Almost Family (AFAM) 10-Q 2016 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from to

Commission file number  001-09848

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 ☒ 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 ☒ 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 ☒ 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 ☒

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 November 7, 2016   10,373,198

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 January 1, 2016 Consolidated Balance Sheet)	3
	Consolidated Balance Sheets as of September 30, 2016 and January 1, 2016	3
	Consolidated Statements of Income for the Three Month and Nine Month Periods Ended September 30, 2016 and October 2, 2015	4
	Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2016 and October 2, 2015	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
PART II.	OTHER INFORMATION	25
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

	September 30, 2016
	(UNAUDITED)		January 1, 2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	6,827	$	7,522
Accounts receivable - net		95,616		92,909
Prepaid expenses and other current assets		14,090		9,033
TOTAL CURRENT ASSETS		116,533		109,464
PROPERTY AND EQUIPMENT - NET		9,753		10,000
GOODWILL		320,794		277,061
OTHER INTANGIBLE ASSETS		69,909		64,629
OTHER ASSETS		4,143		3,615
TOTAL ASSETS	$	521,132	$	464,769
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	14,007	$	11,297
Accrued other liabilities		36,054		40,742
TOTAL CURRENT LIABILITIES		50,061		52,039
LONG-TERM LIABILITIES:
Revolving credit facility		133,824		113,790
Deferred tax liabilities		18,494		13,094
Seller notes		12,500		6,556
Other liabilities		6,335		5,390
TOTAL LONG-TERM LIABILITIES		171,153		138,830
TOTAL LIABILITIES		221,214		190,869
NONCONTROLLING INTEREST - REDEEMABLE -
HEALTHCARE INNOVATIONS		2,256		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; 10,489 and 10,125 issued and outstanding		1,050		1,013
Treasury stock, at cost, 116 and 103 shares		(3,214)		(2,731)
Additional paid-in capital		140,351		127,253
Noncontrolling interest - nonredeemable		(766)		(730)
Retained earnings		160,241		145,456
TOTAL STOCKHOLDERS’ EQUITY		297,662		270,261
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	521,132	$	464,769

See accompanying Notes to Consolidated Financial Statements.

3

ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share data)

	Three months ended				Nine months ended
	September 30, 2016		October 2, 2015		September 30, 2016		October 2, 2015
Net service revenues	$	160,421	$	131,232	$	470,114	$	386,997
Cost of service revenues (excluding depreciation and amortization)		86,074		69,475		251,998		204,134
Gross margin		74,347		61,757		218,116		182,863
General and administrative expenses:
Salaries and benefits		42,952		36,767		126,134		108,993
Other		18,167		15,598		56,323		47,772
Deal, transition and other costs		2,257		(1,306)		7,455		(696)
Total general and administrative expenses		63,376		51,059		189,912		156,069
Operating income		10,971		10,698		28,204		26,794
Interest expense, net		(1,399)		(559)		(4,335)		(1,463)
Income before income taxes		9,572		10,139		23,869		25,331
Income tax expense		(3,194)		(2,078)		(9,120)		(8,458)
Net income		6,378		8,061		14,749		16,873
Net (gain) loss attributable to noncontrolling interest		(1,012)		(262)		(689)		330
Net income attributable to Almost Family, Inc.	$	5,366	$	7,799	$	14,060	$	17,203
Per share amounts-basic:
Average shares outstanding		10,172		9,604		10,150		9,432
Net income attributable to Almost Family, Inc.	$	0.53	$	0.81	$	1.39	$	1.82
Per share amounts-diluted:
Average shares outstanding		10,310		9,822		10,328		9,649
Net income attributable to Almost Family, Inc.	$	0.52	$	0.79	$	1.36	$	1.78

See accompanying Notes to Consolidated Financial Statements.

4

ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

	Nine months ended
	September 30, 2016		October 2, 2015
Cash flows from operating activities:
Net income before NCI	$	14,749	$	16,873
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization		3,020		2,625
Provision for uncollectible accounts		10,626		9,322
Stock-based compensation		2,013		1,455
Deferred income taxes		6,081		3,108
		36,489		33,383
Change in certain net assets and liabilities, net of the effects of acquisitions:
Accounts receivable		(12,831)		(13,444)
Prepaid expenses and other current assets		(4,451)		(4,038)
Other assets		(620)		(46)
Accounts payable and accrued expenses		(3,302)		(2,535)
Net cash provided by operating activities		15,285		13,320
Cash flows from investing activities:
Capital expenditures		(4,364)		(1,753)
Cost basis investment		—		(1,000)
Acquisitions, net of cash acquired		(31,256)		(55,701)
Net cash used in investing activities		(35,620)		(58,454)
Cash flows from financing activities:
Credit facility borrowings		215,430		163,904
Credit facility repayments		(195,396)		(118,053)
Debt issuance fees		(102)		(1,161)
Proceeds from stock option exercises		(9)		141
Purchase of common stock in connection with share awards		(484)		(338)
Tax impact of share awards		257		227
Payment of special dividend		—		(50)
Principal payments on notes payable and capital leases		(56)		(54)
Net cash provided by financing activities		19,640		44,616
Net decrease in cash and cash equivalents		(695)		(518)
Cash and cash equivalents at beginning of period		7,522		6,886
Cash and cash equivalents at end of period	$	6,827	$	6,368

See accompanying Notes to Consolidated Financial Statements.

5

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 periods ended September 30, 2016 and October 2, 2015, 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 January 1, 2016 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 September 30, 2016, and the results of operations and cash flows for the periods ended September 30, 2016 and October 2, 2015.  The results of operations for the period ended September 30, 2016 are not necessarily indicative of the operating results for the year.

