Almost Family 10Q 2014 Q2 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

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

For the transition period from to

Commission file number 001-09848

ALMOST FAMILY, INC.

(Exact name of Registrant as specified in its charter)

Delaware

06-1153720

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification
Number)

9510 Ormsby Station Road, Suite 300, Louisville, Kentucky 40223

(Address of principal executive offices)

(502) 891-1000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨.

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

Large accelerated filer ¨		Accelerated filer x

Non-accelerated filer ¨		Smaller Reporting Company ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class of Common Stock $0.10 par value

Shares outstanding at August 4, 2014 9,468,831

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ALMOST FAMILY, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION			3

Item 1.		Financial Statements. Consolidated Financial Statements and Supplementary Data (unaudited except December 31, 2013 Consolidated Balance Sheet)	3

	Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013		3

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013		4

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013		5

	Notes to Consolidated Financial Statements		6

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.		Quantitative and Qualitative Disclosures about Market Risk	26

Item 4.		Controls and Procedures	26

PART II. OTHER INFORMATION			26

Item 1.		Legal Proceedings	26

Item 1A.		Risk Factors	27

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.		Defaults Upon Senior Securities	27

Item 4.		Mine Safety Disclosures	27

Item 5.		Other Information	27

Item 6.		Exhibits	27

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

	June 30, 2014
	(UNAUDITED)			December 31, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,765		$	12,246
Accounts receivable - net	64,324			61,651
Prepaid expenses and other current assets	10,915			10,278
Deferred tax assets	13,146			11,532
TOTAL CURRENT ASSETS	91,150			95,707

PROPERTY AND EQUIPMENT - NET	6,929			8,142
GOODWILL	196,070			192,575
OTHER INTANGIBLE ASSETS	55,875			55,075
OTHER ASSETS	679			774
TOTAL ASSETS	$	350,703		$	352,273

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	9,150		$	11,526
Accrued other liabilities	37,879			38,916
Current portion - notes payable and capital leases	130			702
TOTAL CURRENT LIABILITIES	47,159			51,144

LONG-TERM LIABILITIES:
Revolving credit facility	50,655			56,000
Deferred tax liabilities	27,585			25,580
Other	1,710			1,856
TOTAL LONG-TERM LIABILITIES	79,950			83,436
TOTAL LIABILITIES	127,109			134,580

NONCONTROLLING INTEREST - REDEEMABLE	3,639			3,639

STOCKHOLDERS’ EQUITY:
Preferred stock, par value $0.05; authorized 2,000 shares; none issued or outstanding	—			—
Common stock, par value $0.10; authorized 25,000; 9,562 and 9,500 issued and outstanding	956			950
Treasury stock, at cost, 94 and 92 shares of common stock	(2,393		)	(2,340		)
Additional paid-in capital	104,725			103,858
Noncontrolling interest - nonredeemable	(93		)	(203		)
Retained earnings	116,760			111,789
TOTAL STOCKHOLDERS’ EQUITY	219,955			214,054
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	350,703		$	352,273

See accompanying Notes to Consolidated Financial Statements.

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ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net service revenues	$	124,937		$	86,400		$	244,969		$	171,854
Cost of service revenues (excluding depreciation & amortization)	65,587			46,147			131,119			91,592
Gross margin	59,350			40,253			113,850			80,262
General and administrative expenses:
Salaries and benefits	35,840			24,835			69,498			49,186
Other	15,259			10,846			30,667			21,215
Deal and transition costs	1,243			128			4,358			139
Total general and administrative expenses	52,342			35,809			104,523			70,540
Operating income	7,008			4,444			9,327			9,722
Interest expense, net	(329		)	(11		)	(677		)	(29		)
Income before income taxes	6,679			4,433			8,650			9,693
Income tax expense	(2,618		)	(1,852		)	(3,435		)	(3,802		)
Net income from continuing operations	4,061			2,581			5,215			5,891

Discontinued operations:
Loss from operations, net of tax of ($41), $49, ($90) and ($2)	(64		)	(227		)	(134		)	(290		)
Gain on sale, net of tax of $973	—			169			—			169
Loss on discontinued operations	(64		)	(58		)	(134		)	(121		)
Net income	3,997			2,523			5,081			5,770
Net (gain) loss - noncontrolling interests	(36		)	—			153			—
Net income attributable to Almost Family, Inc.	$	3,961		$	2,523		$	5,234		$	5,770

Per share amounts-basic:
Average shares outstanding	9,338			9,270			9,316			9,253
Income from continuing operations attributable to Almost Family, Inc.	$	0.43		$	0.28		$	0.58		$	0.64
Discontinued operations	(0.01		)	(0.01		)	(0.01		)	(0.01		)
Net income attributable to Almost Family, Inc.	$	0.42		$	0.27		$	0.57		$	0.63

Per share amounts-diluted:
Average shares outstanding	9,431			9,348			9,423			9,332
Income from continuing operations attributable to Almost Family, Inc.	$	0.43		$	0.28		$	0.57		$	0.63
Discontinued operations	(0.01		)	(0.01		)	(0.01		)	(0.01		)
Net income attributable to Almost Family, Inc.	$	0.42		$	0.27		$	0.56		$	0.62

See accompanying Notes to Consolidated Financial Statements.

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ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

	Six Months Ended June 30,
	2014			2013
Cash flows of operating activities:
Net income	$	5,081		$	5,770
Loss on discontinued operations, net of tax	(134		)	(121		)
Net income from continuing operations	5,215			5,891
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization	2,152			1,298
Provision for uncollectible accounts	4,308			2,466
Stock-based compensation	872			654
Deferred income taxes	2,402			790
	14,949			11,099
Change in certain net assets and liabilities, net of the effects of acquisitions:
Accounts receivable	(11,861		)	(8,342		)
Prepaid expenses and other current assets	(728		)	1,079
Other assets	96			107
Accounts payable and accrued expenses	(4,330		)	1,455
Net cash (used in) provided by operating activities	(1,874		)	5,398

Cash flows of investing activities:
Capital expenditures	(735		)	(1,250		)
Acquisitions, net of cash acquired	(969		)	(43		)
Net cash used in investing activities	(1,704		)	(1,293		)

Cash flows of financing activities:
Credit facility repayments, net	(5,345		)	—
Proceeds from stock options exercises	39			—
Purchase of common stock in connection with share awards	(52		)	—
Tax impact of share awards	(38		)	(67		)
Payment of special dividend in connection with share awards	(35		)	—
Principal payments on notes payable and capital leases	(606		)	(500		)
Net cash used in financing activities	(6,037		)	(567		)

Cash flows from discontinued operations
Operating activities	134			(1,353		)
Investing activities	—			3,075
Net cash provided by discontinued operations	134			1,722

Net change in cash and cash equivalents	(9,481		)	5,260
Cash and cash equivalents at beginning of period	12,246			26,120
Cash and cash equivalents at end of period	$	2,765		$	31,380

See accompanying Notes to Consolidated Financial Statements.

