##### Table of Contents



UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2007
 or
 o
    
    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:0-8082
 LHC GROUP, INC.
 (Exact Name of Registrant as Specified in Charter)
 Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    71-0918189
(I.R.S. Employer Identification No.)
 420 West Pinhook Rd, Suite A
Lafayette, LA 70503
(Address of principal executive offices including zip code)
 (337) 233-1307
(Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### 



LHC GROUP, INC.
 INDEX
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial Statements (unaudited)
    
    1Consolidated Balance Sheets  September 30, 2007 (unaudited)
and December 31, 2006
    
    1Consolidated Statements of Income (unaudited)  Three and
Nine months ended September 30, 2007 and 2006
    
    2Consolidated Statements of Cash Flows (unaudited)  Nine
months ended September 30, 2007 and 2006
    
    3Notes to Consolidated Financial Statements (unaudited)
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    17Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    30Item 4.
    
    Controls and Procedures
    
    30Part II.
    
    Other Information
    
    31Item 1.
    
    Legal Proceedings
    
    31Item 1A.
    
    Risk Factors
    
    31Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    31Item 3.
    
    Defaults Upon Senior Securities
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    31Item 5.
    
    Other Information
    
    32Item 6.
    
    Exhibits
    
    32Signatures
    
    
    
    33EX-31.1 CERTIFICATION OF KEITH G. MYERS, CEOEX-31.2 CERTIFICATION OF PETER J. ROMAN, CFOEX-32 CERTIFICATION OF THE CEO AND CFO




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS.
 LHC GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)(in thousands, except share data)ASSETSCurrent assets:Cash
    
    $
    12,859
    
    
    $
    26,877Receivables:Patient accounts receivable, less allowance for uncollectible accounts of
$8,955, and $5,769 at September 30, 2007 and December 31, 2006, respectively
    
    
    61,009
    
    
    
    50,029Other receivables
    
    
    2,633
    
    
    
    3,367Employee receivables
    
    
    33
    
    
    
    34Amounts due from governmental entities
    
    
    2,372
    
    
    
    2,51866,047
    
    
    
    55,948Deferred income taxes
    
    
    3,107
    
    
    
    1,935Prepaid income taxes
    
    
    519
    
    
    
    Prepaid expenses and other current assets
    
    
    4,299
    
    
    
    4,120Assets held for sale
    
    
    678
    
    
    
    1,171Total current assets
    
    
    87,509
    
    
    
    90,051Property, building, and equipment, net
    
    
    12,609
    
    
    
    11,705Goodwill
    
    
    64,875
    
    
    
    39,681Intangible assets, net
    
    
    9,497
    
    
    
    8,262Other assets
    
    
    3,190
    
    
    
    2,995Total assets
    
    $
    177,680
    
    
    $
    152,694LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and other accrued liabilities
    
    $
    5,666
    
    
    $
    5,903Salaries, wages, and benefits payable
    
    
    14,897
    
    
    
    10,572Amounts due to governmental entities
    
    
    3,162
    
    
    
    3,223Amounts payable under cooperative endeavor agreements
    
    
    72
    
    
    
    51Income taxes payable
    
    
    
    
    
    
    1,219Current portion of capital lease obligations
    
    
    96
    
    
    
    211Current portion of long-term debt
    
    
    433
    
    
    
    428Total current liabilities
    
    
    24,326
    
    
    
    21,607Deferred income taxes, less current portion
    
    
    2,598
    
    
    
    2,104Capital lease obligations, less current portion
    
    
    87
    
    
    
    147Long-term debt, less current portion
    
    
    2,887
    
    
    
    3,051Minority interests subject to exchange contracts and/or put options
    
    
    102
    
    
    
    317Other minority interests
    
    
    7,579
    
    
    
    3,579Stockholders equity:Common stock  $0.01 par value: 40,000,000 shares authorized;
20,717,689 and 20,682,317 shares issued and 17,767,631 and 17,732,258
shares outstanding
at September 30, 2007 and December 31, 2006, respectively
    
    
    177
    
    
    
    177Treasury stock  2,950,059 shares at cost
    
    
    (2,856
    )
    
    
    (2,856
    )Additional paid-in capital
    
    
    81,423
    
    
    
    80,273Retained earnings
    
    
    61,357
    
    
    
    44,295Total stockholders equity
    
    
    140,101
    
    
    
    121,889Total liabilities and stockholders equity
    
    $
    177,680
    
    
    $
    152,694
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##### Table of Contents



LHC GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(unaudited)(in thousands, except share and per share data)Net service revenue
    