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 August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments.  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 March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation. ASU 2016-09 is intended to simplify several aspects of the accounting for share-based payments.  The guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within that year.  The Company is in the process of evaluating the impact of the adoption of this ASU.

In February 2016, the FASB issued ASU 2016-02, Leases.  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 April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30):  Simplifying the Presentation of Debt Issuance Costs.  In certain instances, Subtopic 835-30 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.  Subtopic 835-30 is effective for annual and interim periods beginning after December 15, 2015.  With the adoption of ASU No. 2015-03, amortization of debt issuance costs were reclassified from amortization expense to interest expense in all periods presented.

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In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.  Subtopic 350-40 provides guidance that all software licenses included in cloud computing arrangement be accounted for consistent with other licenses of intangible assets.  However, if a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract, the accounting for which did not change.  Subtopic 350-40 is effective for annual and interim periods beginning after December 15, 2015.  The adoption of ASU No. 2015-05 did not affect the Company’s financial position and results of operations.

In May 2014, the FASB issued ASU No. 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 currently evaluating the impact of the adoption of Topic 606 on its financial position and results of operations.

2.Segment Data

The Company has two divisions, Home Health Care and Healthcare Innovations.  The Home Health Care division is comprised of two reportable segments, Visiting Nurse Services (VN or Visiting Nurse) and Personal Care Services (PC or Personal Care).  Healthcare Innovations (HCI) is also a reportable segment.  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 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 94% 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 83% 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.

The Company’s HCI business segment was created to house and separately report on our developmental activities outside the traditional home health business platform.  These activities are intended ultimately, whether directly or indirectly, to benefit the Company’s patients and payors through the enhanced provision of home health services.  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.

7

	Three months ended				Nine months ended
Consolidated	September 30, 2016		October 2, 2015		September 30, 2016		October 2, 2015
Home Health Operations
Net service revenues:
Visiting Nurse	$	108,425	$	98,344	$	328,697	$	295,627
Personal Care		41,688		30,837		121,074		89,086
		150,113		129,181		449,771		384,713
Operating income before corporate expenses:
Visiting Nurse		12,618		12,074		42,905		36,956
Personal Care		2,540		3,067		9,273		9,580
		15,158		15,141		52,178		46,536
Healthcare Innovations Operations
Revenue		10,308		2,051		20,343		2,284
Operating income (loss)		5,051		485		5,098		(434)
Corporate expenses		6,981		6,234		21,617		20,004
Deal, transition and other costs		2,257		(1,306)		7,455		(696)
Operating income		10,971		10,698		28,204		26,794
Interest expense, net (1)		(1,399)		(559)		(4,335)		(1,463)
Income tax expense		(3,194)		(2,078)		(9,120)		(8,458)
Net income	$	6,378	$	8,061	$	14,749	$	16,873

(1)  Allocation of interest for the three month period ended September 30, 2016 was $384,  $384 and $248 to Visiting Nurse, Personal Care and Healthcare Innovations, respectively and $1,183,  $1,183, and $960 to Visiting Nurse, Personal Care and Healthcare Innovations, respectively for the nine month period ended September 30, 2016.  Substantially all interest in 2015 was in the Visiting Nurse segment.

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 January 1, 2016 and determined that no impairment existed.

The following table summarizes the activity related to goodwill and other intangible assets for 2016:

			Other Intangible Assets
			Certificates
			of Need and		Trade		Non-compete
	Goodwill		Licenses		Names		Agreements		Total
Balances at December 31, 2014	$	192,523	$	39,611	$	14,771	$	20	$	54,402
Acquisitions		84,538		6,433		3,640		180		10,253
Amortization		—		—		(10)		(16)		(26)
Balances at January 1, 2016	$	277,061	$	46,044	$	18,401	$	184	$	64,629
Acquisitions		43,733		5,292		—		—		5,292
Amortization		—		—		(8)		(4)		(12)
Balance at September 30, 2016	$	320,794	$	51,336	$	18,393	$	180	$	69,909

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Acquisitions in the table relate to the acquisitions discussed further in Note 8, “Acquisitions.”

The following table summarizes the Company’s goodwill and other intangible assets at September 30, 2016 by segment:

			Other Intangible Assets
			Certificates
			of Need and		Trade		Non-compete
	Goodwill		Licenses		Names		Agreements		Total
Visiting Nurse	$	193,667	$	47,156	$	13,198	$	90	$	60,444
Personal Care		74,764		4,180		5,195		90		9,465
Healthcare Innovations		52,363		—		—		—		—
September 30, 2016 balance	$	320,794	$	51,336	$	18,393	$	180	$	69,909

4.Revolving Credit Facility

The Company has a 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 $175 million credit line with a maturity date of November 15, 2020 and an “accordion” feature providing for potential future expansion of the Facility to $250 million.  Borrowings (other than letters of credit) under the credit facility generally will bear interest at a rate varying from the London Interbank Offered Rate (LIBOR) plus 1.75% to LIBOR rate plus 3.00%, depending on leverage.  The Facility is secured by substantially all of the Company’s assets and the stock of its subsidiaries.  Debt issuance costs net of amortization were $1.0 million at September 30, 2016, are recorded in prepaid and other assets and are being amortized to interest expense through November 15, 2020.

Borrowings under the Facility are subject to various covenants including a multiple of 3.5 times earnings before interest, taxes, depreciation and amortization (“EBITDA”). “EBITDA” may include “Acquired EBITDA” from pro-forma acquisitions, as defined. Borrowings under the Facility may be used for general corporate purposes, including acquisitions.  The Company had irrevocable letters of credit totaling $14.7 million outstanding in connection with the Company’s self-insurance programs.  Application of the Facility’s borrowing formula as of September 30, 2016, permitted an additional $14.0 million to be used.  As of September 30, 2016, the Company was in compliance with the various financial covenants.  Under the most restrictive of its covenants, the Company was required to maintain minimum net worth of at least $180.6 million at September 30, 2016.  At such date, the Company’s net worth was approximately $297.7 million.

