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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(MARK ONE)

 

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

For The Quarterly Period Ended September 30, 2011

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 0-19946

 

 

LINCARE HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   51-0331330

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

19387 US 19 North

Clearwater, FL

  33764
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(727) 530-7700

 

 

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 (§232.405 of this chapter) during the preceding 12 months (or 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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   

Outstanding at

October 26, 2011

Common Stock, $0.01 par value

   88,547,381

 

 

 


Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

FORM 10-Q

For The Quarterly Period Ended September 30, 2011

INDEX

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (unaudited)

     3   
 

Condensed consolidated balance sheets

     3   
 

Condensed consolidated statements of operations

     4   
 

Condensed consolidated statements of cash flows

     5   
 

Notes to condensed consolidated financial statements (unaudited)

     6   

Item 2.

 

Management’s Discussion and Analysis of Results of Operations and Financial Condition

     19   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     36   

Item 4.

 

Controls and Procedures

     36   

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     37   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     38   

Item 3.

 

Defaults Upon Senior Securities

     38   

Item 4.

 

Removed and Reserved

     38   

Item 5.

 

Other Information

     38   

Item 6.

 

Exhibits

     38   

SIGNATURE

     39   

INDEX OF EXHIBITS

     S-1   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     September 30,
2011
     December 31,
2010
 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 36,804       $ 164,203   

Short-term investments

     20,000         40,000   

Restricted cash

     0         345   

Accounts receivable, net

     238,050         186,001   

Income tax receivable

     928         9,443   

Inventories

     15,310         13,276   

Prepaid and other current assets

     6,738         3,542   

Deferred income taxes

     30,077         26,488   
  

 

 

    

 

 

 

Total current assets

     347,907         443,298   
  

 

 

    

 

 

 

Property and equipment, net

     347,465         338,778   

Goodwill

     1,368,085         1,258,065   

Other

     36,016         7,690   
  

 

 

    

 

 

 

Total assets

   $ 2,099,473       $ 2,047,831   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Current installments of long-term obligations

   $ 104,710       $ 619   

Accounts payable

     48,839         64,078   

Accrued expenses:

     

Compensation and benefits

     24,939         39,500   

Liability insurance

     17,219         19,052   

Other current liabilities

     60,137         51,501   
  

 

 

    

 

 

 

Total current liabilities

     255,844         174,750   
  

 

 

    

 

 

 

Long-term obligations, excluding current installments

     517,742         494,271   

Deferred income taxes and other taxes

     422,193         381,061   
  

 

 

    

 

 

 

Total liabilities

     1,195,779         1,050,082   
  

 

 

    

 

 

 

Commitments and contingencies:

     

Stockholders’ equity:

     

Common stock

     889         963   

Additional paid-in capital

     703,873         681,988   

Retained earnings

     198,932         314,798   
  

 

 

    

 

 

 

Total stockholders’ equity

     903,694         997,749   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 2,099,473       $ 2,047,831   
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

3


Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     For The Three Months Ended     For The Nine Months Ended  
     September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Net revenues

   $ 474,758      $ 418,673      $ 1,355,358      $ 1,247,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of goods and services

     151,336        115,215        417,845        339,730   

Operating expenses

     112,092        100,464        316,188        298,664   

Selling, general and administrative expenses

     88,783        79,405        257,157        247,736   

Bad debt expense

     9,495        10,980        27,107        23,406   

Depreciation and amortization expense

     32,672        28,924        91,976        87,847   
  

 

 

   

 

 

   

 

 

   

 

 

 
     394,378        334,988        1,110,273        997,383   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     80,380        83,685        245,085        249,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     89        133        492        368   

Interest expense

     (9,655     (9,098     (28,261     (27,048
  

 

 

   

 

 

   

 

 

   

 

 

 
     (9,566     (8,965     (27,769     (26,680
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     70,814        74,720        217,316        223,016   

Income tax expense

     27,200        29,268        84,560        87,513   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 43,614      $ 45,452      $ 132,756      $ 135,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.49      $ 0.48      $ 1.46      $ 1.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.48      $ 0.47      $ 1.42      $ 1.39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.20      $ 0.00      $ 0.60      $ 0.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding

     88,563        95,214        91,196        95,666   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares and common share equivalents outstanding

     90,543        96,705        93,507        97,489   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

4


Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     For The Nine Months Ended  
     September 30,
2011
    September 30,
2010
 

Cash flows from operating activities:

    

Net income

   $ 132,756      $ 135,503   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Bad debt expense

     27,107        23,406   

Depreciation and amortization expense

     91,976        87,847   

Net loss (gain) on disposal of property and equipment

     60        (26

Amortization of debt issuance costs

     1,368        1,327   

Amortization of discount on bonds payable

     14,745        13,750   

Stock-based compensation expense

     15,863        19,793   

Deferred income taxes

     38,212        34,589   

Excess tax benefit from stock-based compensation

     (240     (394

Change in assets and liabilities net of effects of acquired businesses:

    

Accounts receivable

     (69,188     (56,530

Inventories

     893        5,187   

Prepaid and other assets

     (3,142     1,514   

Accounts payable

     (12,299     488   

Accrued expenses and other current liabilities

     (27,334     10,271   

Income taxes payable

     8,821        (11,437

Long-term obligations

     (2,386     (6,125
  

 

 

   

 

 

 

Net cash provided by operating activities

     217,212        259,163   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sale of property and equipment

     238        49   

Capital expenditures

     (95,934     (80,380

Purchases of investments

     (40,000     (20,000

Sales and maturities of investments

     60,000        58,650   

Business acquisitions, net of cash acquired

     (95,634     (11,375

Cash restricted for future payments

     345        (5,345
  

 

 

   

 

 

 

Net cash used in investing activities

     (170,985     (58,401
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net proceeds from revolving credit line

     80,000        0   

Payments of principal on debt

     (9,102     (1,034

Payments of debt issuance costs

     (1,783     0   

Payments of cash dividends

     (57,141     (19,617

Proceeds from exercise of stock options and issuance of common shares

     14,147        26,126   

Excess tax benefit from stock-based compensation

     240        394   

Payments to acquire treasury stock

     (199,987     (49,961
  

 

 

   

 

 

 

Net cash used in financing activities

     (173,626     (44,092
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (127,399     156,670   

Cash and cash equivalents, beginning of period

     164,203        20,428   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 36,804      $ 177,098   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 7,665      $ 7,563   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 38,343      $ 65,504   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

5


Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Description of Business: Lincare Holdings Inc. and subsidiaries (“Lincare” or the “Company”) provides oxygen, respiratory therapy services, specialty pharmaceuticals, infusion therapy services and home medical equipment such as hospital beds, wheelchairs and other medical supplies to the home health care market. The Company’s customers are serviced from locations in 48 states in the United States and Canada. The Company’s equipment and supplies are readily available and the Company is not dependent on a single supplier or even a few suppliers.

Basis of Presentation: The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles accepted in the United States for interim financial information and with the instructions to Form 10-Q. They should be read in conjunction with the consolidated financial statements and related notes to the financial statements of Lincare Holdings Inc. and Subsidiaries on Form 10-K for the fiscal year ended December 31, 2010. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

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 the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. It is at least reasonably possible that a change in those estimates will occur in the near term.

Investments: The Company determines the appropriate classification of investments at the time of purchase based upon management’s intent with regard to such investments. Based upon the Company’s intentions and ability to hold certain assets until maturity, the Company classifies certain debt securities as held-to-maturity and measures them at amortized cost. The Company classifies certain other debt securities as available-for-sale and measures them at fair value with unrealized gains or losses recorded in other comprehensive income. Realized gains and losses from both categories of investments are included in net income and are determined on a specific identification basis. Interest income and dividend income, if any, for both categories of investments are included in net income.

Restricted Cash: Restricted cash was held in an interest-bearing escrow account for the purposes of complying with and performing certain contractual obligations in connection with the February 1, 2010 purchase of the respiratory therapy, home medical equipment and infusion therapy business of Gentiva Health Services, Inc.

Concentration of Credit Risk: The Company’s revenues are generated through locations in 48 states in the United States and Canada. The Company generally does not require collateral or other security in extending credit to customers; however, the Company routinely obtains assignment of (or is otherwise entitled to receive) benefits receivable under the health insurance programs, plans or policies of its customers. Included in the Company’s net revenues is reimbursement from government sources under Medicare, Medicaid and other federally and state funded programs, which represented approximately 61% and 60% of net revenues for the nine months ended September 30, 2011 and 2010, respectively. The exclusion of the Company from participating in state and federally funded programs would have a material adverse effect on the Company’s business, financial condition, operating results and cash flows.

Self-Insurance Risk: The Company is subject to workers’ compensation, professional liability, auto liability and employee health benefit claims, which are primarily self-insured; however, the Company maintains certain stop-loss and other insurance coverage which it believes to be appropriate. Provisions for estimated settlements relating to these self-insured liabilities are provided in the period of the related claims on a case-by-case basis plus an amount for incurred but not reported claims. Differences between the amounts accrued and subsequent settlements are recorded in operations in the period of settlement.

Revenue Recognition and Accounts Receivable: The Company’s revenues are recognized on an accrual basis in the period in which services and related products are provided to customers and are recorded at net realizable amounts estimated to be paid by customers and third-party payors. The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. The Company has established an allowance to account for sales adjustments that result from differences between the payment amount received and the expected realizable amount. Actual adjustments that result from differences between the payment amount received and the expected realizable amount are recorded against the allowance for sales adjustments and are typically identified and ultimately recorded at the point of cash application or when otherwise determined pursuant to the Company’s collection procedures. The Company reports revenues in its financial statements net of such sales adjustments.

 

6


Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Certain items provided by the Company are reimbursed under rental arrangements that generally provide for fixed monthly payments established by fee schedules for as long as the patient is using the equipment and medical necessity continues (subject to capped rental arrangements which limit the rental payment periods in some instances and which may result in a transfer of title to the equipment at the end of the rental payment period). Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery. The Company recognizes rental arrangement revenues ratably over the monthly service period and defers revenue for the portion of the monthly bill that is unearned. No separate payment is earned from the initial equipment delivery and setup process. During the rental period, the Company is responsible for servicing the equipment and providing routine maintenance, if necessary.

The Company’s revenue recognition policy is consistent with the criteria set forth in Staff Accounting Bulletin 104, “Revenue Recognition” (“SAB 104”), for determining when revenue is realized or realizable and earned. The Company recognizes revenue in accordance with the requirements of SAB 104 that:

 

   

persuasive evidence of an arrangement exists;

 

   

delivery has occurred;

 

   

the seller’s price to the buyer is fixed or determinable; and

 

   

collectibility is reasonably assured.

Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their net realizable values at the time products and/or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such sales adjustments are typically identified and recorded by the Company at the point of cash application, claim denial or account review. Included in accounts receivable are earned but unbilled accounts receivable from earned revenues. Unbilled accounts receivable represent charges for equipment and supplies delivered to customers for which invoices have not yet been generated by the Company’s billing system. Prior to the delivery of equipment and supplies to customers, the Company performs certain certification and approval procedures to ensure collection is reasonably assured. Once the items are delivered, unbilled accounts receivable are recorded at net amounts expected to be paid by customers and third-party payors. Billing delays, generally ranging from several days to several weeks, can occur due to delays in obtaining certain required payor-specific documentation from internal and external sources as well as interim transactions occurring between cycle billing dates established for each customer within the billing system, and business acquisitions awaiting assignment of new provider enrollment identification numbers. In the event that a third-party payor does not accept the claim, the customer is ultimately responsible for payment for the products or services. Accounts receivable are reported net of allowances for sales adjustments and uncollectible accounts. Sales adjustments are recorded against revenues and result from differences between the payment amount received and the expected realizable amount. Bad debt is recorded as an operating expense and consists of billed charges that are ultimately deemed uncollectible due to the customer’s or third-party payor’s inability to pay.

The Company performs analyses to evaluate the net realizable value of accounts receivable. Specifically, the Company considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. Because of continuing changes in the health care industry and third-party reimbursement, it is possible that the Company’s estimates could change, which could have a material impact on the Company’s results of operations and cash flows.

 

7


Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Net Revenues: The following table sets forth, for the periods indicated, a summary of the Company’s net revenues by product category:

 

     For The Three Months Ended
September 30,
     For The Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (In thousands)      (In thousands)  

Respiratory and other chronic therapies

   $ 423,886       $ 371,207       $ 1,212,928       $ 1,111,069   

DME, infusion and enteral therapies

     50,872         47,466         142,430         136,010   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 474,758       $ 418,673       $ 1,355,358       $ 1,247,079   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in net revenues in the three and nine months ended September 30, 2011 are rental items that comprise approximately 54.7% and 56.9%, respectively, of total revenues and sale items that comprise approximately 45.3% and 43.1%, respectively, of total revenues. Included in net revenues in the three and nine months ended September 30, 2010 are rental items that comprise approximately 61.4% of total revenues and sale items that comprise approximately 38.6% of total revenues in both periods.

Sales and Certain Other Taxes: In its consolidated financial statements, the Company accounts for taxes imposed on revenue-producing transactions by government authorities on a net basis, and accordingly, excludes such taxes from net revenues. Such taxes include, but are not limited to, sales, use, privilege and excise taxes.

