Gentiva® Health Services Reports Second Quarter 2010 Results

Financial and Investor Contact:

Eric Slusser

770-951-6101

[email protected]

or

Brandon Ballew

770-221-6700

[email protected]

Media Contact:

Scott Cianciulli

Brainerd Communicators

212-986-6667

[email protected]

Gentiva Health Services, Inc. and Subsidiaries

Condensed Consolidated Financial Statements and Supplemental Information

(Unaudited)

(in 000's, except per share data)

2nd Quarter

Six Months

2010

2009

2010

2009

Statements of Income

Net revenues

$           297,099

$           284,838

$           594,230

$           561,202

Cost of services sold

135,249

134,144

275,839

268,025

Gross profit

161,850

150,694

318,391

293,177

Selling, general and administrative expenses

(125,535)

(120,529)

(264,771)

(240,033)

Gain (loss) on sale of assets, net

-

(85)

103

5,747

Interest income

650

817

1,314

1,618

Interest expense and other

(1,766)

(2,688)

(3,514)

(5,880)

Income from continuing operations before income taxes and equity in net earnings from affiliate

35,199

28,209

51,523

54,629

Income tax expense

(15,415)

(11,104)

(21,757)

(19,634)

Equity in net earnings of affiliate

439

263

763

541

Income from continuing operations

20,223

17,368

30,529

35,536

Discontinued operations, net of tax

(1,304)

(273)

(2,285)

(419)

Net income

$             18,919

$             17,095

$             28,244

$             35,117

Earnings per Share

Basic earnings per share:

  Income from continuing operations

$                 0.68

$                 0.60

$                 1.03

$                 1.22

  Discontinued operations, net of tax

(0.04)

(0.01)

(0.08)

(0.01)

  Net income

$                 0.64

$                 0.59

$                 0.95

$                 1.21

  Weighted average shares outstanding

29,770

28,959

29,715

28,952

Diluted earnings per share:

  Income from continuing operations

$                 0.66

$                 0.59

$                 1.00

$                 1.20

  Discontinued operations, net of tax

(0.04)

(0.01)

(0.08)

(0.01)

  Net income

$                 0.62

$                 0.58

$                 0.92

$                 1.19

  Weighted average shares outstanding

30,618

29,396

30,568

29,606

Condensed Balance Sheets

ASSETS

July 4, 2010

Jan 3, 2010

Cash and cash equivalents

$           191,066

$           152,410

Accounts receivable, net (A)

168,541

182,192

Deferred tax assets

14,300

17,205

Prepaid expenses and other current assets

25,358

13,904

Current assets held for sale

-

2,549

    Total current assets

399,265

368,260

Note receivable from affiliate

25,000

25,000

Investment in affiliate

25,100

24,336

Fixed assets, net

65,258

65,913

Intangible assets, net

253,085

251,793

Goodwill

304,080

299,534

Non-current assets held for sale

-

8,689

Other assets

26,943

24,410

   Total assets

$        1,098,731

$        1,067,935

LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable

$               5,967

$               8,982

Payroll and related taxes

24,701

23,463

Deferred revenue

40,149

36,359

Medicare liabilities

16,145

7,525

Obligations under insurance programs

44,037

41,636

Other accrued expenses

35,465

47,045

Current portion of long-term debt

-

5,000

    Total current liabilities

166,464

170,010

Long-term debt

232,000

232,000

Deferred tax liabilities, net

71,895

73,259

Other liabilities

23,602

21,503

Shareholders' equity

604,770

571,163

    Total liabilities and shareholders' equity

$        1,098,731

$        1,067,935

Common shares outstanding

29,754

29,480

(A) Accounts receivable, net included an allowance for doubtful accounts of $10.4 million and $9.3 million at July 4, 2010 and January 3, 2010, respectively.  Accounts receivable, net included $2.0 million at July 4, 2010 and $10.2 million at January 3, 2010 relating to discontinued operations; such receivables were retained by the Company following the disposition of the respiratory therapy and home medical equipment and infusion therapy businesses in February 2010.  

(in 000's)

Six Months

Condensed Statements of Cash Flows

2010

2009

OPERATING ACTIVITIES:

Net income

$             28,244

$             35,117

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization

8,807

11,145

Amortization of debt issuance costs

614

681

Provision for doubtful accounts

4,903

4,045

Equity-based compensation expense

3,191

3,466

Windfall tax benefits associated with equity-based compensation

(711)

(585)

Realized loss on auction rate securities

-

1,000

Gain on sale of assets, net

(169)

(5,747)

Equity in net earnings of affiliate

(763)

(541)

Deferred income tax expense

1,542

1,458

Changes in assets and liabilities, net of effects from acquisitions and dispositions:

Accounts receivable

8,748

(1,082)

Prepaid expenses and other current assets

(9,158)

(1,602)

Current liabilities

2,193

1,836

Other, net

538

271

Net cash provided by operating activities

47,979

49,462

INVESTING ACTIVITIES:

Purchase of fixed assets

(5,613)

(12,403)

Proceeds from sale of assets and businesses

8,796

5,619

Acquisition of businesses

(8,500)

