LHC Group Inc (LHCG) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 LHC Group, Inc. earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mr. Barry Stewart.

Thank you, operator, and welcome, everyone, to LHC Group's second quarter 2007 financial results conference call. In a moment we'll hear from Keith Myers, President and CEO of LHC Group, Johnny Indest, LHC Group's Chief Operating Officer, and I will review the financial results. Before that, we must review the legal formalities.

Statements included in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to a number of risks and uncertainties, such as changes in reimbursement, changes in government regulation, changes in the Company's relationship with referral sources, increased competition for its services, increased competition for joint venture and acquisition candidates, and changes in the interpretation of government regulations. Therefore, actual results may differ materially from any financial outlook presented herein. Further information or potential factors that could affect the Company's financial results can be found in the Company's Form 10-K for the year ended December 31, 2006. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

Now I'm pleased to introduce the President and CEO of LHC Group, Keith Myers.

Thanks, Barry, and thanks, everyone, for joining us this morning. Before we review the financial performance of the Company and the highlights of the second quarter, I'd like to make two quick points.

On July 26, we announced that we were recording a charge related to contractual adjustments with respect to commercial patients in the Long-Term Acute Care Hospital setting. The actual charge was 2.1 million before taxes. Of this adjustment, 1.3 million related to the second quarter of 2007, and 783,000 related to the first quarter of 2007. This charge was identified by outside consultants hired by management to improve our processes and controls in billing and collections. This charge affects the facility-based segment only. I would like to emphasize that our underlying fundamentals are as strong as ever. And of course, Barry will give more details when he reviews the financial results.

Second, we have noted a lower reimbursement rate among commercial and managed care insurance carriers. We do not feel that providers should be accepting a lower-than-profitable rate from commercial and managed care payors. LHC Group has begun a process of canceling contracts with unprofitable carriers, and we'll begin just saying no to those carriers.

We'll be happy to address either of these points during the question-and-answer session.

Now I would like to turn to the review of the financial performance of the Company and the highlights of the second quarter. The second quarter of 2007 was another operationally sound quarter, as we continued the accelerated growth trend that began in the first half of the year. Our net service revenues were 70.6 million for the quarter and 139.3 million for the six months ended June 30th, 2007. Our earnings for the second quarter were $0.28 per fully diluted share, and $0.61 per fully diluted share for the six months ended June 30th, 2007.

As usual on these calls, our CFO, Barry Stewart, will review financial results, and then Johnny Indest, our Chief Operating Officer, will provide an update on operations. However, I'd like to touch on the highlights of the quarter before handing it over to Barry and Johnny for more detail.

On May 1st we had several partnerships and acquisitions that began service with LHC Group. These are --

A partnership with Monroe Regional Health System relating to the home health services located in Ocala, Florida. Total Medicare revenue for a 12-month period is approximately 2.6 million at Monroe.

A partnership with Princeton Community Hospital Association relating to the home health services located in Princeton, West Virginia. And total medical care revenue for 12 months for this location is approximately 1.3 million.

Third, the acquisition of a 100% interest in the assets of NorthCrest Home Health in Springfield, Tennessee. Total Medicare revenue for 12 months for this location is approximately 1.1 million.

The acquisition of a 100% interest in the assets of Roane General Home Health from Roane General Hospital in Spencer, West Virginia. Total Medicare revenue for 12 months for this location is approximately 240,000.

And a license lease agreement with Fulton County Hospital in Salem, Arkansas.

On June 1st we announced that we created a partnership with Thomas Hospital relating to the home health services located in Fairhope, Alabama. We acquired a controlling interest in the assets of Thomas Home Health Agency and oversee the day-to-day operations. Total Medicare revenue for 12 months for this location is approximately $710,000. This joint venture began service on June 1st.