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ALMOST FAMILY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Unless otherwise indicated, all dollars and share amounts are in thousands, except per share data)

1. Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2014 and 2013 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations. Accordingly, the reader of this Form 10-Q is referred to Almost Family, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2013 for further information. In the opinion of management of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position at June 30, 2014, the results of operations for the three and six month periods ended June 30, 2014 and 2013 and cash flows for the six month periods ended June 30, 2014 and 2013. The results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of the operating results for the year.

On December 6, 2013, the Company completed the acquisition of Omni Home Health Holdings, Inc. (“SunCrest”). Branded principally under the SunCrest name, its subsidiaries own and operate 66 Medicare-certified home health agencies and 9 private duty agencies in Florida, Tennessee, Georgia, Pennsylvania, Kentucky, Illinois, Indiana, Mississippi and Alabama. On October 4, 2013, the Company acquired a controlling interest in Imperium Health Management, LLC (“Imperium”), a development-stage enterprise that provides strategic health management services to Accountable Care Organizations (“ACO’s”). On July 17, 2013, the Company acquired the assets of the Medicare-certified home health agencies owned by Indiana Home Care Network (“IHCN”). The acquisitions are more fully described in Note 10, “Acquisitions.” The results of operations for SunCrest and IHCN are principally reported within the Company’s Visiting Nurse (VN) reportable segment, while Imperium results are currently included in general and administrative expenses. Results of operations for each acquisition are included from the acquisition date forward.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which impacts virtually all aspects of an entity’s revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016. The Company has not yet completed its assessment of the impact of the new standard, including possible transition alternatives, on the Company’s financial statements.

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In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. To qualify as a discontinued operation the standard requires a disposal to represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The standard also expands the disclosures for discontinued operations and requires new disclosures related to individually material dispositions that do not qualify as discontinued operations. The standard is effective prospectively for fiscal years beginning after December 15, 2014, with early adoption permitted. The implementation of this standard is not expected to have a material impact on the Company’s financial statements, but could impact the reporting of any future dispositions.

Discontinued Operations

In the first quarter of 2014, the Company’s VN segment exited a market in the Northeast through the closure of a branch location. In conjunction with the SunCrest acquisition, the Company acquired some operations which had been discontinued prior to acquisition. During the quarter ended June 30, 2013, the Company completed the sale of two Alabama locations, which operated in the VN segment. The operations and any related gain on sale for these operations were reclassified from continuing operations into discontinued operations for all periods presented. Unless otherwise noted, amounts in these Notes to Consolidated Financial Statements exclude amounts attributable to discontinued operations.

2. Segment Data

The Company has two reportable segments, VN and Personal Care (PC), which operate locations in Florida, Ohio, Tennessee, Kentucky, Connecticut, New Jersey, Massachusetts, Indiana, Pennsylvania, Georgia, Missouri, Illinois, Mississippi and Alabama. Reportable segments have been identified based upon how management has organized the business by services provided to customers and the criteria in ASC 280, Segment Reporting. The Company does not allocate certain expenses to the reportable segments. These expenses are included in corporate expenses.

The VN 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 90% of the VN segment revenues are generated from the Medicare program while the balance is generated from Medicaid and private insurance programs. VN Medicare revenues include revenues from all Medicare sources including traditional Medicare and Medicare Advantage, whether paid on a per episode basis or a per visit basis.

The PC segment services are also provided in patients’ homes. These services (generally provided by paraprofessional staff such as home health aides) are generally of a custodial rather than skilled nature. PC revenues are generated on an hourly basis. Approximately 72% of the PC segment revenues are generated from Medicaid and other government programs while the balance is generated from insurance programs and private pay patients.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net service revenues:
Visiting Nurse	$	99,438		$	66,000		$	195,194		$	132,552
Personal Care	25,499			20,400			49,775			39,302
	124,937			86,400			244,969			171,854
Operating income before corporate expenses:
Visiting Nurse	13,597			6,824			22,970			15,161
Personal Care	3,335			3,176			5,859			5,174
	16,932			10,000			28,829			20,335
Corporate expenses	8,681			5,428			15,144			10,474
Deal and transition costs	1,243			128			4,358			139
Operating income	7,008			4,444			9,327			9,722
Interest expense, net	(329		)	(11		)	(677		)	(29		)
Income tax expense	(2,618		)	(1,852		)	(3,435		)	(3,802		)
Net income from continuing operations	$	4,061		$	2,581		$	5,215		$	5,891

3. Capitalized Software Development Costs

The Company capitalizes the cost of internally generated computer software developed for the Company’s own use. Software development costs of approximately $108 and $136 were capitalized in the three months ended June 30, 2014 and 2013, respectively. Software development costs of approximately $192 and $405 were capitalized in the six months ended June 30, 2014 and 2013, respectively. Capitalized software development costs are amortized over the estimated useful life, generally three years, once the software is ready for its intended use.

4. Goodwill and Other Intangible Assets

The Company conducts annual reviews 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 31, 2013 and determined that no impairment existed.

The following table summarizes the activity related to goodwill and other intangible assets for 2014:

			Other Intangible Assets
	Goodwill		Certificates of Need and licenses		Trade Names		Non-compete Agreements			Total
Balances at 12-31-13	$	192,575	$	38,321	$	16,691	$	63		$	55,075
Acquisitions	—		846		—		—			846
Changes	3,495		—		—		—			—
Amortization	—		—		—		(46		)	(46		)
Balances at 6-30-14	$	196,070	$	39,167	$	16,691	$	17		$	55,875

At June 30, 2014, the VN segment includes $158,499, $38,387, $13,311 and $2, while the PC segment includes $37,571, $780, $3,380 and $15 of total goodwill, certificates of need and licenses, trade names and non-compete agreements, respectively. At June 30, 2013, the VN segment included $100,087, $8,781, $7,701 and $25, while the PC segment included $30,974, $610, $2,720 and $83 of total goodwill, certificates of need and licenses, trade names and non-compete agreements, respectively. Acquisitions primarily related to the

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Caldwell Co. Home Health acquisition in April of 2014. Changes to goodwill primarily include VN segment acquisition adjustments related to the SunCrest acquisition. Amortization expense recognized on finite-lived intangible assets for the second quarter of 2014 and 2013 was $23 and for the six month period ending June 30, 2014 and 2013 was $46.