    $
    77,495
    
    
    $
    58,626
    
    
    $
    216,786
    
    
    $
    155,462Cost of service revenue
    
    
    39,979
    
    
    
    30,168
    
    
    
    110,676
    
    
    
    80,870Gross margin
    
    
    37,516
    
    
    
    28,458
    
    
    
    106,110
    
    
    
    74,592General and administrative expenses
    
    
    26,748
    
    
    
    18,885
    
    
    
    74,558
    
    
    
    50,427Operating income
    
    
    10,768
    
    
    
    9,573
    
    
    
    31,552
    
    
    
    24,165Interest expense
    
    
    96
    
    
    
    83
    
    
    
    273
    
    
    
    229Non-operating income, including (gain) on
sales of assets
    
    
    (358
    )
    
    
    (363
    )
    
    
    (955
    )
    
    
    (644
    )Income from continuing operations before income taxes
and minority interest and cooperative endeavor
allocations
    
    
    11,030
    
    
    
    9,853
    
    
    
    32,234
    
    
    
    24,580Income tax expense
    
    
    3,377
    
    
    
    3,094
    
    
    
    10,246
    
    
    
    7,409Minority interest and cooperative endeavor
allocations
    
    
    1,413
    
    
    
    1,325
    
    
    
    4,327
    
    
    
    3,448Income from continuing operations
    
    
    6,240
    
    
    
    5,434
    
    
    
    17,661
    
    
    
    13,723Loss from discontinued operations (net of income tax
benefit of $157 and $93 in the three months ended
September 30, 2007 and 2006, respectively, and $539
and $393 in the nine months ended September 30,
2007 and 2006, respectively)
    
    
    246
    
    
    
    163
    
    
    
    843
    
    
    
    728Gain on sale of discontinued operations (net of
income taxes of $20 in the three months ended
September 30, 2007, and $20 and $336 in the nine
months ended September 30, 2007 and 2006,
respectively)
    
    
    31
    
    
    
    
    
    
    
    31
    
    
    
    667Net income
    
    
    6,025
    
    
    
    5,271
    
    
    
    16,849
    
    
    
    13,662Redeemable minority interests
    
    
    57
    
    
    
    (72
    )
    
    
    213
    
    
    
    942Net income available to common stockholders
    
    $
    6,082
    
    
    $
    5,199
    
    
    $
    17,062
    
    
    $
    14,604Earnings per share  basic:Income from continuing operations
    
    $
    0.35
    
    
    $
    0.31
    
    
    $
    0.99
    
    
    $
    0.81Loss from discontinued operations, net
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.05
    
    
    
    0.04Gain on sale of discontinued operations, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.04Net income
    
    
    0.34
    
    
    
    0.30
    
    
    
    0.94
    
    
    
    0.81Redeemable minority interests
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    0.05Net income available to common shareholders
    
    $
    0.34
    
    
    $
    0.30
    
    
    $
    0.95
    
    
    $
    0.86Earnings per share  diluted:Income from continuing operations
    
    $
    0.35
    
    
    $
    0.31
    
    
    $
    0.99
    
    
    $
    0.81Loss from discontinued operations, net
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.05
    
    
    
    0.04Gain on sale of discontinued operations, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.04Net income
    
    
    0.34
    
    
    
    0.30
    
    
    
    0.94
    
    
    
    0.81Redeemable minority interests
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    0.05Net income available to common shareholders
    
    $
    0.34
    
    
    $
    0.30
    
    
    $
    0.95
    
    
    $
    0.86Weighted average shares outstanding:Basic
    
    
    17,766,612
    
    
    
    17,557,576
    
    
    
    17,756,537
    
    
    
    16,895,929Diluted
    
    
    17,794,072
    
    
    
    17,574,541
    
    
    
    17,823,237
    
    
    
    16,907,787
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##### Table of Contents



LHC GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine months EndedSeptember 30,2007
    
    
    2006(unaudited)(in thousands)Operating activitiesNet income
    
    $
    16,849
    
    
    $
    13,662Adjustments to reconcile net income to net cash provided by operating activities:Depreciation expense
    
    
    2,201
    
    
    
    1,742Provision for bad debts
    
    
    7,291
    
    
    
    2,836Stock-based compensation expense
    
    
    758
    
    
    
    536Minority interest in earnings of subsidiaries
    
    
    3,932
    
    
    
    3,460Deferred income taxes
    
    
    (678
    )
    
    
    (427
    )Gain on divestitures and sale of assets
    
    
    
    
    
