transaction deposit and was included in revolving credit facility in the 2016 Consolidated Balance Sheet.  On December 31, 2016, the first day of the Company’s 2017 fiscal year, the Transaction deposit converted to purchase price with the closing of the CHS-JV acquisition.  On January 25, 2017, the Company sold 3.5 million shares of common stock for net proceeds of $143.9 million, after deducting the estimated underwriting discounts and commissions and offering expenses, which were used to repay obligations under the Facility. 

As of June 30, 2017, the Company was in compliance with the various financial covenants.  Application of the Facility’s borrowing formula as of June 30, 2017, would have permitted approximately $198.2 million to be used.  The Company had irrevocable letters of credit totaling $16.7 million in connection with its self-insurance programs. 

The effective interest rates on the Company’s borrowings were 3.89% and 5.76% for the quarters ended June 30, 2017 and July 1, 2016, respectively. 

5. Fair Value Measurements

The Company’s financial instruments consist of cash, accounts receivable, payables and debt instruments.  The carrying values of cash, accounts receivable and payables are considered representative of their respective fair values due to the short-term nature of these instruments.  The fair value of the Company’s debt instruments approximates their carrying values as substantially all of such debt instruments have rates which fluctuate with changes in market rates.  The Company does not have any assets or liabilities carried at fair value that are measured on a recurring basis.

6. Earnings per Common Share

A reconciliation of the weighted average shares outstanding used in the calculation of basic and diluted earnings per common share is as follows:

7. Commitments and Contingencies

Insurance Programs

The Company bears significant insurance risk under its large-deductible workers’ compensation insurance program and its self-insured employee health program.  Under the workers’ compensation insurance program, the Company bears risk up to $0.4 million per incident, after which stop-loss coverage is maintained.  The Company purchases stop-loss insurance for the employee health plan that places a specific limit, generally $0.3 million, on its exposure for any individual covered life.

Malpractice and general patient liability claims for incidents which may give rise to litigation have been asserted against the Company by various claimants.  The claims are in various stages of processing and some may ultimately be brought to trial.  The Company is aware of incidents that have occurred through June 30, 2017 that may result in the assertion of additional claims.  The Company currently carries professional and general liability insurance coverage (on a claims made basis) for this exposure with no deductible.  The Company also carries D&O coverage (also on a claims made basis) for potential claims against the Company’s directors and officers, including securities actions, with deductibles ranging from $0.2 million to $0.5 million per claim.

The Company records estimated liabilities for its insurance programs based on information provided by the third-party plan administrators, historical claims experience, the life cycle of claims, expected costs of claims incurred but not paid, and expected costs to settle unpaid claims.  The Company monitors its estimated insurance-related liabilities and recoveries, if any, on a monthly basis and records amounts due under insurance policies in other current assets, while recording the estimated carrier liability in other current liabilities.  As facts change, it may become necessary to make adjustments that could be material to the Company’s results of operations and financial condition.

Legal Proceedings

The Company is currently, and from time to time, subject to claims and suits arising in the ordinary course of its business, including claims for damages for personal injuries.  In the opinion of management, after discussions with legal counsel, the ultimate resolution of any of these ordinary course pending claims and legal proceedings will not have a material effect on the Company’s financial position or results of operations.

8. Acquisitions

CHS-JV Acquisition

The acquisition of CHS-JV closed on the Company’s first day of fiscal 2017.  As a result, the Company’s six months ended June 30, 2017 included two full quarters of revenues, operating income before corporate expenses and deal and transaction costs of approximately $98.1 million, $17.9 million and $3.9 million, respectively.  Comparable unaudited pro forma year to date CHS-JV operating results for 2016 totaled revenue and operating income of $98.4 million and $4.5 million, respectively.  Unaudited pro forma information is for illustrative purposes only and may not be indicative of the results of operations that would have actually occurred if the transaction described had been completed as of the beginning of 2016.  In addition, future results may vary from the results reflected in such information. 

The following table summarizes the preliminary estimates of fair values of the assets acquired and liabilities assumed in the CHS-JV acquisition:

Second quarter adjustments to the CHS-JV acquisition purchase price allocation are based on the preliminary results from our valuation firm.  Goodwill arising from the CHS-JV transaction is based upon expected contributions to the overall corporate strategy in addition to synergies and acquired workforce, which are not separable from goodwill.  Revenues and goodwill associated with this transaction are assigned to the Home Health and Other Home-Based Services segments.  Amortizable goodwill and intangibles acquired in the CHS-JV acquisition are expected to be tax deductible. 

Other Acquisitions

During the third quarter of 2016, one of the Company’s HCI subsidiaries redeemed certain outstanding shares increasing the Company's ownership percentage to 72.0% from 61.5%. 

On June 18, 2016, the Company acquired certain home health agency assets primarily in Wisconsin, but also in Connecticut and Kentucky (collectively, the Wisconsin acquisition).  The purchase price was $6.1 million, funded through borrowings on the Company’s bank credit facility.  The post-acquisition operating results of these agencies are primarily reported in the Company’s OHBS segment.  No accounts receivable were acquired. 