5. Revolving Credit Facility

At June 30, 2014, the Company had a $125 million senior secured revolving credit facility with JP Morgan Chase Bank, NA, as Administrative Agent, Bank of America, as Syndication Agent and certain other lenders (the “Facility”). The Facility consists of a $125 million credit line with a maturity date of December 2, 2015 and an “accordion” feature providing for potential future expansion of the Facility to $175 million. Borrowings (other than letters of credit) under the credit facility are at either the bank’s prime rate plus a margin (ranging from 1.25% to 2.25%, currently 1.50%) or the London Interbank Offered Rate (LIBOR) plus a margin (ranging from 2.25% to 3.25%, 2.50% at June 30, 2014). The margin for prime rate or LIBOR borrowings is determined by the Company’s leverage. Borrowings under the Facility are secured by a first priority perfected security interest in all tangible and intangible assets of the Company, and all existing and future direct and indirect subsidiaries of the Company, as guarantors.

The weighted average prime rate-based interest rate was 4.50% for both the three months ended June 30, 2014 and 2013. The weighted average LIBOR rates were 2.42% and 2.53% for the three months ended June 30, 2014 and 2013, respectively. The Company pays a quarterly commitment fee of 0.30% to 0.50% on the average daily unused facility balance based on leverage. Borrowings are subject to various covenants including a multiple of 3.0 times earnings before interest, income tax, depreciation and amortization (“EBITDA”). “EBITDA” may include “Acquired EBITDA” from proforma acquisitions pursuant to a calculation rider, up to 50% of “Adjusted EBITDA,” as defined. Borrowings under the Facility may be used for general corporate purposes, including acquisitions. As of June 30, 2014, the formula permitted $47.2 million to be used. The Company had irrevocable letters of credit totaling $8.2 million outstanding in connection with the Company’s self-insurance programs, which resulted in a total of $39.0 million being available for use at June 30, 2014. As of June 30, 2014, the Company was in compliance with the Facility’s various financial covenants. Under the most restrictive of its covenants, the Company was required to maintain minimum net worth of at least $163.2 million at June 30, 2014. At such date, the Company’s net worth was approximately $220.0 million.

6. 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.

7. Stock-Based Compensation

The Company issues both restricted share and option awards to employees and non-employee directors. Restricted share awards to employees cliff vest on the third anniversary, while option share awards vest annually in 25% increments over four years. Stock option grant date fair values are determined at the date of grant using a Monte Carlo option valuation model with suboptimal exercise behavior. Changes in awards outstanding are summarized as follows:

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	Restricted shares				Options
	Shares		Wtd Avg. Grant Price		Shares		Wtd Avg. Exercise Price
December 31, 2013	100		$	24.12	383		$	24.52
Granted	60		23.27		70		24.28
Vested or exercised	(38	)	24.01		(2	)	19.40
Forfeited	—		—		(6	)	23.24
June 30, 2014	122		$	22.68	445		$	24.52

8. 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:

	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
Basic weighted average outstanding shares	9,338	9,270	9,316	9,253
Add common equivalent shares representing shares issuable upon exercise of dilutive awards	93	78	107	79
Diluted weighted average number of shares	9,431	9,348	9,423	9,332

Anti-dilutive shares excluded from calculation	261	254	96	254

9. 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 $250 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 $300, 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, 2014 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 $100 to $250 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.

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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.

As previously disclosed, four derivative complaints were filed in Jefferson Circuit Court, Kentucky, against the members of the Company’s board of directors, president and chief executive officer, and chief financial officer. All four lawsuits named the Company as a nominal defendant and were consolidated into a single action. All of the complaints and the resulting consolidated complaint refer to an April 27, 2010 The Wall Street Journal article and the subsequent governmental investigations. On February 13, 2012, the independent directors filed a motion to dismiss the complaint. On October 2, 2012, the Court entered an order granting the motion to dismiss and dismissing the complaint with prejudice. On November 1, 2012 two plaintiffs filed an appeal of the Court’s ruling with the Kentucky Court of Appeals. After briefing was complete, the Board received a demand letter dated July 17, 2013, from counsel for one of the derivative plaintiff shareholders. The letter stated that the shareholder believed certain of the Company’s officers and directors violated their fiduciary duties based on allegations similar to those described in the consolidated complaint. The letter requested that the Board take appropriate action against the individuals in question. The Board appointed a Special Litigation Committee to respond to the shareholder demand. As a result of the demand from the plaintiff shareholder, the Company’s outside directors filed a motion with the Court of Appeals asking the Court to dismiss the appeal as moot. On March 11, 2014, the Court of Appeals denied the outside directors’ motion to dismiss the appeal as moot. Moreover, the Court of Appeals on its own motion abated the appeal. The abatement removed the appeal from the Court’s active appellate docket. The Court stated that upon the Board’s response to the shareholder demand, the parties should file a motion to redocket the case. The Special Litigation Committee completed its investigation and presented its findings to the Board on June 25, 2014. The Special Litigation Committee concluded that it would not be in the best interest of the Company or its shareholders to pursue the claims raised in the shareholder demand. In accordance with the instruction from the Kentucky Court of Appeals to file a motion to redocket the appeal once the Special Litigation Committee responded to the shareholder demand, the Company has moved to redocket the case and dismiss the appeal.

As previously disclosed, a fifth derivative complaint involving Richard W. Carey was filed in U.S. District Court for the Western District of Kentucky. The lawsuit names the Company as a nominal defendant and is substantially duplicative of the derivative complaint pending in the Jefferson Circuit Court. The Court granted the defendants’ motion to stay the lawsuit pending further order of the Court.

The Company is unable to assess the probable outcome or potential liability, if any, arising from these matters.

10. Acquisitions

The Company completed each of the following acquisitions in pursuit of its strategy for operational expansion in the eastern United States through an expanded service base and enhanced position in certain geographic areas. The purchase price of each acquisition was determined based on the Company’s analysis of comparable acquisitions, expected cash flows and arm’s length negotiation with the sellers. Each acquisition was included in the Company’s consolidated financial statements from the respective acquisition date.

Goodwill recognized from the acquisitions primarily relates to expected contributions of each entity to the overall corporate strategy in addition to synergies and acquired workforce, which are not separable from goodwill. Goodwill and other intangible assets generated in asset purchase transactions are expected to be amortizable for tax purposes on a straight-line basis over 15 years, unless otherwise noted. Goodwill and other intangible assets generated in stock purchase transactions are not amortizable for tax purposes, unless otherwise noted. The purchase price allocations for 2013 and subsequent acquisitions remain preliminary as the Company is continuing to obtain information regarding acquired assets and liabilities.

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On December 6, 2013, the Company acquired the stock of SunCrest. SunCrest and its subsidiaries own and operate 66 Medicare-certified home health agencies and 9 private duty agencies in Florida, Tennessee, Georgia, Pennsylvania, Kentucky, Illinois, Indiana, Mississippi and Alabama. The total SunCrest purchase price for the stock was $76.6 million, subject to a working capital adjustment which is expected to be finalized in 2014. The purchase price consisted of cash consideration of $75.1 million, of which $0.5 million remained unpaid at June 30, 2014 and a $1.5 million note payable, net of acquired cash balances of $2.2 million. The following table summarizes the approximate estimated fair values of the assets acquired and liabilities assumed in the SunCrest acquisition, which includes adjustments to accounts receivable as the company continues to gather facts on underlying accounts.