(2,200)

Sale of short-term investments available-for-sale

-

2,550

Net cash used in investing activities

(5,317)

(6,434)

FINANCING ACTIVITIES:

Proceeds from issuance of common stock

5,612

5,910

Windfall tax benefits associated with equity-based compensation

711

585

Debt repayments

(5,000)

(14,000)

Repurchases of common stock

(4,985)

(4,813)

Repayment of capital lease obligations

(344)

(441)

Net cash used in financing activities

(4,006)

(12,759)

Net change in cash and cash equivalents

38,656

30,269

Cash and cash equivalents at beginning of period

152,410

69,201

Cash and cash equivalents at end of period

$           191,066

$             99,470

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Interest paid

$               3,219

$               5,172

Income taxes paid

$             25,054

$             15,831

(in 000's)

Supplemental Information

2nd Quarter

Six Months

2010

2009

2010

2009

Segment Information (1)

Net revenues  

Home Health

$           276,231

$           266,587

$           553,704

$           525,341

Hospice

20,868

18,251

40,526

35,861

Total net revenues

$           297,099

$           284,838

$           594,230

$           561,202

Operating contribution (4)

Home Health

$             60,924

$             51,608

$           105,616

$             97,321

Hospice

4,084

2,723

7,622

4,704

Total operating contribution

65,008

54,331

113,238

102,025

Corporate administrative expenses

(24,264)

(19,943)

(50,811)

(40,578)

Gain (loss) on sale of assets, net

-

(85)

103

5,747

Depreciation and amortization

(4,429)

(4,223)

(8,807)

(8,303)

Interest expense and other, net (5)

(1,116)

(1,871)

(2,200)

(4,262)

Income from continuing operations before income taxes and equity in net earnings from affiliate

$             35,199

$             28,209

$             51,523

$             54,629

2nd Quarter

Six Months

2010

2009

2010

2009

Net Revenues by Major Payer Source:

Medicare

 Home Health

$           207,376

$           194,140

$           415,052

$           380,210

 Hospice

19,396

16,714

37,593

33,016

 Total Medicare

226,772

210,854

452,645

413,226

Medicaid and local government

18,648

23,328

37,949

49,832

Commercial insurance and other:

  Paid at episodic rates

21,303

19,164

42,176

35,294

  Other

30,376

31,492

61,460

62,850

  Total commercial insurance and other

51,679

50,656

103,636

98,144

    Total net revenues

$           297,099

$           284,838

$           594,230

$           561,202

A reconciliation of Adjusted EBITDA to Net income follows:

2nd Quarter

Six Months

2010

2009

2010

2009

Adjusted EBITDA (2)

$             43,220

$             34,997

$             80,394

$             62,951

Gain (loss) on sale of assets, net

-

(85)

103

5,747

Restructuring, legal settlement and merger and acquisition costs (4)

(2,476)

(609)

(17,967)

(1,504)

EBITDA

40,744

34,303

62,530

67,194

Depreciation and amortization

(4,429)

(4,223)

(8,807)

(8,303)

Interest expense and other, net (5)

(1,116)

(1,871)

(2,200)

(4,262)

Income from continuing operations before income taxes and equity in net earnings from affiliate

35,199

28,209

51,523

54,629

Income tax expense (6)

(15,415)

(11,104)

(21,757)

(19,634)

Equity in net earnings of affiliate

439

263

763

541

Income from continuing operations

20,223

17,368

30,529

35,536

Discontinued operations, net of tax (3)

(1,304)

(273)

(2,285)

(419)

Net income

$             18,919

$             17,095

$             28,244

$             35,117

A reconciliation of Adjusted income from continuing operations to Income from continuing operations follows:

2nd Quarter

Six Months

2010

2009

2010

2009

Adjusted income from continuing operations

$             22,666

$             17,822

$             41,968

$             30,752

Gain (loss) on sale of assets, net

-

(85)

103

5,747

Restructuring, legal settlement and merger and acquisition costs

(2,476)

(609)

(17,967)

(1,504)

Tax impact of items excluded from income from continuing operations

33

240

6,425

541

Income from continuing operations

$             20,223

$             17,368

$             30,529

$             35,536

Notes:

1)

The Company's senior management evaluates performance and allocates resources based on operating contributions of the operating segments, which exclude corporate administrative expenses, depreciation, amortization, and interest expense (net), but include revenues and all other costs directly attributable to the specific segment.  

2)

Adjusted EBITDA, a non-GAAP financial measure, is defined as income before interest expense (net of interest income), income taxes, depreciation and amortization and excluding charges relating primarily to restructuring, legal settlements and merger and acquisition activities and gain (loss) on sales of assets, net. Management uses Adjusted EBITDA to evaluate overall performance and compare current operating results with other companies in the healthcare industry. Adjusted EBITDA should not be considered in isolation or as a substitute for net income, operating income or cash flow statement data determined in accordance with accounting principles generally accepted in the United States.  Because Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and is susceptible to varying calculations, it may not be comparable to similarly titled measures in other companies. Adjusted EBITDA presented in the Supplemental Information relates to the Company's continuing operations.