Cost of Goods and Services: Cost of goods and services includes the cost of medical equipment (excluding depreciation of $26.0 million and $79.6 million for the three and nine-month periods in 2011 and $24.6 million and $78.3 million for the three and nine-month periods in 2010, respectively), drugs and supplies sold to patients and certain operating costs related to the Company’s respiratory drug product line. These costs include an allocation of customer service, distribution and administrative costs relating to the respiratory drug product line of approximately $13.8 million and $41.3 million for the three and nine-month periods ended September 30, 2011, respectively. For the three and nine-month periods of 2010, such costs amounted to $13.4 million and $39.9 million, respectively. Included in cost of goods and services in the three and nine-month periods ended September 30, 2011 are salary and related expenses of pharmacists and pharmacy technicians of approximately $4.1 million and $11.3 million, respectively. Such salary and related expenses for the three and nine-month periods ended September 30, 2010, were $3.3 million and $9.7 million, respectively.

Operating Expenses: The Company manages 1,108 operating centers from which customers are provided equipment, supplies and services. An operating center averages approximately seven to eight employees and is typically comprised of a center manager, two customer service representatives (referred to as “CSR’s” – telephone intake, scheduling, documentation), two or three service representatives (referred to as “Service Reps” – delivery, maintenance and retrieval of equipment and delivery of disposables), a respiratory therapist (non-reimbursable clinical follow-up with the customer and communication to the prescribing physician) and a sales representative (marketing calls to local physicians and other referral sources).

The Company includes in operating expenses the costs incurred at the Company’s operating centers for certain service personnel (center manager, CSR’s and Service Reps), facilities (rent, utilities, communications, property taxes, etc.), vehicles (vehicle leases, gasoline, repair and maintenance), and general business supplies and miscellaneous expenses. Operating expenses for the interim periods of 2011 and 2010 within these major categories were as follows:

 

Operating Expenses (in thousands)    For The Three Months Ended
September 30,
     For The Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Salary and related

   $ 71,479       $ 64,645       $ 204,255       $ 192,711   

Facilities

     15,981         15,917         44,412         46,781   

Vehicles

     14,360         11,938         40,780         35,446   

General supplies/miscellaneous

     10,272         7,964         26,741         23,726   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 112,092       $ 100,464       $ 316,188       $ 298,664   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Included in operating expenses during the three and nine-month periods ended September 30, 2011 are salary and related expenses for Service Reps in the amount of $29.7 million and $85.6 million, respectively. Such salary and related expenses for the three and nine-month periods ended September 30, 2010, were $27.3 million and $81.2 million, respectively.

Selling, General and Administrative Expenses: Selling, general and administrative expenses (“SG&A”) include costs related to sales and marketing activities, corporate overhead and other business support functions. Included in SG&A during the three and nine-month periods ended September 30, 2011 are salary and related expenses of $65.3 million and $190.4 million, respectively. These salary and related expenses include the cost of the Company’s respiratory therapists for the three and nine-month periods ended September 30, 2011, of $18.0 million and $52.5 million, respectively. Included in SG&A during the three and nine-month periods ended September 30, 2010 are salary and related expenses of $63.4 million and $191.6 million, respectively. These salary and related expenses include the cost of the Company’s respiratory therapists for the three and nine-month periods ended September 30, 2010, of $17.1 million and $50.7 million, respectively. The Company’s respiratory therapists generally provide non-reimbursable clinical follow-up with the customer and communication, as appropriate, to the prescribing physician with respect to the customer’s prescribed plan of care. The Company includes the salaries and related expenses of its respiratory therapist personnel (licensed respiratory therapists or, in some cases, registered nurses) in SG&A because it believes that these personnel enhance the Company’s business relative to its competitors who do not employ respiratory therapists.

Comprehensive Income: The Company’s comprehensive income is the same as reported net income for all periods presented.

Note 2. Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. A hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

   

Level 1 — Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

   

Level 2 — Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

   

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the Company’s degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases an asset or liability is classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition has caused, and in the future may cause, the Company’s financial instruments to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. During the three and nine-month periods ended September 30, 2011 and 2010, the Company did not have any reclassifications in levels.

The Company estimated the fair value of acquisition-related contingent consideration arrangements by applying the income approach using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value.

Contingent consideration of $9.6 million, $10.9 million and $1.1 million was recognized in connection with business acquisitions in February 2011, June 2011 and September 2011, respectively. At September 30, 2011, the amounts recognized for these contingent consideration arrangements, the range of outcomes, and the assumptions used to develop the estimates had not materially changed.

The following table presents the valuation of the Company’s financial assets and liabilities as of September 30, 2011 and December 31, 2010, measured at fair value on a recurring basis (in thousands):

 

     Level 1      Level 3      Fair Value  

September 30, 2011

        

Liabilities

        

Acquisition-related contingent consideration-short-term (1)

   $ 0       $ 10,483       $ 10,483   

Acquisition-related contingent consideration-long-term (2)

     0         11,112         11,112   
  

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ 0       $ 21,595       $ 21,595   
  

 

 

    

 

 

    

 

 

 

December 31, 2010

        

Assets

        

Money Market Funds (3)

   $ 101,600       $ 0       $ 101,600   
  

 

 

    

 

 

    

 

 

 

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

(1) Included in current installments of long-term obligations in the accompanying condensed consolidated balance sheets.
(2) Included in long-term obligations, excluding current installments in the accompanying condensed consolidated balance sheets.
(3) Included in cash and cash equivalents in the accompanying condensed consolidated balance sheets. The balance in money market funds at September 30, 2011 was $0.

The following table presents the changes in the estimated fair values of the Company’s financial assets and liabilities that are measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2011:

 

     (In thousands)  
     Assets      Liabilities  

Balance on December 31, 2010

   $ 0       $ 0   

Acquisition-related contingent consideration recorded in 2011

     0         21,595   
  

 

 

    

 

 

 

Balance on September 30, 2011

   $ 0       $ 21,595   
  

 

 

    

 

 

 

Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis are as follows:

 

(In thousands)    September 30, 2011      December 31, 2010  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Assets:

           

Short-term investments – held to maturity

   $ 20,000       $ 20,000       $ 40,000       $ 40,000   

Restricted cash

     0         0         345         345   

Liabilities:

           

2.75% Series A Debentures

     263,322         284,109         255,727         302,672   

2.75% Series B Debentures

     241,197         284,281         234,047         305,422   

Short-term debt

     80,000         80,000         0         0   

Deferred acquisition obligations

     14,227         14,227         619         619   

Fair values were determined as follows:

 

   

The carrying amounts of short-term investments, short-term debt, restricted cash and deferred acquisition obligations approximate fair value because of the short-term maturity of these instruments. The short-term investments are classified as held-to-maturity and are carried at amortized cost.

 

   

The fair value of the Series A and Series B Debentures are estimated based on several standard market variables, including the Company’s stock price, yield to put/call through conversion and yield to maturity.

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

   

The Company believes that the recorded values of all of its other financial instruments approximate their fair values because of their nature and respective relatively short maturity dates or durations.

 

   

Deferred acquisition obligations exclude acquisition-related contingent consideration measured at fair value using Level 3 inputs.

Note 3. Investments

On April 15, 2011, the Company invested $20.0 million in a 185-day time deposit issued by Credit Agricole Corporate and Investment Bank maturing on October 17, 2011. The investment is classified as held-to-maturity and carried at amortized cost of $20.0 million in the accompanying balance sheet at September 30, 2011.

On October 15, 2010, the Company invested $20.0 million in a 182-day time deposit issued by Credit Agricole Corporate and Investment Bank that matured on April 15, 2011. The investment is classified as held-to-maturity and carried at amortized cost of $20.0 million in the accompanying balance sheet at December 31, 2010.

On August 10, 2010, the Company invested $20.0 million in a 157-day time deposit issued by Credit Agricole Corporate and Investment Bank that matured on January 14, 2011. The investment is classified as held-to-maturity and carried at amortized cost of $20.0 million in the accompanying balance sheet at December 31, 2010.

Note 4. Business Combinations

Lincare acquires the business and related assets of local and regional companies as an ongoing strategy to increase revenue within its respective markets. Lincare arrives at a negotiated purchase price taking into account such factors including, but not limited to, the acquired company’s historical and projected revenue growth, operating cash flow, product mix, payor mix, service reputation and geographical location.

During the nine-month period ended September 30, 2011, the Company acquired all of the outstanding common stock of seven companies and certain assets of three other companies. During the nine-month period ended September 30, 2010, the Company acquired certain assets of five companies.

The acquisition date fair value of the total consideration transferred for the 2011 acquisitions was $131.1 million, which consisted of the following:

 

     (In thousands)  

Cash consideration, net of cash acquired (1)

   $ 92,849   

Contingent consideration

     21,595   

Deferred acquisition obligations (2)

     16,632   
  

 

 

 
   $ 131,076   
  

 

 

 

 

(1) Does not include $2.8 million related to an acquisition closed in December 2010 and paid in January 2011.
(2) Includes $1.0 million related to an acquisition closed in September 2011 and paid in October 2011.

The following table summarizes the fair values of the assets and liabilities assumed based on preliminary estimates that are subject to change in 2011 upon completion of the final valuation analyses.

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

     (In thousands)  

Current assets, net of cash acquired

   $ 12,995   

Property and equipment

     4,499   

Intangible assets

     29,510   

Goodwill

     110,020   

Assumption of liabilities

     (25,310

Deferred revenue

     (638
  

 

 

 
   $ 131,076   
  

 

 

 

The results of the 2011 acquisitions have been included in the Company’s financial statements from the acquisition date forward and were not significant for the first nine months of 2011. Pro forma information for the comparable period of 2010 would not be materially different from amounts reported.

Note 5. Accounts Receivable, Net

Accounts receivable, net at September 30, 2011 and December 31, 2010 consist of:

 

     September 30,
2011
    December 31,
2010
 
     (In thousands)  

Trade accounts receivable

   $ 290,563      $ 234,404   

Less allowance for sales adjustments and uncollectible accounts

     (52,513     (48,403
  

 

 

   

 

 

 

Accounts receivable, net

   $ 238,050      $ 186,001   
  

 

 

   

 

 

 

Note 6. Property and Equipment, Net

Property and equipment, net at September 30, 2011 and December 31, 2010 consist of:

 

     September 30,
2011
    December 31,
2010
 
     (In thousands)  

Property and equipment at cost

   $ 1,243,618      $ 1,168,236   

Less accumulated depreciation

     (896,153     (829,458
  

 

 

   

 

 

 

Property and equipment, net

   $ 347,465      $ 338,778   
  

 

 

   

 

 

 

Note 7. Other Current Liabilities

Other current liabilities at September 30, 2011 and December 31, 2010 consist of:

 

     September 30,
2011
     December 31,
2010
 
     (In thousands)  

Deferred revenue

   $ 41,691       $ 39,256   

Other current liabilities

     18,446         12,245   
  

 

 

    

 

 

 

Other current liabilities

   $ 60,137       $ 51,501   
  

 

 

    

 

 

 

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 8. Long-Term Obligations

Long-term obligations at September 30, 2011 and December 31, 2010 consist of:

 

     September 30,
2011
    December 31,
2010
 
     (In thousands)  

Series A convertible debentures to mature in 2037, bearing fixed interest of 2.75%, with a put/call option in 2012

   $ 275,000      $ 275,000   

Unamortized discount

     (11,678     (19,273

Series B convertible debentures to mature in 2037, bearing fixed interest of 2.75%, with a put/call option in 2014

     275,000        275,000   

Unamortized discount

     (33,803     (40,953

Eurodollar loans under five-year revolving credit agreement bearing annual interest equal to the British Bankers Association LIBOR Rate (“BBA LIBOR”) plus an applicable margin based on the Company’s consolidated leverage ratio (consolidated funded indebtedness to consolidated EBITDA)

     80,000        0   

Other long-term obligations

     2,111        4,497   

Unsecured acquisition obligations and contingent consideration, net of imputed interest, payable in various installments through 2014

     35,822        619   
  

 

 

   

 

 

 

Total long-term obligations

     622,452        494,890   

Less: current installments

     104,710        619   
  

 

 

   

 

 

 

Long-term obligations, excluding current installments

   $ 517,742      $ 494,271   
  

 

 

   

 

 

 

The Company’s revolving credit agreement with several lenders and Bank of America N.A., as agent, dated September 15, 2011, permits the Company to borrow amounts up to $450.0 million under a five-year revolving credit facility. The revolving credit facility contains a $60.0 million letter of credit sub-facility, which reduces the principal amount available under the facility by the amount of outstanding letters of credit on the sub-facility. As of September 30, 2011, $80.0 million of borrowings was outstanding under the credit facility and $33.8 million in standby letters of credit were issued. The revolving credit agreement has a maturity date of September 15, 2016. The Company pays an annual administration agency fee along with a quarterly facility fee. The facility fee is based on the Company’s consolidated leverage ratio and ranges between 0.175% and 0.275% annually. The leverage ratio is calculated each quarter to determine the applicable interest rate on revolving loans, the letter of credit fee and the facility fee for the following quarter. The revolving credit agreement contains several financial and other negative and affirmative covenants customary in such agreements and is secured by a pledge of the stock of the wholly-owned subsidiaries of Lincare Holdings Inc. The financial covenants in the Company’s credit agreement include interest coverage and leverage ratios, as defined in the agreement. The Company’s credit agreement requires compliance with all covenants set forth in the agreement and the Company was in compliance with all covenants as of September 30, 2011. The credit agreement defines the occurrence of certain specified events as events of default which, if not waived by or cured to the satisfaction of the requisite lenders, allow the lenders to take actions against the Company, including termination of commitments under the agreement, acceleration of any unpaid principal and accrued interest in respect of outstanding borrowings, payment of additional cash collateral to be held in escrow for the benefit of the lenders and enforcement of any and all rights and interests created and existing under the credit agreement. Under certain conditions, an event of default may result in an increase in the interest rate (the “Default Rate”) payable by the Company on loans outstanding under the credit facility. The Default Rate is equal to the interest rate (including any applicable percentage as set forth in the agreement) otherwise applicable to such loans plus 2% per annum. In the case of a bankruptcy event (as defined in the credit agreement), all commitments automatically terminate and all amounts outstanding under the credit facility become immediately due and payable.