The effective interest rates on the Company’s borrowings were 3.50% and 2.62% for the three month periods ended September 30, 2016 and October 2, 2015, 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.

9

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:

	Three months ended		Nine months ended
	September 30, 2016	October 2, 2015	September 30, 2016	October 2, 2015
Basic weighted average outstanding shares	10,172	9,604	10,150	9,432
Add common equivalent shares representing shares issuable upon exercise of dilutive awards	138	218	178	217
Diluted weighted average number of shares	10,310	9,822	10,328	9,649
Anti-dilutive shares excluded from calculation	20	—	20	20

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 $400 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 September 30, 2016 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 $175 to $500 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

2016 Acquisitions

During the third quarter, one of our HCI subsidiaries redeemed certain outstanding shares increasing the Company's ownership percentage to 72.04% from 61.50%. 

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

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through borrowings on the Company’s bank credit facility.  The post-acquisition operating results of these agencies are primarily reported in the Company’s PC segment.  No accounts receivable were acquired.  Thus, accounts receivable need to accumulate to normal levels post close.

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.  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 VN segment.

2015 Acquisitions

On November 5, 2015, the Company acquired the stock of Black Stone Operations, LLC (Black Stone).  Black Stone is a provider of in-home personal care and skilled home health services in western Ohio and operates under the name “Home Care by Black Stone.”  The purchase price of $40 million was funded through borrowings on the Company’s bank credit facility, seller notes and issuance of the Company’s common stock.  Black Stone’s post-acquisition operating results are primarily reported in the VN and PC segments.

On August 29, 2015, the Company acquired 100% of the equity of Bracor, Inc. (dba WillCare).  The purchase price for the New York and Connecticut operations was $50.8 million.  The transaction was funded by borrowings under the Company’s bank credit facility.  On March 1, 2015, the Company acquired the stock of WillCare’s Ohio operations for $3.0 million.  WillCare’s post-acquisition operating results are reported in the VN and PC segments.

On July 22, 2015, the Company acquired 100% of the equity of Ingenios Health Co. (Ingenios) for $11.4 million of the Company’s common stock plus $2.0 million in cash.  Ingenios is a leading provider of technology enabled in-home clinical assessments for Medicare Advantage, Managed Medicaid and Commercial Exchange lives in 7 states and Washington, D.C.  The operating results of Ingenios are reported in the HCI business segment.

On January 29, 2015, the Company acquired a noncontrolling interest in a development stage analytics and software company, NavHealth, Inc. (NavHealth).  The investment is an asset of the Company’s HCI segment.

The following table summarizes the fair value of the respective acquisition dates of the assets acquired and liabilities assumed for the WillCare (final), Ingenios (final), Black Stone (preliminary), LTS (preliminary), Bayonne (preliminary)and Wisconsin (preliminary) acquisitions:

	Purchase
	Price Allocation
Accounts receivable	$	14,146
Property, plant & equipment		2,964
Other assets		2,074
Goodwill		128,137
Other intangibles		15,740
Assets acquired		163,061
Liabilities assumed		(9,933)
Net assets acquired	$	153,128

Deal and transition costs incurred in conjunction with the 2015 and 2016 acquisitions were $2.0 million for the quarter ended September 30, 2016.  Similar amounts for the prior year period were $962.  Such amounts are included in Deal, transition and other costs in the Consolidated Statements of Income.

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9.Income Taxes

The Company’s effective income tax rate for the nine month periods ended September 30, 2016 and October 2, 2015 was approximately 39.3% and 32.9%, respectively.  The lower 2015 effective income tax rate was primarily related to the tax treatment of a legal settlement benefit of $4.2 million in the third quarter of 2015.

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 $3.3 million of unrecognized tax benefits at September 30, 2016, 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.Subsequent Events

On October 14, 2016, the Company signed a definitive agreement to acquire a controlling interest in the entity holding the home health and hospice assets of Community Health Systems, Inc. for $128.0 million, subject to a working capital adjustment.  Financing for the transaction has been fully committed by JPMorgan.    The transaction is expected to be completed during the fourth quarter, subject to regulatory approvals and the satisfaction of customary closing conditions.  The Company expects the transaction will add approximately $200 million in revenue, all of which will be classified in the Company’s VN segment.  The transaction will expand the Company’s geographic service territory to a total of 26 states.

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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 regionally focused 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;

· changes in the marketplace and regulatory environment for Health Risk Assessments;

· 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 January 1, 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, 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 January 1, 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

The Company has two divisions, Home Health Care and Healthcare Innovations.  The Home Health Care division is comprised of two reportable segments, Visiting Nurse Services (VN or Visiting Nurse) and Personal Care Services (PC or Personal Care).  Our Healthcare Innovations (HCI) division is also a reporting segment.  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. 

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.  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.  Approximately 94% of the VN segment revenues are generated from the Medicare program while the balance is generated from Medicaid and private insurance programs.

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 typically generated on an hourly basis.  Approximately 83% 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.

Our HCI business segment was created to separately report on our developmental activities outside our traditional home health business platform.   These activities are intended ultimately, whether directly or indirectly, to benefit our patients and our payers through the enhanced provision of home health services.  Our 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. 

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

Acquisitions

On October 14, 2016, the Company signed a definitive agreement to acquire a controlling interest in the entity holding the home health and hospice assets of Community Health Systems, Inc. for $128.0 million, subject to a working capital adjustment.  Financing for the transaction has been fully committed by JPMorgan.  The transaction is expected to be completed during the fourth quarter, subject to regulatory approvals and the satisfaction of customary closing conditions.  The Company expects the transaction will add approximately $200 million in revenue, all of which will be classified in the Company’s VN segment.  The transaction will expand the Company’s geographic service territory to a total of 26 states.

