XNAS:GTIV Gentiva Health Services Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File No. 1-15669

 

 

Gentiva Health Services, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-4335801

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3350 Riverwood Parkway, Suite 1400, Atlanta, GA 30339-3314

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (770) 951-6450

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer ¨    Accelerated filer x   Non-accelerated filer ¨   Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s Common Stock, as of May 2, 2012, was 30,433,403.

 

 

 


Table of Contents

INDEX

 

         Page No.  
PART I - FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets (Unaudited) – March 31, 2012 and December 31, 2011

     3   
 

Consolidated Statements of Comprehensive Income (Unaudited) – Three Months Ended March 31, 2012 and 2011

     4   
 

Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended March 31, 2012 and 2011

     5   
 

Notes to Consolidated Financial Statements (Unaudited)

     6-36   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37-52   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     52   

Item 4.

 

Controls and Procedures

     53   
PART II - OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     53   

Item 1A.

 

Risk Factors

     53   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     53   

Item 3.

 

Defaults Upon Senior Securities

     53   

Item 4.

 

Mine Safety Disclosures

     53   

Item 5.

 

Other Information

     53   

Item 6.

 

Exhibits

     54-55   
SIGNATURES      56   
EXHIBIT INDEX      57-58   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

     March 31, 2012     December 31, 2011  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 72,762      $ 164,912   

Accounts receivable, less allowance for doubtful accounts of $12,829 and $11,562 at March 31, 2012 and December 31, 2011, respectively

     312,768        290,589   

Deferred tax assets, net

     17,472        26,451   

Prepaid expenses and other current assets

     48,726        38,379   
  

 

 

   

 

 

 

Total current assets

     451,728        520,331   

Note receivable from CareCentrix

     25,000        25,000   

Fixed assets, net

     45,682        46,246   

Intangible assets, net

     211,802        214,874   

Goodwill

     641,669        641,669   

Other assets

     85,492        82,208   
  

 

 

   

 

 

 

Total assets

   $ 1,461,373      $ 1,530,328   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 9,193      $ 14,903   

Accounts payable

     15,943        12,613   

Payroll and related taxes

     32,679        42,027   

Deferred revenue

     39,797        34,114   

Medicare liabilities

     24,553        23,066   

Obligations under insurance programs

     56,598        54,976   

Accrued nursing home costs

     26,047        24,223   

Other accrued expenses

     53,080        89,270   
  

 

 

   

 

 

 

Total current liabilities

     257,890        295,192   

Long-term debt

     928,932        973,222   

Deferred tax liabilities, net

     30,050        32,498   

Other liabilities

     34,776        26,885   

Equity:

    

Gentiva shareholders’ equity:

    

Common stock, $0.10 par value; authorized 100,000,000 shares; issued 31,557,654 and 31,435,264 shares at March 31, 2012 and December 31, 2011, respectively

     3,158        3,144   

Additional paid-in capital

     390,125        387,803   

Retained (deficit)

     (173,291     (178,131

Treasury stock, 655,802 shares at both March 31, 2012 and December 31, 2011

     (12,878     (12,878
  

 

 

   

 

 

 

Total Gentiva shareholders’ equity

     207,114        199,938   

Noncontrolling interests

     2,611        2,593   
  

 

 

   

 

 

 

Total equity

     209,725        202,531   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,461,373      $ 1,530,328   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands, except per share amounts)

(Unaudited)

 

     For the Three Months Ended  
     March 31, 2012     March 31, 2011  

Net revenues

   $ 435,652      $ 451,109   

Cost of services sold

     232,861        230,756   
  

 

 

   

 

 

 

Gross profit

     202,791        220,353   

Selling, general and administrative expenses

     (173,707     (172,733

Interest income

     661        665   

Interest expense and other

     (22,163     (27,548
  

 

 

   

 

 

 

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

     7,582        20,737   

Income tax expense

     (2,529     (8,119

Equity in net earnings of CareCentrix

     —          554   
  

 

 

   

 

 

 

Income from continuing operations

     5,053        13,172   

Discontinued operations, net of tax

     —          447   
  

 

 

   

 

 

 

Net income

     5,053        13,619   

Less: Net income attributable to noncontrolling interests

     (213     (167
  

 

 

   

 

 

 

Net income attributable to Gentiva shareholders

   $ 4,840      $ 13,452   
  

 

 

   

 

 

 

Comprehensive income

   $ 5,053      $ 13,141   
  

 

 

   

 

 

 

Basic earnings per common share:

    

Income from continuing operations attributable to Gentiva shareholders

   $ 0.16      $ 0.43   

Discontinued operations, net of tax

     —          0.02   
  

 

 

   

 

 

 

Net income attributable to Gentiva shareholders

   $ 0.16      $ 0.45   
  

 

 

   

 

 

 

Weighted average shares outstanding

     30,724        30,127   
  

 

 

   

 

 

 

Diluted earnings per common share:

    

Income from continuing operations attributable to Gentiva shareholders

   $ 0.16      $ 0.42   

Discontinued operations, net of tax

     —          0.02   
  

 

 

   

 

 

 

Net income attributable to Gentiva shareholders

   $ 0.16      $ 0.44   
  

 

 

   

 

 

 

Weighted average shares outstanding

     30,959        30,789   
  

 

 

   

 

 

 

Amounts attributable to Gentiva shareholders:

    

Income from continuing operations

   $ 5,053      $ 13,172   

Discontinued operations, net of tax

     —          447   

Less: Net income attributable to noncontrolling interests

     (213     (167
  

 

 

   

 

 

 

Net income

   $ 4,840      $ 13,452   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     For the Three Months Ended  
     March 31, 2012     March 31, 2011  

OPERATING ACTIVITIES:

    

Net income

   $ 5,053      $ 13,619   

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     7,430        7,614   

Amortization and write-off of debt issuance costs

     3,686        6,418   

Provision for doubtful accounts

     2,262        2,581   

Equity-based compensation expense

     1,631        1,641   

Windfall tax benefits associated with equity-based compensation

     —          (194

Equity in net earnings of CareCentrix

     —          (554

Deferred income tax benefit

     6,531        2,754   

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

    

Accounts receivable

     (24,441     (20,449

Prepaid expenses and other current assets

     (10,347     2,489   

Accounts payable

     3,330        2,240   

Payroll and related taxes

     (9,348     21,248   

Deferred revenue

     5,683        4,787   

Medicare liabilities

     1,487        (1,859

Obligations under insurance programs

     1,622        (4,775

Accrued nursing home costs

     1,824        (3,203

Other accrued expenses

     (36,191     (31,712

Other, net

     5,083        76   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (34,705     2,721   
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Purchase of fixed assets

     (3,793     (3,317
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,793     (3,317
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Proceeds from issuance of common stock

     705        4,652   

Windfall tax benefits associated with equity-based compensation

     —          194   

Repayment of long-term debt

     (50,000     (3,438

Debt issuance costs

     (4,125     (13,457

Repayment of capital lease obligations

     (37     (76

Other

     (195     (239
  

 

 

   

 

 

 

Net cash used in financing activities

     (53,652     (12,364
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (92,150     (12,960

Cash and cash equivalents at beginning of period

     164,912        104,752   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 72,762      $ 91,792   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Interest paid

   $ 27,776      $ 32,318   

Income taxes paid

   $ 247      $ 613   

See notes to consolidated financial statements.

 

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Gentiva Health Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Background and Basis of Presentation

Gentiva Health Services, Inc. (“Gentiva” or the “Company”) provides home health services and hospice care throughout most of the United States. The Company’s continuing operations involve servicing its patients and customers through (i) its Home Health segment and (ii) its Hospice segment.

Effective October 14, 2011, the Company sold its homemaker services agency business in Illinois (“IDOA”) pursuant to an asset purchase agreement. The financial results of this business are presented as discontinued operations in the Company’s consolidated financial statements for the three months ended March 31, 2011. See Note 4 for additional information.

Effective September 10, 2011, the Company completed the sale of its Rehab Without Walls® business. The financial results of the Rehab Without Walls® business are presented as discontinued operations in the Company’s consolidated financial statements for the three months ended March 31, 2011. See Note 4 for additional information.

The accompanying interim consolidated financial statements are unaudited, and have been prepared by the Company using accounting principles consistent with those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments necessary for a fair statement of financial position, results of operations and cash flows for each period presented. Certain information and disclosures normally included in the consolidated statements of financial position, comprehensive income and cash flows prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements.

The Company’s consolidated financial statements include the accounts and operations of the Company and its subsidiaries in which the Company owns more than a 50 percent interest. Noncontrolling interests, which relate to the minority ownership held by third party investors in certain of the Company’s hospice programs, are reported below net income under the heading “Net income attributable to noncontrolling interests” in the Company’s consolidated statements of comprehensive income and presented as a component of equity in the Company’s consolidated balance sheets. All balances and transactions between the consolidated entities have been eliminated.

Note 2. Recent Accounting Pronouncements

On September 15, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, Intangibles—Goodwill and Other (Topic 350), which provides final guidance on goodwill impairment that gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step quantitative test and reduce costs. ASU 2011-08 gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a company concludes that this is the case, it must perform the two-step quantitative test. Otherwise, a company can skip the two-step quantitative test. The ASU is effective for the year beginning January 1, 2012 for the Company. The adoption of ASU 2011-08 did not have a material impact on the Company’s consolidated financial statements.

In July 2011, the FASB issued ASU 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities, which requires health care organizations that do not assess the collectibility of a receivable before recognizing revenue to present their provision for bad debt related to patient service revenue as a deduction from revenue on the face of the statement of comprehensive income. Enhanced disclosure about policies for recognizing revenue, assessing bad debts and qualitative and quantitative information about changes in the allowance for doubtful accounts also are required. The guidance is effective for the first quarter of 2012 for the Company. The adoption of ASU 2011-07 did not have a material impact on the Company’s consolidated financial statements as the Company currently evaluates the collectibility of a receivable before recognizing revenue.