Adjusted income from continuing operations is defined as income from continuing operations, excluding charges relating to restructuring, legal settlements and merger and acquisition activities and gain (loss) on sales of assets, net of taxes.

3)

On February 1, 2010, the Company consummated the sale of its respiratory therapy and home medical equipment ("HME") and infusion therapy ("IV") businesses pursuant to an asset purchase agreement. Total consideration relating to the sale was approximately $16.4 million, consisting of (i) approximately $8.5 million of cash proceeds paid to the Company on the closing date, (ii) approximately $2.5 million of payments by the buyer associated with operating and capital lease obligations of the HME and IV businesses and (iii) approximately $5.4 million of cash in two escrow funds which will be released to the Company following the one year anniversary date of closing based on the achievement of certain post-closing cash collection targets and the resolution of certain post-closing liabilities. In connection with the transaction, the Company retained net accounts receivable of approximately $10 million and liabilities of approximately $3 million associated with the HME and IV businesses.

The financial results of these two operating segments are reported as discontinued operations in the accompanying condensed consolidated financial statements.  HME and IV net revenues, operating results and the gain on sale of business for the periods presented were as follows (dollars in thousands):

2nd Quarter

Six Months

2010

2009

2010

2009

Net revenues

$                    -

$             13,265

$               3,956

$             25,818

Loss before income taxes

$             (2,171)

$                (423)

$             (5,498)

$                (649)

Gain on sale of business

-

-

66

-

Income tax benefit

867

150

3,147

230

Discontinued operations, net of tax

$             (1,304)

$                (273)

$             (2,285)

$                (419)

The condensed balance sheet as of January 3, 2010 reflects the classification of certain assets of these businesses as held for sale and presents the debt repayment required for lenders approval of the transaction as a current liability.  

Capital expenditures related to discontinued operations amounted to $0.3 million for the first six months of 2010 and $1.4 million and $2.7 million for the second quarter and first six months of 2009, respectively. Depreciation and amortization expense relating to discontinued operations amounted to $1.4 million and $2.8  million for the second quarter and first six months of 2009, respectively. There was no depreciation and amortization expense for the 2010 periods as the assets were treated as held for sale as of January 3, 2010.  

4)

Operating contribution and EBITDA for the second quarter and first six months of 2010, included charges relating to restructuring, legal settlements and merger and acquisition activities of $2.5 million and $18.0 million, respectively, and $0.6 million and $1.5 million, respectively, for the corresponding periods in 2009.

For the second quarter of 2010, the Company recorded (i) a net reduction in charges related to legal settlements of $1.4 million which included a reduction of $1.8 million associated with the reclassification of the tax impact of the settlement charges recorded in the first quarter of 2010 and incremental legal fees of approximately $0.4 million, both relating to the settlement of the three-year old commercial contractual dispute involving the Company's former subsidiary, CareCentrix, (ii) restructuring costs of $1.9 million and (iii) merger and acquisition costs of $2.0 million, primarily relating to the pending acquisition of Odyssey HealthCare, Inc.

The charges for the six months of 2010 included (i) settlement costs and legal fees of $4.2 million related to a three-year old commercial contractual dispute involving the Company's former subsidiary, CareCentrix, (ii) incremental charges of $9.5 million in connection with an agreement in principle, subject to final approvals, between the Company and the Department of Health and Human Services, Office of the Inspector General to resolve the matters which were subject to a 2003 OIG subpoena relating to the Company's cost reports for the 1998 to 2000 periods, (iii) restructuring costs of $2.3 million and (iv) merger and acquisition costs of $2.0 million.

These charges were reflected as follows for segment reporting purposes (dollars in millions):

2nd Quarter

Six Months

2010

2009

2010

2009

Home Health

$                    -

$                   0.4

$                   9.5

$                   0.5

Hospice

0.1

-

0.1

-

Corporate administrative expenses

2.4

0.2

8.4

1.0

Total

$                   2.5

$                   0.6

$                 18.0

$                   1.5

5)

Interest expense and other, net for the second quarter and first six months of 2009 included realized losses on auction rate securities of approximately $0.6 million and $1.0 million, respectively.

6)

The Company's effective tax rate relating to its continuing operations was 42.9% and 41.6% for the second quarter and first six months of 2010, respectively as compared to 39.4% and 35.9% for the second quarter and first six months of 2009.  

During the second quarter of 2010, the Company reclassified the tax benefit associated with the CareCentrix legal settlement from income taxes to net legal settlement costs since the benefit is expected to be realized by and reimbursed to Gentiva from CareCentrix. Excluding the impact of the reclassification, the Company's effective tax rate relating to its continuing operations would have been 39.9% and 39.5% for the second quarter and first six months of 2010, respectively.

During the first six months of 2009, the Company recorded a pre-tax gain, net of transaction costs, of $5.7 million relating to the sale of several branch offices that specialized in pediatric home health care services.  There was no income tax expense relating to the gain on sale of assets in 2009 due to the utilization of a capital loss carryforward.  Excluding the impact of the non-recurring gain, the Company's effective tax rate relating to its continuing operations would have been 41.1% for the first six months of 2009.