Accounts Receivable	$	11,422
Property, plant & equipment	2,266
Other assets	3,005
Goodwill	47,557
Other intangibles	33,390
Assets acquired	97,640
Liabilities assumed	(21,083		)
Net assets acquired	$	76,557

Amortizable goodwill and intangibles acquired in the SunCrest acquisition are expected to provide an annual tax deduction approximating $2.8 million through 2020.

The unaudited proforma results of operations for the Company as if the SunCrest acquisition had been made at the beginning of 2013 are as follows:

	Three months ended June 30,		Six months ended June 30,
	2013		2013
Revenues	$	125,200	$	251,123
Net income from continuing operations	$	2,656	$	6,885
Net income	$	2,597	$	6,764
Earnings per share from continuing operations
Basic	$	0.29	$	0.74
Diluted	$	0.28	$	0.74
Earnings per share
Basic	$	0.28	$	0.73
Diluted	$	0.28	$	0.72

The proforma information presented above is presented 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 2013. In addition, future results may vary from the results reflected in such information.

On October 4, 2013, the Company acquired 61.5% of Imperium for $5.8 million, of which $3.0 million was working capital for Imperium. Imperium is a development-stage enterprise that provides strategic health management services to ACOs. Substantially all of the purchase price was allocated to goodwill. The Company is party to a put and call arrangement with respect to the remaining 38.5% non-controlling interest in Imperium that becomes exercisable five years after the initial investment date. The redemption value for both the put and the call arrangement is equal to fair value. Due to the existing put and call arrangements, the non-controlling interest is considered to be redeemable and is recorded on the balance sheet as a redeemable non-controlling interest outside of permanent equity. The redeemable non-controlling interest is recognized at the higher of 1) the accumulated earnings associated with the non-controlling interest or 2) the redemption value as of the balance sheet date.

On July 17, 2013, the Company acquired the assets of the Medicare-certified home agencies owned by IHCN. IHCN operated six home health agencies primarily in northern Indiana for a total purchase price of $12.5

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million consisting of cash and $0.5 million of Almost Family, Inc. common stock. A preliminary allocation of purchase price resulted in the allocation of $9.9 million to goodwill, $1.8 million to identified intangibles with the remainder primarily due to property plant and equipment and accounts receivable.

11. Income Taxes

The Company’s effective income tax rates from continuing operations for the three and six month periods ended June 30, 2014 and 2013 were approximately 39.2% and 41.8%, respectively, and 39.7% and 39.2%, respectively. The higher year to date 2014 income tax rates from continuing operations was primarily due to a benefit resulting from the January 2, 2013 retroactive extension of the Work Opportunity Tax Credit (WOTC) that was recognized in the first quarter of 2013. The WOTC has not yet been extended to 2014.

Certain tax authorities may periodically audit the Company. Based on the Company’s evaluation, the Company concluded that no significant uncertain tax positions require recognition in the consolidated financial statements. 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.

12. Subsequent Events

Management has evaluated all events and transactions that occurred after June 30, 2014. During this period, the Company had no material subsequent events requiring recognition in the consolidated financial statements or any non-recognized subsequent events requiring disclosure.

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

The Company

Almost Family, Inc. and subsidiaries (collectively “Almost Family”) is a leading regional provider of home health nursing services. In this report, the terms “Company,” “we,” “us” or “our” mean Almost Family, Inc. and all subsidiaries included in our consolidated financial statements.

Cautionary Statements - Forward Outlook and Risks

Certain statements contained in this quarterly report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “assumes,” “trends” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company’s current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, among others, the following:

· general economic and business conditions;

· demographic changes;

· changes in, or failure to comply with, existing governmental regulations;

· legislative proposals for healthcare reform;

· changes in Medicare and Medicaid reimbursement levels;

· changes in laws and regulations with respect to Accountable Care Organizations;

· effects of competition in the markets in which the Company operates;

· liability and other claims asserted against the Company;

· potential audits and investigations by government and regulatory agencies, including the impact of any negative publicity or litigation;

· ability to attract and retain qualified personnel;

· availability and terms of capital;

· loss of significant contracts or reduction in revenues associated with major payor sources;

· ability of customers to pay for services;

· business disruption due to natural disasters or terrorist acts;

· ability to effectively integrate, manage and keep secure our information systems;

· ability to successfully integrate the operations of acquired businesses and achieve expected synergies and operating efficiencies from the acquisition, in each case within expected time-frames or at all;

· significant deterioration in economic conditions and significant market volatility;

· effect on liquidity of the Company’s financing arrangements; and

· changes in estimates and judgments associated with critical accounting policies and estimates.

For a detailed discussion of these and other factors that could cause the Company’s 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 the Company’s annual report on Form 10-K for year ended December 31, 2013 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, the Company assumes no responsibility for updating forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its Form 10-K and various filings with the Securities and Exchange Commission (SEC). The reader is encouraged to review these risk factors and filings.

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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 31, 2013 for a detailed discussion of our critical accounting policies. There have been no material changes to our critical accounting policies and estimates in 2014.

Operating Segments

We have two reportable segments, Visiting Nurse (VN) and Personal Care (PC), which operate locations in Florida, Ohio, Tennessee, Kentucky, Connecticut, New Jersey, Massachusetts, Indiana, Pennsylvania, Georgia, Missouri, Illinois, Mississippi and Alabama (in order of revenue significance). Reportable segments have been identified based upon how management has organized the business by services provided to customers and the criteria in ASC 280, Segment Reporting.

Our VN 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 90% of the VN segment revenues are generated from the Medicare program, while the balance is generated from Medicaid and private insurance programs. VN Medicare revenues include revenues from all Medicare sources including traditional Medicare and Medicare Advantage, whether paid on a per episode basis or a per visit basis.

Our PC segment services are also provided in patients’ homes. These services (generally provided by paraprofessional staff such as home health aides) are generally of a custodial rather than skilled nature. PC revenues are generated on an hourly basis. Approximately 72% of the PC segment revenues are generated from Medicaid and other government programs while the balance is generated from insurance programs and private pay patients.