During the third quarter, one of our HCI subsidiaries redeemed certain outstanding shares increasing the Company's ownership percentage to 72.04% from 61.50%. 

On June 18, 2016, we 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 for these agencies are primarily reported in our PC segment.  No accounts receivable were acquired.

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On January 5, 2016, we 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.  LTS’s post-acquisition operating results are reported in our HCI business segment.

On January 5, 2016, we 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 our VN segment.

On November 5, 2015, we acquired the stock of Black Stone Operations, LLC (Black Stone).  Black Stone is a provider of in-home personal care and skilled home health services in western Ohio and operates under the name “Home Care by Black Stone.”  The purchase price of $40 million was funded through borrowings on the Company’s bank credit facility, seller notes and issuance of the Company’s common stock.  Black Stone’s post-acquisition operating results are primarily reported in the VN and PC segments.

On August 29, 2015, we acquired 100% of the equity of Bracor, Inc. (d/b/a WillCare).  The purchase price for the New York and Connecticut operations was $50.8 million.  The transaction was funded by borrowings under the Company’s bank credit facility.  On March 1, 2015, the Company acquired the stock of WillCare’s Ohio operations for $3.0 million.  WillCare’s post-acquisition operating results are reported in the VN and PC segments.

On July 22, 2015, we acquired 100% of the equity of Ingenios Health Co. (Ingenios) for $11.4 million of the Company’s common stock plus $2.0 million in cash.  Ingenios is a leading provider of technology enabled in-home clinical assessments for Medicare Advantage, Managed Medicaid and Commercial Exchange lives in 7 states and Washington, D.C.  The operating results of Ingenios are reported in the HCI business segment.

On January 29, 2015, we acquired a noncontrolling interest in a development stage analytics and software company, NavHealth, Inc. (NavHealth).  The investment is an asset of the Company’s HCI segment.

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 January 1, 2016. 

On October 31, 2016, the Centers for Medicare and Medicaid Services (CMS) issued its CY2017 Home Health Prospective Payment System Rate Update, which includes a 0.7% rate cut consisting of a 2.8% market basket update minus a 0.3% productivity adjustment, a 2.3% rebasing cut, and a 0.97% case mix adjustment.  Based on our initial analysis of the 2017 rule, we estimate it will reduce our Medicare reimbursement rates for 2017 in the range of 1% to 2%. 

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 the CMS announcement, the pre-claim review demonstration will help educate Home Health Agencies (HHA) 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 no earlier than August 1, 2016 and the remaining states of Florida, Texas, Michigan and Massachusetts will phase in over 2016 and 2017.  The Company is currently unable to predict what impact, if any, this demonstration program may have on its result of operations or financial position.

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Seasonality

Our VN 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.  However, with our growth and acquisition activity outside of the state, the impact of Florida seasonality on the Company’s operating results is lessening.  Florida operations currently account for approximately one fourth of the VN segment revenues as compared to one-third a year ago and one-half three years ago.

RESULTS OF OPERATIONS

THIRD QUARTER

Consolidated

(In thousands)

	Three months ended
	September 30, 2016			October 2, 2015			Change
Consolidated	Amount		% Rev	Amount		% Rev	Amount		%
Home Health Operations
Net service revenues:
Visiting Nurse	$	108,425	72.2%	$	98,344	76.1%	$	10,081	10.3	%
Personal Care		41,688	27.8%		30,837	23.9%		10,851	35.2	%
		150,113	100.0%		129,181	100.0%		20,932	16.2	%
Operating income before corporate expenses:
Visiting Nurse		12,618	11.6%		12,074	12.3%		544	4.5	%
Personal Care		2,540	6.1%		3,067	9.9%		(527)	-17.2	%
		15,158	10.1%		15,141	11.7%		17	0.1	%
Healthcare Innovations
Revenue		10,308	100.0%		2,051	100.0%		8,257	402.6	%
Operating income (loss)		5,051	49.0%		485	23.6%		4,566	941.4	%
Corporate expenses		6,981	4.4%		6,234	4.8%		747	12.0	%
Deal, transition and other costs		2,257	1.4%		(1,306)	-1.0%		3,563	-272.8	%
Operating income		10,971	6.8%		10,698	8.2%		273	2.6	%
Interest expense, net		(1,399)	-0.9%		(559)	-0.4%		(840)	150.3	%
Income tax expense		(3,194)	-2.0%		(2,078)	-1.6%		(1,116)	53.7	%
Net income	$	6,378	4.0%	$	8,061	6.1%	$	(1,683)	-20.9	%
Adjusted EBITDA (1)	$	14,804	9.2%	$	10,623	8.1%	$	4,181	39.4	%
Adjusted net income (1)	$	7,793	4.9%	$	5,361	4.1%	$	2,432	45.4	%

(1)See Page 23 for GAAP reconciliation of Adjusted EBITDA and Adjusted earnings.

Home Health revenue increased year over year by $20.9 million primarily as a result of our acquisition activity in late 2015 and the first half of 2016.  Refer to VN and PC segment discussions for further operating performance details. 

Healthcare Innovations (HCI) segment net revenues increased $8.3 million to a record $10.3 million in 2016 from $2.1 million in 2015.  Our ACO-enablement operations recorded shared savings incentive revenue of $4.3 million from multiple ACOs participating in the Medicare Shared Savings Program.  ACOs managed by us saved the Medicare program a total of $25 million in the measurement period.  Our assessment business acquired in transactions in January 2016 and July 2015 contributed the balance of the revenues.  As a result, operating income for the HCI segment was a record $5.1 million, or $0.15 per share attributable to Almost Family.