    
    (667
    )Changes in operating assets and liabilities, net of acquisitions:Receivables
    
    
    (17,390
    )
    
    
    (10,323
    )Prepaid income taxes
    
    
    (519
    )
    
    
    Prepaid expenses, other assets
    
    
    (318
    )
    
    
    (3,652
    )Accounts payable and accrued expenses
    
    
    2,958
    
    
    
    10,498Net amounts due under cooperative endeavor agreements
    
    
    21
    
    
    
    16Net amounts due governmental entities
    
    
    (61
    )
    
    
    1,711Net cash provided by operating activities
    
    
    15,044
    
    
    
    19,392Investing activitiesPurchases of property, building, and equipment
    
    
    (2,634
    )
    
    
    (2,702
    )Proceeds from sale of entities
    
    
    
    
    
    
    1,440Cash paid for acquisitions, primarily goodwill and intangible assets
    
    
    (22,376
    )
    
    
    (21,060
    )Net cash used in investing activities
    
    
    (25,010
    )
    
    
    (22,322
    )Financing activitiesIssuance of common stock, net of underwriting discounts of $1,104 for the nine
months ended September 30, 2006
    
    
    
    
    
    
    21,033Principal payments on debt
    
    
    (159
    )
    
    
    (1,163
    )Payments on capital leases
    
    
    (175
    )
    
    
    (327
    )Proceeds from employee stock purchase plan
    
    
    303
    
    
    
    85Proceeds from exercise of options
    
    
    
    
    
    
    135Offering costs incurred
    
    
    
    
    
    
    (250
    )Minority interest distributions, net
    
    
    (4,021
    )
    
    
    (3,392
    )Net cash provided by (used in) financing activities
    
    
    (4,052
    )
    
    
    16,121Change in cash
    
    
    (14,018
    )
    
    
    13,191Cash at beginning of period
    
    
    26,877
    
    
    
    17,398Cash at end of period
    
    $
    12,859
    
    
    $
    30,589Supplemental disclosures of cash flow informationInterest paid
    
    $
    272
    
    
    $
    230Income taxes paid
    
    $
    12,052
    
    
    $
    120
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##### Table of Contents



LHC GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Organization
  Unaudited Interim Financial Information
   2. Significant Accounting Policies
 Use of Estimates
  Critical Accounting Policies
  Principles of Consolidation
   - 4 -




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##### Table of Contents



Equity Joint Ventures
  Cooperative Endeavors
  License Leasing Arrangements
  Management Services
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Wholly-owned subsidiaries
    
    
    44.6
    %
    
    
    43.8
    %
    
    
    45.2
    %
    
    
    40.7
    %Equity joint ventures
    
    
    41.7
    
    
    
    43.4
    
    
    
    41.2
    
    
    
    46.4Cooperative endeavors
    
    
    1.4
    
    
    
    1.3
    
    
    
    1.4
    
    
    
    1.5License leasing arrangements
    
    
    10.4
    
    
    
    8.9
    
    
    
    10.0
    
    
    
    9.3Management services
    
    
    1.9
    
    
    
    2.6
    
    
    
    2.2
    
    
    
    2.1100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Revenue Recognition
  - 5 -




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Home-based services
    
    
    81.6
    %
    
    
    76.0
    %
    
    
    81.3
    %
    
    
    72.8
    %Facility-based services
    
    
    18.4
    
    
    
    24.0
    
    
    
    18.7
    
    
    
    27.2100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Payor:Medicare
    
    
    82.0
    %
    
    
    81.3
    %
    
    
    82.0
    %
    
    
    83.7
    %Medicaid
    
    
    5.0
    
    
    
    4.1
    
    
    
    5.6
    
    
    
    4.3Other
    
    
    13.0
    
    
    
    14.6
    
    
    
    12.4
    
    
    
    12.0100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 - 6 -




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##### Table of Contents



Home-Based Services
 Home Nursing Services.
   Hospice Services.
 Facility-Based Services
 Long-Term Acute Care Services.
 Outpatient Rehabilitation Services.
 Accounts Receivable and Allowances for Uncollectible Accounts
  - 7 -




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##### Table of Contents



Payor
    
    0-30
    
    
    31-60
    
    
    61-90
    
    
    91-120
    
    
    121-150
    
    
    151+
    
    
    Total(in thousands)Medicare
    
    $
    19,098
    
    
    $
    1.291
    
    
    $
    2,304
    
    
    $
    1,299
    
    
    $
    2,315
    
    
    $
    12,515
    
    
    $
    38,822Medicaid
    
    
    3,328
    
    
    