During 2013, we completed three acquisitions. On December 6, 2013, the Company completed the acquisition of Omni Home Health Holdings, Inc. (“SunCrest”). SunCrest subsidiaries own and operate 66 Medicare-certified home health agencies and 9 private duty agencies in Florida, Tennessee, Georgia, Pennsylvania, Kentucky, Illinois, Indiana, Mississippi and Alabama. On October 4, 2013, we acquired a controlling interest in Imperium Health Management, LLC (“Imperium”), a development-stage enterprise that provides strategic health management services to Accountable Care Organizations (“ACO’s”). On July 17, 2013, the Company acquired the assets of the Medicare-certified home health agencies owned by Indiana Home Care Network (“IHCN”). The results of operations for SunCrest and IHCN are principally reported within the Company’s Visiting Nurse reportable segment, while Imperium results are included in corporate expenses. Results of operations are included from the acquisition date forward.

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

Discontinued Operations

When appropriate, we reclassify operating units closed, sold, or held for sale out of continuing operations and into discontinued operations for all periods presented. In the first quarter of 2014, our VN segment exited a market in the Northeast through the closure of a branch location. In conjunction with our SunCrest acquisition, we acquired some operations which had been discontinued prior to our acquisition. During the quarter ended June 30, 2013, we completed the sale of two Alabama locations, which operated in our VN segment. The operations and gain on sale, if any, related to these locations were reclassified from continuing operations to discontinued operations for all periods presented. Unless otherwise noted, Management’s Discussion and Analysis of Financial Condition and Results of Operations excludes amounts attributable to discontinued operations.

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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” including but not limited to Item 1A. “Risk Factors” in the Company’s annual report on Form 10-K for year ended December 31, 2013. Additional developments since filing the Form 10-K include:

· On July 1, 2014, the Centers for Medicare and Medicaid Services issued the proposed rule for 2015. The proposed rule included the maximum rebasing cut in Medicare reimbursement rates (3.5% rate reduction in each of the years 2014-2017) allowable by the Patient Protection and Affordable Care Act (the ACA), which was signed into law in March 2010. The rebasing cuts are in addition to other legislated cuts for that same period by the ACA. The 2014 proposed rule is currently open for comment. The final rule is expected to be released in late October 2014.

· Effective January 1, 2015, Connecticut will increase the fee schedule for services provided by the Connecticut Home Care Program for Elders by 1%. These services include fees for service programs such as in-home nursing care, home health aide, occupational, speech and physical therapies, nursing assessment and evaluation and related home care services.

· Effective July 1, 2014, Tennessee implemented a 1% across the board rate cut for all medical and behavioral health services including home care under TennCare (the state Medicaid Program). In addition to this rate cut, Tennessee imposed an additional 1% across the board cut for TennCare services including home care effective July 1, 2015.

These matters, if implemented, may have a material adverse impact on our results of operations or financial condition. Although we are formulating plans and developing appropriate courses of action related to these changes, there can be no assurance that such plans or courses of action will prove successful. Such changes may cause us to change our business model, increase costs or reduce our revenues in ways not currently contemplated by us, or may result in recognition of an impairment of our recorded goodwill or intangible assets.

Shareholder Litigation

See Note 9 to the consolidated financial statements and Part II, Item 1, “Legal Proceedings” of this Form 10-Q for a discussion of certain litigation. The Company is currently unable to predict the outcome of these matters. However, the Company may incur ongoing expenses, net of insurance recoveries, if any, related to defense of such complaints.

Seasonality

Our VN segment operations located in Florida (which generated approximately 38% of that segment’s revenues in the first quarter of 2014) 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.

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RESULTS OF OPERATIONS

THREE MONTHS

Consolidated

(In thousands)

	Three Months Ended June 30,
	2014					2013					Change
	Amount			% Rev		Amount			% Rev		Amount			%
Net service revenues:
Visiting Nurse	$	99,438		79.6	%	$	66,000		76.4	%	$	33,438		50.7	%
Personal Care	25,499			20.4	%	20,400			23.6	%	5,099			25.0	%
	124,937			100.0	%	86,400			100.0	%	38,537			44.6	%
Operating income before corporate expenses:
Visiting Nurse	13,597			13.7	%	6,824			10.3	%	6,773			99.3	%
Personal Care	3,335			13.1	%	3,176			15.6	%	159			5.0	%
	16,932			13.6	%	10,000			11.6	%	6,932			69.3	%
Corporate expenses	8,681			6.9	%	5,428			6.3	%	3,253			59.9	%
Deal and transition costs	1,243			1.0	%	128			0.1	%	1,115			NM
Operating income	7,008			5.6	%	4,444			5.1	%	2,564			57.7	%
Interest expense, net	(329		)	-0.3	%	(11		)	0.0	%	(318		)	NM
Income tax expense	(2,618		)	-2.1	%	(1,852		)	-2.1	%	(766		)	41.4	%
Net income from continuing operations	$	4,061		3.3	%	$	2,581		3.0	%	$	1,480		57.3	%

Adjusted EBITDA from continuing operations	$	9,759		7.8	%	$	5,609		6.5	%	$	4,150		74.0	%

(1) See Page 24 for discussion of EBITDA.

The year over year increase in revenue was primarily driven by acquired growth in our VN and PC segments. Refer to segment discussions for further operating performance details.

Corporate expenses increased by $3.3 million to $8.7 million from $5.4 million in the prior year. The 2014 period includes $1.6 million of incremental home office costs associated with our 2013 acquisition activity, including $0.4 million in the operation of Imperium. Additionally, 2014 included $1.6 million of performance incentive accruals while the prior year had no such provision.

Deal and transition costs increased $1.1 million, primarily related to the SunCrest acquisition on December 6, 2013.

Interest expense increased $0.3 million due to borrowings on our line of credit in conjunction with the SunCrest acquisition.

The effective tax rate was approximately 39.2% for the second quarter of 2014, which decreased from 41.8% in 2013. The effective tax rate in the second quarter of 2013 was higher than normal due to a combination of increases in permanent differences compared to pre-tax income and estimated state tax rates.

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Visiting Nurse Segment

	Three Months Ended June 30,
	2014					2013					Change
(In thousands, except for statistics)	Amount			% Rev		Amount			% Rev		Amount			%
Net service revenues	$	99,438		100.0	%	$	66,000		100.0	%	$	33,438		50.7	%
Cost of service revenues	47,929			48.2	%	32,627			49.4	%	15,302			46.9	%
Gross margin	51,509			51.8	%	33,373			50.6	%	18,136			54.3	%
General and administrative expenses:
Salaries and benefits	27,754			27.9	%	19,761			29.9	%	7,993			40.4	%
Other	10,158			10.2	%	6,788			10.3	%	3,370			49.6	%
Total general and administrative expenses	37,912			38.1	%	26,549			40.2	%	11,363			42.8	%
Operating income before corporate expenses	$	13,597		13.7	%	$	6,824		10.3	%	$	6,773		99.3	%

Average number of locations	173					104					69			66.3	%

All payors:
Patient months	82,709					53,977					28,732			53.2	%
Admissions	24,665					15,522					9,143			58.9	%
Billable visits	685,271					478,510					206,761			43.2	%