Corporate expenses as a percentage of revenue declined to 4.4%, from 4.8% in the prior year period due to expansion of revenues from acquisitions and differences in management incentives.  Deal, transition and other costs grew to $2.2 

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million for 2016, primarily as a result of costs related to 2016 and 2015 acquisitions, while the prior year included a one-time $4.2 million benefit related to legal settlements.  Borrowings related to acquisitions increased our interest expense to $1.4 million, from $0.5 million in the prior year period.

The effective tax rate for the third quarter of 2016 and 2015 was 37.3% and 21.0%, respectively.  During the quarter, we lowered our estimated effective tax rate from 40.5% to 39.5% due to lower permanently non-deductible expenses in relation to taxable income.

Visiting Nurse Segment

(In thousands, except for statistics)

	Three months ended
	September 30, 2016					October 2, 2015					Change
	Amount			% Rev		Amount			% Rev		Amount			%
Net service revenues	$	108,425		100.0	%	$	98,344		100.0	%	$	10,081		10.3	%
Cost of service revenues		54,119		49.9	%		47,958		48.8	%		6,161		12.8	%
Gross margin		54,306		50.1	%		50,386		51.2	%		3,920		7.8	%
General and administrative expenses:
Salaries and benefits		31,115		28.7	%		28,309		28.8	%		2,806		9.9	%
Other		10,573		9.8	%		10,003		10.2	%		570		5.7	%
Total general and administrative expenses		41,688		38.4	%		38,312		39.0	%		3,376		8.8	%
Operating income before corporate expenses	$	12,618		11.6	%	$	12,074		12.3	%	$	544		4.5	%
Average number of locations		169					164					5		3.0	%
All payors:
Patients Months		88,396					80,940					7,456		9.2	%
Admissions		25,788					24,759					1,029		4.2	%
Billable Visits		711,998					645,589					66,409		10.3	%
Medicare:
Admissions (1)		23,030		89.3	%		21,876		88.4	%		1,154		5.3	%
Revenue (in thousands)	$	101,383		93.5	%	$	92,033		93.6	%	$	9,350		10.2	%
Revenue per admission	$	4,402				$	4,207				$	195		4.6	%
Billable visits (1)		630,089		88.5	%		580,709		90.0	%		49,380		8.5	%
Recertifications		12,639					11,966					673		5.6	%
Payor mix % of Admissions
Traditional Medicare Episodic		84.0	%				84.6	%				(0.6)	%
Replacement Plans Paid Episodically		5.9	%				4.1	%				1.8	%
Replacement Plans Paid Per Visit		10.1	%				11.3	%				(1.2)	%
Non-Medicare:
Admissions (1)		2,758		10.7	%		2,883		11.6	%		(125)		(4.3)	%
Revenue (in thousands)	$	7,042		6.5	%	$	6,311		6.4	%	$	731		11.6	%
Revenue per admission	$	2,553				$	2,189				$	364		16.6	%
Billable visits (1)		81,909		11.5	%		64,880		10.0	%		17,029		26.2	%
Recertifications		1,233					774					459		59.3	%
Payor mix % of Admissions
Medicaid & other governmental		25.9	%				30.6	%				(4.7)	%
Private payors		74.1	%				69.4	%				4.7	%

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

VN segment net revenues increased $10.1 million to $108.4 million from $98.3 million in the prior year and total Medicare admissions grew by 5.3% to 23,030 from 21,876 primarily due to home health agencies acquired in late 2015

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and the first half of 2016 (WillCare, Black Stone, Bayonne and Wisconsin acquisitions).  The growth in Non-Medicare revenue was driven by the business mix of our acquisitions.

Gross margin as a percentage of revenue decreased to 50.1% from 51.2% primarily due to higher labor costs per visit from acquired agencies and unusually high health insurance claims experience of about $1.0 million.  Total general and administrative expenses declined as a percentage of revenue to 38.4% in the third quarter of 2016 from 39.0% in the prior year quarter primarily from the effect of acquired operations plus the closing of selected underperforming smaller branches.

As a result, VN segment operating income before corporate expenses increased $0.5 million, or 4.5%, to $12.6 million, from $12.1 million in the prior year period, while VN segment operating income as percentage of revenue decreased to 11.6% from 12.3% in the prior year period.    

Personal Care Segment

(In thousands, except for statistics)

	Three months ended
	September 30, 2016				October 2, 2015				Change
	Amount		% Rev		Amount		% Rev		Amount		%
Net service revenues	$	41,688	100.0	%	$	30,837	100.0	%	$	10,851	35.2	%
Cost of service revenues		29,125	69.9	%		21,034	68.2	%		8,091	38.5	%
Gross margin		12,563	30.1	%		9,803	31.8	%		2,760	28.2	%
General and administrative expenses:
Salaries and benefits		6,313	15.1	%		4,309	14.0	%		2,004	46.5	%
Other		3,710	8.9	%		2,427	7.9	%		1,283	52.9	%
Total general and administrative expenses		10,023	24.0	%		6,736	21.8	%		3,287	48.8	%
Operating income before corporate expenses	$	2,540	6.1	%	$	3,067	9.9	%	$	(527)	-17.2	%
Average number of locations		80				66				14	21.2	%
Admissions		2,638				1,725				913	52.9	%
Patient months of care		43,562				25,419				18,143	71.4	%
Billable hours		1,919,931				1,384,466				535,465	38.7	%
Revenue per billable hour	$	21.71			$	22.27			$	(0.56)	-2.5	%

PC segment net revenues increased $10.9 million or 35.2% to a record $41.7 million in 2016 from $30.8 million in 2015 primarily due to acquisitions.  PC segment contribution decreased $0.5 million as compared to the same period of last year, primarily due to a 20% rate cut in the State of Connecticut’s Medicaid-sponsored behavioral health program which generated approximately $2.6 million of revenue in the current quarter as compared to $3.3 million in the same quarter last year on similar volumes.  We are currently evaluating the on-going viability of this program under current reimbursement and regulations.