On July 2nd, we announced that we formed two separate joint venture partnerships. Under the terms of the first partnership, LHC Group sold a 33% interest in an existing agency in Lafayette, Louisiana to Our Lady of Lourdes Regional Medical Center. In the second partnership, LHC Group sold a 33% interest in an existing agency in Monroe, Louisiana to St. Francis Medical Center. LHC Group continues to oversee the day-to-day operations of each agency. The primary service area covered by these partnerships has a combined estimated population of 975,000, of which 13% are over the age of 65. LHC Group began providing services under these partnerships on July 1st, 2007.

On July 5th, we announced that we entered into a partnership agreement effective July 1st with the University of Tennessee Medical Center located in Knoxville, Tennessee to provide home health and hospice services. LHC Group oversees the day-to-day operations. The service area of this partnership spans 16 counties in east Tennessee and brings LHC Group's total service area in Tennessee to 26 counties. The approximate population in the primary service area covered by this transaction is 1.1 million, with almost 14% over the age of 65. Total Medicare revenue for 12 months for this location is approximately 4.8 million.

Also on July 5th, we announced that we acquired a 100% interest in the assets of Wetzel County Homecare in New Martinsville, West Virginia. The service area of this acquisition spans two counties and brings LHC Group's total service area in West Virginia to 24 counties covered by five locations. Total Medicare revenue for 12 months is approximately 560,000 at this location.

Yesterday, August 1st, we entered into a partnership with Boone Memorial Hospital in Madison, West Virginia to provide home health services. LHC Group will oversee the day-to-day operations there as well. The service area of this partnership includes three counties in West Virginia, two of which are not currently serviced by LHC Group operations. The estimated population for this service area is 85,000, with 14% being over the age of 65. The Medicare revenue for 12 months for this location is approximately 280,000. I would like to take this opportunity to welcome the employees in Madison, West Virginia into the LHC Group family.

With regard to our acquisition pipeline, I'll limit my comments to only those opportunities in which we have reached a point in the negotiation process where we have and executed letter of intent at this time. We currently have five active LOIs, all of which have closing dates scheduled for the next 60 days. In addition, we remain in active conversations with multiple other facility owners to continue expanding our pipeline. We continue to maintain a very active acquisition focus. The opportunities created by these acquisitions have already revealed de novo opportunities, some of which we will describe later during Johnny's operational review.

Now I will let Barry Stewart, our CFO, provide the financial details.

Thanks, Keith. We'll start with the second-quarter financial results, and then I'll review the six-month results briefly.

Our net service revenue for the quarter ended June 30, 2007, was 70.6 million, up 41.2% from 50 million in the first quarter of 2006. For the three months ended June 30, 2007 and 2006, 82% and 85.8%, respectively, of our net service revenue was derived from Medicare.

Net income in the second quarter of 2007 was $5 million, or $0.28 per fully diluted share. For the quarter ended June 30, 2006, net income was 4.3 million, or $0.26 per fully diluted share. Fully diluted weighted average shares for the quarter ended June 30, 2007 were 17.8 million, as compared to 16.6 million for the same period in 2006.

As Keith mentioned earlier, in the second quarter of 2007, a pre-tax adjustment of 1.3 million was recorded relating to revenue and bad debt adjustments with respect to commercial patients in the Long-Term Acute Care Hospital setting. The adjustment decreased revenue in the facility-based segment by $1.1 million, and increased bad debt expense by $222,000 pre-tax. This adjustment reduced net income by $850,000, or $0.05 per fully diluted share. Net income from continuing operations was $5.4 million, or $0.30 per fully diluted share. And we had a loss from discontinued operations of $0.02 per fully diluted share.

Breaking these down by business segment, home-based net service revenue for the three months ended June 30, 2007 was $58 million, an increase of 60.4% from 36.1 million for the three months ended June 30, 2006. Organic growth was approximately 16.5 million, or 54.4%, during the period.

In the facility-based services segment, net service revenue for the three months ended June 30, 2007 was $12.6 million, a decrease of 9% from 13.8 million for the three months ended June 30, 2006. The decrease in facility-based net service revenue is due primarily to the revenue adjustment of $1.1 million taken in the second quarter relating to commercial patients in the LTACHs.