Medicare:
Admissions (1)	22,040			89	%	14,177			91	%	7,863			55.5	%
Revenue (in thousands)	$	92,388		93	%	$	61,200		93	%	$	31,188		51.0	%
Revenue per admission	$	4,192				$	4,317				$	(125	)	-2.9	%
Billable visits (1)	596,418			87	%	408,308			85	%	188,110			46.1	%
Recertifications	12,108					7,999					4,109			51.4	%
Payor mix % of Admissions
Traditional Medicare Episodic	83.9		%			91.9		%			-8.0		%
Replacement Plans Paid Episodically	3.2		%			2.8		%			0.4		%
Replacement Plans Paid Per Visit	12.9		%			5.3		%			7.6		%

Non-Medicare:
Admissions (1)	2,625			11	%	1,345			9	%	1,280			95.2	%
Revenue (in thousands)	$	7,050		7	%	$	4,800		7	%	$	2,250		46.9	%
Revenue per admission	$	2,686				$	3,569				$	(883	)	-24.7	%
Billable visits (1)	88,853			13	%	70,202			15	%	18,651			26.6	%
Recertifications	1,532					1,382					150			10.9	%
Payor mix % of Admissions
Medicaid & other governmental	26.9		%			31.7		%			-4.8		%
Private payors	73.1		%			68.3		%			4.8		%

(1) Percentages pertain to percentage of total admissions or total billable visits, as applicable.

Visiting Nurse segment net service revenues increased primarily due to the SunCrest acquisition (December 6, 2013) which combined with the IHCN Acquisition (July 19, 2013) to increase net service revenues by $33.4 million and operating income before corporate expenses by $4.4 million.

Excluding acquisitions, revenues remained consistent, as favorable changes in patient mix were offset by the 2014 Medicare rate cut of $0.8 million.

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Cost of service revenues grew primarily due to acquired volume growth and to a lesser degree an increase in cost per visit, primarily related to the SunCrest acquisition.

General and administrative expenses — salaries and benefits as a percentage of revenue declined to 27.9% from 29.9% primarily related to lower staffing levels in our acquired operations. General and administrative expenses — other as a percentage of revenue decreased slightly to 10.2% from 10.3%.

As a result, VN segment operating income before corporate expenses increased $6.8 million to $13.6 million from $6.8 million in the second quarter of 2013, while operating income before corporate expenses as a percent of revenues increased to 13.7% in 2014 from 10.3% in 2013.

Personal Care Segment

	Three Months Ended June 30,
	2014				2013				Change
(In thousands, except for statistics)	Amount		% Rev		Amount		% Rev		Amount		%
Net service revenues	$	25,499	100.0	%	$	20,400	100.0	%	$	5,099	25.0	%
Cost of service revenues	17,590		69.0	%	13,519		66.3	%	4,071		30.1	%
Gross margin	7,909		31.0	%	6,881		33.7	%	1,028		14.9	%
General and administrative expenses:
Salaries and benefits	3,044		11.9	%	2,462		12.1	%	582		23.6	%
Other	1,530		6.0	%	1,243		6.1	%	287		23.1	%
Total general and administrative expenses	4,574		17.9	%	3,705		18.2	%	869		23.5	%
Operating income before corporate expenses	$	3,335	13.1	%	$	3,176	15.6	%	$	159	5.0	%

Average number of locations	61				60				1		1.7	%

Admissions	1,523				1,154				369		32.0	%
Patient months of care	20,111				17,565				2,546		14.5	%
Billable hours	1,322,771				1,147,174				175,597		15.3	%
Revenue per billable hour	$	19.28			$	17.78			$	1.49	8.4	%

Net service revenues increased $5.1 million, or 25.0%, to $25.5 million in 2014 from $20.4 million in 2013, primarily due to the SunCrest acquisition which increased revenues by $4.3 million, with the remainder due to organic volume growth. Cost of service revenues as a percentage of net service revenues increased to 69.0% in 2014 from 66.3% in 2013, primarily due to changes in business mix partially due to the SunCrest acquisition.

Total general and administrative expenses as a percent of net service revenue decreased to 17.9% in 2014 from 18.2% in 2013, primarily due to SunCrest acquisition related changes.

As a result, PC segment operating income before corporate expenses increased to $3.3 million from $3.2 million in 2013, while operating income before corporate expenses as percentage of revenue decreased 2.5%.

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RESULTS OF OPERATIONS

SIX MONTHS

Consolidated

(In thousands)

	Six Months Ended June 30,
	2014					2013					Change
	Amount			% Rev		Amount			% Rev		Amount			%
Net service revenues:
Visiting Nurse	$	195,194		79.7	%	$	132,552		77.1	%	$	62,642		47.3	%
Personal Care	49,775			20.3	%	39,302			22.9	%	10,473			26.6	%
	244,969			100.0	%	171,854			100.0	%	73,115			42.5	%
Operating income before corporate expenses:
Visiting Nurse	22,970			11.8	%	15,161			11.4	%	7,809			51.5	%
Personal Care	5,859			11.8	%	5,174			13.2	%	685			13.2	%
	28,829			11.8	%	20,335			11.8	%	8,494			41.8	%
Corporate expenses	15,144			6.2	%	10,474			6.1	%	4,670			44.6	%
Deal and transition costs	4,358			1.8	%	139			0.1	%	4,219			NM
Operating income	9,327			3.8	%	9,722			5.7	%	(395		)	-4.1	%
Interest expense, net	(677		)	-0.3	%	(29		)	0.0	%	(648		)	NM
Income tax expense	(3,435		)	-1.4	%	(3,802		)	-2.2	%	367			-9.7	%
Net income from continuing operations	$	5,215		2.1	%	$	5,891		3.4	%	$	(676	)	-11.5	%

Adjusted EBITDA from continuing operations	$	16,709		6.8	%	$	11,813		6.9	%	$	4,896		41.4	%

(1) See Page 24 for discussion of EBITDA.

The year over year increase in revenue was primarily driven by acquired growth in our VN and PC segments, which was partially offset by Medicare rate cuts. Refer to segment discussions for further operating performance details.

Corporate expenses increased by $4.7 million to $15.1 million from $10.4 million in the prior year. The 2014 period includes $2.7 million of incremental home office costs associated with our 2013 acquisition activity, including $0.7 million in the operation of Imperium. Additionally, 2014 included $1.6 million of performance incentive accruals while the prior year had no such provision. No performance incentive accrual was recorded in the first quarter of 2014.

Deal and transition costs increased $4.2 million primarily related to the SunCrest acquisition on December 6, 2013.

Interest expense increased $0.6 million due to borrowings on our line of credit in conjunction with the SunCrest acquisition.