On January 5, 2016, the Company acquired 100% of the equity of Long Term Solutions, Inc. (“LTS”).  LTS is a provider of in-home nursing assessments for the long-term care insurance industry.  LTS provides assessments in all 50 U.S. states and a number of foreign countries.  The purchase price of $37 million was funded through borrowings on the Company’s bank credit facility, seller notes and issuance of the Company’s common stock.  The Company expects goodwill from this transaction to be deductible for tax purposes.  Approximately 74% of LTS’s 2016 revenue was from two customers.  LTS’s post-acquisition operating results are reported in the Company’s HCI business segment.

On January 5, 2016, the Company purchased the assets of a Medicare-certified home health agency owned by Bayonne Visiting Nurse Association (“Bayonne”) located in New Jersey.  The purchase price was $4.1 million.  Bayonne’s post-acquisition operating results are reported in the Company’s HH segment.

9. Income Taxes

The Company’s effective income tax rate for the six month periods ended June 30, 2017 and July 1, 2016 was approximately 29.5% and 40.5%, respectively.  The lower effective income tax rate for the six months of 2017 was due to a change in accounting rules for excess tax benefits or losses from the exercise of stock options and vesting of restricted shares.  Previously, accounting guidance recorded called for this to be recorded to Additional paid-in capital.  Future periods with option exercises or restricted stock vesting will have a lower tax provision.   See Note 1 for additional discussion of the new accounting guidance.

Accounting principles generally accepted in the United States prescribe 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 had $4.1 million of unrecognized tax benefits at June 30, 2017, the total amount of which, if recognized, would affect the tax rate.  The Company includes the full amount of unrecognized tax benefits in other liabilities in the Consolidated Balance Sheets.  Additionally, the Company may from time to time be assessed interest and penalties by tax jurisdictions.  Any such assessments historically have been immaterial to the Company’s financial results and are classified as other general and administrative expenses in the consolidated statements of income.

10. Stockholders’ Equity

Stock Transaction

On January 19, 2017, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant to which the Company agreed to issue and sell to the Underwriters a total of 3,000 shares of the Company’s common stock, par value $0.10 per share, plus an option to purchase up to 450 additional shares of common stock (the “Offering”), in a registered public offering pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333-204584).

On January 25, 2017, the Company sold 3,450 shares of common stock at $44.50 per share under the shelf registration statement for gross proceeds of approximately $153.5 million.  Net proceeds were approximately $143.9 million after deducting the estimated underwriting discounts and commissions and offering expenses. Proceeds from the Offering were used to repay obligations under the revolving credit facility, which increased credit available under the Facility from approximately $78.6 million at December 30, 2016 to approximately $204 million after the Offering.  Further, the Company incurred $0.4 million in professional fees related to the Offering that were recorded to additional paid-in capital.

11. Subsequent Events

On July 14, 2017, the Company’s CHS-JV purchased the assets of a Medicare-certified home health agency and related private duty company from Island Home Care located in Key West, Florida.  The purchase price was $1.2 million. Post-acquisition operating results are reported in the Company’s HH and OHBS segments. 

For a detailed discussion of these and other factors that could cause our actual results to differ materially from the results contemplated by the forward-looking statements, please refer to Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 30, 2016 and this Form 10-Q.  The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report.  Except as required by law, we assume no responsibility for updating forward-looking statements to reflect unforeseen or other events after the date of this report.  We have provided a detailed discussion of risk factors in our Form 10-K and various filings with the Securities and Exchange Commission (“SEC”).  The reader is encouraged to review these risk factors and filings.

Critical Accounting Policies

Refer to the “Critical Accounting Policies” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the year ended December 30, 2016 for a detailed discussion of our critical accounting policies.  There have been no material changes to our critical accounting policies and estimates as described therein.

Operating Segments

In the first quarter in 2017, we redefined our reporting segments to include a) Home Health (“HH”) formerly Visiting Nurse, b) Other Home-Based Services (“OHBS”) which includes all other home care services outside of Home Health services and c) the Healthcare Innovations (“HCI”) segment.  Our OHBS segment consists of our historical personal care operations plus hospice services.  Prior year segment information has been reclassified to conform to our new segment definitions.  In our opinion, this approach provides investors clarity for the largest segment, Home Health, and best aligns with our internal decision-making processes as viewed by the chief operating decision maker.

Reportable segments have been identified based upon how we have organized the business by services provided to customers and how our chief operating decision maker manages the business and allocates resources, consistent with the criteria in ASC 280, Segment Reporting .  Consistent with information given to our chief operating decision maker, we do not allocate certain expenses to the reportable segments.  We evaluate the performance of our business segments based on operating income.  We eliminate intercompany and intersegment transactions.

Our HH segment provides skilled medical services in patients’ homes largely to enable recipients to reduce or avoid periods of hospitalization and/or nursing home care.  Approximately 95% of our HH segment revenues were generated from the Medicare program, while the balance was generated from Medicaid and private insurance programs.

