Addus HomeCare Corp 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FIN ANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this Annual Report on Form 10-K and other risks as well as other factors that are not currently known to us, that we currently consider immaterial or that are not specific to us, such as general economic conditions. The discussion of our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) can be found in the Annual Report on Form 10-K for the year ended December 31, 2022. Overview We are a home care services provider operating three segments: personal care, hospice and home health. Our services are principally provided in-home under agreements with federal, state and local government agencies, managed care organizations, commercial insurers and private individuals. Our consumers are predominantly “dual eligible,” meaning they are eligible to receive both Medicare and Medicaid benefits. Managed care revenues accounted for 36.6%, 36.0% and 37.2% of our revenue during the years ended December 31, 2023, 2022, and 2021 respectively. A summary of certain consolidated financial and statistical data results for 2023, 2022 and 2021 are provided in the table below. For the Years Ended December 31, 2023 2022 2021 (Amounts in Thousands, except States and Locations) Net service revenues $ 1,058,651 $ 951,120 $ 864,499 Net income $ 62,516 $ 46,025 $ 45,126 Total assets $ 1,024,426 $ 937,994 $ 947,585 Adjusted EBITDA (1) $ 121,020 $ 101,480 $ 97,661 States served at period end 22 22 22 Locations at period end 219 202 206 (1) The Company defines adjusted EBITDA as earnings before interest expense, other non-operating income, taxes, depreciation, amortization, acquisition expense, stock-based compensation expense, restructure expenses and other non-recurring costs and loss on the sale of assets and retroactive rate increases from New York. The Company defined adjusted EBITDA to exclude net COVID expenses arising from the pandemic from the second quarter of 2020 to the first quarter of 2021. Adjusted EBITDA is a performance measure used by management that is not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”). It should not be considered in isolation or as a substitute for net income, operating income or any other measure of financial performance calculated in accordance with GAAP. Additionally, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Management believes that Adjusted EBITDA is useful to investors, management and others in evaluating the Company’s operating performance, to provide investors with insight and consistency in the Company’s financial reporting and to present a basis for comparison of the Company’s business operations among periods, and to facilitate comparison with the results of the Company’s peers. Additionally, we believe that Adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance of other public companies. The financial results presented in accordance with U.S. GAAP and a reconciliation of this non-GAAP measure included within this Annual Report on Form 10-K should be carefully evaluated. Acquisitions In addition to our organic growth, we have grown through acquisitions that have expanded our presence in current markets, with the goal of having all three levels of in-home care in our markets, or facilitating our entry into new markets where in-home care has been moving to managed care organizations. On February 1, 2022, we completed the acquisition of the operations of JourneyCare. The purchase price was approximately $86.6 million, including the amount of acquired excess cash held by JourneyCare at the closing of the acquisition (approximately $0.4 million). The JourneyCare acquisition was funded with a combination of a $35.0 million draw on the Company’s revolving credit facility and available cash. With the JourneyCare acquisition, the Company expanded its hospice services in the state of Illinois. 36 Table of Contents On October 1, 2022, we completed the acquisition of Apple Home for $12.7 million, with funding provided by drawing on the Company’s revolving credit facility. With the purchase of Apple Home, the Company expanded clinical services for its home health segment to Illinois. On January 1, 2023, we completed the acquisition of CareStaff for approximately $1.0 million, with funding provided by available cash. With the purchase of CareStaff, the Company expanded its personal care services to consumers in Florida. On August 1, 2023, we completed the acquisition of Tennessee Quality Care for approximately $111.2 million, with funding primarily provided by drawing on the Company’s revolving credit facility. The purchase price is subject to the completion of working capital and related adjustments. With the purchase of Tennessee Quality Care, the Company expanded its services within its hospice and home health segment to Tennessee. Revenue by Payor and Significant States Our payor clients are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local programs under which the agencies operate are subject to legislative and budgetary changes and other risks that can influence reimbursement rates. We are experiencing a transition of business from government payors to managed care organizations, which we believe aligns with our emphasis on coordinated care and the reduction of the need for acute care. For the years ended December 31, 2023, 2022 and 2021, our revenue by payor and significant states by segment were as follows: Personal Care 2023 2022 2021 Amount (in Thousands) % of Segment Net Service Revenues Amount (in Thousands) % of Segment Net Service Revenues Amount (in Thousands) % of Segment Net Service Revenues State, local and other governmental programs $ 400,753 50.4 % $ 348,234 49.3 % $ 338,325 49.3 % Managed care organizations 367,557 46.2 326,778 46.3 311,801 45.5 Private pay 16,268 2.0 18,301 2.6 19,991 2.9 Commercial insurance 6,321 0.8 7,689 1.1 9,820 1.4 Other 3,819 0.6 5,505 0.7 5,917 0.9 Total personal care segment net service revenues $ 794,718 100.0 % $ 706,507 100.0 % $ 685,854 100.0 % Illinois $ 411,081 51.7 % $ 360,778 51.1 % $ 328,619 47.9 % New Mexico 115,986 14.6 105,315 14.9 97,784 14.3 New York 92,469 11.6 86,592 12.3 99,732 14.5 All other states 175,182 22.1 153,822 21.7 159,719 23.3 Total personal care segment net service revenues $ 794,718 100.0 % $ 706,507 100.0 % $ 685,854 100.0 % With the acquisition of CareStaff in 2023, the Company expanded its personal care services to consumers in the state of Florida. 37 Table of Contents Hospice 2023 2022 2021 Amount (in Thousands) % of Segment Net Service Revenues Amount (in Thousands) % of Segment Net Service Revenues Amount (in Thousands) % of Segment Net Service Revenues Medicare $ 186,317 89.9 % $ 183,407 90.9 % $ 142,086 93.3 % Managed care organizations 7,037 3.4 7,353 3.6 5,664 3.7 Other 13,801 6.7 11,012 5.5 4,503 3.0 Total hospice segment net service revenues $ 207,155 100.0 % $ 201,772 100.0 % $ 152,253 100.0 % Ohio $ 74,871 36.1 % $ 70,503 35.0 % $ 61,415 40.3 % Illinois 47,247 22.8 47,181 23.4 — — New Mexico 30,782 14.9 30,722 15.2 36,063 23.7 All other states 54,255 26.2 53,366 26.4 54,775 36.0 Total hospice segment net service revenues $ 207,155 100.0 % $ 201,772 100.0 % $ 152,253 100.0 % With the acquisition of JourneyCare in 2022, the Company expanded its hospice services to patients in the state of Illinois, and with the acquisition of Tennessee Quality Care in 2023, the Company also expanded its hospice services to patients in the state of Tennessee. Home Health 2023 2022 2021 Amount (in Thousands) % of Segment Net Service Revenues Amount (in Thousands) % of Segment Net Service Revenues Amount (in Thousands) % of Segment Net Service Revenues Medicare $ 41,078 72.3 % $ 31,505 73.5 % $ 20,700 78.4 % Managed care organizations 12,613 22.2 8,698 20.3 4,457 16.9 Other 3,087 5.5 2,638 6.2 1,235 4.7 Total home health segment net service revenues $ 56,778 100.0 % $ 42,841 100.0 % $ 26,392 100.0 % New Mexico $ 32,949 58.0 % $ 34,111 79.6 % $ 24,735 93.7 % Illinois 12,851 22.6 8,730 20.4 1,657 6.3 Tennessee 10,978 19.4 — — — — Total home health segment net service revenues $ 56,778 100.0 % $ 42,841 100.0 % $ 26,392 100.0 % With the acquisition of Tennessee Quality Care in 2023, the Company also expanded its home health services to patients in the state of Tennessee. We derive a significant amount of our net service revenues in Illinois, which represented 44.5% and 43.8% of our net service revenues for the years ended December 31, 2023 and 2022, respectively. A significant amount of our revenue is derived from one payor client, the Illinois Department on Aging, the largest payor program for our Illinois personal care operations, which accounted for 20.9% and 20.7% of our net service revenues for the years ended December 31, 2023 and 2022, respectively. Changes in Illinois Reimbursement On November 26, 2019, the City of Chicago voted to approve increases in the Chicago minimum wage to $14 per hour beginning July 1, 2020 and to $15 per hour beginning July 1, 2021. In each subsequent year, the City is required to raise the wage based on the lower of the increases in the Consumer Price Index (“CPI”) or 2.5% subject to a cap and other requirements. On July 1, 2023, the rate was adjusted to $15.80. The Illinois fiscal year 2022 budget included an increase in hourly rates for in-home care services to $24.96, to be effective January 1, 2022. On July 12, 2021, in connection with the temporary increase in federal funding for Medicaid HCBS authorized by the ARPA, the State of Illinois submitted its Initial Spending Plan and Narrative to CMS for approval. That plan included the acceleration by two months of the rate increase to $24.96 from January 1, 2022, to November 1, 2021. The Company recognized $3.6 million related to the rate increase for the year ended December 31, 2021. 