Days sales outstanding, or DSO, for the three months ended June 30, 2007 was 75 days, as compared with 74 days for the same three-month period in 2006. DSOs, when adjusted for acquisition and unbilled accounts receivables, was 70 days. The adjustment takes into account $3.7 million of unbilled receivables that the Company has delayed in billing due to the lag time in receiving the change of ownership after acquiring companies. For the comparable period in 2006, adjusted DSOs were 65 days, taking into account 4.6 million in unbilled accounts receivable.

Turning to the six-month results, net service revenue for the six months ended June 30, 2007 was 139.3 million, an increase of 43.5 million, or 45.5%, from 95.8 million in 2006. For the six months ended June 30, 2007 and 2006, 82% and 86.1%, respectively, of our net service revenue was derived from Medicare. Earnings per share at the six-month mark in 2007, including the adjustment, are $0.61 per share, up from $0.51 per share for the same period in 2006.

In the six months ended June 30, 2007, the LTACH adjustment that we spoke of was $2.1 million pre-tax. Of this adjustment, 1.3 million related to the second quarter of 2007, and 783,000 related to the first quarter of 2007. This adjustment reduced net income by 1.3 million, or $0.07 per diluted share, in the six months ended June 30, 2007. LHC Group will amend the first quarter 2007 financials in a Form 10-QA to be filed on or before August 9, 2007.

Again, by business segment, and looking at home-based services first, we had net service revenue for the six months ended June 30, 2007 of $113.1 million, an increase of $44.5 million, or 64.9%, from 68.6 million for the six months ended June 30, 2006. Organic growth was approximately $32 million, or 53.1%, during the period.

Meanwhile, facility-based services provided net service revenue for the six months ended June 30, 2007 of 26.2 million, a decrease of $1 million, or 3.5%, from $27.2 million for the six months ended June 30, 2006. The decrease in facility-based net service revenue is due primarily to the revenue adjustment of 1.9 million relating to the commercial patients in the LTACHs.

We can drill down into these results further during the Q&A if anyone desires. Now I'm pleased to have Johnny Indest, our Chief Operating Officer, take over to review the details of our operations.

Thanks Barry, and good morning, everyone. First I'd like to touch on the operational data from the second quarter of 2007. Total admissions to our home nursing division climbed 75.6% to 10,277 in the three months ended June 30, 2007, from 5852 in the three months ended June 30, 2006. Organic growth in admissions was 70.7%. Medicare admissions rose 68.9% to 7109 in the three months ended June 30, 2007, from 4210 in the three months ended June 30, 2006. Organic growth in Medicare admissions was 63.6%.

For the second quarter of 2007, our average home-based patient census was 16,283, an increase of 66% as compared to 9807 patients for the second quarter of 2006. Organic growth in home-based patient census was 59.8%.

Average Medicare patient census rose 53.9% to 12,222 in the three months ended June 30, 2007, from 7944 in the three months ended June 30, 2006. Organic growth in Medicare patient census was 53.3%.

We had 19,260 completed Medicare episodes and 349,055 Medicare visits in the three months ended June 30, 2007, for an average of 18.1 visits per completed Medicare episode. Total growth in Medicare episodes was 60.8%, while organic growth in Medicare episodes was 51.6% for the three months ended June 30, 2007 as compared to the same period in 2006. Our average case mix for completed Medicare episodes in the second quarter of 2007 was 1.36, with an average reimbursement of $2595 per episode.

Looking at our facility-based services segment, patient days increased 3.1% to 11,453 in the three months ended June 30, 2007, from 11,110 in the three months ended June 30, 2006.

Now I would like to turn to the operational data for the first half of 2007. Total admissions to our home nursing division climbed 79% to 20,442 in the six months ended June 30, 2007, from 11,422 in the six months ended June 30, 2006. Organic growth in admissions for the six months was 72.8%.

Medicare admissions rose 70% to 14,087 in the six months ended June 30, 2007, from 8288 in the six months ended June 30, 2006. Organic growth in Medicare admissions for the six months was 67%.