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RESULTS OF OPERATIONS

YEAR TO DATE

Consolidated

(In thousands)

	Nine months ended
	September 30, 2016			October 2, 2015			Change
Consolidated	Amount		% Rev	Amount		% Rev	Amount		%
Home Health Operations
Net service revenues:
Visiting Nurse	$	328,697	73.1%	$	295,627	76.8%	$	33,070	11.2	%
Personal Care		121,074	26.9%		89,086	23.2%		31,988	35.9	%
		449,771	100.0%		384,713	100.0%		65,058	16.9	%
Operating income before corporate expenses:
Visiting Nurse		42,905	13.1%		36,956	12.5%		5,949	16.1	%
Personal Care		9,273	7.7%		9,580	10.8%		(307)	(3.2)	%
		52,178	11.6%		46,536	12.1%		5,642	12.1	%
Healthcare Innovations
Revenue		20,343	100.0%		2,284	100.0%		18,059	790.7	%
Operating income (loss)		5,098	25.1%		(434)	-19.0%		5,532	(1274.7)	%
Corporate expenses		21,617	4.6%		20,004	5.2%		1,613	8.1	%
Deal, transition and other costs		7,455	1.6%		(696)	-0.2%		8,151	(1171.1)	%
Operating income		28,204	6.0%		26,794	6.9%		1,410	5.3	%
Interest expense, net		(4,335)	-0.9%		(1,463)	-0.4%		(2,872)	196.3	%
Income tax expense		(9,120)	-1.9%		(8,458)	-2.2%		(662)	7.8	%
Net income	$	14,749	3.1%	$	16,873	4.4%	$	(2,124)	(12.6)	%
Adjusted EBITDA (1)	$	40,486	8.6%	$	29,962	7.7%	$	10,524	35.1	%
Adjusted net income (1)	$	19,259	4.1%	$	14,536	3.8%	$	4,723	32.5	%

(1)See Page 23 for GAAP reconciliation of Adjusted EBITDA and Adjusted earnings.

Home Health revenue increased year over year by $65.1 million primarily as a result of our late 2015 and first half of 2016 acquisitions.  Refer to VN and PC segment discussions for further operating performance details. 

HCI segment net revenues increased $18.0 million to a record $20.3 million, in 2016 from $2.3 million in 2015, as acquired LTS and Ingenios assessment business revenues were $15.4 million with the remainder due to a $4.3 million shared savings revenue as multiple Imperium served ACOs received Medicare shared savings payments.  LTS was acquired in January 2016 and Ingenios was acquired in July 2015.  The HCI segment contribution thus improved $5.5 million, as the segment was profitable for year to date 2016.

Corporate expenses as a percentage of revenue declined to 4.6%, from 5.2% in the prior year period due to the expansion of revenues from acquisitions and differences in management incentives.  Deal, transition and other costs grew to $7.5 million for 2016, primarily as a result of costs related to 2016 and 2015 acquisitions, while the prior year included a one-time $4.2 million benefit related to legal settlements.  Borrowings related to acquisitions increased interest expense to $4.3 million, from $1.5 million in the prior year period.

Our effective tax rate for 2016 and 2015 was 39.3% and 32.9%, respectively.

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Visiting Nurse Segment

(In thousands, except for statistics)

	Nine months ended
	September 30, 2016					October 2, 2015					Change
	Amount			% Rev		Amount			% Rev		Amount			%
Net service revenues	$	328,697		100.0	%	$	295,627		100.0	%	$	33,070		11.2	%
Cost of service revenues		160,529		48.8	%		142,541		48.2	%		17,988		12.6	%
Gross margin		168,168		51.2	%		153,086		51.8	%		15,082		9.9	%
General and administrative expenses:
Salaries and benefits		91,727		27.9	%		85,204		28.8	%		6,523		7.7	%
Other		33,536		10.2	%		30,926		10.5	%		2,610		8.4	%
Total general and administrative expenses		125,263		38.1	%		116,130		39.3	%		9,133		7.9	%
Operating income before corporate expenses	$	42,905		13.1	%	$	36,956		12.5	%	$	5,949		16.1	%
Average number of locations		165					162					3		1.9	%
All payors:
Patients Months		270,880					242,989					27,891		11.5	%
Admissions		81,574					75,958					5,616		7.4	%
Billable Visits		2,174,980					1,926,660					248,320		12.9	%
Medicare:
Admissions (1)		70,021		85.8	%		68,380		90.0	%		1,641		2.4	%
Revenue (in thousands)	$	308,055		93.7	%	$	280,827		95.0	%	$	27,228		9.7	%
Revenue per admission	$	4,399				$	4,107				$	293		7.1	%
Billable visits (1)		1,921,796		88.4	%		1,745,856		90.6	%		175,940		10.1	%
Recertifications		37,777					35,473					2,304		6.5	%
Payor mix % of Admissions
Traditional Medicare Episodic		82.5	%				83.9	%				(1.4)	%
Replacement Plans Paid Episodically		5.2	%				4.0	%				1.2	%
Replacement Plans Paid Per Visit		12.3	%				12.1	%				0.2	%
Non-Medicare:
Admissions (1)		11,553		14.2	%		7,578		10.0	%		3,975		52.5	%
Revenue (in thousands)	$	20,642		6.3	%	$	14,800		5.0	%	$	5,842		39.5	%
Revenue per admission	$	1,787				$	1,953				$	(166)		(8.5)	%
Billable visits (1)		253,184		11.6	%		180,804		9.4	%		72,380		40.0	%
Recertifications		3,517					1,485					2,032		136.8	%
Payor mix % of Admissions
Medicaid & other governmental		41.1	%				32.4	%				8.7	%
Private payors		58.9	%				67.6	%				(8.7)	%

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

VN segment net revenues increased $33.1 million to a record $328.7 million from $295.6 million in the prior year and total Medicare admissions grew by 2.4% to 70,021 from 68,380 primarily due to home health agencies acquired in late 2015 and first half of 2016 (WillCare, Black Stone, Bayonne and Wisconsin acquisitions).  The more rapid growth in Non-Medicare business was driven by the business mix of our acquisitions.