 

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In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in shareholders’ equity. ASU 2011-05 requires that all items of net income, items of other comprehensive income and total comprehensive income be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is required for the quarter ending on or after March 31, 2012 and must be applied retrospectively. The Company adopted the updated presentation required by ASU 2011-05 as further amended by ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, for the Company’s March 31, 2012 consolidated financial statements and retrospectively applied the updated presentation to the March 31, 2011 consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 primarily clarifies existing concepts in accounting principles generally accepted in the United States of America. However, ASU 2011-04 requires new disclosures for Level 3 fair value measurements including quantitative information about significant unobservable inputs, the valuation process in place for all Level 3 measurements, and a narrative description of the sensitivity of recurring Level 3 fair value measurements to changes in the unobservable inputs used. In addition, ASU 2011-04 requires disclosure of transfers between Level 1 and Level 2 of the fair value hierarchy, the hierarchy classification for assets and liabilities whose fair value is disclosed only in the footnotes, and, if applicable, the reason nonfinancial assets measured at fair value are being used in a manner that differs from their highest and best use. ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated financial statements.

Note 3. Accounting Policies

Cash and Cash Equivalents

The Company considers all investments with a maturity date three months or less from their date of acquisition to be cash equivalents, including money market funds invested in U.S. Treasury securities, short-term treasury bills and commercial paper. Cash and cash equivalents also included amounts on deposit with several major financial institutions in excess of the maximum amount insured by the Federal Deposit Insurance Corporation. Management believes that these major financial institutions are viable entities.

The Company had operating funds of approximately $5.4 million and $5.0 million at March 31, 2012 and December 31, 2011, respectively, which relate exclusively to a non-profit hospice operation managed in Florida.

Investments

At March 31, 2012 and December 31, 2011, the Company had no remaining ownership interest in CareCentrix Holdings Inc. See Note 7 for additional information.

At March 31, 2012 and December 31, 2011, the Company had assets of $29.2 million and $26.3 million, respectively, held in a Rabbi Trust for the benefit of participants of the Company’s non-qualified defined contribution retirement plan. The corresponding amounts payable to the plan participants are equivalent to the underlying value of the assets held in the Rabbi Trust. Assets held in a Rabbi Trust and amounts payable to plan participants are classified in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets.

Debt Issuance Costs

The Company amortizes deferred debt issuance costs over the term of its credit agreement and senior notes. As of March 31, 2012 and December 31, 2011, the Company had unamortized debt issuance costs of $54.1 million and $53.7 million, respectively, recorded in other assets in the Company’s consolidated balance sheets. During the first quarter of 2012, the Company incurred incremental debt issuance costs of approximately $5.3 million in connection with an amendment to the Company’s Term Loan A, Term Loan B and revolving credit facilities. Approximately $4.1 million of these costs have been capitalized and are being amortized over the remaining life of the debt using an effective interest rate methodology. In addition, the Company wrote off prepaid debt issuance costs of approximately $0.5 million, which is reflected in interest expense in the Company’s consolidated statement of comprehensive income, associated with the reduction in the revolving credit facility.

 

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During the first quarter of 2011, the Company (i) incurred incremental debt issuance costs of approximately $10.9 million and (ii) recorded a write-off of deferred debt issuance costs of approximately $3.5 million in connection with the refinancing of the Company’s Term Loan A and Term Loan B under the Company’s senior secured credit agreement. See Note 11 for additional information.

Fixed Assets

Fixed assets, including costs of Company developed software, are stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the improvement. Repairs and maintenance costs are expensed as incurred. As of March 31, 2012 and December 31, 2011, fixed assets, net were $45.7 million and $46.2 million, respectively.

Goodwill and Other Indefinite-Lived Intangible Assets

The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. The Company allocates goodwill to its various operating units. The Company compares the fair value of each operating unit to its carrying amount to determine if there is potential goodwill impairment. If the fair value of an operating unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the operating unit is less than the carrying value of its goodwill. To determine the fair value of the Company’s operating units, the Company uses a present value (discounted cash flow) technique corroborated by market multiples when available, or other valuation methodologies, as appropriate.

If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.

During 2011, the Company determined a triggering event had occurred and performed an interim impairment test of its identifiable intangible assets and goodwill. The Company recorded a non-cash charge to reduce the carrying value of certain identifiable intangible assets, as well as goodwill, to their estimated fair values. See Note 9 for additional information.

The Company also completed its annual impairment test of goodwill and indefinite-lived intangible assets for the Company’s operating units as of December 31, 2011, which indicated that there was no additional impairment.

Obligations Under Self Insurance Programs

As of March 31, 2012 and December 31, 2011, the Company’s obligations under insurance programs were $56.6 million and $55.0 million, respectively. The increase is primarily attributable to the increase in and timing of payments.

Workers’ compensation and professional and general liability expenses associated with continuing operations were $4.7 million for the first quarter of 2012, as compared to $4.1 million for the corresponding period of 2011. The Company’s workers’ compensation and professional and general liability costs relating to discontinued operations were approximately $0.2 million for the first quarter of 2011.

Employee health and welfare expenses associated with continuing operations were $23.6 million for the first quarter of 2012, as compared to $20.1 million for the corresponding period of 2011, primarily related to an increased cost of claims. The Company’s employee health and welfare expenses relating to discontinued operations were approximately $0.2 million for the first quarter of 2011.

Nursing Home Costs

For patients receiving nursing home care under a state Medicaid program who elect hospice care under Medicare or Medicaid, the Company contracts with nursing homes for the nursing homes to provide patients’ room and board services. The state must pay the Company, in addition to the applicable Medicare or Medicaid hospice daily or hourly rate, an amount equal to at least 95 percent of the Medicaid daily nursing home rate for room and board furnished to the patient by the nursing home. Under the Company’s standard nursing home contracts, the Company pays the nursing home for these room and board services at the Medicaid daily nursing home rate. Nursing home costs are partially offset by nursing home net revenue, and the net amount is included in cost of services sold in the Company’s consolidated statements of comprehensive income.

 

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Note 4. Acquisitions and Dispositions

Dispositions

Homemaker Services Agency and Rehab Without Walls® Dispositions

Effective October 14, 2011, the Company completed the sale of its IDOA business to Premier Home Health Care Services, Inc., pursuant to an asset purchase agreement, for total consideration of approximately $2.4 million, consisting of (i) cash proceeds of approximately $2.0 million and (ii) an escrow fund of approximately $0.4 million, to be received by the Company subject to certain post closing conditions. During the first quarter of 2012, the Company reduced the escrow fund receivable to approximately $0.3 million as a result of certain post closing conditions.

Effective September 10, 2011, the Company completed the sale of its Rehab Without Walls® business to Southern Home Care Services, Inc., pursuant to an asset purchase agreement, for total consideration of approximately $9.8 million. The consideration consisted of (i) cash proceeds of approximately $9.2 million and (ii) an escrow fund of approximately $0.6 million that will be received by the Company subject to certain post closing conditions.

Net revenues and operating results for the first quarter of 2011 for the homemaker services agency business in Illinois, the Rehab Without Walls® business as well as a $0.3 million change in settlement of the Company’s post closing liabilities in connection with the 2010 sale of its HME and IV businesses were as follows (in thousands):

 

     First Quarter
2011
 

Net revenues

   $ 7,706   
  

 

 

 

Income before income taxes

   $ 741   

Income tax expense

     294   
  

 

 

 

Discontinued operations, net of tax

   $ 447   
  

 

 

 

 

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Note 5. Fair Value of Financial Instruments

The Company’s financial instruments are measured and recorded at fair value on a recurring basis, except for the note receivable from CareCentrix and long-term debt. The fair values for the note receivable from CareCentrix and non-financial assets, such as fixed assets, intangible assets and goodwill, are measured periodically and adjustments recorded only if an impairment charge is required. The carrying amount of the Company’s accounts receivable, accounts payable and certain other current liabilities approximates fair value due to their short maturities.

Fair value is defined under authoritative guidance as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The three levels of inputs are as follows:

 

   

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Financial Instruments Recorded at Fair Value

The Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis was as follows (in thousands):

 

     March 31, 2012      December 31, 2011  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  

Assets:

                       

Money market funds

   $ 34,027       $ —         $ —         $ 34,027       $ 54,006       $ —         $ —         $ 54,006   

Rabbi Trust:

                       

Mutual funds

     22,972         —           —           22,972         25,626         —           —           25,626   

Money market funds

     6,201         —           —           6,201         697         —           —           697   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 63,200       $ —         $ —         $ 63,200       $ 80,329       $ —         $ —         $ 80,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                       

Payables to plan participants

   $ 29,173       $ —         $ —         $ 29,173       $ 26,323       $ —         $ —         $ 26,323   

Assets held in the Rabbi Trust are held for the benefit of participants of the Company’s non-qualified defined contribution retirement plan. The value of assets held in the Rabbi Trust is based on quoted market prices of securities and investments, including money market accounts and mutual funds, maintained within the Rabbi Trust. The corresponding amounts payable to plan participants are equivalent to the underlying value of assets held in the Rabbi Trust. Assets held in the Rabbi Trust and amounts payable to plan participants are classified in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets. Money market funds held in the Company’s account represent cash equivalents and were classified in cash and cash equivalents in the Company’s consolidated balance sheets at March 31, 2012 and December 31, 2011.