38 Table of Contents The Illinois fiscal year 2023 budget included an increase of hourly rates for in-home care services to $25.66, to be effective January 1, 2023. This increase offsets the $0.40 increase in Chicago minimum wage that occurred on July 1, 2022. In addition, CMS approved a waiver amendment proposal submitted by the Illinois Department of Healthcare and Family Services with regard to its Persons who are Elderly program, further increasing in-home care rates to $26.92, effective March 1, 2023. The Illinois Medicaid omnibus legislation passed in June 2023 included an increase in hourly rates for in-home care services to $28.07, which took effect on January 1, 2024 and required a minimum wage rate of $17.00 per hour. Our business will benefit from the rate increases noted above as planned for 2024, but there is no assurance that there will be additional offsetting rate increases in Illinois for fiscal years beyond fiscal year 2024, and our financial performance will be adversely impacted for any periods in which an additional offsetting reimbursement rate increase is not in effect. Changes in Medicare and Medicaid Reimbursement Hospice Hospice services provided to Medicare beneficiaries are paid under the Medicare Hospice Prospective Payment System, under which CMS sets a daily rate for each day a patient is enrolled in the hospice benefit. CMS updates these rates each federal fiscal year. Effective October 1, 2023, CMS increased hospice payment rates by 3.1%. This reflects a 3.3% market basket increase and a negative 0.2 percentage point productivity adjustment. Hospices that do not satisfy quality reporting requirements will be subject to a 4-percentage point reduction to the market basket update. Overall payments made by Medicare to each hospice provider number are subject to an inpatient cap and an aggregate cap, which is set each federal fiscal year. The inpatient cap limits the number of days of inpatient care to no more than 20% of total patient care days. The aggregate cap, which limits the total Medicare reimbursement that a hospice may receive based on an annual per-beneficiary cap amount and the number of Medicare patients served, was updated to $33,494.01 for federal fiscal year 2024. If a hospice’s Medicare payments exceed its inpatient or aggregate caps, it must repay Medicare the excess amount. Home Health Home health services provided to Medicare beneficiaries are paid under the Medicare Home Health Prospective Payment System (“HHPPS”), which uses national, standardized 30-day period payment rates for periods of care that meet a certain threshold of home health visits (periods of care that do not meet the visit threshold are paid a per-visit payment rate for providing care). Although payment is made for each 30-day period, the HHPPS permits continuous 60-day certification periods through which beneficiaries are verified as eligible for the home health benefit. The daily home health payment rate is adjusted for case-mix and area wage levels. CMS uses the PDGM as the case-mix classification model to place periods of care into payment categories, classifying patients based on clinical characteristics and their resource needs. An outlier adjustment may be paid for periods of care where costs exceed a specific threshold amount. CMS updates the HHPPS payment rates each calendar year. For calendar year 2024, CMS estimates that Medicare payments to home health agencies will increase by 0.8%. This is based on a home health payment update percentage of 3.0, which reflects a 3.3% market basket update reduced by a productivity adjustment of negative 0.3 percentage points, and an estimated 2.6% decrease associated with the transition to the PDGM, among other changes. Home health providers that do not comply with quality data reporting requirements are subject to a 2-percentage point reduction to their market basket update. In addition, Medicare requires home health agencies to submit a one-time Notice of Admission (“NOA”) for each patient that establishes that the beneficiary is under a Medicare home health period of care. Failure to submit the NOA within five calendar days from the start of care will result in a reduction to the 30-day period payment amount for each day from the start of care date until the date the NOA is submitted. Under the Home Health Value-Based Purchasing (“HHVBP”) Model, home health agencies receive increases or decreases to their Medicare fee-for-service payments of up to 5% based on performance against specific quality measures relative to the performance of other home health providers. Data collected in each performance year will impact Medicare payments two years later. 39 Table of Contents In certain states, payment of claims may be impacted by the Review Choice Demonstration for Home Health Services, a program intended to identify and prevent fraud, reduce the number of Medicare appeals and improve provider compliance with Medicare program requirements. The program currently applies to home health agencies in certain states, including Illinois, Ohio, Oklahoma, North Carolina, Florida and Texas. Providers in states subject to the Review Choice Demonstration may initially select from the following claims review and approval processes: pre-claim review, post-payment review or a minimal post-payment review with a 25% payment reduction. Home health agencies that maintain high compliance levels will be eligible for additional options that may be less burdensome. We are currently unable to predict what impact, if any, this program may have on our result of operations or financial position. The IMPACT Act required HHS, together with MedPAC, to consider and propose a unified payment system for post-acute care services provided by home health agencies, inpatient rehabilitation facilities, skilled nursing facilities, and long-term care hospitals. A unified post-acute care payment system would pay post-acute care providers under a single framework according to a patient’s characteristics, rather than based on the post-acute care setting where the patient receives treatment. As required under the statute, CMS and the HHS Office of the Assistant Secretary for Planning and Evaluation issued a report in July 2022 presenting a prototype for a unified post-acute care payment model, and MedPAC submitted a report to Congress in June 2023 evaluating a prototype design. Although both CMS and MedPAC concluded that designing a unified payment system is feasible, CMS noted that universal implementation of a unified payment system would require congressional action and MedPAC cautioned that implementation would be complex. Due to the agency resources required to implement a unified model, MedPAC noted that CMS may consider smaller-scale site-neutral policies to address some of the overlap in patients treated in different settings and highlighted that recent changes to various post-acute care payment systems address some of the concerns underlying the push for a unified model. New York Consumer Directed Personal Assistance Program (“CDPAP”) The CDPAP is a self-directed care alternative program that allows eligible individuals who need help with activities of daily living or skilled nursing services to choose their caregivers. We provide support services as a CDPAP fiscal intermediary. The Company recognized approximately $40.7 million in revenue from the program for the year ended December 31, 2023. In 2019, New York initiated a new RFO process to competitively procure CDPAP fiscal intermediaries. On February 11, 2021, the NYSDOH announced its initial selection of entities to enter into contracts as a Lead Fiscal Intermediary. The Company was not one of the selected entities in the initial RFO process. The Company submitted a formal protest in response to this selection process, which was filed and accepted on March 19, 2021. In April 2022, the New York legislature passed the fiscal year 2023 state budget, which amended the RFO process to authorize all fiscal intermediaries that submitted an RFO application and served at least 200 clients in New York City or 50 clients in other counties between January 1, 2020, and March 31, 2020, but that were not initially awarded a contract, to contract with the New York State Department of Health. These fiscal intermediaries were permitted to continue operating in all counties contained in their RFO application, provided they submitted an attestation and supporting information to the New York State Department of Health no later than November 29, 2022. The Company submitted an attestation on November 22, 2022, which allowed the Company to continue its CDPAP fiscal intermediary operations. However, the Company decided at that time to suspend materially all of its new fee-for-service patient admissions through County Social Service Departments in the CDPAP. On June 6, 2023, the New York State Department of Health notified the Company that it had received a contract award. Under this contract, the Company is providing services to all current payors and has resumed new fee-for-service patient admissions through County Social Service Departments in the CDPAP. The CDPAP continues to be targeted for changes by New York governmental authorities, however. For example, the governor’s most recent update on the state budget contained proposals that could adversely affect the Company’s ability to participate in the CDPAP. CMS Proposed Rule: “ Ensuring Access to Medicaid Services ” In May 2023, CMS published a proposed rule, intended to improve access to services for Medicaid beneficiaries, that includes provisions related to HCBS payments. Specifically, in an effort to address workforce shortages, the proposed rule would (if finalized in its proposed form) require that a minimum of 80% of Medicaid payments in a state for home health aide, personal care services and some similar services be spent on compensation to direct care workers, in addition to related payment transparency requirements. CMS has proposed allowing states four years to implement changes required by a final rule. The ultimate impact of the 80% requirement, if finalized as proposed, could be adverse for periods after implementation, but other aspects of the rule could also benefit our business by improving access to services, depending on the policies ultimately set forth in any final rule. The comment period for the proposed rule ended July 1, 2023. The Company filed a comment letter on the proposed rule before this deadline, as did many other organizations, states and stakeholders. On January 26, 2024, CMS sent a final rule to the Office of Management and Budget (OMB) for review and clearance. The contents of the final rule are unknown at this time, and the final rule may be significantly different than the proposed rule. OMB review is the last step in the process prior to release of the regulation in the Federal Register. The final rule’s timetable on the OMB website projects a release by April 2024. 