    639
    
    
    
    806
    
    
    
    609
    
    
    
    433
    
    
    
    4,367
    
    
    
    10,182Other
    
    
    4,063
    
    
    
    1,619
    
    
    
    1,608
    
    
    
    1,251
    
    
    
    1,442
    
    
    
    10,977
    
    
    
    20,960Total
    
    $
    26,489
    
    
    $
    3,549
    
    
    $
    4,718
    
    
    $
    3,159
    
    
    $
    4,190
    
    
    $
    27,859
    
    
    $
    69,964
 Goodwill and Intangible Assets
   - 8 -




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##### Table of Contents



Other Significant Accounting Policies
 Due to/from Governmental Entities
  Property, Building, and Equipment
   Long-Lived Assets
  Income Taxes
  Minority Interest and Cooperative Endeavor Agreements
 - 9 -




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##### Table of Contents



Minority Interest Subject to Exchange Contracts and/or Put Options
   Stock-based Compensation
  Share-Based Payment Accounting for Stock-Based Compensation
 Earnings Per Share
  - 10 -




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Weighted average number of shares
outstanding for basic per share
calculation
    
    
    17,766,612
    
    
    
    17,557,576
    
    
    
    17,756,537
    
    
    
    16,895,929Effect of dilutive potential shares:Options
    
    
    4,799
    
    
    
    2,828
    
    
    
    6,895
    
    
    
    1,741Restricted stock
    
    
    22,661
    
    
    
    14,137
    
    
    
    59,805
    
    
    
    10,117Adjusted weighted average shares
for diluted per share calculation
    
    
    17,794,072
    
    
    
    17,574,541
    
    
    
    17,823,237
    
    
    
    16,907,787
 Recently Issued Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment to FASB Statement No. 115
 3. Acquisitions and Divestitures
  2007 Acquisitions
  2007 Divestitures
    - 11 -




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)2007
    
    
    2006
    
    
    2007
    
    
    2006Net service revenue
    
    $
    1,084
    
    
    $
    1,187
    
    
    $
    3,150
    
    
    $
    4,729Costs, expenses and minority interest and
cooperative endeavor allocations
    
    
    1,487
    
    
    
    1,443
    
    
    
    4,532
    
    
    
    5,850Loss from discontinued operations before
income
tax benefit
    
    
    403
    
    
    
    256
    
    
    
    1,382
    
    
    
    1,121Income tax benefit
    
    
    157
    
    
    
    93
    
    
    
    539
    
    
    
    393Loss from discontinued operations
    
    $
    246
    
    
    $
    163
    
    
    $
    843
    
    
    $
    728
  Nine monthsEndedSeptember 30,2007(in thousands)Home-based services segment:Balance at December 31, 2006
    
    $
    35,740Goodwill acquired during the period from acquisitions
    
    
    24,793Balance at September 30, 2007
    
    $
    60,533Facility-based services segment:Balance at December 31, 2006
    
    $
    3,941Goodwill reclassified from held for sale during the period
    
    
    401Balance at September 30, 2007
    
    $
    4,342
  4. Credit Arrangements
 Long-Term Debt
  September 30,
    
    
    December 31,2007
    
    
    2006(in thousands)Notes payable:Due in yearly installments of $50,000 through August 2010 at 6.25%
    
    $
    150
    
    
    $
    190Due in monthly installments of $20,565 through October 2015 at LIBOR
plus 225 basis points (7.60% at September 30, 2007)
    
    
    2,876
    
    
    
    2,898Due in monthly installments of $12,500 through November 2009 at 3.08%
    
    
    294
    
    
    
    3913,320
    
    
    
    3,479Less current portion of long-term debt
    
    
    433
    
    
    
    428$
    2,887
    
    
    $
    3,051
   - 12 -




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##### Table of Contents



Other Credit Arrangements
  5. Income Taxes
 Accounting for Uncertainty
in Income Taxes
  6. Stockholders Equity
  Common StockIssued
    
    
    Treasury
    
    
    AdditionalPaid-In
    
    
    RetainedAmount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Capital
    
    
    Earnings
    
    
    TotalBalances at December 31, 2006
    
    $
    177
    
    
    
    20,682,317
    
    
    $
    (2,856
    )
    
    
    2,950,059
    
    
    $
    80,273
    
    
    $
    44,295
    
    
    $
    121,889Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,849
    
    
    
    16,849Options exercised
    
    
    
    
    
    
    527
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 1,167 shares of
vested restricted stock
    
    
    
    
    