 

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Other Financial Instruments

The carrying amount and estimated fair value of the Company’s other financial instruments were as follows (in thousands):

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Assets:

           

Note receivable from CareCentrix

   $ 25,000       $ 27,500       $ 25,000       $ 26,600   

Liabilities:

           

Long-term debt, including current portion

   $ 938,125       $ 889,823       $ 988,125       $ 863,313   

The estimated fair value of the note receivable from CareCentrix was determined from Level 3 inputs based on an income approach using the discounted cash flow method. The fair value represents the net present value of (i) the after tax cash flows relating to the note’s annual income stream plus (ii) the return of the invested principal using a maturity date of March 19, 2017, after considering assumptions relating to risk factors and economic conditions. See Note 7 for additional information.

In determining the estimated fair value of long-term debt, Level 2 inputs based on the use of bid and ask prices were considered. Due to the infrequent number of transactions that occur related to the long-term debt, the Company does not believe an active market exists for purposes of this disclosure.

Cash Flow Hedge

The Company may utilize derivative financial instruments to manage interest rate risk. Derivatives are held only for the purpose of hedging such risk, not for speculative purposes. The Company’s derivative instruments consisted of (i) a one year interest cap with a notional value of $220.0 million and (ii) until March 9, 2011, two year forward starting interest rate swaps with notional value of $300.0 million, each agreement designated as a cash flow hedge of the variability of cash flows associated with a portion of the Company’s variable rate term loans. During the first quarter of 2011, the Company terminated the two year forward starting interest rate swaps in connection with the refinancing of the Company’s Term Loan A and Term Loan B facilities under its senior secured credit agreement. The Company paid approximately $0.3 million to terminate the interest rate swaps, which is reflected in interest expense and other in the Company’s consolidated statement of comprehensive income in 2011. The Company’s interest rate cap expired in November 2011. The Company held no derivative instruments as of March 31, 2012 or December 31, 2011.

 

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Note 6. Net Revenues and Accounts Receivable

Net Revenues

Net revenues in the Home Health and Hospice segments were derived from all major payer classes and were as follows (in millions):

 

     First Quarter  
     2012      2011      Percentage
Variance
 

Medicare:

        

Home Health

   $ 190.6       $ 201.6         (5.5 %) 

Hospice

     182.0         181.0         0.6
  

 

 

    

 

 

    

 

 

 

Total Medicare

     372.6         382.6         (2.6 %) 

Medicaid and Local Government

     19.5         21.0         (7.0 %) 

Commercial Insurance and Other:

        

Paid at episodic rates

     20.0         18.7         6.7

Other

     23.6         28.8         (18.1 %) 
  

 

 

    

 

 

    

 

 

 

Total Commercial Insurance and Other

     43.6         47.5         (8.4 %) 
  

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 435.7       $ 451.1         (3.4 %) 
  

 

 

    

 

 

    

 

 

 

For the first quarter of 2012 and 2011, the Company recorded hospice Medicare cap expenses of $2.1 million and $0.6 million, respectively, which is reflected in net revenues in the Company’s consolidated statements of comprehensive income. The Medicare payment cap, which is calculated for each provider by the Medicare fiscal intermediary at the end of the hospice cap period, is determined by multiplying the number of first time patient admissions during the cap period by the Medicare cap amount, subject to certain adjustments. Medicare revenue paid to a provider during the twelve month cap period that ends annually on October 31 cannot exceed the aggregate Medicare payment cap calculated for the related twelve month period. As of March 31, 2012 and December 31, 2011, the Company had Medicare cap liabilities of $17.7 million and $15.6 million, respectively, which were reflected in Medicare liabilities in the Company’s consolidated balance sheets.

Accounts Receivable

Net revenues in the Home Health and Hospice segments were derived from all major payer classes. Accounts receivable attributable to major payer sources of reimbursement were as follows (in thousands):

 

     March 31, 2012     December 31, 2011  

Medicare

   $ 226,098      $ 217,028   

Medicaid and Local Government

     56,876        46,553   

Commercial Insurance and Other

     42,623        38,570   
  

 

 

   

 

 

 

Gross Accounts Receivable

     325,597        302,151   

Less: Allowance for doubtful accounts

     (12,829     (11,562
  

 

 

   

 

 

 

Net Accounts Receivable

   $ 312,768      $ 290,589   
  

 

 

   

 

 

 

The Commercial Insurance and Other payer group included self-pay accounts receivable relating to patient co-payments of $2.3 million and $2.1 million as of March 31, 2012 and December 31, 2011, respectively.

The Company’s only financing receivable is the note receivable from CareCentrix, Inc. The Company measures impairment based on the present value of expected cash flows after considering assumptions relating to risk factors and economic conditions. On an ongoing basis, the Company assesses the credit quality based on the Company’s review of CareCentrix, Inc.’s financial position and receipt of interest payments when due. Based on the Company’s analysis, as of March 31, 2012 and December 31, 2011, the Company had no allowances for credit losses.

 

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Note 7. Note Receivable from and Investment in CareCentrix

The Company holds a $25 million subordinated promissory note from CareCentrix, Inc. In connection with the sale of the Company’s ownership interest in CareCentrix Holdings, the maturity date of the note was extended to the earlier of March 19, 2017, which is five and one-half years from the closing of the transaction, or a sale of CareCentrix Holdings. The note bears interest at a fixed rate of 10 percent, which is payable quarterly; provided that CareCentrix remains in compliance with its senior debt covenants. Interest on the CareCentrix promissory note, which is included in interest income in the Company’s consolidated statements of comprehensive income, amounted to $0.6 million for both the first quarter of 2012 and 2011.

During 2011, the Company sold its equity investment in CareCentrix Holdings.

The Company recognized $0.6 million of equity in the net earnings of CareCentrix for the first quarter of 2011.

Note 8. Cost Savings Initiatives and Other Restructuring Costs, Acquisition and Integration Activities and Legal Settlements

During the first quarter of 2012 and 2011, the Company recorded net charges relating to cost savings initiatives and other restructuring costs, acquisition and integration activities and legal settlements of $5.4 million and $3.8 million, respectively, which were recorded in selling, general and administrative expenses in the Company’s consolidated statements of comprehensive income.

Cost Savings Initiatives and Other Restructuring Costs

During 2011, the Company undertook a comprehensive review of its branch structure, support infrastructure and other significant expenditures in order to reduce its ongoing operating costs given the challenging rate environment the Company is facing. As a result of this effort, the Company closed or divested 34 home health branches and 9 hospice branches during the fourth quarter of 2011 and 4 home health branches in the first quarter of 2012 and completed significant reductions in staffing levels in regional, area and corporate support functions. In connection with these activities, the Company recorded charges of $0.8 million in the first quarter of 2012, related to severance costs, facility lease and other costs. During the first quarter 2011, the Company recorded charges of $1.3 million in connection with restructuring activities, including severance costs in connection with the termination of personnel and facility leases and other costs.

Acquisition and Integration Activities

During the first quarter of 2012, the Company recorded a credit of $0.4 million related to acquisition and integration activities. During the first quarter of 2011, the Company recorded charges of $2.5 million, in connection with acquisition and integration activities, primarily related to the Odyssey transaction. These costs consisted of legal, accounting and other professional fees and expenses, costs of obtaining required regulatory approvals, write-off of prepaid fees in connection with the termination of the Company’s 2006 credit agreement and severance costs.

Legal Settlements

For the first quarter of 2012, the Company recorded legal settlements of $5.0 million related to certain of the wage and hour litigation. During the first quarter of 2012, the Company paid approximately $26 million related to settlement of the continuous care investigation. See Note 14 for additional information.

 

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The costs incurred and cash expenditures associated with these activities during 2012 and 2011 were as follows (in thousands):

 

     Cost Savings
Initiatives and

Other
Restructuring
    Acquisition  &
Integration
    Legal
Settlements
    Total  

Ending balance at December 31, 2010

   $ 2,893      $ 3,984      $ 12,500      $ 19,377   

Charge in first quarter 2011

     1,259        2,506        —          3,765   

Cash expenditures

     (1,490     (2,346     —          (3,836
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2011

   $ 2,662      $ 4,144      $ 12,500      $ 19,306   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at December 31, 2011

   $ 8,671      $ 3,708      $ 26,000      $ 38,379   

Charge in first quarter 2012

     842        (409     4,958        5,391   

Cash expenditures

     (3,527     (755     (25,958     (30,240

Non-cash expenditures

     19        (216     —          (197
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2012

   $ 6,005      $ 2,328      $ 5,000      $ 13,333   
  

 

 

   

 

 

   

 

 

   

 

 

 

The balance of unpaid charges relating to cost savings initiatives and other restructuring costs, acquisition and integration activities and legal settlements approximated $13.3 million at March 31, 2012 and $38.4 million at December 31, 2011, which were included in other accrued expenses in the Company’s consolidated balance sheets.