40 Table of Contents COVID-19 Update The federal public health emergency declared by HHS as a result of the COVID-19 pandemic expired May 11, 2023. Compared to earlier periods, the number of COVID-19 infections and related hospitalizations has significantly declined. However, we may be more vulnerable to the effects of COVID-19 than other businesses due to the nature of our consumers and patients and the physical proximity required by our operations. For the years ended December 31, 2023 and 2022, COVID-19-related expenses in our personal care segment were approximately $2.8 million and $4.5 million, respectively. COVID-19 related expenses are included in cost of service revenue on the Consolidated Statements of Income. Additionally, we recognized revenue of $1.6 million and $4.3 million attributable to temporary rate increases from certain payors in our personal care segment for the years ended December 31, 2023 and 2022, respectively. For the years ended December 31, 2023 and 2022, COVID-19-related expenses in our hospice segment were approximately $0.1 million and $0.2 million, respectively. As the labor market continues to be tight and unemployment remains at low levels, we expect the competition for new caregivers, including skilled healthcare staff to be significant. To the extent that we continue to experience a shortage of caregivers, it may hinder our ability to attract and retain sufficient caregivers to meet the continuing demand for both our non-clinical and clinical services. The ongoing staffing challenges may also continue to result in increased labor costs to satisfy our staffing requirements. Components of our Statements of Income Net Service Revenues We generate net service revenues by providing our services directly to consumers and primarily on an hourly basis in our personal care segment, on a daily basis in our hospice segment and on an episodic basis in our home health segment. We receive payment for providing such services from our payor clients, including federal, state and local governmental agencies, managed care organizations, commercial insurers and private consumers. In our personal care segment, net service revenues are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate, which is either contractual or fixed by legislation, and are recognized at the time services are rendered. In our hospice segment, net service revenues are provided based on daily rates for each of the levels of care and are recognized as services are provided. In our home health segment, net service revenues are based on an episodic basis at a stated rate and recognized based on the number of days elapsed during a period of care within the reporting period. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record revenues. Cost of Service Revenues We incur direct care wages, payroll taxes and benefit-related costs in connection with providing our services. We also provide workers’ compensation and general liability coverage for our employees. Employees are also reimbursed for their travel time and related travel costs in certain instances. General and Administrative Expenses Our general and administrative expenses include our costs for operating our network of local agencies and our administrative offices. Our agency expenses consist of costs for supervisory personnel, our community care supervisors and office administrative costs. Personnel costs include wages, payroll taxes and employee benefits. Facility costs include rents, utilities, and postage, telephone and office expenses. Our corporate and support center expenses include costs for accounting, information systems, human resources, billing and collections, contracting, marketing and executive leadership. These expenses consist of compensation, including stock-based compensation, payroll taxes, employee benefits, legal, accounting and other professional fees, travel, general insurance, rents, provision for credit losses and related facility costs. Expenses related to streamlining our operations such as costs related to terminated employees, termination of professional services relationships, other contract termination costs and asset write-offs are also included in general and administrative expenses. 41 Table of Contents Depreciation and Amortization Expenses Depreciable assets consist principally of furniture and equipment, network administration and telephone equipment and operating system software. Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms. We amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks and non-competition agreements, using straight line or accelerated methods based upon their estimated useful lives. Interest Expense Interest expense is reported when incurred and principally consists of interest and unused credit line fees on the credit facility. Income Tax Expense All of our income is from domestic sources. We incur state and local taxes in states in which we operate. Our effective income tax rate was 23.1% and 23.5% for the years ended December 31, 2023 and 2022, respectively. The difference between our federal statutory and effective income tax rates was principally due to the inclusion of state taxes, non-deductible compensation, excess tax expense/benefit and the use of federal employment tax credits. Results of Operations Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 The following table sets forth, for the periods indicated, our consolidated results of operations. 2023 2022 Change Net Service Net Service Amount Revenues Amount Revenues Amount % Net service revenues $ 1,058,651 100.0 % $ 951,120 100.0 % $ 107,531 11.3 % Cost of service revenues 718,775 67.9 651,381 68.5 67,394 10.3 Gross profit 339,876 32.1 299,739 31.5 40,137 13.4 General and administrative expenses 234,794 22.2 216,942 22.8 17,852 8.2 Depreciation and amortization 14,126 1.3 14,060 1.5 66 0.5 Total operating expenses 248,920 23.5 231,002 24.3 17,918 7.8 Operating income 90,956 8.6 68,737 7.2 22,219 32.3 Interest income (1,476 ) (0.1 ) (341 ) — (1,135 ) 332.6 Interest expense 11,106 1.0 8,907 0.9 2,199 24.7 Total interest expense, net 9,630 0.9 8,566 1.0 1,064 12.4 Income before income taxes 81,326 7.7 60,171 6.2 21,155 35.2 Income tax expense 18,810 1.8 14,146 1.5 4,664 33.0 Net income $ 62,516 5.9 % $ 46,025 4.7 % $ 16,491 35.8 % Net service revenues increased by 11.3% to $1,058.7 million for the year ended December 31, 2023 compared to $951.1 million in 2022. Net service revenue increased by $88.2 million, $5.4 million and $13.9 million in our personal care, hospice and home health segments, respectively, for the year ended December 31, 2023, compared to 2022. Net service revenue increased due to a 8.2% increase in revenues per billable hour and a 4.2% increase in billable hours for the year ended December 31, 2023 in our personal care segment compared to 2022. The increase in our hospice segment revenue was primarily due to an increase in average daily census and revenue per patient day, mainly attributed to the acquisition of Tennessee Quality Care on August 1, 2023. The increase in our home health segment is primarily due to the full-year effect in 2023 of the acquisition of Apple Home on October 1, 2022 and the acquisition of Tennessee Quality Care on August 1, 2023. Gross profit, expressed as a percentage of net service revenues, increased to 32.1% for the year ended December 31, 2023, from 31.5% in 2022. The increase was primarily attributable to the increase in gross profit percentage in our personal care and home health segments of 1.6% and 6.6%, respectively, offset by a decline in our hospice segment of 3.2%. The home health increase was primarily attributable to the Tennessee Quality Care acquisition on August 1, 2023. 42 Table of Contents General and administrative expenses increased to $234.8 million for the year ended December 31, 2023 compared to $216.9 million in 2022. The increase in general and administrative expenses was primarily due to acquisitions that resulted in an increase in administrative employee wages, taxes and benefit costs of $16.3 million. General and administrative expenses, expressed as a percentage of net service revenues, decreased to 22.2% for 2023, from 22.8% in 2022. Depreciation and amortization were $14.1 million for each of the years ended December 31, 2023 and 2022. Total interest expense, net increased to $9.6 million from $8.6 million for the year ended December 31, 2023 compared to 2022. The increase in interest expense was primarily due to higher average outstanding borrowings from additional borrowings used to fund acquisitions and increased interest rates under our credit facility for the year ended December 31, 2023 compared to 2022. All of our income is from domestic sources. We incur state and local taxes in states in which we operate. The effective income tax rate was 23.1% and 23.5% for the years ended December 31, 2023 and 2022, respectively. Our lower effective income tax rate in 2023 was principally due to the inclusion of state taxes and non-deductible compensation, partially offset by excess tax benefit and the use of federal employment tax credits. For the years ended December 31, 2023 and 2022, the state tax rates were 5.6% and 6.0%, respectively. Results of Operations – Segments The following tables and related analysis summarize our operating results and business metrics by segment: Personal Care Segment For