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

On October 31, 2007, the Company completed the sale of $275.0 million principal amount of convertible senior debentures due 2037 – Series A (the “Series A Debentures”) and $275.0 million principal amount of convertible senior debentures due 2037 – Series B (the “Series B Debentures” and together with the Series A Debentures, the “Series Debentures”) in a private placement. The Series Debentures pay interest semi-annually at a rate of 2.75% per annum. The Series Debentures are unsecured and unsubordinated obligations and will be convertible under specified circumstances based upon a base conversion rate, which, under certain circumstances, will be increased pursuant to a formula that is subject to a maximum conversion rate. Upon conversion, holders of the Series Debentures will receive cash up to the principal amount, and any excess conversion value will be delivered in shares of the Company’s common stock or in a combination of cash and shares of common stock, at the Company’s option. The base conversion rate for the Debentures as of September 30, 2011 is 30.11 shares of common stock per $1,000 principal amount of Series Debentures, equivalent to a base conversion price of approximately $33.21 per share. In addition, if at the time of conversion the applicable price of the Company’s common stock exceeds the base conversion price, holders of the Series A Debentures and Series B Debentures will receive an additional number of shares of common stock per $1,000 principal amount of the Debentures, as determined pursuant to a specified formula. The Company will have the right to redeem the Series A Debentures and the Series B Debentures at any time after November 1, 2012 and November 1, 2014, respectively. Holders of the Series Debentures will have the right to require the Company to repurchase for cash all or some of their Series Debentures upon the occurrence of certain fundamental change transactions or on November 1, 2012, 2017, 2022, 2027 and 2032 in the case of the Series A Debentures and November 1, 2014, 2017, 2022, 2027 and 2032 in the case of the Series B Debentures.

The Company has estimated the fair value of the liability components of the Series Debentures by calculating the present value of the cash flows of similar liabilities without associated equity components. In performing those calculations, the Company estimated that instruments similar to the Series A and B Debentures without a conversion feature as of the date of issuance would have had 7.0% and 7.4% rates of return (respectively) and expected lives of five and seven years (respectively). These estimated rates of return were based on the Company’s nonconvertible debt borrowing rate at the time of issuance and the expected lives were based on the holder’s put option features embedded in the notes. The initial proceeds from the instruments exceeded the estimated fair value of the liability components, and as a result, the Company reclassified $47.4 million and $67.2 million, respectively, of the carrying value of the Series A and B convertible debentures to equity as of the October 31, 2007 issuance date. These amounts represent the equity components of the proceeds from the debentures. The Company also recognized debt discounts equal to the equity components which will be accreted to interest expense over the respective five and seven year terms of the first put/call option dates specified in the indentures underlying the debentures. The accreted interest plus the cash interest payments based on the stated coupon rates results in interest cost being recognized in the income statement that reflects the interest rates on similar instruments without a conversion feature.

The debt and equity components recognized for the Series A and Series B convertible debentures were as follows (in thousands):

 

     September 30, 2011     December 31, 2010  
     Series A     Series B     Series A     Series B  

Principal amount of convertible debentures

   $ 275,000      $ 275,000      $ 275,000      $ 275,000   

Unamortized discount

     (11,678     (33,803     (19,273     (40,953

Net carrying amount

     263,322        241,197        255,727        234,047   

Additional paid-in capital

     29,065        41,238        29,065        41,238   

At September 30, 2011, the remaining period over which the discount on the liability components will be amortized is 13 months and 37 months for the Series A and Series B convertible debentures, respectively.

The amount of interest expense recognized for the three months ended September 30, 2011 and 2010 was as follows (in thousands):

 

     September 30, 2011      September 30, 2010  
     Series A      Series B      Series A      Series B  

Contractual coupon interest

   $ 1,891       $ 1,891       $ 1,891       $ 1,891   

Amortization of discount on convertible debentures

     2,575         2,426         2,405         2,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

   $ 4,466       $ 4,317       $ 4,296       $ 4,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The amount of interest expense recognized for the nine months ended September 30, 2011 and 2010 was as follows (in thousands):

 

     September 30, 2011      September 30, 2010  
     Series A      Series B      Series A      Series B  

Contractual coupon interest

   $ 5,672       $ 5,672       $ 5,672       $ 5,672   

Amortization of discount on convertible debentures

     7,595         7,150         7,095         6,655   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

   $ 13,267       $ 12,822       $ 12,767       $ 12,327   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 9. Income Taxes

The Company conducts business nationally and, as a result, files a U.S. federal income tax return and returns in various state and local jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the United States. With few exceptions, the Company is no longer subject to U.S. federal, and state and local income tax examinations for years before 2006 and 2005, respectively.

The Company does not expect that the total amount of unrecognized tax positions will significantly increase or decrease in the next twelve months. The Company continues to recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Internal Revenue Service has completed its examination of the Company’s U.S. income tax returns through 2009. The U.S. federal statute of limitations remains open for the years 2008 and forward. There are no material disputes for the open tax years. The years 2010 and 2011 are currently under examination.

Note 10. Earnings Per Common Share

Basic earnings per common share is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution of securities that could share in the Company’s earnings, including exercise of outstanding stock options and non-vested restricted stock. As discussed in Note 8, the conditions for conversion related to the Company’s Convertible Debentures have never been met. Accordingly, there was no impact on diluted earnings per share attributable to assumed conversion. When the exercise of stock options or the inclusion of awards would be anti-dilutive, they are excluded from the earnings per common share calculation. For the three and nine months ended September 30, 2011, the number of excluded shares underlying anti-dilutive stock options and awards was 3,808,102 and 2,537,029, respectively. For the three and nine months ended September 30, 2010, the number of excluded shares underlying anti-dilutive stock options and awards was 3,948,714 and 2,748,934, respectively.

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

A reconciliation of the numerators and the denominators of the basic and diluted earnings per common share computations is as follows:

 

     For The Three Months Ended
September 30,
     For The Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (In thousands, except per share data)  

Numerator:

           

Income available to common stockholders and holders of dilutive securities

   $ 43,614       $ 45,452       $ 132,756       $ 135,503   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average shares

     88,563         95,214         91,196         95,666   

Effect of dilutive securities: Incremental shares under stock compensation plans

     1,980         1,491         2,311         1,823   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average shares

     90,543         96,705         93,507         97,489   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount:

           

Basic

   $ 0.49       $ 0.48       $ 1.46       $ 1.42   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.48       $ 0.47       $ 1.42       $ 1.39   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 11. Stock-Based Compensation

For the three months ended September 30, 2011 and 2010, the Company recognized total stock-based compensation expense of $4.9 million and $6.5 million, respectively, as well as related tax benefits of $1.1 million and $1.7 million, respectively. For the nine months ended September 30, 2011 and 2010, the Company recognized total stock-based compensation expense of $15.9 million and $19.8 million, respectively, as well as related tax benefits of $3.8 million and $5.3 million, respectively. All stock-based compensation expenses are recognized using a graded method approach and are either classified within operating expenses or selling, general and administrative expenses on the accompanying condensed consolidated statements of operations, with substantially all of the expense being in selling, general and administrative expenses.

Stock Options

Stock option activity for the nine months ended September 30, 2011 is summarized below:

 

     Number of
Options
    Weighted
Average

Exercise
Price
     Weighted
Average

Remaining
Contractual Life
(Years)
     Aggregate
Intrinsic Value
 

Outstanding at December 31, 2010

     6,912,014      $ 24.51         

Options granted in 2011

     0        —           

Exercised in 2011

     (596,682   $ 21.84         

Cancelled/forfeited/expired in 2011

     (3,100   $ 26.89         
  

 

 

         

Outstanding at September 30, 2011

     6,312,232      $ 24.76         2.88       $ 4,408,183   
  

 

 

         

Exercisable at September 30, 2011

     5,416,232      $ 25.49         2.33       $ 2,508,663   
  

 

 

         

Vested or expected to vest in the future as of September 30, 2011

     6,311,157      $ 24.76         2.88       $ 4,405,904   
  

 

 

         

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Of the stock options outstanding at September 30, 2011, options for 5,416,232 shares were exercisable and options for 896,000 shares were unvested. Of the total stock options outstanding at September 30, 2011, 6,311,157 were vested or expected to vest in the future, net of expected cancellations and forfeitures of 1,075. The intrinsic value of options exercised during the nine months ended September 30, 2011 and 2010 amounted to $1.6 million and $6.3 million, respectively.

As of September 30, 2011, the total remaining unrecognized compensation cost related to unvested stock options amounted to $1.4 million, which will be amortized over the weighted-average remaining requisite service period of 0.6 years.

Restricted Stock

The following table summarizes information about restricted stock activity for the nine months ended September 30, 2011:

 

     Shares     Weighted-
Average  Grant
Date Fair
Value  Per
Share
 

Unvested at December 31, 2010

     2,684,250      $ 21.79   

Granted

     20,000      $ 28.88   

Vested

     (179,225   $ 26.33   

Forfeited

     (14,738   $ 24.56   
  

 

 

   

Unvested at September 30, 2011

     2,510,287      $ 21.50   
  

 

 

   

As of September 30, 2011, the total remaining unrecognized compensation cost related to restricted stock amounted to $19.0 million, which will be amortized over the weighted-average remaining requisite service period of 1.3 years.

Note 12. Subsequent Event

On October 3, 2011, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.20 per share which was paid on October 31, 2011 to stockholders of record as of October 17, 2011. The total dividend paid was $17.8 million.

 

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LINCARE HOLDINGS INC. AND SUBSIDIARIES

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

This “Management’s Discussion and Analysis of Results of Operations and Financial Condition” is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not indicate future performance. As used in this “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” the words “we,” “our,” “us,” “Lincare” and the “Company” refer to Lincare Holdings Inc. and its consolidated subsidiaries.

Medicare Reimbursement

As a provider of home oxygen and other respiratory therapy services to the home health care market, we participate in Medicare Part B, the Supplementary Medical Insurance Program, which was established by the Social Security Act of 1965. Providers of home oxygen and other respiratory therapy services have historically been heavily dependent on Medicare reimbursement due to the high proportion of elderly persons suffering from respiratory disease. Durable medical equipment (“DME”), including oxygen equipment, is traditionally reimbursed by Medicare based on fixed fee schedules.

Recent legislation, including the Patient Protection and Affordable Care Act (“PPACA”), the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”), the Medicare, Medicaid and SCHIP Extension Act of 2007 (“SCHIP Extension Act”), the Deficit Reduction Act of 2005 (“DRA”) and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), contain provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. PPACA, as amended, is a comprehensive health care reform law that contains a large number of health-related provisions to take effect over the next several years, including various cost containment and program integrity changes that will apply to the home medical equipment industry. MIPPA delayed the implementation of a Medicare competitive bidding program for oxygen equipment and certain other DME items that was scheduled to begin on July 1, 2008 and instituted a 9.5% price reduction nationwide for these items as of January 1, 2009. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008. DRA provisions negatively impacted reimbursement for oxygen equipment beginning in 2009 and negatively impacted reimbursement for DME items subject to capped rental payments beginning in 2007. MMA changed the pricing formulas used to establish payment rates for inhalation drug therapies resulting in significantly reduced reimbursement beginning in 2005, established a competitive acquisition program for DME, established a Recovery Audit Contractors (“RAC”) program, a demonstration project designed to test a new method for recovery of Medicare overpayments by utilizing private companies operating on a contingent fee basis to identify and recoup Medicare overpayments, and implemented quality standards and accreditation requirements for DME suppliers. These legislative provisions, as currently in effect and when fully implemented, have had and will continue to have a material adverse effect on our business, financial condition, operating results and cash flows.

PPACA was signed into law on March 23, 2010. Together with the Health Care and Education Reconciliation Act of 2010 (signed into law on March 30, 2010) which amended the statute, PPACA is a comprehensive health care law that is intended to expand access to health insurance, reform the health insurance market to provide additional consumer protections, and improve the health care delivery system to reduce costs and produce better outcomes through a combination of cost controls, subsidies and mandates. Among other things, PPACA:

 

(1) Introduces a productivity adjustment factor that will be applied to Medicare price updates (covered item updates) for 2011 and each subsequent year. Specifically, Medicare payment amounts would be updated each year by the percentage increase in the consumer price index for all urban consumers (CPI-U) for the 12-month period ending with June of the previous year, reduced by a productivity adjustment (as projected by the Secretary of Health and Human Services). The application of the productivity adjustment may result in the covered item update being negative for a year, and may result in payment rates being less than such payment rates for the preceding year. The covered item update for most Medicare items furnished in 2011, net of the productivity adjustment, has been established at negative 0.1%.