Note 9. Identifiable Intangible Assets and Goodwill

The gross carrying amount and accumulated amortization and impairment losses of each category of identifiable intangible assets as of March 31, 2012 and December 31, 2011 were as follows (in thousands):

 

     March 31, 2012     December 31, 2011        
     Home
Health
    Hospice     Total     Home
Health
    Hospice     Total     Useful
Life
 

Amortized intangible assets:

              

Covenants not to compete

   $ 1,473      $ 15,675      $ 17,148      $ 1,473      $ 15,675      $ 17,148        2-5 Years   

Less: accumulated amortization

     (1,417     (10,756     (12,173     (1,411     (9,144     (10,555  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net covenants not to compete

     56        4,919        4,975        62        6,531        6,593     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Customer relationships

     27,196        910        28,106        27,196        910        28,106        5-10 Years   

Less: accumulated amortization

     (15,891     (321     (16,212     (15,304     (299     (15,603  

accumulated impairment losses

     (27     —          (27     (27     —          (27  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net customer relationships

     11,278        589        11,867        11,865        611        12,476     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Tradenames

     18,215        16,730        34,945        18,215        16,730        34,945        5-10 Years   

Less: accumulated amortization

     (10,946     (2,767     (13,713     (10,522     (2,346     (12,868  

accumulated impairment losses

     (411     —          (411     (411     —          (411  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net tradenames

     6,858        13,963        20,821        7,282        14,384        21,666     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Subtotal

     18,192        19,471        37,663        19,209        21,526        40,735     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Indefinite-lived intangible assets:

              

Medicare licenses and certificates of need

     220,285        98,526        318,811        220,285        98,526        318,811        Indefinite   

Less: accumulated impairment losses

     (144,672     —          (144,672     (144,672     —          (144,672  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net medicare licenses and certificates of need

     75,613        98,526        174,139        75,613        98,526        174,139     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total identifiable intangible assets

   $ 93,805      $ 117,997      $ 211,802      $ 94,822      $ 120,052      $ 214,874     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

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The Company recorded amortization expense of approximately $3.1 million and $3.3 million for the first quarter of 2012 and 2011, respectively. The estimated amortization expense for the remainder of 2012 is $7.7 million and for each of the next five succeeding years approximates $7.4 million for 2013, $5.7 million for 2014, $5.6 million for 2015, $3.4 million for 2016, and $2.9 million for 2017.

The gross carrying amount of goodwill as of March 31, 2012 and December 31, 2011 and activity during the first three months of 2012 were as follows (in thousands):

 

     Home Health     Hospice     Total  

Balance at December 31, 2010

   $ 264,679      $ 820,387      $ 1,075,454   

Goodwill adjustment

     2,379        11,261        13,640   

Accumulated impairment losses

     (263,370     (193,667     (457,037
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 3,688      $ 637,981      $ 641,669   

Goodwill acquired during 2012

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 3,688      $ 637,981      $ 641,669   
  

 

 

   

 

 

   

 

 

 

During 2011, the Company reclassified deferred tax assets of $13.6 million associated with the classification of deductible intangible assets and goodwill related to a 2006 acquisition. The impact of this reclassification was an increase in goodwill in the Home Health and Hospice divisions of $2.4 million and $11.2 million, respectively, and a decrease in non-current deferred tax assets of $13.6 million.

Note 10. Earnings Per Share

Basic and diluted earnings per share for each period presented have been computed by dividing income from continuing operations, discontinued operations, net of tax and net income attributable to Gentiva shareholders by the weighted average number of shares outstanding for each respective period. The computations of the basic and diluted per share amounts were as follows (in thousands, except per share amounts):

 

     For the Three Months Ended  
     March 31, 2012      March 31, 2011  

Net income attributable to Gentiva shareholders

   $ 4,840       $ 13,452   
  

 

 

    

 

 

 

Basic weighted average common shares outstanding

     30,724         30,127   

Shares issuable upon the assumed exercise of stock options and under stock plans for employees and directors using the treasury stock method

     235         662   
  

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     30,959         30,789   
  

 

 

    

 

 

 

Basic earnings per common share

     

Net income attributable to Gentiva shareholders

   $ 0.16       $ 0.45   
  

 

 

    

 

 

 

Diluted earnings per common share:

     

Net income attributable to Gentiva shareholders

   $ 0.16       $ 0.44   
  

 

 

    

 

 

 

For the first three months of 2012, approximately 3.7 million stock options and 0.3 million restricted stock awards were excluded from the computations of diluted earnings per share, as their inclusion would be anti-dilutive. For the first three months of 2011, approximately 1.3 million stock options were excluded from the computations of diluted earnings per share, as their inclusion would be anti-dilutive.

 

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Note 11. Long-Term Debt

Credit Arrangements

At March 31, 2012, the Company’s credit arrangements included a senior secured credit agreement providing (i) a $200 million Term Loan A facility, (ii) a $550 million Term Loan B facility and (iii) a $110 million revolving credit facility (collectively, the “Credit Agreement”) and $325 million aggregate principal amount of 11.5% Senior Notes due 2018 (the “Senior Notes”). The Credit Agreement’s revolving credit facility also includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as swing line loans.

As of March 31, 2012 and December 31, 2011, the Company’s long-term debt consisted of the following (in thousands):

 

     March 31, 2012     December 31, 2011  

Credit Agreement:

    

Term Loan A, maturing August 17, 2015

   $ 146,693      $ 158,653   

Term Loan B, maturing August 17, 2016

     466,432        504,472   

11.5% Senior Notes due 2018

     325,000        325,000   
  

 

 

   

 

 

 

Total debt

     938,125        988,125   

Less: current portion of long-term debt

     (9,193     (14,903
  

 

 

   

 

 

 

Total long-term debt

   $ 928,932      $ 973,222   
  

 

 

   

 

 

 

In response to uncertainties around Medicare reimbursement rates and to ensure compliance under its Credit Agreement as of December 31, 2011, on November 28, 2011, the Company entered into Amendment No. 2 to the Credit Agreement (“Amendment No. 2”). In addition, on March 6, 2012, the Company entered into Amendment No. 3 to the Credit Agreement (“Amendment No. 3”) in order to provide increased flexibility in the Company’s debt covenants over the remaining term of the Credit Agreement and to provide reasonable assurance with respect to the Company’s ability to remain in compliance with its debt covenants beyond January 1, 2012, including the maximum consolidated leverage ratio and the minimum interest coverage ratio, which are discussed below under “Debt Covenants.” Among other things, Amendment No. 3 also reduced the revolving credit facility from $125 million to $110 million.

As of March 31, 2012, advances under the revolving credit facility may be made, and letters of credit may be issued, up to the $110 million borrowing capacity of the facility at any time prior to the facility expiration date of August 17, 2015. In connection with the reduction in the revolving credit facility, the Company wrote-off prepaid debt issuance costs of approximately $0.5 million, which is reflected in interest expense and other in the Company’s consolidated statement of comprehensive income and capitalized costs associated with the revolving credit facility of approximately $0.8 million. Outstanding letters of credit were $41.8 million at both March 31, 2012 and December 31, 2011. The letters of credit were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. As of March 31, 2012, the Company’s unused and available borrowing capacity under the Credit Agreement was $68.2 million.

As of March 31, 2012, the mandatory aggregate principal payments of long-term debt are $2.9 million in 2012, $25.0 million in both 2013 and 2014, $93.8 million in 2015 and $466.4 million in 2016, all under the Credit Agreement, and $325.0 million thereafter under the Senior Notes. The weighted average cash interest rate on outstanding borrowings was 8.2 percent per annum at March 31, 2012 and 6.9 percent per annum at December 31, 2011.

The Term Loan A facility is subject to mandatory principal payments of $25 million per year, payable in equal quarterly installments, with the remaining balance of the original $200 million loan payable on August 17, 2015. Pursuant to Amendment No. 3, the Company made a payment of $12.0 million on its Term Loan A facility. There are no required payments on the Company’s Term Loan A facility until the end of the fourth quarter of 2012, at which time a principal payment of $2.9 million is required and $6.3 million per quarter thereafter. The Term Loan B facility is subject to mandatory principal payments of $13.8 million per year, payable in equal quarterly installments, with the remaining balance of the original $550 million loan payable on August 17, 2016. Pursuant to Amendment No. 3, the Company made a payment of $38.0 million on its Term Loan B facility. There are no required payments on the Company’s Term Loan B facility until August 17, 2016, at which time a payment of the outstanding balance of $466.4 million is required.

On March 9, 2011, the Company entered into a First Refinancing Amendment to the Credit Agreement (“Amendment No. 1”), which provided for, among other things, (i) refinancing of the outstanding indebtedness under the Company’s senior secured Term Loan A and Term Loan B facilities, (ii) elimination of the requirement to hedge a certain portion of the Company’s variable rate debt, (iii) a reduction in the minimum Base Rate from 2.75 percent to 2.25 percent, (iv) a reduction

 

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in the minimum Eurodollar Rate from 1.75 percent to 1.25 percent, (v) reductions in Term Loan B Applicable Rates to 3.50 percent for Eurodollar Rate Loans and 2.50 percent for Base Rate Loans as compared to 5.00 percent and 4.00 percent, respectively, under the previous arrangement and (vi) reductions in the Applicable Rate for Term Loan A as reflected in the table below.

 

     Amended Applicable Rate     Previous Applicable Rate  

Consolidated

Leverage Ratio

   Eurodollar  Rate
Term A Facility
    Base Rate
Term  A Facility
    Eurodollar  Rate
Term A Facility
    Base Rate
Term  A Facility
 

³ 3.0:1

     3.25     2.25     5.00     4.00

³ 2.0:1 and < 3.0:1

     3.00     2.00     4.50     3.50

< 2.0:1

     2.75     1.75     4.00     3.00

In addition, Amendment No. 1 provided for a reduction in the Company’s minimum consolidated interest coverage ratio to a ratio of 2.25 to 1.00 from the previous ratio of 2.75 to 1.00. As discussed below under “Debt Covenants,” Amendment No. 3 provided for a further reduction in the minimum consolidated interest coverage ratio.