the Years Ended December 31, 2023 2022 Change Amount % of Segment Net Service Revenues Amount % of Segment Net Service Revenues Amount % (Amounts in Thousands, Except Percentages) Operating Results Net service revenues $ 794,718 100.0 % $ 706,507 100.0 % $ 88,211 12.5 % Cost of services revenues 572,807 72.1 520,617 73.7 52,190 10.0 Gross profit 221,911 27.9 185,890 26.3 36,021 19.4 General and administrative expenses 64,382 8.1 60,532 8.6 3,850 6.4 Segment operating income $ 157,529 19.8 % $ 125,358 17.7 % $ 32,171 25.7 % Business Metrics (Actual Numbers, Except Billable Hours in Thousands) Locations at period end 156 156 Average billable census * (1) 38,521 37,482 1,039 2.8 % Billable hours * (2) 30,658 29,412 1,246 4.2 Average billable hours per census per month * (2) 66.2 65.1 1.1 1.7 Billable hours per business day * (2) 117,915 113,122 4,793 4.2 Revenues per billable hour * (2) $ 25.86 $ 23.91 $ 1.95 8.2 % Same store growth revenue % * (3) (4) 12.1 % 4.6 % (1) Average billable census is the number of unique clients receiving a billable service during the year and is the total census divided by months in operation during the period. (2) Billable hours is the total number of hours served to clients during the period. Average billable hours per census per month is billable hours divided by average billable census. Billable hours per day is total billable hours divided by the number of business days in the period. Revenues per billable hour is revenue, attributed to billable hours, divided by billable hours. 43 Table of Contents (3) 2023 same store growth reflects the change in year-over-year revenue for the same store base. We define the same store base to include those stores open for at least 52 full weeks. This measure highlights the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures, and ARPA associated revenue from this calculation. (4) 2022 same store growth reflects the change in year-over-year revenue for the same store base. We define the same store base to include those stores open for at least 52 full weeks. This measure highlights the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures, the New York CDPAP and ARPA associated revenue from this calculation. * Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results, identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance indicators used by other companies. The personal care segment derives a significant amount of net service revenues from operations in Illinois, which represented 51.7% and 51.1% of our net service revenues for the years ended December 31, 2023 and 2022, respectively. One payor client, the Illinois Department on Aging, accounted for 20.9% and 20.7% of net service revenues for the years ended December 31, 2023 and 2022, respectively. Net service revenues from state, local and other governmental programs accounted for 50.4% and 49.3% of net service revenues for the years ended December 31, 2023 and 2022, respectively. Managed care organizations accounted for 46.2% and 46.3% of net service revenues for the years ended December 31, 2023 and 2022, respectively, with commercial insurance, private pay and other payors accounting for the remainder of net service revenues. Net service revenues increased by 12.5% for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily as a result of an increase in revenues per billable hour of 8.2%, mainly attributed to rate increases discussed above. Gross profit, expressed as a percentage of net service revenues, increased from 26.3% for the year ended December 31, 2022 to 27.9% for the year ended December 31, 2023 due to a decrease of 1.1% in direct payroll expense as a percentage of net service revenues. The personal care segment’s general and administrative expenses primarily consist of administrative employee wages, taxes and benefit costs, rent, information technology and office expenses. General and administrative expenses, expressed as a percentage of net service revenues, was 8.1% and 8.6% for the years ended December 31, 2023 and 2022, respectively. 44 Table of Contents Hospice Segment For the Years Ended December 31, 2023 2022 Change Amount % of Segment Net Service Revenues Amount % of Segment Net Service Revenues Amount % (Amounts in Thousands, Except Percentages) Operating Results Net service revenues $ 207,155 100.0 % $ 201,772 100.0 % $ 5,383 2.7 % Cost of services revenues 110,219 53.2 100,956 50.0 9,263 9.2 Gross profit 96,936 46.8 100,816 50.0 (3,880 ) (3.8 ) General and administrative expenses 52,083 25.1 49,742 24.7 2,341 4.7 Segment operating income $ 44,853 21.7 % $ 51,074 25.3 % $ (6,221 ) (12.2 ) % Business Metrics (Actual Numbers) Locations at period end 39 33 Admissions * (1) 12,902 13,171 (269 ) (2.0 ) % Average daily census * (2) 3,415 3,279 136 4.1 Average length of stay * (3) 94.4 87.7 6.7 7.7 Patient days * (4) 1,203,522 1,176,193 27,329 2.3 Revenue per patient day * (5) $ 175.43 $ 171.55 $ 3.88 2.3 % Organic growth - Revenue * (6) 2.0 % 0.4 % - Average daily census * (6) 0.3 % 1.9 % (1) Represents referral process and new patients on service during the period. (2) Average daily census is total patient days divided by the number of days in the period, adjusted for patient days for acquisitions beginning on date of acquisition. (3) Average length of stay is the average number of days a patient is on service, calculated upon discharge, and is total patient days divided by total discharges in the period. (4) Patient days is days of service for all patients in the period. (5) Revenue per patient day is hospice revenue divided by the number of patient days in the period. (6) Revenue organic growth and average daily census organic growth reflect the change in year-over-year revenue and average daily census for the same store base. We define the same store base to include those stores open for at least 52 full weeks. These measures highlight the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures. * Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results, identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance indicators used by other companies. 45 Table of Contents Hospice generates revenue by providing care to patients with a life expectancy of six months or less, as well as related services for their families. Hospice offers four levels of care, as defined by Medicare, to meet the varying needs of patients and their families. The four levels of hospice include routine care, continuous care, general inpatient care and respite care. Our hospice segment principally provides routine care. Net service revenues from Medicare accounted for 89.9% and 90.9% and Medicare Advantage accounted for 3.4% and 3.6% for the years ended December 31, 2023 and 2022, respectively. Net service revenues increased by $5.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to increases in average daily census and revenue per patient day, mainly attributed to the organic growth and the acquisitions of the operations of Tennessee Quality Care on August 1, 2023 and JourneyCare on February 1, 2022. Gross profit, expressed as a percentage of net service revenues, was 46.8% and 50.0% for the years ended December 31, 2023 and 2022, respectively. The decrease in gross profit as a percentage of net service revenues was mainly attributed to higher direct employee wages, taxes and benefit costs of $6.4 million. The hospice segment’s general and administrative expenses primarily consist of administrative employee wages, taxes and benefit costs, rent, information technology and office expenses. General and administrative expenses, expressed as a percentage of net service revenues, was 25.1% and 24.7% for the years ended December 31, 2023 and 2022, respectively. The increase in general and administrative expenses was primarily due to acquisitions that resulted in a $2.4 million increase in administrative employee wages for the year ended December 31, 2023. Home Health Segment For the Years Ended December 31, 2023 2022 Change Amount % of Segment Net Service Revenues Amount % of Segment Net Service Revenues Amount % (Amounts in Thousands, Except Percentages) Operating Results Net service revenues $ 56,778 100.0 % $ 42,841 100.0 % $ 13,937 32.5 % Cost of services revenues 35,749 63.0 29,808 69.6 5,941 19.9 Gross profit 21,029 37.0 13,033 30.4 7,996 61.4 General and administrative expenses 14,017 24.7 10,251 23.9 3,766 36.7 Segment operating income $ 7,012 12.3 % $ 2,782 6.5 % $ 4,230 152.0 % Business Metrics (Actual Numbers) Locations at period end 24 13 New admissions * (1) 16,251 14,452 1,799 12.4 % Recertifications * (2) 9,030 5,838 3,192 54.7 Total volume * (3) 25,281 20,290 4,991 24.6 Visits * (4) 344,919 293,381 51,538 17.6 % Organic growth - Revenue * (5) (7.1 ) % 8.2 % (1) Represents new patients during the period. (2) A home health certification period begins with a start of care visit and continues for 60 days. If at the end of the initial certification, the patient continues to require home health services, a recertification is required. This represents the number of recertifications during the period. (3) Total volume is total admissions and total recertifications in the period. (4) Represents number of services to patients in the period. (5) Revenue organic growth and new admissions organic growth reflect the change in year-over-year revenue and new admissions for the same store base. We define the same store base to include those stores open for at least 52 full weeks. These measures highlight the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures. 46 Table of Contents * Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results, identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance indicators used by other companies. Home health generates revenue by providing home health services on a short-term, intermittent or episodic basis to individuals, generally to treat an illness or injury. Net service revenues from Medicare accounted for 72.3% and 73.5% and managed care organizations accounted for 22.2% and 20.3% for the years ended December 31, 2023 and 