 

(2) Makes adjustments to the Medicare DME Competitive Acquisition Program (“competitive bidding”). PPACA expands the DME competitive bidding program from 79 markets under prior law to 100 markets. The additional competitive bidding areas will include the next 21 largest metropolitan statistical areas beyond the 79 markets previously identified under the program. PPACA also adds a requirement to competitively bid all areas or use competitive bid information to set prices in all areas by 2016, effectively expanding the program to all geographic markets.

 

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(3) Makes important changes to key fraud and abuse statutes and increases funding for fraud and abuse enforcement. PPACA increases funding for program integrity initiatives, improves screening of providers and suppliers before and after granting Medicare billing privileges and establishes new and enhanced penalties and procedures to deter fraud and abuse. PPACA also specifically adds a requirement that physician orders for covered items of DME must be written by a physician and must document that a physician, a physician assistant, a nurse practitioner, or a clinical nurse specialist has had a face-to-face encounter (including through the use of telehealth) with the individual involved during the six-month period preceding such written order, or other reasonable timeframe as determined by the Secretary of Health and Human Services.

PPACA is a complex, sweeping health care reform law that will dramatically alter the structure of health insurance markets and the practice of medicine in the United States. Due to the complex nature of the legislation and the extended time period over which various provisions of the new law will be implemented (pursuant to yet unwritten regulations), we can not predict at this time what effects PPACA and related regulations will have on our business in the future.

The MIPPA legislation imposed a 9.5% reduction in Medicare payment rates for certain specified product categories, including oxygen, effective January 1, 2009. In addition to the 9.5% reduction, the Centers for Medicare and Medicaid Services (“CMS”), as required by statute, subjected the monthly payment amount for stationary oxygen equipment to additional cuts of 2.3%, thereby reducing the monthly payment rate from $199.28 in 2008 to $175.79 in 2009. The monthly payment amount was reduced by 1.5% in 2010, to $173.17. We estimate that this reduction negatively impacted our annual revenues in fiscal year 2010 by approximately $8.4 million when compared to the prior year period. The stationary oxygen payment rate for 2011 has been established by CMS at $173.31 per month, an increase of 0.1%, and is not material to the Company’s operating results in 2011.

The SCHIP Extension Act, which became law on December 29, 2007, required CMS to adjust the methodology used to determine Medicare payment amounts for inhalation drugs by using volume-weighted average selling prices (“ASP”) based on actual sales volumes rather than average sales prices. CMS publishes payment rates for inhalation drugs each calendar quarter, representing the unit reimbursement rates in effect for inhalation drugs dispensed within that quarter. These payment rates may be subject to volatility as a result of the underlying ASP data used to determine the rates in effect each quarter. The quarterly ASP data published by CMS for inhalation drugs provided in 2010 resulted in reductions in the Medicare payment rates for inhalation drugs that negatively impacted the Company’s annual net revenues by approximately $5.0 million in fiscal year 2010. Based upon the ASP payment rates published by CMS for the fourth quarter of 2011, and assuming no changes in the volume or mix of drugs that we currently dispense, we estimate that our annual net revenues will be negatively impacted by approximately $15.0 million in 2011 when compared with 2010. We can not determine whether quarterly updates in ASP pricing data will continue to result in ongoing reductions in payment rates for inhalation drugs, or what impact such payment reductions could have on our business in the future.

Additionally, beginning in 2011, CMS is using 103% of Average Manufacturer Price (“AMP”) rather than 106% of ASP for a drug when ASP exceeds AMP by 5% for either two straight quarters or three of the past four quarters. The policy limits substitution of the price formula in a given quarter to only those drugs where ASP and AMP can be compared using the same set of national drug codes. We can not determine at this time which, if any, inhalation drugs might meet the criteria established for substitution in a particular future quarter, nor the impact on payment rates for such drugs in the event that the AMP formula is utilized.

On February 1, 2006, Congress passed the DRA legislation which changed the reimbursement methodology for oxygen equipment from continuous monthly payment for as long as the equipment is in use by a Medicare beneficiary, which includes payment for oxygen contents, related disposable supplies and accessories and maintenance of equipment, to a capped rental arrangement whereby payment for oxygen equipment may not extend over a period of continuous use of longer than 36 months. Separate payments for oxygen contents continue to be made for the period of medical need beyond the 36th month. Additionally, payment for routine maintenance and service of the oxygen equipment is made following each six-month period after the 36-month rental period ends. The oxygen provisions contained in DRA became effective on January 1, 2006. In the case of beneficiaries receiving oxygen equipment prior to the effective date, the 36-month period of continuous use began on January 1, 2006. Accordingly, the first month in which the new payment methodology impacted our net revenues was January 2009. We anticipate that the new oxygen payment rules will continue to negatively affect our net revenues on an ongoing basis, as each month additional customers reach the 36-month capped service period, resulting in up to two or more years without rental income from these customers. During the first nine months of 2011, we estimate that our net revenues were reduced as a result of additional customers reaching the payment cap by approximately $16.0 million when compared to the prior year period.

 

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DRA also changed the reimbursement methodology for items of DME in the capped rental payment category, including but not limited to such items as continuous positive airway pressure (“CPAP”) devices, certain respiratory assist devices, nebulizers, hospital beds and wheelchairs. For such items of DME, payment may not extend over a period of continuous use of longer than 13 months. On the first day that begins after the 13th continuous month during which payment is made for the item, the supplier must transfer title of the item to the beneficiary. Additional payments for maintenance and service of the item are made for parts and labor not covered by a supplier’s or manufacturer’s warranty.

In December 2003, MMA was signed into law. The MMA legislation directly impacted reimbursement for the primary respiratory and other DME products that we provide. Among other things, MMA:

 

(1) Established a competitive acquisition program for DME that was expected to commence in 2008, but was subsequently delayed by further legislation. MMA instructed CMS to establish and implement programs under which competitive acquisition areas would be established throughout the United States for purposes of awarding contracts for the furnishing of competitively priced items of DME, including oxygen equipment. The program was initially intended to be implemented in phases such that competition under the program would occur in nine of the largest metropolitan statistical areas (“MSAs”) in the first year and an additional 70 of the largest MSAs in a second, subsequent round of bidding.

For each competitive acquisition area, CMS is required to conduct a competition under which providers submit bids to supply certain covered items of DME. Successful bidders are expected to meet certain program quality standards in order to be awarded a contract and only successful bidders can supply the covered items to Medicare beneficiaries in the acquisition area (there are, however, regulations in place that allow non-contracted providers to continue to provide equipment and services to their existing customers at the new prices determined through the bidding process). The contracts are expected to be re-bid at least every three years. CMS is required to award contracts to multiple entities submitting bids in each area for an item or service, but has the authority to limit the number of contractors in a competitive acquisition area to the number it determines to be necessary to meet projected demand.

CMS concluded the bidding process for the first round of MSAs in September 2007, however, in July 2008, Congress enacted the MIPPA legislation which retroactively delayed the implementation of competitive bidding and reduced Medicare prices nationwide by 9.5% beginning in 2009 for the product categories, including oxygen, that were initially included in competitive bidding.

In 2009, CMS reinstituted the bidding process in the nine largest MSA markets. Reimbursement rates from the re-bidding process were publicly released by CMS on June 30, 2010. CMS announced average savings of approximately 32% off the current payment rates in effect for the product categories included in competitive bidding. As of January 1, 2011, these payment rates were in effect in the nine markets only. Lincare was offered contracts to provide oxygen equipment in just two of the nine markets, Charlotte and Miami, and we accepted and signed those contracts. The Company’s annual Medicare revenues from the product categories in the nine markets affected by competitive bidding were approximately $48.0 million at the time the program commenced. During the second and third quarters of 2011, we completed acquisitions of companies that are contracted to provide home oxygen equipment in all nine competitive bidding markets and positive airway pressure devices in eight of nine markets.

CMS will undertake a second round of competitive bidding in up to 91 additional markets, with contracts expected to be effective some time in mid-2013. The Company estimates that its annual Medicare revenues from the product categories in the 91 additional markets to be included in the second round of competitive bidding are in excess of $250.0 million. This estimate may be revised by the Company due to continued expansion of its business in these markets. The PPACA legislation requires CMS to expand competitive bidding further to additional geographic markets (certain markets may be excluded at the discretion of CMS) or to use competitive bid pricing information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016.

 

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We will continue to monitor developments regarding the implementation of the competitive bidding program. While we can not predict the outcome of the competitive bidding program on our business when fully implemented nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding, it is likely that the program will materially adversely effect our financial position and operating results.

 

(2) Established a Recovery Audit Contractors (“RAC”) program to identify and recoup Medicare overpayments from providers. Started in 2005 as a demonstration project by CMS, the RAC program was designed to test a new method for recovery of Medicare overpayments by utilizing private companies operating on a contingent fee basis to identify and recoup Medicare overpayments from providers. Section 302 of the Tax Relief and Health Care Act of 2006 made the program permanent and requires the Department of Health and Human Services to expand the program to all states. The RAC contractors are empowered to audit claims submitted by health care providers and to withhold future payments, including in cases where the reimbursement rules are unclear or subject to differing interpretations. This activity, as well as the activity of intermediaries and others involved in government reimbursement, may include changes in long-standing interpretations of reimbursement rules, which could have a material adverse effect on our future financial position and operating results.

In October 2008, CMS announced the establishment of new Zone Program Integrity Contractors (“ZPICs”), who are responsible for ensuring the integrity of all Medicare-related claims. The ZPICs assumed the responsibilities previously held by Medicare’s Program Safeguard Contractors (“PSCs”). Industry-wide, ZPIC audit activity increased substantially throughout 2010 and 2011 and that activity is expected to continue to increase for the foreseeable future as additional ZPICs become operational across the country. The industry trade associations are advocating for more standardized audit procedures, contractor transparency and consistency surrounding all government audit activity directed toward the DMEPOS industry.

In order to ensure that Medicare beneficiaries only receive medically necessary and appropriate items and services, the Medicare program has adopted a number of documentation requirements. For example, the Durable Medical Equipment Medicare Administrative Contractor (“DME MAC”) Supplier Manuals provide that clinical information from the “patient’s medical record” is required to justify the initial and ongoing medical necessity for the provision of DME. Some DME MACs, CMS staff and government subcontractors have recently taken the position, among other things, that the “patient’s medical record” refers not to documentation maintained by the DME supplier but instead to documentation maintained by the patient’s physician, healthcare facility or other clinician, and that clinical information created by the DME supplier’s personnel and confirmed by the patient’s physician is not sufficient to establish medical necessity. It may be difficult, and sometimes impossible, for us to obtain documentation from other healthcare providers. Moreover, auditors’ interpretations of these policies are inconsistent and subject to individual interpretation, leading to significant increases in individual supplier and industry-wide error rates. High error rates lead to further audit activity and regulatory burdens. If these or other burdensome positions are generally adopted by auditors, DME MACs, other contractors or CMS in administering the Medicare program, we would have the right to challenge these positions as being contrary to law. If these interpretations of the documentation requirements are ultimately upheld, however, it could result in our making significant refunds and other payments to Medicare and our future revenues and cash flows from Medicare may be reduced. We cannot currently predict the adverse impact, if any, these interpretations of the Medicare documentation requirements might have on our operations, cash flow and capital resources, but such impact could be material.

Federal and state budgetary and other cost-containment pressures will continue to impact the home respiratory care industry. We can not predict whether new federal and state budgetary proposals will be adopted or the effect, if any, such proposals would have on our business.

Government Regulation

The federal government and all states in which we currently operate regulate various aspects of our business. In particular, our operating centers are subject to federal laws that regulate the repackaging of drugs (including oxygen) and interstate motor-carrier transportation. Our operations also are subject to state laws governing, among other things, pharmacies, nursing services, distribution of medical equipment and certain types of home health activities. Certain of our employees are subject to state laws and regulations governing the ethics and professional practice of respiratory therapy, pharmacy and nursing.

As a health care provider, we are subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documenting and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, regional health insurance carriers and state agencies often conduct audits and request customer records and other documents to support our claims submitted for payment of services rendered to customers. Similarly, government agencies periodically open investigations and obtain information from health care providers pursuant to the legal process. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs, which could have a material adverse effect on our business.

 

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Numerous federal and state laws and regulations, including the Federal Health Insurance Portability And Accountability Act of 1996 (“HIPAA”) and the Health Information Technology For Economic And Clinical Health Act (“HITECH Act”), govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information. As part of our provision of, and billing for, health care equipment and services, we are required to collect and maintain patient-identifiable health information. New health information standards, whether implemented pursuant to HIPAA, the HITECH Act, congressional action or otherwise, could have a significant effect on the manner in which we handle health care related data and communicate with payors, and the cost of complying with these standards could be significant. If we do not comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions.

Health care is an area of rapid regulatory change. Changes in the laws and regulations and new interpretations of existing laws and regulations may affect permissible activities, the relative costs associated with doing business, and reimbursement amounts paid by federal, state and other third-party payors. We can not predict the future of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, or possible changes in national health care policies. Future legislative and regulatory changes could have a material adverse effect on our business.