For the six months ended June 30, 2007, our average home-based patient census was 16,009, an increase of 67.9% as compared to 9535 patients for the six months ended June 30, 2006. Organic growth in home-based patient census for the six months was 62%.

Average Medicare patient census rose 56.8% to 11,994 in the six months ended June 30, 2007, from 7647 in the six months ended June 30, 2006. Organic growth in Medicare patient census for the six months was 54.1%.

We had 36,424 completed Medicare episodes and 678,605 Medicare visits in the six months ended June 30, 2007, for an average of 18.6 visits per completed Medicare episode. Total growth in Medicare episodes for the six months was 58.3%, while organic growth in Medicare episodes was 50.4% for the three months ended June 30, 2007, as compared to the same period in '06.

Looking at our facility-based services segment, patient days increased 4.5% to 23,127 in the six months ended June 30, 2007, from 22,140 in the six months ended June 30, 2006.

We have completed a number of significant acquisitions and partnerships in recent months, and these transactions make up an important part of our growth strategy. We understand that successful integration of these operations into the LHC Group is crucial to our future success. I am very pleased to report that the integration of these acquisitions and partnerships, which Keith mentioned, have gone extremely well. We continue to exercise careful due diligence and significant pre-acquisition planning, which help make these transition events run much more smoothly.

I am particularly proud of our operations start-up teams that have worked diligently to learn from their past experiences and to streamline their processes. It is their work that allows us to bring on these new opportunities at the pace that we have experienced.

Along with the active acquisition pipeline, we have also been busy establishing de novo locations. De novo locations are start-ups developed from existing locations. In the second quarter of 2007, we established 7 de novos. These locations were in Fayetteville, Arkansas; Bay St. Louis, Mississippi; Tyler, Texas; Eddyville, Kentucky; Columbia, Georgia; Fulton County, Kentucky; and Monroe, Louisiana. Our plans are to open five additional de novo locations in the third quarter. Through the first half of 2007 we have established 12 de novo locations. We remain firmly on path to meet our stated goal of 15 to 20 de novo openings in 2007.

I will conclude my comments by giving you continued updates on the areas of focus that I have reported in past calls.

The first is our quality care improvement project. There are various means that we utilize to assure quality within our organization, among those being patient satisfaction surveys, physician satisfaction surveys, annual external audits, internal audits conducted by our SOx team, and quarterly internal audits conducted by our performance improvement team. All of these reports have proven to be very positive and, as needed, help us focus for areas of improvement.

In addition, we also continue to make positive strides with our home care compare scores. As of June 30 home care compare update, we have shown improvement in eight of the 10 reported categories. Looking at the same store agencies, we have shown improvement in nine of the 10 categories. In one significant category, improving mobility, we now exceed the national average.

We also continue our movement to home-based technology. Our telemonitoring project continues to expand in markets where we have identified a patient base that will benefit from this technology, coupled with physicians and hospitals that are interested in the positive outcomes that can be derived from telemonitoring. Our point-of-care demonstration project continues in one of our smaller new acquisitions.

In addition to our focus on quality and technology, we continue our intense focus on those home care basics that will help assure our success in the future. Control of labor cost, proper allocation of resources, and increased focus on market development efforts are foremost in our strategic plan for success. Like Barry, I will gladly take any questions you may have concerning operations in a moment.

Thanks, Johnny. As always, I want to take this opportunity to say thank you again to our employees and shareholders for the confidence and trust that they continue to place in our Board of Directors and our management team. Know that we always appreciate and value your confidence and support.

For me and the LHC Group family, we like to think of the journey we are on together as a marathon rather than a sprint. Many people know of us today as a result of our successful IPO in June of 2005 and the performance of our team since that point. Our story, however, as many of you know, began many years before the IPO. The one thing that we count on in our business is change, and our business model has been developed at every step of the way, anticipating change as a rule rather than planning for it as an exception.

The long-term value that we are committed to bringing to the many communities, patients and families we serve, as well as to our shareholders, will continue to be a result of the many thousands of LHC Group family members who give 100% every day. It's an honor and a privilege for me to represent this group, and God willing, I'll be at it for a very long time to come.