    
    1,167
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    33Nonvested stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    725
    
    
    
    
    
    
    
    725Issuance of vested
restricted stock
    
    
    
    
    
    
    22,476
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Excess tax benefits from
issuance of nonvested stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89
    
    
    
    
    
    
    
    89Issuance of common stock
under Employee Stock
Purchase Plan
    
    
    
    
    
    
    11,202
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    303Recording minority interest
in joint venture at
redemption
value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    213
    
    
    
    213Balances at September 30, 2007
    
    $
    177
    
    
    
    20,717,689
    
    
    $
    (2,856
    )
    
    
    2,950,059
    
    
    $
    81,423
    
    
    $
    61,357
    
    
    $
    140,101
 - 13 -




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##### Table of Contents



Share Based Compensation
   Stock Options
  Nonvested Stock
   WeightedaverageNumber of
    
    grant dateShares
    
    fair valueNonvested shares outstanding at December 31, 2006
    
    
    86,716
    
    
    $
    18.29Granted
    
    
    127,171
    
    
    
    30.41Vested
    
    
    (23,643
    )
    
    
    17.72Forfeited
    
    
    (36,217
    )
    
    
    27.42Nonvested shares outstanding at September 30, 2007
    
    
    154,027
    
    
    $
    24.28
  - 14 -




---



##### Table of Contents



Employee Stock Purchase Plan
  7. Commitments and Contingencies
 Contingencies
   Compliance
    - 15 -




---



##### Table of Contents



8. Segment Information
  Three Months Ended September 30, 2007Home-Based
    
    Facility-BasedServices
    
    Services
    
    Total(in thousands)Net service revenue
    
    $
    63,217
    
    
    $
    14,278
    
    
    $
    77,495Cost of service revenue
    
    
    31,135
    
    
    
    8,844
    
    
    
    39,979General and administrative expenses
    
    
    22,107
    
    
    
    4,641
    
    
    
    26,748Operating income
    
    
    9,975
    
    
    
    793
    
    
    
    10,768Interest expense
    
    
    64
    
    
    
    32
    
    
    
    96Non-operating income, including gain on sale of assets
    
    
    246
    
    
    
    112
    
    
    
    358Income from continuing operations before income
taxes and minority interest and cooperative endeavor allocations
    
    
    10,157
    
    
    
    873
    
    
    
    11,030Minority interest and cooperative endeavor allocations
    
    
    1,264
    
    
    
    149
    
    
    
    1,413Income from continuing operations before income taxes
    
    
    8,893
    
    
    
    724
    
    
    
    9,617Total assets
    
    $
    148,909
    
    
    $
    28,771
    
    
    $
    177,680
 Three Months Ended September 30, 2006Home-Based
    
    Facility-BasedServices
    
    Services
    
    Total(in thousands)Net service revenue
    
    $
    44,536
    
    
    $
    14,090
    
    
    $
    58,626Cost of service revenue
    
    
    21,292
    
    
    
    8,876
    
    
    
    30,168General and administrative expenses
    
    
    14,966
    
    
    
    3,919
    
    
    
    18,885Operating income
    
    
    8,278
    
    
    
    1,295
    
    
    
    9,573Interest expense
    
    
    53
    
    
    
    30
    
    
    
    83Non-operating income, including gain on sale of assets
    
    
    251
    
    
    
    112
    
    
    
    363Income from continuing operations before income taxes
and minority interest and cooperative endeavor
allocations
    
    
    8,477
    
    
    
    1,376
    
    
    
    9,853Minority interest and cooperative endeavor allocations
    
    
    879
    
    
    
    446
    
    
    
    1,325Income from continuing operations before income taxes
    
    
    7,598
    
    
    
    930
    
    
    
    8,528Total assets
    
    $
    113,529
    
    
    $
    37,220
    
    
    $
    150,749
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##### Table of Contents



Nine Months Ended September 30, 2007Home-Based
    
    Facility-BasedServices
    
    Services
    
    Total(in thousands)Net service revenue
    
    $
    176,275
    
    
    $
    40,511
    
    
    $
    216,786Cost of service revenue
    
    
    84,874
    
    
    
    25,802
    
    
    
    110,676General and administrative expenses
    
    
    60,739
    
    
    
    13,819
    
    
    
    74,558Operating income
    
    
    30,662
    
    
    
    890
    
    
    
    31,552Interest expense
    
    
    180
    
    
    
    93
    
    
    
    273Non-operating income, including gain on sale of assets
    
    
    661
    
    
    
    294
    
    
    