The interest rate per annum on borrowings under the Credit Agreement is based on, at the option of the Company, (i) the Eurodollar Rate or (ii) the Base Rate, plus an Applicable Rate. The Base Rate represents the highest of (x) the Bank of America prime rate, (y) the federal funds rate plus 0.50 percent and (z) the Eurodollar Rate plus 1.00 percent. In connection with determining the interest rates on the Term Loan A and Term Loan B facilities, in no event shall the Eurodollar Rate be less than 1.25 percent and the Base Rate be less than 2.25 percent. The Company may select interest periods of one, two, three or six months for Eurodollar Rate loans. Interest is payable at the end of the selected interest period. From August 17, 2010 through March 9, 2011, the interest rate on borrowings under the Credit Agreement was 6.75 percent per annum. From March 9, 2011 through March 5, 2012, the interest rate on Term Loan A borrowings was 4.50 percent and on Term Loan B borrowings was 4.75 percent. Giving effect to Amendment No. 3, subsequent to March 5, 2012, the interest rate on Term Loan A borrowings is 6.25 percent and on Term Loan B borrowings is 6.50 percent. The Company must also pay a fee of 0.50 percent per annum on unused commitments under the revolving credit facility.

The Company’s Credit Agreement, in effect prior to Amendment No. 1, included a requirement that the Company enter into and maintain interest rate swap contracts covering a notional value of not less than 50 percent of the Company’s aggregate consolidated outstanding indebtedness (other than total revolving credit outstanding) including the Senior Notes for a period of not less than three years. On November 15, 2010, the Company entered into derivative instruments consisting of (i) a one year interest rate cap with a notional value of $220.0 million and (ii) two year forward starting interest rate swaps with notional value of $300.0 million. Under the interest rate cap, the Company would pay a fixed rate of 1.75 percent per annum plus an applicable rate (an aggregate of 6.75 percent per annum for the period beginning November 15, 2010 through December 30, 2011) on the $220 million rather than a variable rate plus an applicable rate should the variable rate plus applicable rate exceed 6.75 percent. In connection with Amendment No. 1, the Company terminated the two year forward starting interest rate swaps and paid a termination fee of approximately $0.3 million, which is reflected in interest expense and other in the Company’s consolidated statement of comprehensive income for the three months ended March 31, 2011.

The Company may voluntarily repay outstanding loans under the revolving credit facility or Term Loan A at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. For the period from March 9, 2011 to September 9, 2011, the Company was subject to a prepayment premium equal to 1.0 percent of the aggregate principal amount of Term Loan B. Prepayment and commitment reductions will be required in connection with (i) certain asset sales, (ii) certain extraordinary receipts such as certain insurance proceeds, (iii) cash proceeds from the issuance of debt, (iv) 50 percent of the proceeds from the issuance of equity with step-downs based on leverage, with certain exceptions, and (v) 75 percent of “Excess Cash Flow” (as defined in the Credit Agreement) with two step-downs based on the Company’s leverage ratio.

In connection with the refinancing pursuant to Amendment No. 1, the Company paid a two percent prepayment penalty on its Term Loan B facility of approximately $10.9 million which was recorded as deferred debt issuance costs. In accordance with applicable guidance, due to changes in some of the participating lenders, the Company recorded a write-off of a portion of its deferred debt issuance costs of approximately $3.5 million, which is reflected in interest expense and other in the Company’s consolidated statement of comprehensive income for the three months ended March 31, 2011.

 

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Debt Covenants

The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s and its subsidiaries’ ability to incur additional indebtedness or issue certain preferred stock, create liens on assets, enter into sale and leaseback transactions, engage in mergers or consolidations with other companies, sell assets, pay dividends, repurchase capital stock, make investments, loans and advances, make certain acquisitions, engage in certain transactions with affiliates, amend material agreements, repay certain indebtedness, change the nature of the Company’s business, change accounting policies and practices, grant negative pledges and incur capital expenditures. In addition, after giving effect to Amendment No. 3, the Credit Agreement requires the Company to maintain no more than a maximum consolidated leverage ratio as shown in the second table below and no less than a minimum cash interest coverage ratio of 2.00 to 1.00 through June 30, 2013, 1.75 to 1.00 from September 30, 2013 through June 30, 2014 and 2.00 to 1.00 thereafter and also contains certain customary affirmative covenants and events of default. The previously required ratio was 2.25 to 1.00 for all periods.

On November 28, 2011, the Company entered into Amendment No. 2 (“Amendment No. 2”) to the Credit Agreement, which provided for modification to the definition of “Consolidated EBITDA” contained in the Credit Agreement to allow for the add-back of costs associated with the Company’s cost realignment activities and operating losses associated with branches closed or sold during the fourth quarter of 2011 and to reset the maximum consolidated leverage ratio for the fourth quarter of 2011 to 4.75 to 1.00. As of March 31, 2012, the Company was in compliance with all covenants in the Credit Agreement.

The maximum consolidated leverage ratio under Amendment No. 2 was as follows:

 

For the period

   Maximum Consolidated
Leverage Ratio
 

August 17, 2010 to September 30, 2011

     £4.75:1   

October 1, 2011 to September 30, 2012

     £4.50:1   

October 1, 2012 to September 30, 2013

     £3.75:1   

Thereafter

     £3.00:1   

On March 6, 2012, the Company entered into Amendment No. 3 to the Credit Agreement, which provided, among other things, for (i) an increase by 175 basis points per annum of the interest rates applicable to each of outstanding Term Loan A loans and Term Loan B loans, (ii) an increase in the Company’s permitted maximum consolidated leverage ratio as set forth in the table below, (iii) an amendment to the consolidated interest coverage ratio (and corresponding definitions) to provide that consolidated interest charges included in such calculation are such charges paid in cash (as compared with the previous covenant that included non-cash interest charges), along with a decrease in the Company’s permitted minimum consolidated cash interest coverage ratio to (a) 2.00 to 1.00 through June 30, 2013, (b) 1.75 to 1.00 from September 30, 2013 through June 30, 2014 and (c) 2.00 to 1.00 thereafter, (iv) amendments to the definition of “Consolidated EBITDA,” which include the ability to add-back certain costs associated with the Company’s cost realignment and operating losses associated with certain facilities and branches closed or sold by the Company during the fourth quarter of 2011 and during 2012 and an increase in the add-back for litigation settlement costs, (v) an addition of a mechanism for the Company to make discounted prepayments of Term Loan A loans and Term Loan B loans pursuant to Dutch auction procedures and (vi) a reduction of the revolving credit facility from $125 million to $110 million. As a condition to effectiveness of Amendment No. 3, the Company paid $50 million of the outstanding term loans under the Credit Agreement, applied ratably between the Term Loan A facility and the Term Loan B facility. The Company also paid certain fees in connection with Amendment No. 3, including a consent fee to each lender approving Amendment No. 3 in an amount equal to 0.50% of its respective term loans and revolving credit commitments. In connection with Amendment No. 3, the Company incurred costs of approximately $5.3 million. Approximately $4.1 million of these costs (including the $0.8 million associated with the revolving credit facility) have been capitalized and are being amortized over the remaining life of the debt using an effective interest rate.

 

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The increase in Gentiva’s permitted maximum consolidated leverage ratio under Amendment No. 3 is set forth in the following table:

 

Four Fiscal Quarters Ending

   Maximum Consolidated
Leverage Ratio

March 31, 2012 to September 30, 2014

   £6.25:1

Each fiscal quarter thereafter

   £5.75:1

The previously required ratio was (i) 4.50 to 1.00 through September 30, 2012, (ii) 3.75 to 1.00 from December 31, 2012 through September 30, 2013 and (iii) 3.00 to 1.00 thereafter.

As of March 31, 2012, the Company’s consolidated leverage ratio was 4.4x and the Company’s interest coverage ratio was 3.0x.

Guaranty Agreement and Security Agreement

Gentiva and substantially all of its subsidiaries (the “Guarantor Subsidiaries”) entered into a guaranty agreement pursuant to which the Guarantor Subsidiaries have agreed, jointly and severally, fully and unconditionally to guarantee all of the Company’s obligations under the Credit Agreement. Additionally, Gentiva and its Guarantor Subsidiaries entered into a security agreement pursuant to which a first-priority security interest was granted in substantially all of the Company’s and its Guarantor Subsidiaries’ present and future real, personal and intangible assets, including the pledge of 100 percent of all outstanding capital stock of substantially all of the Company’s domestic subsidiaries to secure full payment of all of the Company’s obligations for the ratable benefit of the lenders.

Senior Notes

The Senior Notes are unsecured, senior subordinated obligations of the Company. The Senior Notes are guaranteed by all of Gentiva’s subsidiaries that are guarantors under the Credit Agreement. Interest on the Senior Notes accrues at a rate of 11.5 percent per annum and is payable semi-annually in arrears on March 1 and September 1. Gentiva will make each interest payment to the holders of record on the immediately preceding February 15 and August 15.

The Senior Notes mature on September 1, 2018 and are generally free to be transferred. Gentiva may redeem the Senior Notes, in whole or in part, at any time prior to the first interest payment of 2014, at a price equal to 100 percent of the principal amount of the Senior Notes redeemed plus an applicable make-whole premium based on the present value of the remaining payments discounted at the treasury rate plus 50 basis points plus accrued and unpaid interest, if any, to the date of redemption. In addition, prior to September 1, 2013, Gentiva may redeem up to 35 percent of the aggregate principal amount of the Senior Notes with the net cash proceeds of a qualified equity offering at a redemption price equal to 111.5 percent of the aggregate principal amount, provided that (i) at least 65 percent of the aggregate principal amount of Senior Notes originally issued remain outstanding after the occurrence of such redemption and (ii) such redemption occurs within 180 days after the closing of a qualified equity offering.

On or after September 1, 2014, Gentiva may redeem all or part of the Senior Notes at redemption prices set forth below plus accrued and unpaid interest and Additional Interest, if any, as defined in the indenture relating to the Senior Notes during the twelve month period beginning on September 1 of the years indicated below:

 

Year

        Percentage  

2014

       105.750

2015

       102.875

2016 and thereafter

       100.000

Other

The Company has equipment capitalized under capital lease obligations. At March 31, 2012 and December 31, 2011, the Company had no long-term capital lease obligations. The current portion of obligations under capital leases was $0.1 million at both March 31, 2012 and December 31, 2011, and was recorded in other accrued expenses on the Company’s consolidated balance sheets.