It's great to have a job that you are passionate about. It's great to be excited about getting up and going to work everyday. This has always felt more like a mission than a job, and the challenges that come our way only serve to strengthen my resolve. I'm proud to say that this is a quality that can be found in almost every member of the LHC Group family. When you have this kind of team behind you, it's not very hard to be a leader.

Thank you for allowing us to share these results with you this morning. Operator, we're ready to take questions at this time.

(OPERATOR INSTRUCTIONS). Art Henderson, Jefferies & Company.

I have a couple of questions. The first one is directed to Barry. Obviously, Q2 was a challenge for you guys, and I commend you for taking the charge. I'm just wondering if you could discuss sort of what corrective measures you've taken internally in both your home-based segment and in your facility-based segment, so that we -- so that the investors can get comfort that we may not have to see another charge coming down the road. Could you kind of elaborate on that a little bit?

Thanks, Art. First off, the charge has all been related to the facility-based side. And recognize that we run two different systems, and the different systems require different control mechanisms behind them. So specifically on the facility-based side, what caused this is the person that was running billing and collection overrode a couple of entity-level controls that are required in the system; i.e., contractuals were not being adjusted off, but instead were continuing to be allowed out there after payment had been posted for the account. And so we had an excess amount of accounts receivable that remained out there that continued to get wrapped up in continuing collection efforts, which were never going to be collected, by the way.

The secondary control that would come behind there was a reporting mechanism that is required to be sent over to accounting. And the reporting was also being overridden, and there wasn't clear communication going back to accounting to help close these out. To make sure, first off we brought in a consulting group. We have two separate consulting groups now. The consulting group we brought in for this one on the facility-based side identified all the problems, identified and reviewed the control issues, and has taken over the running of the billing and collection effort for the facility-based side. And they're turning the reporting over to accounting right now to ensure that secondary control is working.

We've released the people that were involved in the transactions, brought the consultants in to run this for us temporarily, and we're going to outsource the billing and collection efforts behind the facility-based. Lastly, there'll be a sign-off on the reporting that comes back through to ensure that accounting has received.

Flipping over to the home-based side, you didn't have any of these issues going in there, and the control mechanism is different because, one, the experience base is deeper, and two, because the system runs and operates a bit differently. So we haven't seen any of those activities there.

Now, we have taken the precaution ourselves to increase the amount of bad debt that is reserved each month that's going through on the revenue. And you all saw us move that up by about 1.5%, which comes through the G&A line. And we've taken that precaution to make sure that we're building a reserve that is going to protect us in the future.

That's very helpful. So in looking at your DSOs where they stand today, I know that you reported a number that was roughly in the '70s, and I guess on an adjusted DSO basis you're at 65. Should we expect to see the DSOs hang at this level for a while, or should we expect to see some improvement over the next couple quarters? Do you have any sort of sense as to where things are going to go?

They're going to have to come down. There's no question about that. The timing becomes the issue that, I think, you run into. We've run through reorganization. We've run through the control steps. We have consultants that are helping us on both sides of the business, on the facility-based side and on the home health side to review this. I'd like to say that in this third quarter that you would probably see a significant reduction, but that's something I can't promise. Because we're going through the steps as we identify what they are, and then creating the corrective processes as we move through each step of identification.

That's fair. One other question, and this is more directed towards Keith. I've got to ask it. What is -- what is your strategy now as far as the LTACH business is concerned?

Our strategy has not changed at all with regard to LTACH. We're going to continue operating them. We operate the LTACHs only in markets that we're very well established with home health agencies. It's the same patient population, and there's -- in a way, it's a feeder system. And some of these patients that are in the LTACHs, most of the patients in LTACHs, have also received home health services from us or some other home health provider.

The other thing that it's important to know is the LTACHs are contributing to the overall profitability of the Company, and covering some overhead items that perhaps you wouldn't see in the financial statements. But I'll let Barry maybe give a little more detail on that.

One of the things that you all may or may not see going through the financial statements is how we allocate corporate overhead. And as you know, in accounting vernacular, as long as you're consistent and use a reasonable approach, you can allocate overhead kind of how you want.