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Gross margin as a percentage of revenue decreased to 51.2% from 51.8% primarily due to higher labor costs per visit from acquired agencies.  Total general and administrative expenses declined as a percentage of revenue to 38.1%  in 2016 from 39.3% in the prior year primarily from the effect of acquired operations plus the closing of selected underperforming smaller branches.

As a result, VN segment operating income before corporate expenses increased $5.9 million, or 16.1%, to $42.9 million, from $37.0 million in the prior year period, while VN segment operating income as percentage of revenue increased to 13.1% from 12.5% in the prior year period.    

Personal Care Segment

(In thousands, except for statistics)

	Nine months ended									��
	September 30, 2016				October 2, 2015				Change
	Amount		% Rev		Amount		% Rev		Amount		%
Net service revenues	$	121,074	100.0	%	$	89,086	100.0	%	$	31,988	35.9	%
Cost of service revenues		83,623	69.1	%		61,044	68.5	%		22,579	37.0	%
Gross margin		37,451	30.9	%		28,042	31.5	%		9,409	33.6	%
General and administrative expenses:
Salaries and benefits		17,915	14.8	%		12,181	13.7	%		5,734	47.1	%
Other		10,263	8.5	%		6,281	7.1	%		3,982	63.4	%
Total general and administrative expenses		28,178	23.3	%		18,462	20.7	%		9,716	52.6	%
Operating income before corporate expenses	$	9,273	7.7	%	$	9,580	10.8	%	$	(307)	(3.2)	%
Average number of locations		74				64				10	15.6	%
Admissions		7,675				4,803				2,872	59.8	%
Patient months of care		122,380				71,907				50,473	70.2	%
Billable hours		5,575,254				3,989,328				1,585,926	39.8	%
Revenue per billable hour	$	21.72			$	22.33			$	(0.61)	(2.8)	%

PC segment net revenues increased $32.0 million or 35.9% to a record $121.1 million in 2016 from $89.1 million in 2015 primarily due to acquisitions.  Changes in cost of service revenues and general and administrative expenses as a percent of revenue are primarily due to mix changes from acquired operations and rate reductions in certain skilled elements of the Connecticut and Ohio Medicaid programs.  As a result, PC segment contribution decreased 3.2% as a percentage of revenue, or $0.3 million.

Liquidity and Capital Resources

Revolving Credit Facility

We have a 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 $175 million credit line with a maturity date of November 15, 2020 and an “accordion” feature providing for potential future expansion of the Facility to $250 million.  Borrowings (other than letters of credit) under the credit facility generally will bear interest at a rate varying from the London Interbank Offered Rate (LIBOR) plus 1.75% to LIBOR rate plus 3.00%, depending on leverage.  The Facility is secured by substantially all of our assets and the stock of our subsidiaries.  Debt issuance costs net of amortization were $1.0 million at September 30, 2016, are recorded in prepaid and other assets and are being amortized to interest expense through November 15, 2020.

Borrowings under the Facility are subject to various covenants including a multiple of 3.5 times earnings before interest, taxes, depreciation and amortization (“EBITDA”).  “EBITDA” may include “Acquired EBITDA” from pro-forma acquisitions as defined.  Borrowings under the Facility may be used for general corporate purposes, including acquisitions.  We had irrevocable letters of credit totaling $14.7 million outstanding in connection with our self-

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insurance programs.  Application of the Facility’s borrowing formula as of September 30, 2016, permitted $14.0 million to be used.  As of September 30, 2016, we were in compliance with the various financial covenants.  Under the most restrictive of the Facility’s covenants, we were required to maintain minimum net worth of at least $180.6 million at September 30, 2016.  At such date, our net worth was approximately $297.7 million.

We believe that this facility plus cash on hand will be sufficient to fund our operating needs and expansion plans 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.  JPMorgan has fully committed to financing the pending acquisition of the home health and hospice assets of Community Health Systems, Inc.

Cash Flows

Key elements to the Consolidated Statements of Cash Flows for the nine month period ended September 30, 2016 were:

Net Change in Cash and Cash Equivalents (in thousands)	2016		2015
Provided by (used in):
Operating activities	$	15,285	$	13,320
Investing activities		(35,620)		(58,454)
Financing activities		19,640		44,616
Net decrease in cash and cash equivalents	$	(695)	$	(518)

2016

Net cash provided by operating activities resulted primarily from current period net income of $14.7 million plus certain non-cash items, net of changes in accounts receivable, accounts payable and accrued expenses.  As a result of not acquiring accounts receivable in conjunction with our Wisconsin acquisition in June of 2016, accounts receivable for 2016 includes a $6.5 million build of normal accounts receivable.  Excluding the acquisition related build, accounts receivable days sales outstanding were 53 at September 30, 2016 and 56 at October 2, 2015.  The decline was due to improved collections in both the VN and PC segments. 

Cash used in investing activities was primarily due to our June 18, 2016 Wisconsin acquisition for $6.1 million, our January 5, 2016 acquisition of the equity of LTS for $19.7 million, our January 5, 2016 acquisition of Bayonne for $4.1 million and capital expenditures of $4.4 million.