 

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Note 12. Equity

Changes in equity for the three months ended March 31, 2012 and 2011 were as follows (in thousands, except share amounts):

 

     Gentiva Shareholders              
                         Accumulated                    
            Additional      Retained     Other                    
     Common Stock      Paid-in      Earnings     Comprehensive     Treasury     Noncontrolling        
     Shares      Amount      Capital      (Deficit)     Income (Loss)     Stock     Interests     Total  

Balance at December 31, 2010

     30,799,091       $ 3,080       $ 372,106       $ 272,394      $ 478      $ (12,484   $ 2,658      $ 638,232   

Comprehensive income:

                   

Net income

     —           —           —           13,452        —          —          167        13,619   

Changes in fair value of interest rate swaps

     —           —           —           —          (768     —          —          (768

Realized loss on interest rate swaps

     —           —           —           —          290        —          —          290   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     —           —           —           13,452        (478     —          167        13,141   

Income tax benefits associated with the exercise of non-qualified stock options

     —           —           258         —          —          —          —          258   

Equity-based compensation expense

     —           —           1,629         —          —          —          —          1,629   

Net issuance of stock upon exercise of stock options and under stock plans for employees and directors

     354,137         35         4,629         —          —          —          —          4,664   

Distribution to partnership interests

     —           —           —           —          —          —          (302     (302
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

     31,153,228       $ 3,115       $ 378,622       $ 285,846      $ —        $ (12,484   $ 2,523      $ 657,622   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     31,435,264       $ 3,144       $ 387,803       $ (178,131   $ —        $ (12,878   $ 2,593      $ 202,531   

Comprehensive income:

                   

Net income

     —           —           —           4,840        —          —          213        5,053   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     —           —           —           4,840        —          —          213        5,053   

Equity-based compensation expense

     —           —           1,631         —          —          —          —          1,631   

Net issuance of stock upon exercise of stock options and under stock plans for employees and directors

     122,390         14         691         —          —          —          —          705   

Distribution to partnership interests

     —           —           —           —          —          —          (195     (195
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     31,557,654       $ 3,158       $ 390,125       $ (173,291   $ —        $ (12,878   $ 2,611      $ 209,725   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income amounted to $5.1 million for the first three months of 2012, and $13.1 million for the first three months of 2011. The amounts in comprehensive income for the three months ended March 31, 2011 are reflected net of tax of approximately $0.4 million.

The Company has an authorized stock repurchase program under which the Company can repurchase and retire up to 1,500,000 shares of its outstanding common stock. The repurchases can occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. During the three months ended March 31, 2012 and 2011, the Company did not repurchase shares of its outstanding common stock. As of March 31, 2012, the Company had remaining authorization to repurchase an aggregate of 180,568 shares of its outstanding common stock. In addition, the Company’s Board of Directors has also authorized the repurchase of additional shares of the Company’s outstanding common stock with an aggregate purchase price up to $5.0 million, which shares are in addition to the remaining 180,568 shares. During the period from April 1, 2012 through May 1, 2012, the Company repurchased 605,077 shares of its common stock at an average cost of $8.20 per share and a total cost of approximately $5.0 million.

The Company’s Credit Agreement provides for repurchases of the Company’s common stock not to exceed $5.0 million per year, and not to exceed $20.0 million per year if the consolidated leverage ratio is less than or equal to 3.5:1 immediately after giving effect on a pro forma basis to the repurchase. The indenture governing the Company’s Senior Notes also contains limitations on the Company’s repurchases of its common stock.

Note 13. Equity-Based Compensation Plans

The Company provides several equity-based compensation plans under which the Company’s officers, employees and non-employee directors may participate, including (i) the 2004 Equity Incentive Plan (amended and restated) (“2004 Plan”), (ii) the Stock & Deferred Compensation Plan for Non-Employee Directors (“DSU Plan”) and (iii) the Employee Stock Purchase Plan (“ESPP”). Collectively, these equity-based compensation plans permit the grants of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock, (v) performance units, (vi) stock units and (vii) cash, as well as allow employees to purchase shares of the Company’s common stock under the ESPP at a pre-determined discount.

 

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For both the first quarter of 2012 and 2011, the Company recorded equity-based compensation expense, as calculated on a straight-line basis over the vesting periods of the related equity instruments, of $1.6 million, which was reflected as selling, general and administrative expense in the consolidated statements of comprehensive income.

Stock Options

The weighted average fair values of the Company’s stock options granted during the first three months of 2012 and 2011 calculated using the Black-Scholes option pricing model and other assumptions, were as follows.

 

     Three Months Ended  
     March 31, 2012      March 31, 2011  

Weighted average fair value of options granted

   $ 8.33          $ 11.30      

Risk-free interest rate

     0.77% -0.95%         2.15%   

Expected volatility

     64%         44%   

Contractual life

     7 years         7 years   

Expected life

     3.4 - 5.4 years         4.5 - 6.5 years   

Expected dividend yield

     0%         0%   

Stock option grants in 2011 and 2012 vest over a three-year period based on a vesting schedule that provides for one-third vesting after each year. Stock option grants in 2006 through 2010 fully vest over a four year period based on a vesting schedule that provides for one-half vesting after year two and an additional one-fourth vesting after each of years three and four. The Company’s expected volatility assumptions are based on the historical volatility of the Company’s stock price over a period corresponding to the expected term of the stock option. Forfeitures are estimated utilizing the Company’s historical forfeiture experience. The expected life of the Company’s stock options is based on the Company’s historical experience of the exercise patterns associated with its stock options.

A summary of Gentiva stock option activity as of March 31, 2012 and changes during the three months then ended is presented below:

 

                 Weighted-         
           Weighted-     Average         
           Average     Remaining      Aggregate  
     Number of     Exercise     Contractual      Intrinsic  
     Options     Price     Life (Years)      Value  

Balance as of December 31, 2011

     4,228,907      $ 15.59        

Granted

     26,000        8.33        

Exercised

     —          —          

Cancelled

     (144,308     (16.92     
  

 

 

   

 

 

      

Balance as of March 31, 2012

     4,110,599      $ 15.50        6.5       $ 4,299,454   
  

 

 

   

 

 

   

 

 

    

 

 

 

Exercisable options

     2,262,157      $ 19.57        4.7       $ 125,039   
  

 

 

   

 

 

   

 

 

    

 

 

 

There were no options exercised during the three months ended March 31, 2012. The total intrinsic value of options exercised during the three months ended March 31, 2011 was $1.7 million. As of March 31, 2012, the Company had $4.4 million of unrecognized compensation expense related to nonvested stock options. This compensation expense is expected to be recognized over a weighted-average period of 1.6 years. The total fair value of options that vested during the first three months of 2012 was $3.4 million.

 

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Performance Share Units

The Company may grant performance share units under its 2004 Plan. Performance share units result in the issuance of common stock at the end of a three-year period and may range between zero and 150 percent of the performance share units granted at target in 2010 and between zero and 200 percent of the performance share units granted at target in 2011, based on the achievement of defined thresholds of the performance criteria over a three-year period (in the case of performance share units granted in 2010) and at the end of a one-year period (in the case of performance share units granted in 2011).

A summary of Gentiva performance share unit activity as of March 31, 2012 is presented below:

 

           Weighted-  
     Number of     Average  
     Performance     Exercise  
     Share Units     Price  

Balance as of December 31, 2011

     114,564      $ 26.40   

Granted

     —          —     

Exercised

     —          —     

Earned, but not released

     (93,683     26.38   

Cancelled

     (600     26.58   
  

 

 

   

 

 

 

Balance as of March 31, 2012

     20,281      $ 26.08   
  

 

 

   

 

 

 

These performance share units carry performance criteria measured on annual diluted earnings per share targets and fully vest at the end of a three-year period provided the performance criteria are met. Forfeitures are estimated utilizing the Company’s historical forfeiture experience.

As of March 31, 2012 and 2011, the Company had $1.6 million and $2.8 million, respectively, of total unrecognized compensation cost related to performance share units. This compensation expense is expected to be recognized over a weighted-average period of 1.7 years and 2.5 years, respectively.

Restricted Stock

A summary of Gentiva restricted stock activity as of March 31, 2012 is presented below:

 

           Weighted-        
     Number of     Average     Aggregate  
     Restricted     Exercise     Intrinsic  
     Shares     Price     Value  

Balance as of December 31, 2011

     377,750      $ 25.30     

Granted

     —          —       

Exercised

     —          —       

Cancelled

     (1,100     (26.58  
  

 

 

   

 

 

   

Balance as of March 31, 2012

     376,650      $ 25.29      $ 3,291,921   
  

 

 

   

 

 

   

 

 

 

The restricted stock fully vests at the end of a three-year or five-year period, depending on the individual grants. Forfeitures are estimated utilizing the Company’s historical forfeiture experience.

As of March 31, 2012, the aggregate intrinsic value of the restricted stock awards was $3.3 million. The Company had $6.3 million and $8.2 million of total unrecognized compensation cost related to restricted stock as of March 31, 2012 and 2011, respectively. This compensation expense is expected to be recognized over a weighted-average period of 3.0 years and 3.8 years, respectively.

 

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Directors Deferred Stock Units

Under the Company’s DSU Plan, each non-employee director receives an annual deferred stock unit award credited quarterly and paid in shares of the Company’s common stock following termination of the director’s service on the Board of Directors. The total number of shares of common stock reserved for issuance under this plan is 300,000, of which 7 shares were available for future grants as of March 31, 2012. During the first three months of 2012, the Company granted 1,888 stock units under the DSU Plan at a grant date weighted-average fair value of $7.90 per stock unit. Because there were insufficient deferred stock units available under the DSU Plan for the full quarterly equity grant to each non-employee director, the Company also made a cash payment of approximately $28,100 to each non-employee director during the first three months of 2012. Under the DSU Plan, 201,746 stock units were outstanding as of March 31, 2012.