The Company has always allocated overhead as a public company on revenue. And as we're identifying some of these activities that are going on, we're perhaps looking at the fact that maybe revenue is not the proper allocation method, because it arbitrarily depresses some of the margins on the facility-based side. So that's an area that we're going to continue to analyze and discuss with our auditors for a determination of what's the right methodology for us to make that allocation process. And we'll get back with you guys probably later this year as we complete those identifications and let you know where that stands.

One last question and I'll jump back into queue. You mentioned the commercial payor environment. Obviously, commercial payors are being pretty hard-nosed on pricing. You've indicated that you're willing to walk away from some contracts. I assume -- is this on the LTACH side of your business, or is this on both sides of your business?

It's on both sides, Art.

Would you basically go out of network, and are the out-of-network rates significantly more favorable?

Let me just say this. We're negotiating better rates with people that we're out of network on. And the fact is that some of the rates that home care providers are accepting in the industry today are far below their costs. But we're not the only home health company that has that. We just were at the NAHC financial managers conference in Boston, and there was a huge focus on this issue there. It was such a small part of the business for many years that, I think, people just kind of used it as a loss leader. But now, in the face of potential cuts in Medicare, everyone is looking at where there are savings. And certainly, if you have commercial payors that you're losing money on a direct-cost basis on every admission, that's a great place to start.

Great. Thanks very much for the color.

Eric Gommel, Stifel Nicolaus.

A follow-up to Art's question. Is there going to be any issue with the filing of your 10-Qs at this point, or timing of that stuff? Is that all on track? And also, you went through a very detailed process of how you found all these control issues and things. How is that going to impact on a SOx basis, if at all?

That's a very fair question. The Q will probably -- both the Q and the QA will probably be filed next week as we complete some of this. What happens when you identify a control issue like that is the auditing firm takes what I would use from the legal vernacular, an abundance of caution. And they are going to send both of the documents up to a review partner that does the technical review to make sure that we're in compliance with all the latest accounting literature. And we rely very heavily on them to help us through that process. The QA is something that we've already started ourselves in process. There's not a lot of changes to have to go through. What you really have to do is put a note in it to update the numbers. And then in the Q, you have to come back on the SOx and make a determination on the control perspective. It's a management decision as to what we have actually seen in the control environment, and whether or not we believe it's operating effectively. Obviously, there has been a gap in effectiveness of the control, and we're still assessing that fact and discussing it among ourselves as to what's the right way to approach it.

Fair enough. And then, the SG&A line -- I guess there's the uptick in the bad debt accrual. Was there anything else in the SG&A that caused it to be higher in the quarter?

Yes, there are some other things that have come through. That's kind of a scattering of things that you pick up on. For instance, expansion of the de novos is coming through the G&A line, too. We're picking up extra costs for administrators that are coming through. That would be about 40 basis points coming through. We had some increase in legal and professional cost. That's -- euphemistically that's where we put our consulting cost. We've hired two different consulting sets here to help us review the accounts receivable side. And we've also spent some money in the legal side up in Washington, quite frankly, helping us review the proposed rule that was put in place, and help us with advisement on how to approach things up there. So we've got another 50 basis points or so running through there. And then we've got some contract services and restricted stock awards that have come through, and the combination of those two is about 60 basis points.

How should I look at the SG&A line going forward from here? Does is it fairly constant on an absolute basis, or --?

I think as a percentage, you first have to make the adjustments to revenue and bad debt that are truly the onetime events and pull those off. And if you make those adjustments and then normalize that against the prior period that you would run into, then that number is going to remain fairly constant through the end of the year, would be my guess. For instance, the consultants are not going to go away right away. We're not going to stop our efforts in Washington; we're going to continue to make sure that we stay focused on the reimbursement environment up there. And then the restricted stock awards that went in are going to be a continuing expense item. I'd keep those there until end of year, and then we'll give you an update toward the end of the year.