    955Income from continuing operations before income taxes and
minority
interest and cooperative endeavor allocations
    
    
    31,143
    
    
    
    1,091
    
    
    
    32,234Minority interest and cooperative endeavor allocations
    
    
    3,673
    
    
    
    654
    
    
    
    4,327Income (loss) from continuing operations before income taxes
    
    
    27,470
    
    
    
    437
    
    
    
    27,907Total assets
    
    $
    148,909
    
    
    $
    28,771
    
    
    $
    177,680
 Nine Months Ended September 30, 2006Home-Based
    
    Facility-BasedServices
    
    Services
    
    Total(in thousands)Net service revenue
    
    $
    113,105
    
    
    $
    42,357
    
    
    $
    155,462Cost of service revenue
    
    
    54,389
    
    
    
    26,481
    
    
    
    80,870General and administrative expenses
    
    
    38,954
    
    
    
    11,473
    
    
    
    50,427Operating income
    
    
    19,762
    
    
    
    4,403
    
    
    
    24,165Interest expense
    
    
    148
    
    
    
    81
    
    
    
    229Non-operating income, including gain on sale of assets
    
    
    439
    
    
    
    205
    
    
    
    644Income from continuing operations before income taxes
and minority interest and cooperative endeavor
allocations
    
    
    20,053
    
    
    
    4,527
    
    
    
    24,580Minority interest and cooperative endeavor allocations
    
    
    2,141
    
    
    
    1,307
    
    
    
    3,448Income from continuing operations before income taxes
    
    
    17,912
    
    
    
    3,220
    
    
    
    21,132Total assets
    
    $
    113,529
    
    
    $
    37,220
    
    
    $
    150,749
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our expectations regarding financial condition or results of operations for periods after September 30, 2007;
    
    our future sources of and needs for liquidity and capital resources;
    
    our expectations regarding any future indebtedness under our credit facility;
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##### Table of Contents




    
    our expectations regarding the size and growth of the market for our services;
    
    our business strategies and our ability to grow our business;
    
    the implementation or interpretation of current or future regulations and legislation;
    
    the reimbursement levels of third-party payors;
    
    the effect of adjustments and corrections to prior reimbursement levels by third-party payors on our
financial condition or results of operations;
    
    the effect of and applicability of annual caps established by third-party payors on our financial condition
or results of operations;
    
    possible changes in legislation and/or government regulations that would affect our business;
    
    possible effects of legal proceedings on our financial condition and results of operations;
    
    the sufficiency of our self-funded medical insurance plan;
    
    the impact that the cost of medical supplies may have on our financial condition or results of operations;
    
    the impact of interest rates on our business;
    
    our discussion of our disclosure controls and procedures; and
    
    our discussion of our critical accounting policies.
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##### Table of Contents



Overview
  Segments
    Recent Developments
 Medicare
 Home-Based Services.
 - 19 -




---



##### Table of Contents




    
    Under the Social Security Act, CMS may adjust the standard payment amount to eliminate
the effect of coding and classification changes that do not reflect changes in case-mix. In
the proposed rule, CMS identified a change in case-mix of 8.7 percent (i.e., change that is
not due to changes in the underlying health of patients). Therefore, CMS proposed a 2.75
percent reduction in the national 60-day episode rate for 3 years starting in 2008.
However, after publishing the proposed rule, CMS updated its analysis and found a change in
case-mix of 11.75 percent. Therefore, in the Final Rule, CMS adopted a 2.75 percent
reduction in the national 60-day episode rate for 3 years starting in 2008, and extended
the adjustment period to a 4th year via a 2.71 percent reduction for 2011. In the Final
Rule, CMS requested public comment on the 2.71 percent reduction for 2011 and set an
October 29, 2007 deadline for public comment.
    
    To adjust for case-mix, HH-PPS currently uses 80 category case-mix classifications to
assign patients to a home health resource group (HHRG). In the Final Rule, CMS increased
the HHRG case-mix classifications from 80 to 153.
    
    CMS decreased the home health market basket increase from 3.3 percent in 2007 to 3.0
percent for 2008.
    
    The Deficit Reduction Act of 2005 provides for a 2 percent reduction in a home health
agencys market basket increase if certain quality measure data are not submitted to CMS.
For 2007, CMS identified 10 required quality measures. CMS added the following two
additional quality measures for 2008: (1) emergent care for wound infections, deteriorating
wound status; and (2) improvement in status of surgical wound. Now, a total of 12 quality
measures must be reported for a full home health market basket increase in 2008. If a home
health agency does not submit quality data, the home health market basket percentage
increase will be reduced by 2.0 percentage points and the agency will receive only a 1.0
percent update for 2008.
    