Employee Stock Purchase Plan

The Company provides an ESPP under which the offering period is three months and the purchase price of shares is equal to 85 percent of the fair market value of the Company’s common stock on the last day of the three-month offering period. All employees of the Company are eligible to purchase stock under the ESPP regardless of their actual or scheduled hours of service. During the first three months of 2012, the Company issued 126,728 shares of common stock under its ESPP. Under the Company’s ESPP, compensation expense is equal to the 15 percent discount from the fair market value of the Company’s common stock on the date of purchase.

Note 14. Legal Matters

Litigation

In addition to the matters referenced in this Note 14, the Company is party to certain legal actions arising in the ordinary course of business, including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. Management does not expect that these other legal actions will have a material adverse effect on the business, financial condition, results of operations, liquidity or capital resources of the Company.

On May 10, 2010, a collective and class action complaint entitled Lisa Rindfleisch et al. v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of New York against the Company in which five former employees allege wage and hour law violations. The former employees claim they were paid pursuant to “an unlawful hybrid” compensation plan that paid them on both a per visit and an hourly basis, thereby voiding their exempt status and entitling them to overtime pay. The plaintiffs have alleged continuing violations of federal and state law and seek damages under the Fair Labor Standards Act (“FLSA”), as well as under the New York Labor Law and North Carolina Wage and Hour Act (“NCWHA”). On October 8, 2010, the Court granted the Company’s motion to transfer the venue of the lawsuit to the United States District Court for the Northern District of Georgia. On April 13, 2011, the Court granted plaintiffs’ motion for conditional certification of the FLSA claims as a collective action. On May 26, 2011, the Court bifurcated the FLSA portion of the suit into a liability phase, in which discovery is scheduled to close on August 28, 2012, and a damages phase, to be scheduled pending outcome of the liability phase. Following a motion for partial summary judgment by the Company regarding the New York state law claims, plaintiffs agreed voluntarily to dismiss those claims in a filing on December 12, 2011. Plaintiffs continue to seek class certification of allegedly similar employees and seek attorneys’ fees, back wages and liquidated damages going back three years under the FLSA and two years under the North Carolina statute. Plaintiffs filed a motion for certification of a North Carolina state law class for NCWHA claims on January 20, 2012. The Company filed a motion for partial summary judgment on plaintiffs’ claims under the NCWHA on March 22, 2012. Plaintiffs also filed a motion for partial summary judgment with regard to the Company’s liability for plaintiffs’ FLSA claims on April 3, 2012. Briefing in each of these motions is pending.

Based on the information the Company has at this time in the Rindfleisch lawsuit, the Company is unable to assess the probable outcome or potential liability, if any, arising from this proceeding on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for this lawsuit at this time. The Company intends to defend itself vigorously in this lawsuit.

On June 11, 2010, a collective and class action complaint entitled Catherine Wilkie, individually and on behalf of all others similarly situated v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of California against the Company in which a former employee alleges wage and hour violations under the FLSA and California law. The complaint alleges that the Company paid some of its employees on both a per visit and hourly basis, thereby voiding their exempt status and entitling them to overtime pay. The complaint further alleges that California employees were subject to violations of state laws requiring meal and rest breaks, accurate wage statements and timely payment of wages. The plaintiff seeks class certification, attorneys’ fees, back wages, penalties and damages going back three years on the FLSA claim and four years on the state wage and hour claims. The parties held mediation discussions on August 3, 2011 and March 7, 2012. The parties are in the process of finalizing the terms of a monetary settlement whereby the Company would pay the total sum of $5 million to settle all claims in the lawsuit, including the plaintiff’s attorney’s fees and costs.

 

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On December 29, 2011, Odyssey HealthCare, Inc. was served with a complaint captioned United States of America and the State of Illinois ex rel. Laurie Geschrey and Laurie Janus v. Generations Healthcare, LLC, Odyssey HealthCare, Inc. Narayan Ponakala and Catherine Ponakala, which was filed on April 19, 2010 as a qui tam action in the United States District Court for the Northern District of Illinois, Eastern Division, Case No. 10 C 2413, under the provisions of the Federal False Claims Act, the Illinois Whistleblower Reward and Protection Act and the Illinois Whistleblower Act. The plaintiffs, two former employees of Generations Healthcare, LLC, a hospice company whose assets were acquired by Odyssey on December 31, 2009, are the relators and allege that defendants committed fraud against the United States and the State of Illinois by, among other things, recruiting and certifying patients as being eligible for hospice care when they were known not to be eligible and falsifying patients’ medical records in support of the claims for reimbursement. Relators further allege that Odyssey was aware of Generations Healthcare’s alleged fraudulent business practices. Both the United States and the State of Illinois declined to intervene in the action, and the complaint was unsealed on December 1, 2011. Relators seek statutory damages, which are three times the amount of any actual damages suffered by the United States and the State of Illinois, the maximum statutory civil penalty due under the statutes plus all costs and attorneys fees. Additionally, relators seek back pay plus interest and other damages because of defendants’ alleged retaliation against relators.

Odyssey filed a motion to dismiss the complaint against it with a supporting memorandum of law on March 23, 2012. Plaintiffs filed a brief in opposition to Odyssey’s motion on April 4, 2012, and Odyssey filed a reply brief on April 18, 2012. Odyssey is also pursuing indemnification from Generations Healthcare and its owners, who are defendants in this action. Given the preliminary stage of this action, the Company is unable to assess the probable outcome or potential liability, if any, arising from this action on the business, financial condition, results of operations, liquidity or capital resources of the Company or Odyssey. Odyssey intends to defend itself vigorously in the action.

Odyssey Merger Litigation

Three putative class action lawsuits were filed in connection with the Company’s acquisition (“Merger”) of Odyssey HealthCare, Inc. (“Odyssey”). The first, entitled Pompano Beach Police & Firefighters’ Retirement System v. Odyssey HealthCare, Inc. et al., was filed on May 27, 2010 in the County Court, Dallas County, Texas. The second, entitled Eric Hemminger et al. v. Richard Burnham et al., was filed on June 9, 2010 in the District Court, Dallas, Texas. The third, entitled John O. Hansen v. Odyssey HealthCare, Inc. et al., was filed on July 2, 2010 in the United States District Court for the Northern District of Texas. All three lawsuits named the Company, GTO Acquisition Corp., Odyssey and the members of Odyssey’s board of directors as defendants. All three lawsuits were brought by purported stockholders of Odyssey, both individually and on behalf of a putative class of stockholders, alleging that Odyssey’s board of directors breached its fiduciary duties in connection with the Merger by failing to maximize shareholder value and that the Company and Odyssey aided and abetted the alleged breaches. On October 8, 2010, the District Court consolidated the Hemminger and Pompano Beach actions and transferred the Hemminger action to County Court No. 5 in Dallas County, Texas. On October 12, 2010, Gentiva entered a general denial with respect to the material allegations in both the Pompano Beach and Hemminger complaints. On December 16, 2010, defendants in the actions executed a Memorandum of Understanding (“MOU”) with plaintiffs Pompano Beach Police & Firefighters’ Retirement System, Eric Hemminger and John O. Hansen reflecting an agreement in principle to settle each of the actions for additional disclosures which were included in Odyssey’s Definitive Proxy Statement on Schedule 14A, filed on July 9, 2010. Defendants also agreed not to contest an application for attorneys’ fees to be made by plaintiffs, which application shall not exceed $675,000. On February 17, 2012, the court preliminarily approved a settlement of the Pompano Beach, Hemminger and Hansen actions. The settlement remains subject to final court approval. A final settlement approval hearing has been set for May 18, 2012.

Federal Securities Class Action Litigation

Between November 2, 2010 and October 25, 2011, five shareholder class actions were filed against Gentiva and certain of its current and former officers and directors in the United States District Court for the Eastern District of New York. Each of these actions asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with the Company’s participation in the Medicare Home Health Prospective Payment System (“HH PPS”). Following consolidation of the actions, and the appointment of Los Angeles City Employees’ Retirement System as lead plaintiff and Kaplan Fox & Kilsheimer LLP as lead counsel, on April 16, 2012, a consolidated shareholder class action complaint, captioned In re Gentiva Securities Litigation, Civil Action No. 10-CV-5064, was filed in the United States District Court for the Eastern District of New York. The complaint, which names Gentiva and certain current and former officers and directors as defendants, asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Sections 11 and 15 of the Securities Act of 1933, in connection with the Company’s participation in the HH PPS. The complaint alleges,

 

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among other things, that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purposes of triggering higher reimbursement rates under the HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock during the period between July 31, 2008 and October 4, 2011.

The defendants have not yet responded to the complaint. Given the preliminary stage of the action, the Company is unable to assess the probable outcome or potential liability, if any, arising from the action on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for the action at this time. The defendants intend to defend themselves vigorously in the action.

Shareholder Derivative Litigation

On January 4, 2011 and October 31, 2011, two actions were filed against Gentiva’s current directors in Superior Court of DeKalb County in the State of Georgia, alleging, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The actions were consolidated and, on February 9, 2012, plaintiffs filed a consolidated complaint (the “Georgia State Court Action”). The Georgia State Court Action, which names Gentiva’s current directors as defendants, alleges, among other things, that Gentiva’s board of directors had actual or constructive knowledge that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock. On March 26, 2012, defendants filed a motion to dismiss the Georgia State Court Action.