One more question, and then I'll get back in the queue. I got on just a hair late, but -- Keith, any comment on the reimbursement, potential changes in reimbursement? I know you made comments, but I don't know -- what are you basically saying about that?

You're talking about the home health side, I assume.

Yes.

I don't know if I want to go much further than saying what's out there for everyone to read. We have some -- there are some things that are pretty positive for us. The rural add-on; everybody can read what's going on. It looks like that has a pretty good shot, if you believe what you read. And with such a significant part of our business being rural, we obviously feel good about that. We are -- on the case mix (inaudible), I think that's the other big issue, and that battle is ongoing. We, obviously, hope that that goes away. It looks like we at least have a shot at that.

Sheryl Skolnick, CRT Capital.

There was some trouble getting into the call, so I apologize if you covered this at first. Did you mention what your cash flow from operations was in the quarter?

I did not. Cash flow from operations during the quarter was -- it was a -1.5 million.

Was that -- if you can do this, I would appreciate it. Can we adjust that for any -- let me start over. The charge you took in the quarter was non-cash?

Sheryl, I got the point there. It would convert to a +1.7 million.

So it would be +1.7 million, but for the events surrounding the discovery of the control issue?

Correct.

Okay. I guess the other question I have is, I think you have about 13 million in cash on the balance sheet at the moment.

Correct.

13.3 million. That's obviously down, and you said that you do want to reduce your DSOs, which of course would help your cash position. But I'm curious as to whether or not that and the cash flows that you expect for the rest of the year will be enough to fund your acquisition and de novo strategy, or might you have to use some of your credit facility?

I don't think we'll have to get into the credit facility at all.

Okay. Just wanted to confirm one thing. When I did the calculation for the home health -- and this is what I may have missed -- for the home health segment, I calculated an operating margin decline of almost 200 basis points. Was that right?

That would be correct.

And that's attributable to the de novos?

It's the G&A. I don't know if you were on the line when I kind of went through the items before, but you've got the uptick in the bad debt.

Okay. That was related to the home health specifically?

No. We did an across-the-board, across-the-organization increase in percentage of our bad debt so that we could increase the reserves. And then we took in two G&A-type items that are not specific to just the home health, but the home health side would be the de novo side. I believe that's what you were looking into.

Yes.

And then some of those items get allocated back in among the different divisions. So that would cover the contract services where we have taken in some of the consultants, the legal fees that would be coming back. If you're specifically looking at a review of the proposed rule that's going toward the home health side, then the allocation, of course, would go back that way, too.

Because it seemed when I did the adjustment for the charge for the LTACH business, the decline in dollars of operating income was easily explained on the home health side; it wasn't quite clear from the press release. And I'm just curious -- you may have also mentioned this. On the control issue, did the audit committee or the Board or management look to see if this issue existed, if the situation existed in 2006 as well?

All management and the audit committee. The Board has not taken an action. We have not had a board meeting regarding this; instead it's been conferred at the audit committee level. The audit committee will report to the Board on actions and reviews.

And has 2006 been looked at as yet?

Yes it has.

So this is what you found and this is what it is?

That's correct.

Excellent. Thank you very much.

Newton Juhng, BB&T Capital Markets.

A quick question here on -- you gave us some great detail on the facilities side. I was just wondering if you also made a thorough check on the home health side to make sure your corporate controls are in place, and you feel like everything is being caught at this point.

It's a different control mechanism there. The system operates in a different manner, so you can put more of the systems and checks and balances together there. The operations side is much more linked to the financial reporting and the billing side.

So you're fairly confident that everything is working well on that side?

Yes.

Can you remind me again what is presently in discontinued ops?

We have two items. We have a critical access hospital, which by the way we sold. So it went into discontinued ops during the period and we sold it in July. And we also have a small pharmacy operation that has been in discontinued ops now for two quarters. We had a contract out there that's still being reviewed.

Thanks, Barry. And then, I guess this question is really for Johnny, just around the abilities of your company at this point to integrate more agencies as you continue to ramp up your M&A activity. I'm wondering how you feel your team is set there, and whether or not there's going to be a potential need for increasing headcount there to try and adjust to the increased volume.