    For episodes beginning and ending in 2008, the Final Rule sets the national 60-day
episode rate at $2,270.32, a decrease from $2,339.00 in 2007. This new amount reflects the
3.0 percent home health market basket increase and the 2.75 percent reduction for the
change in case-mix.
    
    Previously, there was a single therapy threshold set at 10 visits. The Final Rule
implements multiple therapy thresholds set at 6, 14 and 20 visits, with graduated payment
levels between the thresholds, to reduce the impact of financial incentives on the delivery
of therapy visits. Further, CMS included scores for infected surgical wounds, abscesses,
chronic ulcers, gangrene, dysphagia, tracheostomy and cystostomy. CMS also added
gastrointestinal, pulmonary, cardiac, hypertension, cancer, blood disorders and affective
and other psychoses diagnosis groups, and assigned points for some secondary diagnosis and
some combinations of conditions in the same episode.
    
    The low utilization payment adjustment (LUPA) reduces the national standard rate when
minimal services are provided during a 60-day episode. LUPAs are episodes with 4 or fewer
days. In the proposed rule, CMS recognized that initial and only episode LUPAs may not
offset the full cost of initial visits. Therefore, in the Final Rule, CMS adopted an
increase of $87.93 for LUPA episodes that occur as the only episode or the initial episode
during a sequence of adjacent episodes, which will be adjusted annually by the home health
market basket.
    
    CMS continued using the pre-floor and pre-classification hospital wage index data to
adjust the labor portion of the HH-PPS rates.
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##### Table of Contents




    
    CMS eliminated the significant change in condition (SCIC) payment adjustment.
    
    Payment for non-routine medical supplies (NRS), which was $49.62 at the onset of the
HH-PPS, has been updated yearly as part of the national standardized 60-day episode payment
rate. In the proposed rule, CMS proposed revising the NRS methodology, and accounting for
NRS costs based on 5 severity groups and a national conversion factor. In the Final Rule,
CMS adopted a 6 severity group methodology and a national conversion factor of $52.35 for
2008.
    
    The outlier threshold is defined as the 60-day episode payment plus a fixed dollar loss
(FDL) amount. The proportion of additional costs paid as outlier payments is referred to as
the loss sharing ratio. The FDL ratio and loss sharing ratio are selected so that estimated
total outlier adjustments do not exceed 5 percent of total HH-PPS payments. In 2007, the
FDL ratio is 0.67. In the proposed rule, CMS proposed maintaining the FDL ratio at 0.67.
However, after further analysis, CMS adopted a FDL ratio of 0.89 in the Final Rule.
      Facility-Based Services
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##### Table of Contents



Office of Inspector General
  Components of Expenses
 Cost of Service Revenue
  
    
    salaries and related benefits;
 - 22 -




---



##### Table of Contents




    
    transportation, primarily mileage reimbursement; and
    
    supplies and services, including payments to contract therapists.
 General and Administrative Expenses
  
    
    Home office:
 
    
    salaries and related benefits;
    
    insurance;
    
    costs associated with advertising and other marketing activities; and
    
    rent and utilities;
 
    
    Supplies and services:
 
    
    accounting, legal and other professional services; and
    
    office supplies;
 
    
    Depreciation; and
    
    Provision for bad debts.
 Results of Operations
 Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
    Net Service Revenue
 Home-Based Services.
  - 23 -




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##### Table of Contents



Facility-Based Services.
  Organic Growth
   Three months ended
    
    Three months ended
    
    Three months endedMarch 31, 2007
    
    June 30, 2007
    
    September 30, 2007Net Revenue
    
    
    36.0
    %
    
    
    29.3
    %
    
    
    26.0
    %Average Census
    
    
    35.2
    %
    
    
    30.3
    %
    
    
    15.2
    %Average Medicare Census
    
    
    32.6
    %
    
    
    28.0
    %
    
    
    17.7
    %Admissions
    
    
    45.6
    %
    
    
    35.2
    %
    
    
    24.4
    %Medicare Admissions
    
    
    32.5
    %
    
    
    34.7
    %
    
    
    19.8
    %Episodes
    
    
    33.5
    %
    
    
    35.7
    %
    
    
    43.0
    %
 Cost of Service Revenue
  Home-Based Services.
 - 24 -




---



##### Table of Contents



Facility-Based Services.
 General and Administrative Expenses
  Home-Based Services.
 Facility-Based Services.
 Income Tax Expense
  Minority Interest and Cooperative Endeavor Allocations
  Discontinued Operations
  - 25 -