Cash provided by financing activities resulted from $20.0 million of new borrowings on the revolving credit facility to fund acquisitions, net of repayments.

2015

Net cash provided by operating activities resulted primarily from period net income of $16.9 million plus certain non-cash items, net of changes in accounts receivable, accounts payable and accrued expenses.  Accounts receivable days sales outstanding, which were 56 at October 2, 2015 increased due to collection delays, primarily in the PC segment, due to changes in patient enrollment and billing requirements enacted by the Medicaid managed care providers in Tennessee. 

Cash used in investing activities was primarily due to our August 29, 2015 acquisition of the stock of WillCare for $50.8 million, our March 1, 2015 acquisition of the stock of WillCare’s Ohio operations for $3.0 million, our July 23, 2015 acquisition of the stock of Ingenios for $2.0 million, capital expenditures of $1.7 million and a $1.0 million cost basis investment.

Cash used in financing activities resulted from $45.9 million of new borrowings on the revolving credit facility and $1.2 million of debt issuance costs incurred with the five year $175 million credit facility.

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Impact of Inflation

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

Non-GAAP Financial Measures

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 Net Income and Adjusted Earnings Per Share

Adjusted net income and adjusted earnings per share are not measures of financial performance under accounting principles generally accepted in the United States of America (US GAAP).  They 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.  We believe the use of non-GAAP measures on a consolidated and business segment basis assists investors in understanding the ongoing operating performance by presenting comparable financial results between periods.  The non-GAAP information provided is used by us and may not be determined in a manner consistent with the methodologies used by other companies. 

	Three months ended				Nine months ended
(in thousands)	September 30, 2016		October 2, 2015		September 30, 2016		October 2, 2015
Net income	$	6,378	$	8,061	$	14,749	$	16,873
Addbacks:
Deal, transition and other, net of tax		1,415		(2,700)		4,510		(2,337)
Adjusted net income	$	7,793	$	5,361	$	19,259	$	14,536
Non-controlling interest		(1,012)		(262)		(689)		330
Adjusted net income attributable to Almost Family, Inc.	$	6,781	$	5,099	$	18,570	$	14,866
Per share amounts-basic:
Average shares outstanding		10,172		9,604		10,150		9,432
Net income	$	0.63	$	0.84	$	1.45	$	1.79
Addbacks:
Deal, transition and other, net of tax		0.14		(0.28)		0.44		(0.25)
Adjusted earnings per share	$	0.77	$	0.56	$	1.90	$	1.54
Non-controlling interest		(0.10)		(0.03)		(0.07)		0.03
Adjusted net income attributable to Almost Family, Inc.	$	0.67	$	0.53	$	1.83	$	1.58
Per share amounts-diluted:
Average shares outstanding		10,310		9,822		10,328		9,649
Net income	$	0.62	$	0.82	$	1.43	$	1.75
Addbacks:
Deal, transition and other, net of tax		0.14		(0.27)		0.44		(0.24)
Adjusted earnings per share	$	0.76	$	0.55	$	1.86	$	1.51
Non-controlling interest		(0.10)		(0.03)		(0.07)		0.03
Adjusted net income attributable to Almost Family, Inc.	$	0.66	$	0.52	$	1.80	$	1.54

Adjusted EBITDA

Adjusted earnings before interest, income tax, depreciation, amortization, amortization of stock-based compensation, and deal, transition and other (Adjusted EBITDA) is not a measure of financial performance under U.S. GAAP.  It should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or

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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 used in certain covenants contained in our Credit Facility.

The following table sets forth a reconciliation of net income to Adjusted EBITDA as of September 30, 2016:

	Three months ended				Nine months ended
(in thousands)	September 30, 2016		October 2, 2015		September 30, 2016		October 2, 2015
Net income	$	6,378	$	8,061	$	14,749	$	16,873
Add back:
Interest expense, net		1,399		559		4,335		1,463
Income tax expense		3,194		2,078		9,120		8,458
Depreciation and amortization		964		781		2,814		2,409
Stock-based compensation		612		450		2,013		1,455
Deal, transition and other costs		2,257		(1,306)		7,455		(696)
Adjusted EBITDA	$	14,804	$	10,623	$	40,486	$	29,962

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 changes in interest rates on long-term obligations.

At September 30, 2016, a hypothetical 100 basis point increase in short-term interest rates would result in a reduction of approximately $1.3 million in our quarter pre-tax earnings.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures – As of September 30, 2016, 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 September 30, 2016. 

Changes in Internal Control Over Financial Reporting - There were no changes in the Company’s internal control over financial reporting during the third quarter of 2016 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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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.  Refer to our Form 10-K for the year ended January 1, 2016 in Part I, Item 3. Legal Proceedings.

ITEM 1A. RISK FACTORS

Information regarding risk factors appears in our Form 10-K for the year ending January 1, 2016, 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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

2.1

Equity Purchase Agreement dated as of October 14, 2016, by and among (i) National Health Industries, Inc., (ii) Almost Family, Inc., (iii) CHS/Community Health Systems, Inc., and (iv) Community Health United Home Care, LLC, including:*

Attachment ALLC Agreement

Attachment BPurchaser Required Consents**

Attachment CRequired Actions**

Attachment DSeller Required Consents**

Attachment EServices Agreement

Attachment FCompany Indebtedness**

Attachment GNoncompetition Agreement

Attachment HAffiliation Agreement

*Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Almost Family hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the U.S. Securities and Exchange Commission.

**The information scheduled at this Attachment has been omitted pursuant to Item 601(b)(2) of Regulation S-K. Almost Family hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the U.S. Securities and Exchange Commission.

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 September 30, 2016, filed on November 8, 2016, 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  November 8, 2016	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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