Operating Results

The following table sets forth, for the periods indicated, a summary of the Company’s net revenues by product category:

 

     For The Three Months Ended
September 30,
     For The Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (In thousands)      (In thousands)  

Respiratory and other chronic therapies

   $ 423,886       $ 371,207       $ 1,212,928       $ 1,111,069   

DME, infusion and enteral therapies

     50,872         47,466         142,430         136,010   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 474,758       $ 418,673       $ 1,355,358       $ 1,247,079   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues for the three months ended September 30, 2011, increased by $56.1 million (or 13.4%), compared with the three months ended September 30, 2010 and for the nine months ended September 30, 2011, increased by $108.3 million (or 8.7%) compared with the nine months ended September 30, 2010. The Company estimates that the 13.4% increase in net revenues in the three-month period of 2011 was comprised of approximately 15.7% internal and acquisition growth offset by approximately 2.3% negative impact from $9.7 million of Medicare payment changes (see “Medicare Reimbursement” above). The Company estimates that the 8.7% increase in net revenues in the nine-month period of 2011 was comprised of approximately 12.5% internal and acquisition growth offset by approximately 3.8% negative impact from $47.5 million of Medicare payment changes in 2011. The internal growth in net revenues is attributable to underlying demographic growth in the markets for our products and gains in customer counts resulting primarily from our sales and marketing efforts that emphasize high-quality equipment and customer service. Growth in net revenues from acquisitions is attributable to the effects of acquisitions of local and regional companies and is based on the estimated contribution to net revenues for the four quarters following such acquisitions.

The contribution of respiratory and other chronic therapy products to our net revenues was 89.3% and 89.5%, respectively, during the three and nine months ended September 30, 2011 and during the three and nine months ended September 30, 2010 was 88.7% and 89.1%, respectively. Our strategy is to focus on the provision of oxygen, respiratory and other chronic therapy services to patients in the home and to provide home medical equipment, infusion and enteral nutrition products and services where we believe such services will enhance our core respiratory business.

Cost of goods and services, as a percentage of net revenues, was 31.9% and 30.8%, respectively, for the three and nine months ended September 30, 2011, compared with 27.5% and 27.2%, respectively, for the comparable prior year periods. Cost of goods and services for the three months ended September 30, 2011, increased $36.1 million, or 31.4%, when compared with the prior year period. Costs of goods and services for the nine months ended September 30, 2011, increased $78.1 million, or 23.0%, when compared with the prior year period. The increase in cost of goods and services in 2011 is primarily attributable to the Company’s acquisition of a specialty pharmacy business with gross margins that are lower than other products and services provided by the Company and higher sale volumes of CPAP supplies and inhalation drugs.

Cost of goods and services for the three and nine-month periods includes the cost of medical equipment (excluding depreciation of $26.0 million and $79.6 million in 2011 and $24.6 million and $78.3 million in 2010, respectively), drugs and supplies sold to patients and certain costs related to the Company’s respiratory drug product line. These costs include an allocation of customer service, distribution and administrative costs relating to the respiratory drug product line of approximately $13.8 million and $41.3 million for the three and nine-month periods of 2011, respectively, and approximately $13.4 million and $39.9 million for the three and nine-month periods of 2010, respectively. Included in cost of goods and services in the three and nine months ended September 30, 2011 are salary and related expenses of pharmacists and pharmacy technicians of $4.1 million and $11.3 million, respectively. Such salary and related expenses for the three and nine months ended September 30, 2010, were $3.3 million and $9.7 million, respectively.

 

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Operating expenses, as a percentage of net revenues, were 23.6% and 23.3%, respectively, for the three and nine months ended September 30, 2011, compared with 24.0% and 23.9%, respectively, for the comparable prior year periods. Operating expenses for the three and nine months ended September 30, 2011, increased by $11.6 million, or 11.6%, and $17.5 million, or 5.9%, over the prior year periods. The Company has been successful in achieving productivity gains that have contributed to containment of the growth in wage expenses and in managing the growth of its employee health benefit costs. These positive developments were partially offset by increases in vehicle related expenses during the first nine months of 2011, most significantly fuel costs.

The Company manages 1,108 operating centers from which customers are provided equipment, supplies and services. An operating center averages approximately seven to eight employees and is typically comprised of a center manager, two customer service representatives (referred to as “CSR’s” – telephone intake, scheduling, documentation), two or three service representatives (referred to as “Service Reps” – delivery, maintenance and retrieval of equipment and delivery of disposables), a respiratory therapist (non-reimbursable clinical follow-up with the customer and communication to the prescribing physician) and a sales representative (marketing calls to local physicians and other referral sources).

The Company includes in operating expenses the costs incurred at the Company’s operating centers for certain service personnel (center manager, CSR’s and Service Reps), facilities (rent, utilities, communications, property taxes, etc.), vehicles (vehicle leases, gasoline, repair and maintenance), and general business supplies and miscellaneous expenses. Operating expenses for the interim periods of 2011 and 2010 within these major categories were as follows:

 

Operating Expenses (in thousands)    For The Three Months Ended
September 30,
     For The Nine Months  Ended
June 30,
 
     2011      2010      2011      2010  

Salary and related

   $ 71,479       $ 64,645       $ 204,255       $ 192,711   

Facilities

     15,981         15,917         44,412         46,781   

Vehicles

     14,360         11,938         40,780         35,446   

General supplies/miscellaneous

     10,272         7,964         26,741         23,726   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 112,092       $ 100,464       $ 316,188       $ 298,664   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in operating expenses during the three and nine months ended September 30, 2011 are salary and related expenses for Service Reps in the amount of $29.7 million and $85.6 million, respectively. Such salary and related expenses for the three and nine months ended September 30, 2010 were $27.3 million and $81.2 million, respectively.

Selling, general and administrative (“SG&A”) expenses, as a percentage of net revenues, were 18.7% and 19.0%, respectively, for the three and nine months ended September 30, 2011, compared with 19.0% and 19.9% for the comparable prior year periods. SG&A expenses for the three months ended September 30, 2011 increased by $9.4 million, or 11.8% when compared to the prior year period. SG&A expenses for the nine months ended September 30, 2011, increased by $9.4 million, or 3.8% when compared to the prior year period.

SG&A expenses include costs related to sales and marketing activities, corporate overhead and other business support functions. Included in SG&A during the three and nine months ended September 30, 2011 are salary and related expenses of $65.3 million and $190.4 million, respectively. These salary and related expenses include the cost of the Company’s respiratory therapists for the three and nine months ended September 30, 2011, of $18.0 million and $52.5 million, respectively. Included in SG&A during the three and nine months ended September 30, 2010 are salary and related expenses of $63.4 million and $191.6 million, respectively. These salary and related expenses include the cost of the Company’s respiratory therapists for the three and nine months ended September 30, 2010, of $17.1 million and $50.7 million, respectively. The Company’s respiratory therapists generally provide non-reimbursable clinical follow-up with the customer and communication, as appropriate, to the prescribing physician with respect to the customer’s prescribed plan of care. The Company includes the salaries and related expenses of its respiratory therapist personnel (licensed respiratory therapists or, in some cases, registered nurses) in SG&A because it believes that these personnel enhance the Company’s business relative to its competitors who do not employ respiratory therapists.

Bad debt expense as a percentage of net revenues was 2.0% for the three and nine months ended September 30, 2011, compared with 2.6% and 1.9%, respectively, for the three and nine months ended September 30, 2010. Bad debt expense for the three months ended September 30, 2011 decreased by $1.5 million and for the nine months ended September 30, 2011 increased $3.7 million, over the comparable prior year periods. Contributing to the increase in bad debt expense in 2011 is the increase in the aging of our accounts receivable, particularly with respect to amounts due from customers for insurance copayments and deductibles.

 

 

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Included in depreciation and amortization expense in the three and nine months ended September 30, 2011 is depreciation of medical equipment of $26.0 million and $79.6 million, respectively, and depreciation of other property and equipment of $5.7 million and $10.7 million, respectively. Included in depreciation and amortization expense in the three and nine months ended September 30, 2010 is depreciation of medical equipment of $24.6 million and $78.3 million, respectively, and depreciation of other property and equipment of $4.2 million and $9.3 million, respectively.

Operating income for the three and nine months ended September 30, 2011, was $80.4 million (16.9% of net revenues) and $245.1 million (18.1% of net revenues), respectively, compared with $83.7 million (20.0% of net revenues) and $249.7 million (20.0% of net revenues), respectively, for the comparable prior year periods. The decrease in operating income in 2011 is attributed primarily to the impact on net revenues in the three and nine months ended September 30, 2011, of $9.7 million and $47.5 million of Medicare payment changes during the respective periods. These payment changes include reductions in average payment rates for respiratory medications, the impact of new Medicare payment rates in the nine markets affected by the competitive bidding program and the ongoing effect of Medicare oxygen customers reaching the 36-month rental payment cap.

Liquidity and Capital Resources

Our primary sources of liquidity have been internally generated funds from operations and proceeds from equity and debt transactions. We have used these funds to meet our capital requirements, which consist primarily of operating costs, capital expenditures, acquisitions, debt service and share repurchases. The Company also has access to borrowings under its credit facilities.

Net cash provided by operating activities decreased by 16.2% to $217.2 million for the nine months ended September 30, 2011, compared with $259.2 million for the nine months ended September 30, 2010. Net cash used in investing and financing activities was $344.6 million for the nine months ended September 30, 2011. Investing and financing activities during the nine-month period ended September 30, 2011 included our net investment in property and equipment of $95.7 million, $40.0 million of short-term investments, $57.1 million of dividends paid, $95.6 million of business acquisition expenditures, $200.0 million of repurchases of our common stock, net proceeds of $80.0 million from our revolving credit facility, proceeds of $60.0 million from the sale of investments, and proceeds of $14.1 million from the exercise of stock options and issuance of common shares.

As of September 30, 2011, our principal sources of liquidity consisted of approximately $36.8 million of cash and cash equivalents, $20.0 million of short-term investments and $336.2 million available under our revolving credit agreement. The revolving credit agreement, dated September 15, 2011, makes available to us up to $450.0 million over a five-year period, subject to certain terms and conditions set forth in the agreement. As of September 30, 2011, there were $80.0 million of borrowings outstanding and $33.8 million of standby letters of credit issued under the credit facility.

On October 3, 2011, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.20 per share which was paid on October 31, 2011, to stockholders of record as of October 17, 2011. The payment of future dividends is dependent on our future earnings and cash flow and is subject to the discretion of our Board of Directors.

On June 21, 2010, the Company announced that its Board of Directors had approved the initiation of a quarterly cash dividend payable at an annual rate of $0.80 per share of common stock outstanding.

On May 14, 2010, our Board of Directors declared a three-for-two stock split effected in the form of a 50% stock dividend on the Company’s common stock. The additional shares were distributed to stockholders on June 15, 2010.

Our Board of Directors has authorized a share repurchase plan whereby the Company may repurchase from time to time, on the open market or in privately negotiated transactions, shares of the Company’s common stock in amounts determined pursuant to a formula (the “share repurchase formula”) that takes into account both the ratio of the Company’s net debt to cash flow and its available cash resources and borrowing availability. During the nine months ended September 30, 2011, the Company repurchased and retired 8,023,497 shares for $200.0 million pursuant to the repurchase plan. As of September 30, 2011, $291.9 million of the Company’s common stock was eligible for repurchase in accordance with the plan’s formula.

 

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On October 31, 2007, we completed the sale of $275.0 million principal amount of convertible senior debentures, due 2037 – Series A (the “Series A Debentures”) and $275.0 million principal amount of convertible senior debentures due 2037 – Series B (the “Series B Debentures” and together with the Series A Debentures, the “Series Debentures”) in a private placement. The Series Debentures pay interest semi-annually at a rate of 2.75% per annum. The Series Debentures are unsecured and unsubordinated obligations and are convertible under specified circumstances based upon a base conversion rate, which, under certain circumstances, will be increased pursuant to a formula that is subject to a maximum conversion rate. Upon conversion, holders of the Series Debentures will receive cash up to the principal amount, and any excess conversion value will be delivered in shares of our common stock or in a combination of cash and shares of common stock, at our option. The base conversion rate for the Debentures as of September 30, 2011 is 30.11 shares of common stock per $1,000 principal amount of Series Debentures, equivalent to a base conversion price of approximately $33.21 per share. In addition, if at the time of conversion the applicable price of our common stock exceeds the base conversion price, holders of the Series Debentures will receive an additional number of shares of common stock per $1,000 principal amount as determined pursuant to a specified formula. We have the right to redeem the Series A Debentures and the Series B Debentures at any time after November 1, 2012 and November 1, 2014, respectively. Holders of the Series Debentures will have the right to require us to repurchase for cash all or some of their Series Debentures upon the occurrence of certain fundamental change transactions or on November 1, 2012, 2017, 2022, 2027 and 2032 in the case of the Series A Debentures and November 1, 2014, 2017, 2022, 2027 and 2032 in the case of the Series B Debentures.

Our future liquidity will continue to be dependent upon our operating cash flow and management of accounts receivable. We anticipate that funds generated from operations, together with our current cash on hand and funds available under our revolving credit facility, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and capital expenditures, and meet our contractual obligations for at least the next 12 months.