2022, respectively. Home health services provided to Medicare beneficiaries are paid under the Medicare HHPPS, which uses national, standardized 30-day period payment rates for periods of care. CMS uses the PDGM as the case-mix classification model to place periods of care into payment categories, classifying patients based on clinical characteristics. An outlier adjustment may be paid for periods of care in which costs exceed a specific threshold amount. Net service revenues increased by $13.9 million for the year ended December 31, 2023 compared to 2022. Total visits increased for the year ended December 31, 2023, mainly attributed to the acquisition of Tennessee Quality Care on August 1, 2023 and the full-year effect in 2023 of the acquisition of Apple Home on October 1, 2022. Gross profit, expressed as a percentage of net service revenues, was 37.0% and 30.4% for the years ended December 31, 2023 and 2022, respectively. The increase in gross profit as a percentage of net service revenues was due to a decrease of 6.6% in direct payroll expense as a percentage of net service revenues. The home health segment’s general and administrative expenses consist of administrative employee wages, taxes and benefit costs, rent, information technology and office expenses. General and administrative expenses, expressed as a percentage of net service revenues, was 24.7% and 23.9% for the years ended December 31, 2023 and 2022, respectively. The increase in general and administrative expenses was primarily due to acquisitions that resulted in a $3.1 million increase in administrative employee wages, taxes and benefit costs and a $0.3 million increase in rent expenses for the year ended December 31, 2023. Non-GAAP Financial Measures Adjusted EBITDA is a non-GAAP measure that has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results of operations as reported under generally accepted accounting principles in the United States (“GAAP”). The financial results presented in accordance with U.S. GAAP and a reconciliation of this non-GAAP measure included within this Annual Report on Form 10-K should be carefully evaluated. We define Adjusted EBITDA as earnings before interest expense, other non-operating income, taxes, depreciation, amortization, acquisition expenses, stock-based compensation expense, restructure expenses and other non-recurring costs, loss on the sale of assets and retroactive rate increases from New York. The Company defined adjusted EBITDA to exclude net COVID expenses arising from the pandemic from the second quarter of 2020 to the first quarter of 2021. Adjusted EBITDA is a performance measure used by management that is not calculated in accordance with GAAP. It should not be considered in isolation or as a substitute for net income, operating income or any other measure of financial performance calculated in accordance with GAAP. Additionally, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Management believes that Adjusted EBITDA is useful to investors, management and others in evaluating our operating performance for the following reasons: • By reporting Adjusted EBITDA, we believe that we provide investors with insight and consistency in our financial reporting and present a basis for comparison of our business operations between current, past and future periods. We believe that Adjusted EBITDA allows management, investors and others to evaluate and compare our core operating results, including return on capital and operating efficiencies, from period to period, by removing the impact of our capital structure (interest expense), asset base (amortization and depreciation), tax consequences, stock-based compensation expense and other identified adjustments. • We believe that Adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance of other public companies. 47 Table of Contents • We recorded stock-based compensation expense of $10.3 million, $10.6 million and $9.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. By comparing our Adjusted EBITDA in different periods, our investors can evaluate our operating results without stock-based compensation expense, which is a non-cash expense which we believe is not a key measure of our operations. In addition, management has chosen to use Adjusted EBITDA as a performance measure because we believe that the amount of non-cash expenses, such as depreciation, amortization and stock-based compensation expense, may not directly correlate to the underlying performance of our business operations, and because such expenses can vary significantly from period to period as a result of new acquisitions, full amortization of previously acquired tangible and intangible assets or the timing of new stock-based awards, as the case may be. This facilitates internal comparisons to historical operating results, as well as external comparisons to the operating results of our competitors and other companies in the personal care services industry. Because management believes Adjusted EBITDA is useful as a performance measure, management uses Adjusted EBITDA: • as one of our primary financial measures in the day-to-day oversight of our business to allocate financial and human resources across our organization, to assess appropriate levels of marketing and other initiatives and to generally enhance the financial performance of our business; • in the preparation of our annual operating budget, as well as for other planning purposes on a quarterly and annual basis, including allocations in order to implement our growth strategy, to determine appropriate levels of investments in acquisitions and to endeavor to achieve strong core operating results; • to evaluate the effectiveness of business strategies, such as the allocation of resources, the mix of organic growth and acquisitive growth and adjustments to our payor mix; • as a means of evaluating the effectiveness of management in directing our core operating performance, which we consider to be performance that can be affected by our management in any particular period through their allocation and use of resources that affect our underlying revenue and profit-generating operations during that period; • for the valuation of prospective acquisitions, and to evaluate the effectiveness of integration of past acquisitions into our Company; and • in communications with our Board concerning our financial performance. Although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations include: • Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not reflect interest expense or interest income; • Adjusted EBITDA does not reflect cash requirements for income taxes; • although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements; • Adjusted EBITDA does not reflect any acquisition expenses; • Adjusted EBITDA does not reflect any stock-based compensation; • Adjusted EBITDA does not reflect any restructure expense and other non-recurring costs; • Adjusted EBITDA does not reflect any net COVID-19 expense arising from the pandemic from the second quarter of 2020 to the first quarter of 2021; and • other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Management compensates for these limitations by using GAAP financial measures in addition to Adjusted EBITDA in managing the day-to-day and long-term operations of our business. We believe that consideration of Adjusted EBITDA, together with a careful review of our GAAP financial measures, is the most informed method of analyzing our Company. 48 Table of Contents The following table sets forth a reconciliation of net income, the most directly comparable GAAP measure, to Adjusted EBITDA: For the Years Ended December 31, 2023 2022 2021 (Amounts In Thousands) Reconciliation of net income to Adjusted EBITDA (a): Net income $ 62,516 $ 46,025 $ 45,126 Interest expense, net 9,630 8,566 5,538 Impact of retroactive New York rate increase (868 ) — — Income tax expense 18,810 14,146 15,272 Depreciation and amortization 14,126 14,060 14,494 Acquisition expenses 6,220 7,657 7,306 Stock-based compensation expense 10,319 10,625 9,434 Restructure expense and other related costs 269 461 1,057 COVID-19 expense, net (b) — — (591 ) (Gain) loss on sale of assets (2 ) (60 ) 25 Adjusted EBITDA* $ 121,020 $ 101,480 $ 97,661 (a) The selected historical Consolidated Statements of Income data for the fiscal years ended December 31, 2023, 2022 and 2021, were derived from our audited Consolidated Financial Statements. (b) Excludes net COVID expenses arising from the pandemic from the second quarter of 2020 to the first quarter of 2021. * Management deems Adjusted EBITDA to be a key performance indicator. Management uses key performance indicators to monitor our performance, both in our existing operations and acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results, identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance indicators used by other companies. Liquidity and Capital Resources Overview Our primary sources of liquidity are cash on hand and cash from operations and borrowings under our credit facility. At December 31, 2023 and 2022, we had cash balances of $64.8 million and $80.0 million, respectively. Cash flows from operating activities represent the inflow of cash from our payor clients and the outflow of cash for payroll and payroll taxes, operating expenses, interest and taxes. We drew approximately $110.0 million on the revolver portion of our credit facility to fund, in part, the purchase price paid in connection with the Tennessee Quality Care acquisition, and repaid $118.5 million under our revolving credit facility in 2023. At December 31, 2023, we had a total of $126.4 million in revolving loans, with an interest rate of 7.21% outstanding on our credit facility. After giving effect to the amounts drawn on our credit facility, approximately $8.0 million of outstanding letters of credit and borrowing limits based on an advance multiple of Adjusted EBITDA (as defined in the Credit Agreement), we had $470.0 million of capacity and $335.6 million available for borrowing under our credit facility. At December 