Our OHBS segment includes traditional personal care services (generally provided by paraprofessional staff such as home health aides) which are generally of a custodial rather than skilled nature.  Personal care revenues are generated on an hourly basis and are primarily from Medicaid (approximately 79% of personal care revenues).  Hospice services are

largely provided in patients’ homes and generally require specialized hospice nursing skills.  Hospice revenues are generated on a per diem basis and are primarily from Medicare (approximately 92% of hospice revenues).

Our HCI business segment is used to report on our developmental activities outside our HH and OHBS businesses.  These activities are intended ultimately, whether directly or indirectly, to benefit our patients and payors through the enhanced provision of HH and OHBS.  The activities all share a common goal of improving patient experiences and quality outcomes, while lowering costs.  They include, but are not limited to, items such as: technology, information, population health management, risk-sharing, care-coordination and transitions, clinical advancements, enhanced patient engagement and informed clinical decision and technology enabled in-home clinical assessments.

The HCI segment includes: a) an ACO enablement company; b) an in-home assessment company serving the long-term care insurance industry and managed care organizations; and c) an investment in a population-health analytics company.

Certain general and administrative expenses incurred at the corporate level have not been allocated to the segments.

Recent Developments

On December 31, 2016, the first day of our 2017 fiscal year end, we acquired an 80% controlling interest in the entity holding the home health and hospice assets of Community Health Systems, Inc. (NYSE: CYH) (referred to herein as “CHS-JV”).  CHS-JV, a provider of skilled home health and hospice services, currently operates 74 home health and 15 hospice branch locations in 22 states.  With the completion of this transaction, Almost Family now operates 329 branches across 26 states.  The purchase price of $128 million was funded through borrowings on the Company's revolving credit facility.  We expect the transaction will add approximately $200 million in revenue annually.  Approximately 85% of CHS-JV revenue is reported in our HH segment and 15% (hospice) is reported in our OHBS segment.

2017 Common Stock Offering

On January 25, 2017, we sold 3,450 shares of common stock at $44.50 per share for gross proceeds of approximately $153.5 million.  Total net proceeds, after underwriting discounts and commissions and our offering expenses, were approximately $143.9 million.  These proceeds were used to repay obligations under the revolving credit facility.

Health Care Reform Legislation and Medicare Regulations

The reader is encouraged to review our detailed discussion of Health Care Reform 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 discussion under “Government Regulation” in Part I, Item 1, “Business” and Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2016. 

On July 25, 2017, the Centers for Medicare and Medicaid Services (CMS) issued its proposed rule for 2018. CMS is proposing a 0.4% rate cut consisting of a 1.0% market basket update, a 0.97% case mix adjustment and sunset of the rural add-on provision. The proposed rule, which also proposes certain refinements to the Home Health Value-based Purchasing Model plus a new Home Health Groupings Model (HHGM Case Mix Model) for 2019, is currently open for comment. The final rule is expected to be released in late October 2017.  With regard to the HHGM Case Mix Model, as proposed it would also be subject to regulatory review through the 2019 preliminary and final rule process and thus can reasonably be expected to change from its current form prior to actual implementation.

Due to the complexity, early stage of development and announcement and subjectivity to future change of the FY2019 HHGM, the Company is unable to predict at this time the impact such a proposal, if enacted, and in what form enacted, may have on the Company’s future financial performance and condition.

In January of 2017, CMS released a final rule revising the conditions of participation (“CoPs”) for home health agencies to participate in the Medicare and Medicaid programs.  The rule, originally effective July 13, 2017, and now deferred through the end of 2017, focuses on, among other things, care delivered to patients, an interdisciplinary view of patient care, greater flexibility in meeting quality of care standards and the elimination of certain unneeded procedural burdens

on providers.  We are currently unable to predict what impact, if any, this new rule may have on our result of operations or financial position.

On June 8, 2016, CMS announced the “Pre-Claim Review Demonstration of Home Health Services” which seeks to demonstrate that a review of selected documentation prior to payment of claims can decrease “improper payments because of insufficient documentation”.  According to CMS, the pre-claim review demonstration is expected to help educate Home Health Agencies on what documentation is required and encourage them to submit the correct documentation, while still allowing the HHA to begin providing services and receive initial payments prior to the pre-claim review decision.  The pre-claim review demonstration began in Illinois in 2016, but currently has been suspended.  Further expansion to Florida, Texas, Michigan and Massachusetts has also been delayed.  We are currently unable to predict what impact, if any, this demonstration program may have on our results of operations or financial position.

Seasonality

Our HH segment operations in Florida normally experience higher admissions during the first quarter and lower admissions during the third quarter than in the other quarters due to seasonal population fluctuations.  Year to date Florida operations generated approximately 20% of our 2017 revenue.  In our HCI segment, first quarter assessment revenues are traditionally lower than the other quarters due to the seasonal nature of our Medicare Advantage plan customers, while the majority of our ACO Management revenues are generated in the third quarter.