Accounts Receivable: The Company maintains payor-specific price tables in its billing system that reflect the fee schedule amounts statutorily in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. Due to the nature of the health care industry and the reimbursement environment in which Lincare operates, situations can occur where expected payment amounts are not established by fee schedules or contracted rates, and estimates are required to record revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that revenues and accounts receivable will have to be revised or updated as additional information becomes available. Contractual adjustments to revenues and accounts receivable can result from price differences between allowed charges and amounts initially recognized as revenue due to incorrect price tables or subsequently negotiated payment rates. Actual adjustments that result from differences between the payment amount received and the expected realizable amount are recorded against the allowance for sales adjustments and are typically identified and ultimately recorded at the point of cash application or account review. We report revenues in our financial statements net of such sales adjustments. Accounts receivable are reported net of allowances for sales adjustments and uncollectible accounts. Bad debt is recorded as an operating expense and consists of billed charges that are ultimately deemed uncollectible due to the customer’s or third-party payor’s inability to pay.

The Company’s payor mix is highly concentrated among Medicare, Medicaid and other government third-party payors and contracted private insurance or commercial payors. Government payment rates are determined according to published fee schedules established pursuant to statute, law or other regulatory processes and commercial payment rates are based on contractual line item pricing as reflected in the respective contracts. Fee schedule updates have historically occurred on a prospective basis and have been made available to the Company in advance of the effective date of a change in reimbursement rates. The Company’s proprietary billing system has features that allow the Company to timely update payor price tables within the system as changes occur in order to accurately record revenues and accounts receivable at their expected realizable values. Additional systems and manual controls and processes are used by management to evaluate the accuracy of these recorded amounts. Based on the Company’s experience, it is unlikely that a change in estimate of unsettled amounts from third-party payors would have a material adverse impact on its financial position or results of operations.

 

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Accounts receivable balance concentrations by major payor category as of September 30, 2011 and December 31, 2010 were as follows:

 

Percentage of Accounts Receivable Outstanding:    September 30,
2011
    December 31,
2010
 

Medicare

     38.0     34.1

Medicaid/Other Government

     13.9     14.2

Private Insurance

     36.4     38.2

Customer Pay

     11.7     13.5
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Aged accounts receivable balances by major payor category as of September 30, 2011 and December 31, 2010 were as follows:

 

Percentage of Accounts Aged in Days:    September 30, 2011  
     0-60     61-120     Over 120  

Medicare

     68.4     12.4     19.2

Medicaid/Other Government

     55.8     17.1     27.1

Private Insurance

     57.5     14.3     28.2

Customer Pay

     30.3     16.7     53.0

All Payors

     58.2     14.3     27.5

 

Percentage of Accounts Aged in Days:    December 31, 2010  
     0-60     61-120     Over 120  

Medicare

     77.5     11.5     11.0

Medicaid/Other Government

     59.8     17.0     23.2

Private Insurance

     61.8     14.3     23.9

Customer Pay

     33.7     19.7     46.6

All Payors

     63.1     14.5     22.4

We operate 35 regional billing and collection offices (“RBCOs”) that are responsible for the billing and collection of accounts receivable. The RBCOs are aligned geographically to support the accounts receivable activity of the operating centers within their assigned territories. As of September 30, 2011, there were 1,390 full-time employees in the RBCOs. Accounts receivable collections are performed by designated collectors within each of the RBCOs. The collectors use various reporting tools available within our proprietary billing system to identify claims that have been denied or partially paid by the responsible party and claims that have not been processed by the third-party payor in a timely manner. Collections of accounts receivable are typically pursued using direct phone contact to determine the reason for non-payment and, if necessary, corrected claims are prepared for resubmission and further follow-up with the responsible party. In some cases, third-party payors have developed electronic inquiry methods that we can access to determine the status of individual claims. We have benefited from the increasing availability of electronic funds transfers from payors, which now account for approximately 79.5% of all payments received.

 

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Our accounts receivable days sales outstanding (“DSO”) increased to 45 days at September 30, 2011 compared with 41 days at September 30, 2010 and our bad debt expense, as a percentage of net revenues, increased to 2.0% during 2011 compared with 1.9% during the prior year nine-month period. Contributing to the increase in our accounts receivable is a significant increase in the number of claims subject to prepayment audits, primarily by the DME MACs. These audits are substantially delaying the collection of our Medicare accounts receivable as well as related secondary amounts due under supplemental insurance plans. Also contributing to the increase in accounts receivable and bad debt expense are copayments and deductibles due from customers who are finding it difficult to pay their out-of-pocket charges due to loss of insurance coverage or reductions in their investment or employment income.

The ultimate collection of accounts receivable may not be known for several months. We record bad debt expense based on a percentage of revenue using historical Company-specific data. The percentage and amounts used to record bad debt expense and the allowance for doubtful accounts are supported by various methods and analyses including current and historical cash collections, bad debt write-offs, aged accounts receivable and consideration of any payor-specific concerns. The ultimate write-off of an accounts receivable occurs once collection procedures are determined to have been exhausted by the collector and after appropriate review of the specific account and approval by supervisory and/or management employees within the RBCOs. Management and RBCO supervisory and management employees also review accounts receivable write-off reports, correspondence from payors and individual account information to evaluate and correct processes that might have contributed to an unsuccessful collection effort.

We do not use an aging threshold for account receivable write-offs. However, the age of an account balance may provide an indication that collection procedures have been exhausted, and would be considered in the review and approval of an account balance write-off.

Future Minimum Obligations

In the normal course of business, we enter into obligations and commitments that require future contractual payments. The commitments primarily result from repayment obligations for borrowings under our revolving credit facility and Series Debentures as well as contractual lease payments for facility, vehicle, and equipment leases, deferred taxes and acquisition obligations.

New Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective for interim and annual financial periods beginning after December 15, 2011 with early adoption not permitted. We will adopt the new guidance effective January 1, 2012. The Company does not expect the adoption of this guidance to have a material impact on its financial condition, results of operations or cash flows.

In June 2011, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income,” to eliminate the current option to present the components of other comprehensive income in the statement of changes in equity and to require presentation of net income and other comprehensive income (and their respective components) either in a single continuous statement or in two separate but consecutive statements. The amendments do not alter any current recognition or measurement requirements in respect of items of other comprehensive income. The guidance should be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. We will adopt the new guidance effective January 1, 2012. The Company does not expect the adoption of this guidance to have an impact on its financial condition, results of operations or cash flows.

In September 2011, the FASB issued Accounting Standards Update 2011-08, “Testing Goodwill for Impairment,” which allows an initial assessment of qualitative factors to determine whether it is more likely than not (i.e., there is more than a 50% likelihood) that the fair value of a reporting unit is less than its carrying amount for purposes of determining whether it is necessary to perform the first step of the two-step goodwill impairment test. Accordingly, the calculation of a reporting unit’s fair value is not required unless, as a result of the qualitative assessment, it is more likely than not that fair value of the reporting unit is less than its carrying amount. The amendments do not affect the manner in which the first and second steps of the impairment test are performed. The guidance, which should be applied prospectively, is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. We will adopt the new guidance effective January 1, 2012. The Company does not expect the adoption of this guidance to have an impact on its financial condition, results of operations or cash flows.

 

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Forward Looking Statements

Statements in this report concerning future results, performance or expectations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. All forward-looking statements included in this document are based upon information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statements. In some cases, forward-looking statements that involve risks and uncertainties contain terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or variations of these terms or other comparable terminology.

Key factors that have an impact on our ability to attain these estimates include potential reductions in reimbursement rates by government and other third-party payors, changes in reimbursement policies, the demand for our products and services, the availability of appropriate acquisition candidates and our ability to successfully complete and integrate acquisitions, efficient operations of our existing and future operating facilities, regulation and/or regulatory action affecting us or our business, economic and competitive conditions, access to borrowed and/or equity capital on favorable terms and other risks described below.

In developing our forward-looking statements, we have made certain assumptions relating to reimbursement rates and policies, internal growth and acquisitions and the outcome of various legal and regulatory proceedings. If the assumptions we use differ materially from what actually occurs, then actual results could vary significantly from the performance projected in the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this report.

Certain Risk Factors Relating to the Company’s Business

We operate in a rapidly changing environment that involves a number of risks. The following discussion highlights some of these risks and others are discussed elsewhere in this report. These and other risks could materially and adversely affect our business, financial condition, operating results and cash flows.

A MAJORITY OF OUR CUSTOMERS HAVE PRIMARY HEALTH COVERAGE UNDER MEDICARE PART B, AND RECENTLY ENACTED AND FUTURE CHANGES IN THE REIMBURSEMENT RATES OR PAYMENT METHODOLOGIES UNDER THE MEDICARE PROGRAM COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.

As a provider of home oxygen and other respiratory therapy services for the home health care market, we have historically depended heavily on Medicare reimbursement as a result of the high proportion of elderly persons suffering from respiratory disease. Medicare Part B, the Supplementary Medical Insurance Program, provides coverage to eligible beneficiaries for DME, such as oxygen equipment, respiratory assistance devices, continuous positive airway pressure devices, nebulizers and associated inhalation medications, hospital beds and wheelchairs for the home setting. Approximately 64% of our customers have primary coverage under Medicare Part B. There are increasing pressures on Medicare to control health care costs and to reduce or limit reimbursement rates for home medical equipment and services. Medicare reimbursement is subject to statutory and regulatory changes, retroactive rate adjustments, administrative and executive orders and governmental funding restrictions, all of which could materially decrease payments to us for the services and equipment we provide.

 

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Recent legislation, including the Patient Protection and Affordable Care Act (“PPACA”), the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”), the Medicare, Medicaid and SCHIP Extension Act of 2007 (“SCHIP Extension Act”), the Deficit Reduction Act of 2005 (“DRA”) and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), contain provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. PPACA, as amended, is a comprehensive health care reform law that contains a large number of health-related provisions to take effect over the next several years, including various cost containment and program integrity changes that will apply to the home medical equipment industry. MIPPA delayed the implementation of a Medicare competitive bidding program for oxygen equipment and certain other DME items that was scheduled to begin on July 1, 2008 and instituted a 9.5% price reduction nationwide for these items as of January 1, 2009. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008. DRA provisions negatively impacted reimbursement for oxygen equipment beginning in 2009 and negatively impacted reimbursement for DME items subject to capped rental payments beginning in 2007. MMA changed the pricing formulas used to establish payment rates for inhalation drug therapies resulting in significantly reduced reimbursement beginning in 2005, established a competitive acquisition program for DME, established a Recovery Audit Contractors (“RAC”) program, a demonstration project designed to test a new method for recovery of Medicare overpayments by utilizing private companies operating on a contingent fee basis to identify and recoup Medicare overpayments, and implemented quality standards and accreditation requirements for DME suppliers. These legislative provisions, as currently in effect and when fully implemented, have had and will continue to have a material adverse effect on our business, financial condition, operating results and cash flows. See “MEDICARE REIMBURSEMENT” for a full discussion of the PPACA, MIPPA, SCHIP Extension Act, DRA and MMA provisions.

A SIGNIFICANT PERCENTAGE OF OUR BUSINESS IS DERIVED FROM THE SALE AND RENTAL OF MEDICARE-COVERED OXYGEN AND DME ITEMS, AND RECENT LEGISLATIVE ACTS IMPOSE SUBSTANTIAL CHANGES IN THE MEDICARE PAYMENT METHODOLOGIES AND REDUCTIONS IN THE MEDICARE PAYMENT AMOUNTS FOR THESE ITEMS.

DRA changed the reimbursement methodology for oxygen equipment from continuous monthly payment for as long as the equipment is in use by a Medicare beneficiary, which includes payment for oxygen contents, related disposable supplies and accessories and maintenance of equipment, to a capped rental arrangement whereby payment for oxygen equipment may not extend over a period of continuous use of longer than 36 months. Separate payments for oxygen contents continue to be made for the period of medical need beyond the 36th month. Additionally, payment for routine maintenance and service of the oxygen equipment is made following each six-month period after the 36-month rental period ends. The oxygen provisions contained in DRA became effective on January 1, 2006. In the case of beneficiaries receiving oxygen equipment prior to the effective date, the 36-month period of continuous use began on January 1, 2006. Accordingly, the first month in which the new payment methodology impacted our net revenues was January 2009. We anticipate that the new oxygen payment rules will continue to negatively affect our net revenues on an ongoing basis, as each month additional customers reach the 36-month capped service period, resulting in up to two or more years without rental income from these customers. During the first nine months of 2011, we estimate that our net revenues were reduced as a result of additional customers reaching the payment cap by approximately $16.0 million when compared to the prior year period.

DRA also changed the reimbursement methodology for items of DME in the capped rental payment category, including but not limited to such items as continuous positive airway pressure (“CPAP”) devices, certain respiratory assist devices, nebulizers, hospital beds and wheelchairs. For such items of DME, payment may not extend over a period of continuous use of longer than 13 months. On the first day that begins after the 13th continuous month during which payment is made for the item, the supplier must transfer title of the item to the beneficiary. Additional payments for maintenance and service of the item are made for parts and labor not covered by a supplier’s or manufacturer’s warranty. The DME capped rental provisions contained in DRA first impacted our net revenues in February 2007.

On July 15, 2008, Congress enacted the MIPPA legislation which reduced Medicare payment rates nationwide for certain DME items, including oxygen equipment, by 9.5% beginning in 2009. In addition to the 9.5% reduction, CMS subjected the monthly payment amount for stationary oxygen equipment to additional cuts of 2.3% in 2009, thereby reducing the monthly payment rate from $199.28 in 2008 to $175.79 in 2009. The monthly payment amount was reduced by 1.5% in 2010, to $173.17. We estimate that this reduction negatively impacted our annual revenues in fiscal year 2010 by approximately $8.4 million when compared to the prior year period. The stationary oxygen payment rate for 2011 has been established by CMS at $173.31 per month, an increase of 0.1%, and is not material to the Company’s operating results in 2011.