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##### Table of Contents



Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
    Net Service Revenue
 Home-Based Services.
  Facility-Based Services.
  Organic Growth
   Three months ended
    
    Six months ended
    
    Nine months endedMarch 31, 2007
    
    June 30, 2007
    
    September 30, 2007Net Revenue
    
    
    36.0
    %
    
    
    34.8
    %
    
    
    43.3
    %Average Census
    
    
    35.2
    %
    
    
    32.2
    %
    
    
    14.5
    %Average Medicare Census
    
    
    32.6
    %
    
    
    29.8
    %
    
    
    15.8
    %
 - 26 -




---



##### Table of Contents



Three months ended
    
    Six months ended
    
    Nine months endedMarch 31, 2007
    
    June 30, 2007
    
    September 30, 2007Admissions
    
    
    45.6
    %
    
    
    39.8
    %
    
    
    47.6
    %Medicare Admissions
    
    
    32.5
    %
    
    
    38.5
    %
    
    
    41.4
    %Episodes
    
    
    33.5
    %
    
    
    37.1
    %
    
    
    47.9
    %
 Cost of Service Revenue
  Home-Based Services.
 Facility-Based Services.
 General and Administrative Expenses
  Home-Based Services.
 - 27 -




---



##### Table of Contents



Facility-Based Services.
 Income Tax Expense
  Minority Interest and Cooperative Endeavor Allocations
  Discontinued Operations
  Liquidity and Capital Resources
  
    
    Operating Results Our net income has a significant impact on our operating cash
flows. Any significant increase or decrease in our net income could have a material impact
on our operating cash flows.
    
    Start-Up Costs Following the completion of an acquisition, we generally incur
substantial start-up costs in order to implement our business strategy. There is generally
a delay between our expenditure of these start-up costs and the increase in net service
revenue, and subsequent cash collections, which adversely affects our cash flows from
operating activities.
    
    Timing of Payroll Our employees are paid bi-weekly on Fridays; therefore, operating
cash flows decline in reporting periods that end on a Friday. Conversely, for those
reporting periods ending on a day other than Friday, our cash flows are higher because we
have not yet paid our payroll.
    
    Medical Insurance Plan Funding We are self funded for medical insurance purposes.
Any significant changes in the amount of insurance claims submitted could have a direct
impact on our operating cash flows.
 - 28 -




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##### Table of Contents




    
    Medical Supplies A significant expense associated with our business is the cost of
medical supplies. Any increase in the cost of medical supplies, or in the use of medical
supplies by our patients, could have a material impact on our operating cash flows.
      Indebtedness
     - 29 -




---



##### Table of Contents



Contingencies
  Off-Balance Sheet Arrangements
  Critical Accounting Policies
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
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---



##### Table of Contents



Changes in Internal Controls
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  - 31 -




---



##### Table of Contents



ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS.
 3.1
    
    
    Certificate of Incorporation of LHC Group, Inc. (previously filed as
an exhibit to the Form S-1/A (File No. 333-120792) on February 14,
2005).3.2
    
    
    Bylaws of LHC Group, Inc. (previously filed as an exhibit to the Form
S-1/A (File No. 333-120792) on May 9, 2005).4.1
    
    
    Specimen Stock Certificate of LHCs Common Stock, par value $0.01 per
share (previously filed as an
exhibit to the Form S-1/ A (File No. 333-120792) on February 14, 2005).4.2
    
    
    Reference is made to Exhibits 3.1 and 3.2 (previously filed as an
exhibit to the Form S-1/A (File No. 333-120792) on February 14, 2005
and May 9, 2005, respectively).10.1
    
    
    Consulting and Severance agreement, dated August 15, 2007, between LHC
Group, Inc. and Barry E. Stewart (previously filed as Exhibit 10.1 to
the Form 8-K (File No. 000-51343) on August 15, 2007).31.1
    
    
    Certification of Keith G. Myers, Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Peter J. Roman, Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32*
    
    
    Certification of Chief Executive Officer and Chief Financial Officer
of LHC Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    This exhibit is furnished to the SEC as an accompanying document and is not deemed to be filed
for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the
liabilities of that Section, and the document will not be deemed incorporated by reference into any
filing under the Securities Act of 1933. - 32 -




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##### Table of Contents



SIGNATURES
  LHC GROUP, INC.Date
    
    November 8, 2007
    
    
    
    /s/ Peter J. RomanPeter J. Roman
Senior Vice President and Chief Financial Officer
 - 33 -