31, 2022, we had a total of $134.9 million of revolving loans, with an interest rate of 6.13%. During the year ended December 31, 2022, the Company drew approximately $47.0 million on the revolver portion of its credit facility to fund, in part, the Journey Care and Apple Home acquisitions on February 1, 2022 and October 1, 2022, respectively. Our credit facility requires us to maintain a total net leverage ratio not exceeding 3.75:1.00. At December 31, 2023, we were in compliance with our financial covenants under the Credit Agreement. Although we believe our liquidity position remains strong, we can provide no assurance that we will remain in compliance with the covenants in our Credit Agreement, and in the future, it may prove necessary to seek an amendment with the bank lending group under our credit facility. Additionally, there can be no assurance that we will be able to raise additional funds on terms acceptable to us, if at all. 49 Table of Contents Borrowing Capacity The Company’s Credit Agreement provides for a $600.0 million revolving credit facility and a $125.0 million incremental loan facility, which incremental loan facility may be for term loans or an increase to the revolving loan commitments. The maturity of the credit facility is July 30, 2026. Pursuant to the Third Amendment to Amended and Restated Credit Agreement dated as of April 26, 2023, the Company amended its credit facility to replace the London Inter-Bank Offered Rate (“LIBOR”) with the secured overnight financing rate as administered by the Federal Reserve Bank of New York (“SOFR”) as the benchmark reference rate for loans under its credit facility. The transition to SOFR did not and is not expected to have a material impact on the Company’s results of operations or liquidity. See Note 7, Long-Term Debt, to the Notes to Consolidated Financial Statements for additional details of our long-term debt. Current Macroeconomic Conditions and COVID-19 Relief Funding Economic conditions in the United States continue to be challenging in various respects. For example, the United States economy continues to experience significant inflationary pressures, elevated interest rates, challenging labor market conditions, and disruptions to supply networks. Any resulting economic downturn would pose a risk to states’ revenues, which in turn could affect our reimbursements and collections received for services rendered. Depending on the severity and length of any potential economic downturn, states could face significant fiscal challenges and revise their revenue forecasts and adjust their budgets, and sales tax collections and income tax withholdings could be depressed in fiscal year 2023 (which began July 1 in most states), and, potentially, future fiscal years. In this regard, Illinois, New Mexico and New York, our top three personal care markets, previously revised revenue estimates downward for the 2022 fiscal year as the result of earlier negative economic conditions arising from the pandemic. Also, in response to reduced revenues, the state of New York authorized the issuance of short-term bonds and implemented uniform reductions to Medicaid payments, applicable to home health and personal care services (hospice services were exempt). These reductions took effect for dates of service on or after April 2, 2020, and were eliminated effective April 1, 2022. COVID-19 Provider Relief Fund In response to the COVID-19 pandemic, the federal government took various measures intended to assist healthcare providers, including authorizing several forms of financial relief. One of the primary sources of relief for eligible healthcare providers was the Provider Relief Fund, distributions from which were intended to compensate healthcare providers for lost revenues and healthcare related expenses incurred in response to the COVID-19 pandemic. Recipients were not required to repay funding received, provided that they attested to and complied with certain terms and conditions. In November 2020, the Company received grants in an aggregate principal amount of $13.7 million from the Provider Relief Fund, for which we had previously applied. The Company utilized the remaining $12.3 million of these funds during the year ended December 31, 2021, for healthcare related expenses, including retention payments attributable to COVID-19 that were unreimbursed by other sources. We were required to properly and fully document the use of such funds in reports to HHS. The Company documented the use of such funds in reports to HHS, as required, and submitted the reports to HHS prior to the deadline of March 31, 2022. During the year ended December 31, 2022, we submitted an unmodified audit report to HHS in accordance with Generally Accepted Government Auditing Standards, as required for commercial organizations that received and expended total awards of $750,000 or more. Payroll tax deferral The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) also provides for certain federal income and other tax changes, including allowing for the deferral of the employer portion of Social Security payroll taxes through December 31, 2020. The payroll tax deferral requires that the deferred payroll taxes be paid over two years, with half of the eligible deferred amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Company received a cash benefit of approximately $7.1 million related to the deferral of employer payroll taxes for 2020 under the CARES Act, for the period April 2, 2020 through June 30, 2020. Effective July 1, 2020, the Company began paying its deferred portion of employer Social Security payroll taxes and repaid $4.1 million and $3.0 million as of December 31, 2022 and 2021, respectively. 50 Table of Contents ARPA Spending Plans The ARPA became law on March 11, 2021 and provides for $350 billion in relief funding for eligible state, local, territorial, and Tribal governments to mitigate the fiscal effects of the COVID-19 public health emergency. Additionally, the law provided for a 10 percentage point increase in federal matching funds for Medicaid HCBS from April 1, 2021, through March 31, 2022, provided the state satisfied certain conditions. States are permitted to use the state funds equivalent to the additional federal funds through March 31, 2025. States must use the monies attributable to this matching fund increase to supplement, not supplant, their level of state spending for the implementation of activities enhanced under the Medicaid HCBS in effect as of April 1, 2021. HCBS spending plans for the additional matching funds vary by state, but common initiatives in which the Company is participating include those aimed at strengthening the provider workforce (e.g., efforts to recruit, retain, and train direct service providers). The Company is required to properly and fully document the use of such funds in reports to the state in which the funds originated. Funds may be subject to recoupment if not expended or if they are expended on non-approved uses. The Company received state funding provided by the ARPA in an aggregate amount of $3.7 million and $23.4 million for the years ended December 31, 2023 and 2022, respectively. The Company recorded revenue of $0.3 million and $1.9 million and related cost of service revenues of $0.1 million and $1.5 million for certain states that met the revenue recognition criteria for the years ended December 31, 2023 and 2022, respectively. The Company deferred the remaining $3.4 million and $21.5 million, which was received from states with specific spending plans and reporting requirements, for the years ended December 31, 2023 and 2022, respectively. The Company utilized $10.5 million and $8.6 million of these funds during the years ended December 31, 2023 and 2022, respectively, primarily for caregivers and adding support to recruiting and retention efforts. The deferred portion of ARPA funding was $5.8 million and $12.9 million for the years ended December 31, 2023 and 2022, respectively, which is included within Government stimulus advances on the Company’s Consolidated Balance Sheets. Medicare sequester The CARES Act and related legislation also include other provisions offering financial relief, including, for example, temporarily suspending the Medicare sequester, which would have otherwise reduced payments to Medicare providers by 2% as required by the Budget Control Act of 2011. The sequestration adjustment resumed with a 1% reduction beginning April 1, 2022, and a 2% reduction beginning July 1, 2022. These sequestration cuts have been extended through April 2032. In our hospice segment, Medicare sequester relief resulted in an increase in net service revenues of $0.0 million and $1.4 million for the years ended December 31, 2023 and 2022, respectively. In our home health segment, Medicare sequester relief resulted in an increase in net service revenues of $0.0 million and $0.3 million, for the years ended December 31, 2023 and 2022, respectively. However, the ARPA increased the federal budget deficit in a manner that triggers an additional statutorily mandated sequestration under the PAYGO Act. As a result, an additional Medicare payment reduction of up to 4% was required to take effect in January 2022. However, Congress has delayed implementation of this payment reduction until 2025. We cannot currently determine if, or to what extent, our business, results of operations, financial condition or liquidity will ultimately be impacted by mandated sequestration triggers under the PAYGO Act, or if or when the mandated sequestration will occur. Further, we anticipate that the federal deficit will continue to place pressure on government healthcare programs, and it is possible that future deficit reduction legislation will impose additional Medicare spending reductions. Cash Flows The following table summarizes historical changes in our cash flows for the years ended December 31, 2023, 2022 and 2021: 2023 2022 2021 (Amounts in Thousands) Net cash provided by operating activities $ 112,247 $ 105,110 $ 39,488 Net cash used in investing activities (119,236 ) (106,590 ) (42,015 ) Net cash (used in) provided by financing activities (8,181 ) (87,454 ) 26,344 Net cash provided by operating activities was $112.2 million for the year ended December 31, 2023, compared to $105.1 million in 2022 primarily due to the timing of receipts on accounts receivable and the timing of government stimulus funds. The changes in accounts receivable were primarily related to the growth in revenue and a decrease in days sales outstanding (“DSO”) during the year ended December 31, 2023 compared to 2022, as described below. The related receivables due from the Illinois Department on Aging represented 25.8% and 18.0% of net accounts receivable at December 31, 2023 and 2022, respectively. 