The effective tax rate was approximately 39.7% for the second quarter of 2014, which increased slightly from 39.2% in 2013, primarily due to a benefit in the prior year period resulting from the January 2, 2013 retroactive extension of the Work Opportunity Tax Credit (WOTC) that was recognized in the first quarter of 2013. The WOTC has not yet been extended to 2014.

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Visiting Nurse Segment

	Six Months Ended June 30,
	2014					2013					Change
(In thousands, except for statistics)	Amount			% Rev		Amount			% Rev		Amount			%
Net service revenues	$	195,194		100.0	%	$	132,552		100.0	%	$	62,642		47.3	%
Cost of service revenues	96,227			49.3	%	64,942			49.0	%	31,285			48.2	%
Gross margin	98,967			50.7	%	67,610			51.0	%	31,357			46.4	%
General and administrative expenses:
Salaries and benefits	55,036			28.2	%	39,236			29.6	%	15,800			40.3	%
Other	20,961			10.7	%	13,213			10.0	%	7,748			58.6	%
Total general and administrative expenses	75,997			38.9	%	52,449			39.6	%	23,548			44.9	%
Operating income before corporate expenses	$	22,970		11.8	%	$	15,161		11.4	%	$	7,809		51.5	%

Average number of locations	174					104					70			67.3	%

All payors:
Patient months	164,160					108,559					55,601			51.2	%
Admissions	49,854					31,775					18,079			56.9	%
Billable visits	1,342,247					947,801					394,446			41.6	%

Medicare:
Admissions (1)	44,585			89	%	29,134			92	%	15,451			53.0	%
Revenue (in thousands)	$	181,336		93	%	$	122,938		93	%	$	58,398		47.5	%
Revenue per admission	$	4,067				$	4,220				$	(153	)	-3.6	%
Billable visits (1)	1,168,197			87	%	809,091			85	%	359,106			44.4	%
Recertifications	23,988					15,959					8,029			50.3	%
Payor mix % of Admissions
Traditional Medicare Episodic	83.4		%			91.4		%			-8.0		%
Replacement Plans Paid Episodically	3.2		%			2.7		%			0.5		%
Replacement Plans Paid Per Visit	13.4		%			5.9		%			7.5		%

Non-Medicare:
Admissions (1)	5,269			11	%	2,641			8	%	2,628			99.5	%
Revenue (in thousands)	$	13,858		7	%	$	9,614		7	%	$	4,244		44.1	%
Revenue per admission	$	2,630				$	3,640				$	(1,010	)	-27.8	%
Billable visits (1)	174,050			13	%	138,710			15	%	35,340			25.5	%
Recertifications	3,046					2,719					327			12.0	%
Payor mix % of Admissions
Medicaid & other governmental	25.7		%			30.1		%			-4.4		%
Private payors	74.3		%			69.9		%			4.4		%

(1) Percentages pertain to percentage of total admissions or total billable visits, as applicable.

Visiting Nurse segment net service revenues increased primarily due to the SunCrest acquisition (December 6, 2013) which combined with the IHCN Acquisition (July 19, 2013) to increase net service revenues by $65.9 million and operating income before corporate expenses by $7.5 million.

Excluding acquisitions, revenues decreased by $3.3 million, as a result of Medicare rate cuts of $2.6 million, with the remainder due to lower volumes and changes in patient mix. Medicare rate cuts were comprised of a 1.15% 2014 rate cut on episodes ending after December 31, 2013 and a 2.0% Medicare sequestration cut effective for episodes ended after March 2013.

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Cost of service revenues grew primarily due to acquired volume growth and to a lesser degree an increase in cost per visit primarily related to the SunCrest acquisition.

General and administrative expenses — salaries and benefits as a percentage of revenue declined to 28.2% from 29.6% primarily related to lower staffing levels in our acquired operations. General and administrative expenses — other as a percentage of revenue increased to 10.7% from 10.0% primarily due to a higher provision for bad debts in the first quarter of 2014, which was due to aging out of non-episodic accounts along with increased reserve estimates related to ADR and RAC audit activity, which are under appeal.

As a result, VN segment operating income before corporate expenses increased $7.8 million to $23.0 million from $15.2 million in the first quarter of 2013, while operating income before corporate expenses as a percent of revenues increased to 11.8% in 2014 from 11.4% in 2013.

Personal Care Segment

	Six Months Ended June 30,
	2014				2013				Change
(In thousands, except for statistics)	Amount		% Rev		Amount		% Rev		Amount		%
Net service revenues	$	49,775	100.0	%	$	39,302	100.0	%	$	10,473	26.6	%
Cost of service revenues	34,733		69.8	%	26,650		67.8	%	8,083		30.3	%
Gross margin	15,042		30.2	%	12,652		32.2	%	2,390		18.9	%
General and administrative expenses:
Salaries and benefits	5,973		12.0	%	4,914		12.5	%	1,059		21.6	%
Other	3,210		6.4	%	2,564		6.5	%	646		25.2	%
Total general and administrative expenses	9,183		18.4	%	7,478		19.0	%	1,705		22.8	%
Operating income before corporate expenses	$	5,859	11.8	%	$	5,174	13.2	%	$	685	13.2	%

Average number of locations	61				60				1		1.7	%

Admissions	2,959				2,243				716		31.9	%
Patient months of care	39,705				34,904				4,801		13.8	%
Billable hours	2,589,816				2,216,611				373,205		16.8	%
Revenue per billable hour	$	19.22			$	17.73			$	1.49	8.4	%

Net service revenues increased $10.5 million, or 26.6%, to $49.8 million in 2014 from $39.3 million in 2013, primarily due to the SunCrest acquisition which increased revenues by $8.1 million, with the remainder due primarily to organic volume growth. Cost of service revenues as a percentage of net service revenues increased slightly to 69.8% in 2014 from 67.8% in 2013, primarily due to changes in business mix partially due to the SunCrest acquisition.

Total general and administrative expenses as a percent of net service revenue decreased to 18.4% in 2014 from 19.0% in 2013, primarily due to SunCrest acquisition related changes.

As a result, PC segment operating income before corporate expenses increased to $5.9 million from $5.2 million in 2013, while operating income before corporate expenses as percentage of revenue decreased 1.4%.

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Liquidity and Capital Resources

Revolving Credit Facility

We have a $125 million senior secured revolving credit facility with JP Morgan Chase Bank, NA, as Administrative Agent, Bank of America, as Syndication Agent and certain other lenders (the “Facility”). The Facility consists of a $125 million credit line with a maturity date of December 2, 2015 and an “accordion” feature providing for potential future expansion of the Facility to $175 million. Borrowings (other than letters of credit) under the credit facility are made at either: a) the bank’s prime rate plus a margin (ranging from 1.25% to 2.25%, currently 1.50%) or b) LIBOR plus a margin (ranging from 2.25% to 3.25%, 2.50% at June 30, 2014). The margin for prime rate or LIBOR borrowings is determined by our leverage. Borrowings under the Facility are secured by a first priority perfected security interest in all our tangible and intangible assets, and all our existing and future direct and indirect subsidiaries, as guarantors.