A SIGNIFICANT PERCENTAGE OF OUR BUSINESS IS DERIVED FROM THE SALE OF MEDICARE-COVERED RESPIRATORY MEDICATIONS, AND RECENT LEGISLATION AND MEDICARE POLICY REVISIONS IMPOSED SIGNIFICANT REDUCTIONS IN MEDICARE REIMBURSEMENT FOR SUCH INHALATION DRUGS.

 

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Recently enacted legislation negatively affected Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008 (See “MEDICARE REIMBURSEMENT”). The SCHIP Extension Act required CMS to adjust the average sales price (“ASP”) calculation methodology used to determine Medicare payment amounts for inhalation drugs by using volume-weighted ASPs based on actual sales volume rather than average sales price. CMS publishes payment rates for inhalation drugs each calendar quarter, representing the unit reimbursement rates in effect for inhalation drugs dispensed within that quarter. These payment rates may be subject to volatility as a result of the underlying ASP data used to determine the rates in effect each quarter. The quarterly ASP data published by CMS for inhalation drugs provided in 2010 resulted in reductions in the Medicare payment rates for inhalation drugs that negatively impacted the Company’s annual net revenues by approximately $5.0 million in fiscal year 2010. Based upon the ASP payment rates published by CMS for the fourth quarter of 2011 and assuming no changes in the volume or mix of drugs that we currently dispense, we estimate that our annual net revenues will be negatively impacted by approximately $15.0 million in 2011 when compared with 2010. We can not determine whether quarterly updates in ASP pricing data will continue to result in ongoing reductions in payment rates for inhalation drugs, or what impact such payment reductions could have on our business in the future.

Additionally, beginning in 2011, CMS is using 103% of Average Manufacturer Price (“AMP”) rather than 106% of ASP for a drug when ASP exceeds AMP by 5% for either two straight quarters or three of the past four quarters. The policy limits substitution of the price formula in a given quarter to only those drugs where ASP and AMP can be compared using the same set of national drug codes. We can not determine at this time which, if any, inhalation drugs might meet the criteria established for substitution in a particular future quarter, nor the impact on payment rates for such drugs in the event that the AMP formula is utilized.

FEDERAL REGULATORY CHANGES SUBJECT THE MEDICARE REIMBURSEMENT RATES FOR OUR EQUIPMENT AND SERVICES TO ADDITIONAL REDUCTIONS AND TO POTENTIAL DISCRETIONARY ADJUSTMENT BY CMS, WHICH COULD REDUCE OUR REVENUES, NET INCOME AND CASH FLOWS.

In February 2006, a final rule governing CMS’ Inherent Reasonableness, or IR, authority became effective. The IR rule establishes a process for adjusting fee schedule amounts for Medicare Part B services when existing payment amounts are determined to be either grossly excessive or deficient. The rule describes the factors that CMS or its contractors will consider in making such determinations and the procedures that will be followed in establishing new payment amounts. To date, no payment adjustments have occurred or been proposed as a result of the IR rule.

The effectiveness of the IR rule itself did not trigger payment adjustments for any items or services. Nevertheless, the IR rule puts in place a process that could eventually have a significant impact on Medicare payments for our equipment and services. We can not predict whether or when CMS will exercise its IR authority with respect to payment for our equipment and services, or the effect that such payment adjustments would have on our financial position or operating results.

FUTURE IMPLEMENTATION OF A COMPETITIVE BIDDING PROCESS UNDER MEDICARE COULD REDUCE OUR REVENUES, NET INCOME AND CASH FLOWS.

CMS is required by law to establish and implement programs under which competitive acquisition areas will be established throughout the United States for purposes of awarding contracts for the furnishing of competitively priced items of DME, including oxygen equipment (See “MEDICARE REIMBURSEMENT”). The program was initially intended to be implemented in phases such that competition under the program would occur in nine of the largest MSAs in the first year, and an additional 70 of the largest MSAs in a second, subsequent round of bidding. The PPACA legislation expands the DME competitive bidding program from 79 markets under prior law to 100 markets. The additional competitive bidding areas will include the next 21 largest metropolitan statistical areas beyond the 79 markets previously identified under the program. PPACA also adds a requirement to competitively bid all areas or use competitive bid information to set prices in all areas by 2016, effectively expanding the program to all geographic markets.

For each competitive acquisition area, CMS is required to conduct a competition under which providers submit bids to supply certain covered items of DME. Successful bidders are expected to meet certain program quality standards in order to be awarded a contract and only successful bidders can supply the covered items to Medicare beneficiaries in the acquisition area (there are, however, regulations in place that allow non-contracted providers to continue to provide equipment and services to their existing customers at the new prices determined through the bidding process). The contracts are expected to be re-bid at least every three years. CMS is required to award contracts to multiple entities submitting bids in each area for an item or service, but has the authority to limit the number of contractors in a competitive acquisition area to the number it determines to be necessary to meet projected demand.

 

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CMS concluded the bidding process for the first round of MSAs in September 2007, however, in July 2008, Congress enacted the MIPPA legislation which retroactively delayed the implementation of competitive bidding and reduced Medicare prices nationwide by 9.5% beginning in 2009 for the product categories, including oxygen, that were initially included in competitive bidding.

In 2009, CMS reinstituted the bidding process in the nine largest MSA markets. Reimbursement rates from the re-bidding process were publicly released by CMS on June 30, 2010. CMS announced average savings of approximately 32% off the current payment rates in effect for the product categories included in competitive bidding. As of January 1, 2011, these payment rates were in effect in the nine markets only. We were offered contracts to provide oxygen equipment in just two of the nine markets, Charlotte and Miami, and we accepted and signed those contracts. The Company’s annual Medicare revenues from the product categories in the nine markets affected by competitive bidding were approximately $48.0 million at the time the program commenced. During the second and third quarters of 2011, we completed acquisitions of companies that are contracted to provide home oxygen equipment in all nine competitive bidding markets and positive airway pressure devices in eight of nine markets.

CMS will undertake a second round of competitive bidding in up to 91 additional markets, with contracts expected to be effective some time in mid-2013. The Company estimates that its annual Medicare revenues from the product categories in the 91 additional markets to be included in the second round of competitive bidding are in excess of $250.0 million. This estimate may be revised by the Company due to continued expansion of its business in these markets. The PPACA legislation requires CMS to expand competitive bidding further to additional geographic markets (certain markets may be excluded at the discretion of CMS) or to use competitive bid pricing information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016.

We will continue to monitor developments regarding the implementation of the competitive bidding program. While we can not predict the outcome of the competitive bidding program on our business when fully implemented nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding it is likely that the program will materially adversely effect our future financial position and operating results.

FUTURE REDUCTIONS IN REIMBURSEMENT RATES UNDER MEDICAID COULD REDUCE OUR REVENUES, NET INCOME AND CASH FLOWS.

Due to budgetary shortfalls, many states are considering, or have enacted, cuts to their Medicaid programs, including funding for our equipment and services. These cuts have included, or may include, elimination or reduction of coverage for some or all of our equipment and services, amounts eligible for payment under co-insurance arrangements, or payment rates for covered items. Approximately 7% of our customers are eligible for primary Medicaid benefits, and State Medicaid programs fund approximately 12% of our payments from primary and secondary insurance benefits. Continued state budgetary pressures could lead to further reductions in funding for the reimbursement for our equipment and services which, in turn, could have a material adverse effect on our financial position and operating results.

FUTURE REDUCTIONS IN REIMBURSEMENT RATES FROM PRIVATE PAYORS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND OPERATING RESULTS.

Payors such as private insurance companies and employers are under pressure to increase profitability and reduce costs. In response, certain payors are limiting coverage or reducing reimbursement rates for the equipment and services we provide. Approximately 28% of our customers and approximately 32% of our primary and secondary payments are derived from private payors. Continued financial pressures on these entities could lead to further reimbursement reductions for our equipment and services that could have a material adverse effect on our financial condition and operating results.

WE DEPEND UPON REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR A SIGNIFICANT MAJORITY OF OUR REVENUES, AND IF WE FAIL TO MANAGE THE COMPLEX AND LENGTHY REIMBURSEMENT PROCESS, OUR BUSINESS AND OPERATING RESULTS COULD SUFFER.

 

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We derive a significant majority of our revenues from reimbursement by third-party payors. We accept assignment of insurance benefits from customers and, in most instances, invoice and collect payments directly from Medicare, Medicaid and private insurance carriers, as well as from customers under co-insurance provisions. Approximately 49% of our revenues are derived from Medicare, 32% from private insurance carriers, 12% from Medicaid and the balance directly from individual customers and commercial entities.

Our financial condition and results of operations may be affected by the reimbursement process, which in the health care industry is complex and can involve lengthy delays between the time that services are rendered and the time that the reimbursement amounts are settled. Depending on the payor, we may be required to obtain certain payor-specific documentation from physicians and other health care providers before submitting claims for reimbursement. Certain payors have filing deadlines and they will not pay claims submitted after such time. We are also subject to extensive pre-payment and post-payment audits by governmental and private payors that could result in material refunds of monies received or denials of claims submitted for payment under such third-party payor programs and contracts. We can not ensure that we will be able to continue to effectively manage the reimbursement process and collect payments for our equipment and services promptly.

WE ARE SUBJECT TO EXTENSIVE FEDERAL AND STATE REGULATION, AND IF WE FAIL TO COMPLY WITH APPLICABLE REGULATIONS, WE COULD SUFFER SEVERE CRIMINAL OR CIVIL SANCTIONS OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.

The federal government and all states in which we currently operate regulate various aspects of our business. In particular, our operating centers are subject to federal laws that regulate the repackaging of drugs (including oxygen) and interstate motor-carrier transportation. Our operations also are subject to state laws governing, among other things, pharmacies, nursing services, distribution of medical equipment and certain types of home health activities. Certain of our employees are subject to state laws and regulations governing the ethics and professional practices of respiratory therapy, pharmacy and nursing.

As a health care provider, we are subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documenting and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, regional health insurance carriers and state agencies often conduct audits and request customer records and other documents to support our claims submitted for payment of services rendered to customers. Similarly, government agencies periodically open investigations and obtain information from health care providers pursuant to the legal process. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs, which could have a material adverse effect on our business.

Health care is an area of rapid regulatory change. Changes in the laws and regulations and new interpretations of existing laws and regulations may affect permissible activities, the relative costs associated with doing business, and reimbursement amounts paid by federal, state and other third-party payors. We can not predict the future of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, or possible changes in national health care policies. Future legislation and regulatory changes could have a material adverse effect on our business.

WE ARE SUBJECT TO BURDENSOME AND COMPLEX BILLING AND RECORD-KEEPING REQUIREMENTS IN ORDER TO SUBSTANTIATE OUR CLAIMS FOR PAYMENT UNDER FEDERAL, STATE AND COMMERCIAL HEALTH CARE REIMBURSEMENT PROGRAMS, AND OUR FAILURE TO COMPLY WITH EXISTING REQUIREMENTS, OR CHANGES IN THOSE REQUIREMENTS OR INTERPRETATIONS THEREOF, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.

 

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We are subject to many stringent and frequently changing laws and regulations, and interpretations thereof, at both the federal and state levels, requiring compliance with burdensome and complex billing and record-keeping requirements in order to substantiate our claims for payment under federal, state and commercial health care reimbursement programs. On an ongoing basis, we have implemented policies and procedures designed to meet the various documentation requirements of government payors as they have been interpreted and applied. Examples of such documentation requirements are contained in the Durable Medical Equipment Medicare Administrative Contractor (“DME MAC”) Supplier Manuals which provide that clinical information from the “patient’s medical record” is required to justify the medical necessity for the provision of DME. Auditors working on behalf of the DME MACs have recently taken the position, among other things, that the “patient’s medical record” refers not to documentation maintained by the DME supplier but instead to documentation maintained by the patient’s physician, health care facility, or other clinician, and that clinical information created by the DME supplier’s personnel and confirmed by the patient’s physician is not sufficient to establish medical necessity. Other government auditors have recently taken the same or a similar position. It may be difficult, and sometimes impossible, for us to obtain such documentation from other health care providers. If these or other burdensome positions continue to be adopted by auditors, DME MACs, other contractors or CMS in administering the Medicare program, we have the right to challenge these positions as being contrary to law. If these interpretations of the documentation requirements are ultimately upheld, however, it could result in our making significant refunds and other payments to Medicare and our future revenues from Medicare would likely be substantially reduced. We have also experienced a significant increase in pre-payment audits of our claims by the DME MACs, which has caused substantial delays in the collection of our Medicare accounts receivable as well as related amounts due under supplemental insurance plans. We cannot currently predict the adverse impact, if any, that these new, more burdensome interpretations of the Medicare documentation requirements might have on our financial position or operating results, but such impact could be material.