Right now, we are very well-staffed for what we are bringing on and what we anticipate bringing on. As a matter of fact, we have actually used some of our start-up team in the recent past to go to existing agencies and help bolster them up a little bit on processes, etcetera. So the answer is is that we are well-staffed to handle the growth that we know having come down the pipeline.

In addition to that, if we were to see more activity coming on, there's a good amount of interest from within the Company among experienced personnel within the Company to serve on these start-up teams. I, obviously, stay in constant contact with Daryl and [John Whitlock] and Keith and the whole management team on what we have in the pipeline, making sure that we can handle what is coming on. And I'm very confident that we have -- we can handle what we have coming on.

That's great. So you've really -- you're set and ready to go as the pipeline continues to increase?

Yes.

A couple last quick points here. Barry, the tax rate of 32 and change, 32.2% --

It's 36.4. I think you're taking your tax expense prior to taking the minority interest.

Okay. 36.4. How should we look at that going forward, in terms of through the rest of the year, something of a similar level?

No. I think we've talked about this at each period. It depends upon the credits that we're still getting from the GO Zone legislation. And that's all dependent upon where you hire somebody that they have worked in those parishes or counties prior to the hurricanes that went through. First off, that credit ends on September 30th. So in the fourth quarter we'll be a full-rate taxpayer at 39.1. I believe that at the last call, we recommended that you kind of stay at the first-quarter rate, which was 38.4 or 6, or something like that. 38.1? 38.3. I was looking for confirmation.

Okay. That's very helpful, Barry. And then, just can you remind us again how your case mix has been trending through 2007?

Our case mix has been fairly consistent through 2007. And this is for completed episodes. We're currently at 1.36. Last quarter is 1.34. We're staying right in that general area.

And expect to be at that level going forward as well?

Yes.

Greg Williams, Sidoti & Co.

Most of my questions have been answered, so I just have a quick housekeeping question here. Did you mention the CapEx for the quarter in the D&A? If not, can you?

I can. Just one moment. 801,000 in CapEx, and 739,000 in depreciation.

Great. Thanks. No other questions.

Derrick Dagnan, Avondale Partners.

One quick question. Just a bigger picture on the acquisition market. Are you seeing, with the potential changes -- with the changes in Medicare, are you seeing any increase in the willingness of sellers to be selling their home health agencies? And have you seen any change in the valuation that they're looking for?

Yes, we've seen an increase in activity in conversations, which won't show up in the form of closings until later this year or early '08. As for the valuations, I'd like to say that they're going down. That's what I expected, but we're not really seeing that yet. And I think there was -- maybe there was a little buildup of demand, and maybe that will drop off. But we've tested that, and unfortunately we're not seeing that.

I think most of my other questions have been answered. I just want to clarify one thing on Sheryl. So for 2006, there will be no need to do any restatement. Is that correct?

That is correct.

(OPERATOR INSTRUCTIONS). Darren Lehrich, Deutsche Bank.

It's actually Sudeep Singh calling in for Darren. I just had another kind of big-picture question. You guys mentioned that you're working on two different billing systems right now. I guess we're just wondering, is the goal to eventually transition to a common platform, or do you think both businesses will continue to run on two different systems?

They'll run on two different systems, Sudeep. Mysys does not operate a hospital-based system that runs in a multi-site environment for us. So we're always going to use a home care-based system as well as a facility-based system.

And then just one housekeeping question here. Can you just give us the number of home health and hospice locations that you ended with in the quarter?

Just one second. That's home-based; where's the hospice? Eight hospice and 134 home health. And I guess that would give us -- where's the managed and private data? They come in there, too, right? 137? And then -- I got it right; 134 and eight.

At this time there are no further questions. I would now like to turn the call over to management for closing remarks.

Thank you, operator. On behalf of all of us here at LHC Group, I want to thank you again for taking the time to listen in and participate in the call this morning. As always, Barry, Johnny and I are available to answer any questions that may come up between our quarterly earnings calls. Have a great day. Thank you again for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.