The weighted average prime rate-based interest rate was 4.50% for both the three months ended June 30, 2014 and 2013. The weighted average LIBOR rates were 2.42% and 2.53% for the three months ended June 30, 2014 and 2013, respectively. We pay a quarterly commitment fee of 0.30% to 0.50% on the average daily unused facility balance based on leverage. Borrowings are subject to various covenants including a multiple of 3.0 times earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA may include “Acquired EBITDA” from proforma acquisitions pursuant to a calculation rider, up to 50% of “Adjusted EBITDA,” as defined. Borrowings under the Facility may be used for general corporate purposes, including acquisitions. As of June 30, 2014, the formula permitted $47.2 million to be used against which we had irrevocable letters of credit totaling $8.2 million outstanding in connection with our self-insurance programs. As a result a total of $39.0 million was available for borrowing at June 30, 2014. As of June 30, 2014, we were in compliance with the Facility’s various financial covenants. Under the most restrictive of its covenants, we were required to maintain minimum net worth of at least $163.2 million at June 30, 2014. At such date, our net worth was approximately $220.0 million.

We believe that this facility plus cash on hand will be sufficient to fund our operating needs for at least the next year. We will continue to evaluate additional capital, including possible debt and equity investments in the Company, to support a more rapid development of the business than would be possible with internal funds.

Cash Flows

Key elements to the Consolidated Statements of Cash Flows for the three months ended June 30, 2014 and 2013 were:

Net Change in Cash and Cash Equivalents (in thousands)	2014			2013
(Used in) provided by:
Operating activities	$	(1,874	)	$	5,398
Investing activities	(1,704		)	(1,293		)
Financing activities	(6,037		)	(567		)
Discontinued operations activities	134			1,722
Net change in cash and cash equivalents	$	(9,481	)	$	5,260

2014

Net cash used in operating activities resulted primarily from current period net income of $5.2 million plus certain non-cash items, net of changes in accounts receivable, accounts payable and accrued expenses. The decrease from 2013 is due to increased accounts receivable days outstanding which was 47 at June 30, 2014 and 46 at December 31, 2013 along with a decrease in accounts payable and accrued expenses acquired in the SunCrest acquisition. The increase in accounts receivable is due to an increase in the backlog of claims in our VN segment, partially related to the transition of SunCrest.

The cash used in investing activities was primarily due to an April 2014 acquisition and capital expenditures.

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The cash used in financing activities was primarily related to a $6.0 million payment on the line of credit drawn in connection with the SunCrest acquisition.

Net cash used in discontinued operations was due to additional costs incurred as operating activities wind down for the discontinued operations.

2013

Net cash provided by operating activities resulted primarily from current period net income of $5.8 million plus certain non-cash items, net of changes in accounts receivable, accounts payable and accrued expenses. Accounts receivable days revenues outstanding was 58 at June 30, 2013 and 53 at December 31, 2012 due to processing delays as well as prepayment Additional Data Requests (ADR) from Palmetto Government Benefits Administration in our VN segment, which did not repeat in 2013.

The cash used in investing activities was primarily due to capital expenditures.

Net cash provided by discontinued operations was due to the $3.0 million in proceeds from sale of the Alabama agencies, which was offset by cash used in operating activities for the discontinued operations.

Impact of Inflation

Management does not believe that inflation has had a material effect on income during the past several years.

Non-GAAP Financial Measure

The information provided in some of the tables use certain non-GAAP financial measures as defined under SEC rules. In accordance with SEC rules, the Company has provided, in the supplemental information below, a reconciliation of those measures to the most directly comparable GAAP measures.

Adjusted EBITDA

Adjusted EBITDA is not a measure of financial performance under U.S generally accepted accounting principles. It should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating financial performance and liquidity. Management routinely calculates and communicates Adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within our industry to evaluate performance, measure leverage capacity and debt service ability, and to estimate current or prospective enterprise value. Adjusted EBITDA is also used in certain covenants contained in our credit agreement.

The following table sets forth a reconciliation of Net Income to Adjusted EBITDA:

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	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2014		2013		2014		2013
Net income from continuing operations	$	4,061	$	2,581	$	5,215	$	5,891
Add back:
Interest expense	329		11		677		29
Income tax expense	2,618		1,852		3,435		3,802
Depreciation and amortization	1,050		670		2,152		1,298
Amortization of stock-based compensation	458		367		872		654
Deal and transition costs	1,243		128		4,358		139
Earnings before interest, income taxes, depreciation and amortization, amortization of stock-based compensation and deal and transition costs (Adjusted EBITDA) from continuing operations	$	9,759	$	5,609	$	16,709	$	11,813

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Instruments

The Company does not use derivative instruments.

Market Risk of Financial Instruments

Our primary market risk exposure with regard to financial instruments is to changes in interest rates on long-term obligations.

At June 30, 2014, a hypothetical 100 basis point increase in short-term interest rates would result in a reduction of approximately $506,550 in our quarter pre-tax earnings.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures — As of June 30, 2014, the Company’s management, with participation of the Company’s Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e). Based on that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2014.

Changes in Internal Control Over Financial Reporting - There were no changes in the Company’s internal control over financial reporting during the second quarter of 2014, that have materially affected, or are reasonably likely to materially affect, Almost Family, Inc.’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to various legal actions arising in the ordinary course of our business, including claims for damages for personal injuries. In our opinion, after discussion with legal counsel, the ultimate resolution of any of these pending ordinary course claims and legal proceedings will not have a material effect on our financial position or results of operations.

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the instruction from the Kentucky Court of Appeals to file a motion to redocket the appeal once the Special Litigation Committee responded to the shareholder demand, the Company has moved to redocket the case and dismiss the appeal.

ITEM 1A. RISK FACTORS

Information regarding risk factors appears in our Form 10-K for the year ending December 31, 2013, under the heading “Special Caution Regarding Forward — Looking Statements” and in the Form 10-K Part I, Item 1A. Risk Factors. There have been no material changes from the risk factors disclosed in our Form 10-K.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

31.1

Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certifications of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certifications of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

Financial statements from the quarterly report on Form 10-Q of Almost Family, Inc. for the quarter ended June 30, 2014, filed on August 6, 2014, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

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SIGNATURES

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

	*ALMOST FAMILY, INC*.

Date August 6, 2014	By:	/s/ William B. Yarmuth
		William B. Yarmuth
		Chairman of the Board and Chief Executive Officer


	By:	/s/ C. Steven Guenthner
		C. Steven Guenthner
		President and Principal Financial Officer

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Almost Family (AFAM) Inactive 10-Q2014 Q2 Quarterly report

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