51 Table of Contents Net cash used in investing activities was $119.2 million for the year ended December 31, 2023, compared to $106.6 million for the year ended December 31, 2022. Our investing activities for the year ended December 31, 2023 consisted of $1.0 million primarily for the acquisition of CareStaff, $111.2 million for the acquisition of Tennessee Quality Care and $9.4 million in purchases of property and equipment primarily related to technology infrastructure. Our investing activities for the year ended December 31, 2022 primarily consisted of $86.6 million primarily for the acquisition of JourneyCare, $12.7 million for the acquisition of Apple Home and $8.3 million in purchases of property and equipment primarily related to technology infrastructure. Net cash used in financing activities was $8.2 million for the year ended December 31, 2023 compared to $87.4 million for the year ended December 31, 2022. Our financing activities for the year ended December 31, 2023 included borrowings of $110.0 million on the revolver portion of our credit facility to fund two acquisitions and the payment of $118.5 million of our revolving loans. Our financing activities for the year ended December 31, 2022 included borrowings of $47.0 million on the revolver portion of our credit facility to fund two acquisitions and the payment of $137.0 million of our revolving loans. Outstanding Accounts Receivable Gross accounts receivable as of December 31, 2023 and 2022 were $117.8 million and $127.1 million, respectively. Outstanding accounts receivable, net of the allowance for credit losses, decreased by $10.0 million as of December 31, 2023 compared to December 31, 2022. The open receivable balance from the Illinois Department on Aging, the largest payor program for the Company’s Illinois personal care operation, increased by $7.3 million from $22.5 million as of December 31, 2022 to $29.8 million as of December 31, 2023. Our collection procedures include review of account aging and direct contact with our payors. We have historically not used collection agencies. An uncollectible amount is written off to the allowance account after reasonable collection efforts have been exhausted. We calculate our DSO by taking the accounts receivable outstanding, net of the allowance for credit losses, divided by the net service revenues for the last quarter, multiplied by the number of days in that quarter. Our DSOs were 39 days and 45 days at December 31, 2023 and 2022, respectively. The DSOs for our largest payor, the Illinois Department on Aging, at December 31, 2023 and 2022 were 50 days and 42 days, respectively. Off-Balance Sheet Arrangements As of December 31, 2023, we did not have any off-balance sheet guarantees or arrangements with unconsolidated entities. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements prepared in accordance with GAAP. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expense and related disclosures. Our significant accounting policies are described in Note 1 to the Notes to Consolidated Financial Statements. An accounting policy is deemed to be critical if it involves a significant level of estimation uncertainty and has had or is reasonably likely to have a material impact on our financial condition or results of operations. We base our estimates and judgments on historical experience and other sources and factors that we believe to be reasonable under the circumstances, however, actual results may differ from these estimates. Our critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below. 52 Table of Contents Revenue Recognition, Accounts Receivable and Allowances Net service revenue is recognized at the amount that reflects the consideration the Company expects to receive in exchange for providing services directly to consumers. Receipts are from federal, state and local governmental agencies, managed care organizations, commercial insurers and private consumers for services rendered. The Company assesses the consumers’ ability to pay at the time of their admission based on the Company’s verification of the customer’s insurance coverage under the Medicare, Medicaid, and other commercial or managed care insurance programs. Laws and regulations governing the governmental programs in which we participate are complex and subject to interpretation. Net service revenues related to uninsured accounts, or self-pay, is recorded net of implicit price concessions estimated based on historical collection experience to reduce revenue to the estimated amount we expect to collect. Amounts collected from all sources may be less than amounts billed due to implicit price concessions resulting from client eligibility issues, insufficient or incomplete documentation, services at levels other than authorized, pricing differences and other reasons unrelated to credit risk. We monitor our net service revenues and collections from these sources and record any necessary adjustment to net service revenues based upon management’s assessment of historical write offs and expected net collections, business and economic conditions, trends in federal, state and private employer healthcare coverage and other collection indicators. Accounts receivable is reduced to the amount expected to be collected in future periods for services rendered to customers prior to the balance sheet date. Management estimates the value of accounts receivable, net of allowances for implicit price concessions based upon historical experience and other factors, including an aging of accounts receivable, evaluation of expected adjustments, past adjustments and collection experience in relation to amounts billed, current contract and reimbursement terms, shifts in payors and other relevant information. Collection of net service revenues we expect to receive is normally a function of providing complete and correct billing information to the payors within the various filing deadlines. The evaluation of these historical and other factors involves complex, subjective judgments impacting the determination of the implicit price concession assumption. In addition, we compare our cash collections to recorded net service revenues and evaluate our historical allowances, including implicit price concessions, based upon the ultimate resolution of the accounts receivable balance. Goodwill and Intangible Assets Under business combination accounting, assets and liabilities are generally recognized at their fair values and the difference between the consideration transferred, excluding transaction costs, and the fair values of the assets and liabilities is recognized as goodwill. The Company’s significant identifiable intangible assets consist of customer and referral relationships, trade names and trademarks and state licenses. The Company uses various valuation techniques to determine initial fair value of its intangible assets, including relief-from-royalty, income approach, discounted cash flow analysis, and multi-period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, we are required to make estimates and assumptions about future market growth and trends, forecasted revenue and costs, expected periods over which the assets will be utilized, appropriate discount rates and other variables. The Company estimates the fair values of the trade names using the relief-from-royalty method, which requires assumptions such as the long-term growth rates of future revenues, the relief from royalty rate for such revenue, the tax rate and the discount rate. The Company estimates the fair value of existing indefinite-lived state licenses based on a blended approach of the replacement cost method and cost savings method, which involves estimating the total process costs and opportunity costs to obtain a license, by estimating future earnings before interest and taxes and applying an estimated discount rate, tax rate and time to obtain the license. The Company estimates the fair value of existing finite-lived state licenses based on a method of analyzing the definite revenue streams with the license and without the license, which involves estimating revenues and expenses, estimated time to build up to a current revenue base, which is market specific, and the non-licensed revenue allocation, revenue growth rates, discount rate and tax amortization benefits. The Company estimates the fair value of customer and referral relationships based on a multi-period excess earnings method, which involves identifying revenue streams associated with the assets, estimating the attrition rates based upon historical financial data, expenses and cash flows associated with the assets, contributory asset charges, rates of return for specific assets, growth rates, discount rate and tax amortization benefits. The Company estimates the fair value of non-competition agreements based on a method of analyzing the factors to compete and factors not to compete, which involves estimating historical financial data, forecasted financial statements, growth rates, tax amortization benefit, discount rate, review of factors to compete and factors not to compete as well as an assessment of the probability of successful competition for each non-competition agreement. 