Gentiva Health Services Inc. (GTIV) reported first-quarter 2012 operating net earnings of 27 cents per share, at par with the Zacks Consensus Estimate, but lower than the year-ago quarter level of 57 cents per share. Operating net income of $9.1 million also compares unfavorably with $19.1 million in the year-ago quarter.
Operating earnings in the reported quarter exclude the impact of amendment fees and other related expenses incurred in connection with the amendment of Gentiva’s credit agreement, write-off of debt issuance costs in connection with the reduction of the company’s revolving credit facility, costs related to restructuring, legal settlements, acquisition and integration and various other one-time charges. However, the prior-year quarter excludes costs related to legal settlement, restructuring, acquisition and integration as well as refinancing related charges.
Including all one-time charges and income from discontinued operations, Gentiva posted net income of $4.8 million or 16 cents per share, declining substantially from the prior-year income of $13.5 million or 44 cents per share.
Gentiva’s net revenues declined 3.0% year over year to $435.7 million, marginally lagging the Zacks Consensus Estimate of $438.0 million. The year-over-year decline was largely due to the sale and closure of some branches coupled with a 4% decline in the Home Health Episodic segment revenue to $210.6 million, arising from reduced Medicare reimbursement rates. However, the Hospice segment revenue remained almost flat year over year at $195.7 million.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) attributable to continuing operations decreased 27% to $43.1 million from $59.0 million in the prior-year quarter. Adjusted EBITDA also excludes all the one-time charges that are excluded from adjusted operating income.
Gentiva exited the quarter with cash and cash equivalents of approximately $72.8 million compared with $164.9 million as of December 31, 2012 and outstanding debt of $938.1 million, down from $988.1 million at 2011 end. During the reported quarter, the company repaid $50 million on term loans. The company has repaid $166.9 million on its revolving credit facility and term loans since the completion of the Odyssey acquisition.
During the reported quarter, net cash used in operating activities was $34.7 million versus $2.7 million in the prior-year period, mainly due to higher DSO levels and a $25 million settlement payment pertaining to an investigation into the provision of continuous care services of its subsidiary, Odyssey HealthCare Inc. Free cash flow also deteriorated considerably to a negative $38.5 million from a negative $0.6 million in the first-quarter of 2011.
As of March 31, 2011, Gentiva had total assets of $1.46 billion and shareholders’ equity of $209.7 million, as compared with $1.53 billion and $202.5 million, respectively, as of December 31, 2011.
Stock Repurchase Update
On March 12, 2012, Gentiva announced a stock repurchase plan under Rule 10b5-1 of the U.S. Securities and Exchange Commission. The rule allows the company to override restrictions on buybacks imposed due to access to substantial non-public information or self-imposed trading black out periods.
Consequently, since March 31, 2012, the company repurchased 0.61 million shares for $5.0 million.
On March 6, 2012, Gentiva announced an amendment to its senior secured credit agreement to make the financial covenants more flexible for the remaining period of the credit facility. The amendment consists of alteration of the definition of consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) in the credit agreement.
Consequently, all expenses related to Gentiva’s cost realignment initiative, certain non-recurring cash charges and legal settlements will be added back during the calculation of consolidated EBITDA. Additionally, the maximum limit for the consolidated leverage ratio has been raised to 6.25:1.00 for the period starting January 1, 2012 to September 30, 2014 and 5.75:1.00 subsequently. The previous limit was 4.50:1.00 till September 30, 2012, 3.75:1.00 from October 1, 2012 to September 30, 2013 and 3.00:1.00 beyond that.
Further, the minimum interest coverage ratio requirement has been relaxed to 2.00:1.00 for the period from January 1, 2012 to June 30, 2013, 1.75:1.00 from July 1, 2013 to June 30, 2014 and 2.00:1.00 from July 1, 2014 onwards. Moreover, the definition of consolidated interest charges has been modified to exclude non-cash interest charges, which were previously included.
The amendment also hiked the interest rates on the term loans taken under the credit facility by 1.75% per annum. Thus, the new rates applicable on the Eurodollar term loans A and B are 6.25% and 6.50%, respectively.
Additionally, Gentiva is now allowed to make discounted prepayments of outstanding term loans through a Dutch auction process. Gentiva also repaid $50 million of its principal outstanding under term loans A and B on a pro rata basis and downsized its revolving credit facility to $110 million from $125 million.
Outlook for Fiscal 2012
Gentiva affirmed its net revenue guidance at $1.70–1.76 billion and adjusted income from continuing operations guidance at $1.00–1.20 per share. The adjusted income from continuing operations guidance excludes expenses associated with acquisitions, restructuring, integration activities, legal settlements and other special items but includes the impact of increased interest rates due to the amendment of its credit agreement.
Gentiva’s competitor, Amedisys Inc. (AMED) is expected to release its first-quarter 2012 earnings before the market opens on May 8, 2012.
Gentiva carries a Zacks #3 Rank, which translates into a short-term Hold rating.
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