Furthermore, the Tax Relief and Health Care Act of 2006 made permanent and expanded a Recovery Audit Contractor (“RAC”) program that was initiated as a demonstration project by CMS in 2005, designed to test a new method for recovery of Medicare overpayments by utilizing private companies operating on a contingent fee basis to identify and recoup Medicare overpayments from providers. The RAC contractors are empowered to audit claims submitted by health care providers and to withhold future payments, including in cases where the reimbursement rules are unclear or subject to differing interpretations. This activity, as well as the activity of intermediaries and others involved in government reimbursement, may include changes in long-standing interpretations of reimbursement rules, which could have a material adverse effect on our future financial position and operating results.

EXPANDED GOVERNMENT AUDITING AND OVERSIGHT OF MEDICARE AND MEDICAID SUPPLIERS AND MORE STRINGENT INTERPRETATIONS BY THOSE AUDITORS OF REGULATIONS AND RULES CONCERNING BILLING FOR OUR PRODUCTS AND SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.

Current law provides for a significant expansion of the government’s auditing and oversight of suppliers who care for patients covered by various government health care programs. Examples of this expansion include audit programs being implemented by the DME MAC contractors, the Zone Program Integrity Contractors (“ZPICs”), the Recovery Audit Contractors (“RACs”) and the Comprehensive Error Rate Testing contractors (“CERTs”) operating under the direction of CMS. We work cooperatively with these auditors and have long maintained a process for centrally tracking and managing our responses to their audit requests. However, unlike other government programs that are subject to a formal rulemaking process, there are only limited publicly-available guidelines and methodologies for determining errors or for providing clear and timely communications to DMEPOS suppliers in connection with these new types of audits. As a result, there is significant lack of clarity regarding the authority of the auditors, their expectations for document production requested during audits and the methodologies for issuing claim denials, determining billing errors and calculating billing error rates.

Along with other health care providers and suppliers, we have recently been subject to a significant increase in the number of pre-payment audits conducted under these new programs. Many of these audits have resulted in claim denial rates at our audited locations that are significantly higher than we, and others in the industry, have experienced in the past. In some cases, these high claim denial rates appear to be based on the auditors’ incomplete or erroneous review of our submitted documentation or unclear scoring methodologies used by the auditors. In other instances, high claim denial rates have resulted from the auditors’ use of more stringent interpretations of the types of medical necessity documentation required for CMS to pay for the services we provide. We are appealing the results of these recent audits and making changes to our operating policies and procedures, but cannot predict the ultimate impact that the government’s expanded and more stringent auditing may have on our business, financial conditions or results of operations.

 

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We have been informed by these auditors that other health care providers and all suppliers of certain DMEPOS product categories are expected to experience further increased scrutiny from these audit programs. When a government auditor ascribes a high billing error rate to one or more of our locations, it generally results in protracted pre-payment claims review, payment delays, refunds and other payments to the government and/or our need to request more documentation from referral sources than has historically been required. It may also result in additional audit activity in other company locations in that state or DME MAC jurisdiction. We can not currently predict the adverse impact that these new audits, methodologies and interpretations might have on our operations, cash flow and capital resources, but such adverse impact could be material.

COMPLIANCE WITH REGULATIONS UNDER THE FEDERAL HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 (HIPAA), THE HEALTH INFORMATION TECHNOLOGY FOR ECONOMIC AND CLINICAL HEALTH ACT (HITECH ACT) AND RELATED RULES, RELATING TO THE TRANSMISSION, SECURITY AND PRIVACY OF HEALTH INFORMATION COULD IMPOSE ADDITIONAL SIGNIFICANT COSTS ON OUR OPERATIONS.

Numerous federal and state laws and regulations, including HIPAA and the HITECH Act, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information. HIPAA and the HITECH Act require us to comply with standards for the use and disclosure of health information within our company and with third parties. HIPAA and the HITECH Act also include standards for common health care electronic transactions and code sets, such as claims information, plan eligibility, payment information and the use of electronic signatures, and privacy and electronic security of individually identifiable health information. HIPAA requires health care providers, including us, in addition to health plans and clearinghouses, to develop and maintain policies and procedures with respect to protected health information that is used or disclosed. The HITECH Act expands the notification requirement for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information and provides a tiered system for civil monetary penalties for HIPAA violations.

If we do not comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions. New health information standards, whether implemented pursuant to HIPAA, the HITECH Act, congressional action or otherwise, could have a significant effect on the manner in which we handle health care related data and communicate with payors, and the cost of complying with these standards could be significant.

WE MAY UNDERTAKE ACQUISITIONS THAT COULD SUBJECT US TO UNANTICIPATED LIABILITIES AND THAT COULD FAIL TO ACHIEVE EXPECTED BENEFITS.

Our strategy is to increase our market share through internal growth and strategic acquisitions. Consideration for the acquisitions has generally consisted of cash, unsecured non-interest bearing obligations and the assumption of certain liabilities.

The implementation of an acquisition strategy entails certain risks, including inaccurate assessment of disclosed liabilities, the existence of undisclosed liabilities, regulatory compliance issues associated with the acquired business, entry into markets in which we may have limited or no experience, diversion of management’s attention and human resources from our underlying business, difficulties in integrating the operations of an acquired business or in realizing anticipated efficiencies and cost savings, failure to retain key management or operating personnel of the acquired business, and an increase in indebtedness and a limitation in the ability to access additional capital on favorable terms. The successful integration of an acquired business may be dependent on the size of the acquired business, condition of the customer billing records, and complexity of system conversions and execution of the integration plan by local management. If we do not successfully integrate the acquired business, the acquisition could fail to achieve its expected revenue contribution or there could be delays in the billing and collection of claims for services rendered to customers, which may have a material adverse effect on our financial position and operating results.

WE FACE INTENSE NATIONAL, REGIONAL AND LOCAL COMPETITION AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, WE WILL LOSE REVENUES AND OUR BUSINESS WILL SUFFER.

The home respiratory market is a fragmented and highly competitive industry. We compete against other national providers and, by our estimate, more than 2,000 local and regional providers. Home respiratory companies compete primarily on the basis of service rather than price since reimbursement levels are established by Medicare and Medicaid or by the individual determinations of private health plans.

Our ability to compete successfully and to increase our referrals of new customers is highly dependent upon our reputation within each local health care market for providing responsive, professional and high-quality service and achieving strong customer satisfaction. Given the relatively low barriers to entry in the home respiratory market, we expect that the industry will become increasingly competitive in the future. Increased competition in the future could limit our ability to attract and retain key operating personnel and achieve continued growth in our core business.

 

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INCREASES IN OUR COSTS COULD ERODE OUR PROFIT MARGINS AND SUBSTANTIALLY REDUCE OUR NET INCOME AND CASH FLOWS.

Cost containment in the health care industry, fueled, in part, by federal and state government budgetary shortfalls, is likely to result in constant or decreasing reimbursement amounts for our equipment and services. As a result, we must control our operating cost levels, particularly labor and related costs, which account for a significant component of our operating costs and expenditures. We compete with other health care providers to attract and retain qualified or skilled personnel. We also compete with various industries for administrative and service employees. Since reimbursement rates are established by fee schedules mandated by Medicare, Medicaid and private payors, we are not able to offset the effects of general inflation in labor and related cost components, if any, through increases in prices for our equipment and services. Consequently, such cost increases could erode our profit margins and reduce our net income.

IF THE COVERAGE LIMITS ON OUR INSURANCE POLICIES ARE INADEQUATE TO COVER OUR LIABILITIES OR OUR INSURANCE COSTS CONTINUE TO INCREASE, THEN OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD LIKELY DECLINE.

Participants in the health care industry, including the Company, are subject to substantial claims and litigation in the ordinary course, often involving large claims and significant defense costs. As a result of the liability risks inherent in our lines of business we maintain liability insurance intended to cover such claims. Our insurance policies are subject to annual renewal. The coverage limits of our insurance policies may not be adequate, and we may not be able to obtain liability insurance in the future on acceptable terms or at all. In addition, our insurance premiums could be subject to increases in the future, which increases may be material. If the coverage limits are inadequate to cover our liabilities or our insurance costs continue to increase, then our financial condition and results of operations would likely decline.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to the information provided in Item 7A in our Annual Report on Form 10-K regarding our market risk.

Our revolving credit facility is subject to changing LIBOR-based interest rates. At September 30, 2011, we had $80.0 million of outstanding borrowings under the credit facility.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company has conducted an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter ended September 30, 2011, that has materially affected, or is 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

As a health care provider, the Company is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documenting and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, regional carriers and state agencies often conduct audits and request patient records and other documents to support claims submitted by the Company for payment of services rendered to customers. Similarly, government agencies periodically open investigations and request information pursuant to legal process from the Company.

Our operating centers are also subject to federal and/or state laws regulating, among other things, interstate motor-carrier transportation, repackaging of oxygen, distribution of medical equipment, certain types of home health activities, pharmacy operations, nursing services and respiratory services and apply to those locations involved in such activities. Certain of our employees are subject to state laws and regulations governing the ethics and professional practice of respiratory therapy, pharmacy and nursing. From time to time, the Company receives inquiries and complaints from various government agencies related to its operations or personnel.

It has been the Company’s policy to cooperate with all inquiries, investigations and requests for information from government agencies and to vigorously defend any administrative complaints. The Company can provide no assurances as to the duration or outcome of these investigations, inquiries and/or complaints.

Private litigants may also make claims against health care providers for violations of health care laws in actions known as qui tam suits. In these cases, the government has the opportunity to intervene in, and take control of, the litigation. From time to time we are named as a defendant in such qui tam proceedings. We vigorously defend these suits. The government has declined to intervene for purposes other than dismissal in all unsealed qui tam actions of which we are aware.

Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.

We are also involved in certain other claims and legal actions arising in the ordinary course of our business. The ultimate disposition of all such matters is not currently expected to have a material adverse impact on our financial position, results of operations or liquidity.

 

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

During the three months ended September 30, 2011, the Company repurchased approximately 6.3 million shares of its common stock in the open market.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   Total Number
of Shares
Purchased
     Average Price
Paid

Per  Share
     Total Number
of Shares
Purchased as
Part of  the
Repurchase
Program
     Approximate
Dollar Value of
Shares that May
Yet  Be
Purchased
Under the
Repurchase
Program
 

July 1, 2011 to July 31, 2011

     1,907,500       $ 26.17         1,907,500       $ 325,103,000   

August 1, 2011 to August 31, 2011

     4,415,097         22.66         4,415,097       $ 234,836,000   

September 1, 2011 to September 30, 2011

     0         0.00         0       $ 291,946,000   
  

 

 

    

 

 

    

 

 

    

Total

     6,322,597       $ 23.72         6,322,597      
  

 

 

    

 

 

    

 

 

    

Our Board of Directors has authorized a share repurchase plan whereby the Company may repurchase shares of the Company’s common stock in amounts determined pursuant to a formula that takes into account both the ratio of the Company’s net debt to cash flow and its available cash resources and borrowing availability. As of September 30, 2011, $291.9 million of common stock was eligible for repurchase in accordance with the plan’s formula.

Item 3. Defaults Upon Senior Securities - Not Applicable

Item 4. Removed and Reserved

Item 5. Other Information - Not Applicable

Item 6. Exhibits

(a) Exhibits included or incorporated herein: See Exhibit Index.

 

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SIGNATURE

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.

 

LINCARE HOLDINGS INC.

Registrant

/S/    PAUL G. GABOS        

Paul G. Gabos

Secretary, Chief Financial Officer

and Principal Accounting Officer

November 3, 2011

 

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INDEX OF EXHIBITS

 

Exhibit

Number

 

Exhibit

    3.10 (A)   Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.
    3.11 (A)   Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.
    3.20 (B)   Amended and Restated By-Laws of Lincare Holdings Inc.
    4.10 (C)   Lincare Holdings Inc. Indenture dated as of June 11, 2003
    4.20 (C)   Lincare Holdings Inc. Registration Rights Agreement dated as of June 11, 2003
    4.30 (D)   Lincare Holdings Inc. Series A Indenture dated as of October 31, 2007
    4.40 (D)   Lincare Holdings Inc. Series B Indenture dated as of October 31, 2007
    4.50 (D)   Lincare Holdings Inc. Registration Rights Agreement dated as of October 31, 2007
    4.70 (E)   Credit Agreement with Bank of America, N.A. as Agent and Credit Agricole Corporate and Investment Bank and Wells Fargo Bank, National Association, as Co-Syndication Agents and U.S. Bank National Association, and RBS Citizens, National Association, as Co-Documentation Agents.
  31.1   Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by John P. Byrnes, Chief Executive Officer
  31.2   Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Paul G. Gabos, Chief Financial Officer
  32.1   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by John P. Byrnes, Chief Executive Officer
  32.2   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Paul G. Gabos, Chief Financial Officer
101.INS *   XBRL Instance Document
101.SCH *   XBRL Taxonomy Extension Schema Document
101.CAL *   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF *   XBRL Definition Linkbase Document
101.LAB *   XBRL Taxonomy Extension Label Linkbase Document
101.PRE *   XBRL Taxonomy Extension Presentation Linkbase Document

 

A Incorporated by reference to the Registrant’s Form 10-Q dated August 12, 1998.
B Incorporated by reference to the Registrant’s Form 8-K dated December 21, 2010.
C Incorporated by reference to the Registrant’s Form 8-K dated June 12, 2003.
D Incorporated by reference to the Registrant’s Form 8-K dated November 6, 2007.
E Incorporated by reference to the Registrant’s Form 8-K dated September 19, 2011.
* Furnished herewith

 

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