53 Table of Contents As of December 31, 2023 and 2022, goodwill was $663.0 million and $582.8 million, respectively, included in our Consolidated Balance Sheets. The carrying value of our goodwill is the excess of the purchase price over the fair value of the net assets acquired from various acquisitions. In accordance with ASC Topic 350, Goodwill and Other Intangible Assets , goodwill and intangible assets with indefinite useful lives are not amortized. We test goodwill for impairment at the reporting unit level on an annual basis, as of October 1, or whenever potential impairment triggers occur, such as a significant change in business climate or regulatory changes that would indicate that an impairment may have occurred. We may elect to use a qualitative test to determine whether impairment has occurred, focused on various factors including macroeconomic conditions, market trends, specific reporting unit financial performance and other entity specific events, to determine if it is more likely than not that the fair value of a reporting unit exceeds its carrying value, including goodwill. We may also bypass the qualitative assessment and perform a quantitative test. Additionally, it is our policy to update the fair value calculation of our reporting units and perform the quantitative goodwill impairment test on a periodic basis. The quantitative goodwill impairment test involves comparing the fair value of a reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then goodwill is not impaired. If the fair value of a reporting unit is less than its carrying value, then goodwill is impaired to the extent of the difference. For the years ended December 31, 2023, 2022 and 2021, we performed the quantitative analysis to evaluate whether an impairment occurred. Since quoted market prices for our reporting units are not available, we rely on widely accepted valuation techniques to determine fair value, including discounted cash flow and market multiple approaches, which capture both the future income potential of the reporting unit and the market behaviors and actions of market participants in the industry that includes the reporting unit. These types of models require us to make assumptions and estimates regarding future cash flows, industry-specific economic factors and the profitability of future business strategies. The discounted cash flow model uses a projection of estimated operating results and cash flows that are discounted using a weighted average cost of capital. The market multiple model estimates fair value based on market multiples of earnings before interest, taxes and depreciation and amortization. Under the discounted cash flow model, the projection uses management’s best estimates of economic and market conditions over the projected period for each reporting unit using significant assumptions such as revenue growth rates, operating margins and the weighted-average cost of capital. Based on the totality of the information available, we concluded that it was more likely than not that the estimated fair values of our reporting units were greater than their carrying values. Consequently, we concluded that there were no impairments for the years ended December 31, 2023 , 2022 or 2021. For the fiscal year 2023 impairment tests, the fair value of the reporting units exceeded their respective carrying values (commonly referred to as “headroom”) by at least 100% in the personal care and in the home health reporting unit, and 20% in the hospice reporting unit. The headroom percentage for the hospice reporting unit decreased as compared to the prior year primarily due to the result of labor shortages with rising costs adding pressure to gross margin and patient volumes have not rebounded as quickly following the acute phase of the COVID-19 pandemic as previously anticipated. We performed a sensitivity analysis on this reporting unit and determined that a more than 1.2% increase to the weighted- average cost of capital, the most sensitive assumption used in the estimate, would result in the fair value being lower than the carrying value. The Company bases its fair value estimates on assumptions management believes to be reasonable but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. As of December 31, 2023 and 2022, intangibles, net of accumulated amortization, was $92.0 million and $72.2 million, respectively, included in our Consolidated Balance Sheets. Our identifiable intangible assets consist of customer and referral relationships, trade names, trademarks, state licenses and non-competition agreements. Definite-lived intangible assets are amortized using straight-line and accelerated methods based upon the estimated useful lives of the respective assets, which range from one to twenty-five years, and assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Customer and referral relationships are amortized systematically over the periods of expected economic benefit, which range from five to ten years. We would recognize an impairment loss when the estimated future non-discounted cash flows associated with the intangible asset are less than the carrying value. An impairment charge would then be recorded for the excess of the carrying value over the fair value. We estimate the fair value of these intangible assets using the income approach. In accordance with ASC Topic 350, Goodwill and Other Intangible Assets , intangible assets with indefinite useful lives are not amortized. We test intangible assets with indefinite useful lives for impairment at the reporting unit level on an annual basis, as of October 1, or whenever potential impairment triggers occur, such as a significant change in business climate or regulatory changes that would indicate that an impairment may have occurred. No impairment charge was recorded for the years ended December 31, 2023, 2022 or 2021. Amortization of intangible assets is reported in the statement of income caption, “Depreciation and amortization” and not included in the income statement caption cost of service revenues. Recent Accounting Pronouncements Refer to Note 1 to the Notes to Consolidated Financial Statements for further discussion. 54 Table of Contents Standby Letters of Credit We had outstanding letters of credit of $8.0 million at December 31, 2023. These standby letters of credit benefit our third-party insurer for our high deductible workers’ compensation insurance program. The amount of the letters of credit is negotiated annually in conjunction with the insurance renewals. Material Cash Requirements We believe that our existing cash on hand, our anticipated cash flows from operations and amounts available under our Credit Agreement will be sufficient to fund our anticipated operating and investing needs for the next 12 months and for the foreseeable future thereafter. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the effects of risks detailed in Part I, Item 1A—”Risk Factors” Debt As of December 31, 2023, the Company had outstanding debt on our revolving loan under our credit facility of $126.4 million, payable on July 30, 2026. Interest payments associated with the debt aggregate to $27.1 million, with $10.8 million payable within 12 months. As described in Note 7 to the Notes to Consolidated Financial Statements, interest on borrowings under the revolving loan are variable. The calculated interest payable amounts use actual rates available through January 2024 and assumes the January rates of 7.21%, respectively, for all future interest payable on the revolving loans. See Note 7, Long-Term Debt, to the Notes to Consolidated Financial Statements for additional details of our long-term debt. Leases The Company has lease arrangements for local branches, our corporate headquarters and certain equipment. As of December 31, 2023, the Company had fixed lease payment obligations aggregating to $61.2 million, with $13.8 million payable within 12 months. See Note 2, Leases, to the Notes to Consolidated Financial Statements for additional details of our leases. Impact of Inflation The United States has recently experienced high rates of inflation. These inflationary conditions have resulted in, and may continue to result in, increased operating costs, particularly as the result of increased wages we have paid and may continue to pay our caregivers and other personnel and our ability to attract and retain personnel. Increased price levels might allow us to increase our fees to private pay clients, but our ability to realize rate increases from government programs might be limited despite inflation. Inflation may also raise our financing costs. For additional information regarding the risks to us from the current competitive labor market and increasing labor costs, see Item 1A—Risk Factors — “ We may not be able to attract and retain qualified personnel or we may incur increased costs in doing so. ” 55 Table of Contents ITEM 7A. QUANTITATIVE AND QUALITA TIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk associated with changes in interest rates on our variable rate long-term debt. As of December 31, 2023, we had outstanding borrowings of approximately $126.4 million on our credit facility, all of which was subject to variable interest rates. As of December 31, 2022, we had outstanding borrowings of approximately $134.9 million on our credit facility, all of which was subject to variable interest rates. If the variable rates on this debt were 100 basis points higher than the rate applicable to the borrowing during the year ended December 31, 2023, our net income would have decreased by $1.0 million, or $0.06 per diluted share. We do not currently have any derivative or hedging arrangements, or other known exposures, to changes in interest rates. ITEM 8. FINANCIAL STATEMEN TS AND SUPPLEMENTARY DATA Our Consolidated Financial Statements together with the related Notes to Consolidated Financial Statements and the report of our independent registered public accounting firm, are set forth on the pages indicated in Part IV, Item 15—”Exhibits and Financial Statement Schedules.” ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOU NTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.