On October 7 and October 13, 2011, two actions were filed against Gentiva’s current directors and one former officer in the United States District Court for the Northern District of Georgia, alleging, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The actions also asserted a claim under Section 14(a) of the Securities Exchange Act of 1934. The actions were consolidated and, on March 5, 2012, plaintiffs filed a consolidated complaint (the “Georgia Federal Court Action”). The Georgia Federal Court Action, which names Gentiva’s current directors and one former officer as defendants, alleges, among other things, that Gentiva’s board of directors had actual or constructive knowledge that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock. The complaint further alleges that the Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders was materially false and misleading. On April 16, 2012, defendants filed a motion to dismiss the Georgia Federal Court Action.

Given the preliminary stage of the actions, the Company is unable to assess the probable outcome or potential liability, if any, arising from these actions on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for these actions at this time. The defendants intend to defend themselves vigorously in these actions.

Government Matters

PRRB Appeal

In connection with the audit of the Company’s 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary’s methodology. The Company believed the methodology it used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the Provider Reimbursement Review Board (“PRRB”) concerning this issue with respect to cost reports for the years 1997, 1998 and 1999. The Company’s consolidated financial statements for the years 1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal intermediary. In June 2003, the Company and its Medicare fiscal intermediary signed an Administrative Resolution relating to the issues covered by the appeals pending before the PRRB. Under the terms of the Administrative Resolution, the fiscal intermediary agreed to reopen and adjust the Company’s cost reports for the years 1997, 1998 and 1999 using a modified version of the methodology used by the Company prior to 1997. This modified methodology will also be applied to cost reports for the year 2000, which are currently under audit. The Administrative Resolution required that the process to (i) reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs through the issuance of Notices of Program Reimbursement and (iii) make appropriate payments to the Company, be completed in early 2004. Cost reports relating to years subsequent to 1997 were to be reopened after the process for the 1997 cost reports was completed.

The fiscal intermediary completed the reopening of all 1997, 1998 and 1999 cost reports and determined that the adjustment to allowable costs aggregated $15.9 million which the Company has received and recorded as adjustments to net revenues in the fiscal years 2004 through 2006. The Company is unable to predict when the Centers for Medicare & Medicaid Services (“CMS”) will finalize all items relating to the 2000 cost reports.

 

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Senate Finance Committee Report

In a letter dated May 12, 2010, the United States Senate Finance Committee requested information from the Company regarding its Medicare utilization rates for therapy visits. The letter was sent to all publicly traded home healthcare companies mentioned in a Wall Street Journal article that explored the relationship between the CMS’ home health policies and the utilization rates of some health agencies. The Company responded to this request as well as to supplemental requests for information. On October 3, 2011, the Senate Finance Committee released its report, which generally criticized certain of the home health therapy practices of publicly traded home healthcare companies, including the Company. The Company maintains its belief that it has provided and is providing the highest quality of care and has received and continues to receive payment within the standards set forth by the reimbursement system established by CMS. The Company is unable to assess the probable outcome or potential liability, if any, arising from this matter on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for this matter at this time.

Subpoena

On July 13, 2010, the SEC informed the Company that the SEC had commenced an investigation relating to the Company’s participation in the Medicare Home Health Prospective Payment System, and, on July 16, 2010, the Company received a subpoena from the SEC requesting certain documents in connection with its investigation. Similar to the Senate Finance Committee request, the SEC subpoena, among other things, focused on issues related to the number of and reimbursement received for therapy visits before and after changes in the Medicare reimbursement system, relationships with physicians, compliance efforts including compliance with fraud and abuse laws, and certain documents sent to the Senate Finance Committee. The Company is unable to assess the probable outcome or potential liability, if any, arising from this matter on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for this matter at this time.

Investigations Involving Odyssey

On February 14, 2008, Odyssey received a letter from the Medicaid Fraud Control Unit of the Texas Attorney General’s office notifying Odyssey that the Texas Attorney General was conducting an investigation concerning Medicaid hospice services provided by Odyssey, including its practices with respect to patient admission and retention, and requesting medical records of approximately 50 patients served by its programs in the State of Texas. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of this investigation, the Texas Attorney General’s views of the issues being investigated or any actions that the Texas Attorney General may take.

On May 5, 2008, Odyssey received a letter from the U.S. Department of Justice (“DOJ”) notifying Odyssey that the DOJ was conducting an investigation of VistaCare, Inc. (“VistaCare”) and requesting that Odyssey provide certain information and documents related to the DOJ’s investigation of claims submitted by VistaCare to Medicare, Medicaid and the U.S. government health insurance plan for active military members, their families and retirees, formerly the Civilian Health and Medical Program of the Uniformed Services (“TRICARE”), from January 1, 2003 through March 6, 2008, the date Odyssey completed the acquisition of VistaCare. Odyssey has been informed by the DOJ and the Medicaid Fraud Control Unit of the Texas Attorney General’s Office that they are reviewing allegations that VistaCare may have billed the federal Medicare, Medicaid and TRICARE programs for hospice services that were not reasonably or medically necessary or performed as claimed. The basis of the investigation is a qui tam lawsuit filed in the United States District Court for the Northern District of Texas by a former employee of VistaCare. The lawsuit was unsealed on October 5, 2009 and served on Odyssey on January 28, 2010. In connection with the unsealing of the complaint, the DOJ filed a notice with the court declining to intervene in the qui tam action at such time. The Texas Attorney General also filed a notice of non-intervention with the court. These actions should not be viewed as a final assessment by the DOJ or the Texas Attorney General of the merits of this qui tam action. Odyssey continues to cooperate with the DOJ and the Texas Attorney General in their investigation. The relator has continued to pursue the qui tam lawsuit that is in the motion to dismiss phase. Based on the information that Odyssey has at this time, the Company cannot predict the outcome of the qui tam lawsuit, the governments’ continuing investigation, the DOJ’s or Texas Attorney General’s views of the issues being investigated, other than the DOJ’s and Texas Attorney General’s notice declining to intervene in the qui tam action, or any actions that the DOJ or Texas Attorney General may take.

 

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On October 28, 2011, the Assistant United States Attorney for the Northern District of Texas notified Odyssey and the Company of the existence of a second qui tam lawsuit against VistaCare, doing business as VistaCare Hospice, Odyssey Healthcare, Inc., and Gentiva Healthcare Services, that had initially been filed on October 29, 2010, in the Northern District of Alabama, but transferred to the Northern District of Texas due to the similarity of allegations with the first qui tam lawsuit. A non-intervention order and unsealing of the second complaint was entered by the District Court for the Northern District of Texas on October 27, 2011. The Company believes this action should not be viewed as a final assessment by the DOJ of the merits of this qui tam action. On February 28, 2012, the court ordered a stay in this qui tam action until the court rules on the pending motion to dismiss in the first qui tam action. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of this second qui tam lawsuit, the government’s continuing investigation, the DOJ’s views of the issues being investigated, other than the DOJ’s non-intervention in the qui tam action, or any actions that the DOJ may take.

On January 5, 2009, Odyssey received a letter from the Georgia State Health Care Fraud Control Unit notifying Odyssey that the Georgia State Health Care Fraud Unit was conducting an investigation concerning Medicaid hospice services provided by VistaCare from 2003 through 2007 and requesting certain documents. Odyssey is cooperating with the Georgia State Health Care Fraud Control Unit and has complied with the document request. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of the investigation, the Georgia State Health Care Fraud Control Unit’s views of the issues being investigated or any actions that the Georgia State Health Care Fraud Control Unit may take.

On February 23, 2010, Odyssey received a subpoena from the Department of Health and Human Services, Office of Inspector General (“OIG”), requesting various documents and certain patient records of one of Odyssey’s hospice programs relating to services performed from January 1, 2006 through December 31, 2009. Odyssey is cooperating with the OIG and has completed its subpoena production. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of the investigation, the OIG’s views of the issues being investigated or any actions that the OIG may take.

The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made at this time with regard to the above investigations involving Odyssey. Based on the limited information that Odyssey has at this time regarding such investigations, the Company is unable to predict the impact, if any, that such investigations may have on Odyssey’s and the Company’s business, financial condition, results of operations, liquidity or capital resources.

On February 2, 2009, Odyssey received a subpoena from the OIG requesting certain documents related to Odyssey’s provision of continuous care services from January 1, 2004 through January 22, 2009. On September 9, 2009 and June 24, 2011, Odyssey received two additional subpoenas from the OIG requesting medical records for certain patients who had been provided continuous care services by Odyssey during the same time period. On February 15, 2012, Odyssey entered into a settlement agreement (“Settlement Agreement”) with the United States, acting through the DOJ and on behalf of the OIG, regarding Odyssey’s provision of continuous care services prior to the Company’s acquisition of Odyssey in August 2010. Pursuant to the Settlement Agreement, Odyssey paid the United States $25 million on February 22, 2012. Additionally, Odyssey entered into a five-year Corporate Integrity Agreement (the “CIA”) with the OIG. Under the CIA, among other things, Odyssey must maintain a compliance officer and compliance committee, provide special training and education to its employees, undertake annual internal and external audits and submit annual reports on compliance with the CIA requirements to the OIG.

Note  15. Income Taxes

The Company recorded an income tax provision of $2.5 million for the first quarter of 2012. The Company’s effective income tax rate for the first quarter of 2012 was 33.4 percent. The rate for the first quarter is lower than what is expected for the year as a result of an issue being effectively settled with the IRS and a reversal of related reserves in the first quarter. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 33.4 percent for the first three months of 2012 is primarily due to state income taxes (approximately 4.9 percent), and other items (approximately 1.1 percent) offset by a change in tax reserves (approximately 7.6 percent).

The Company recorded an income tax provision of $8.1 million for the first quarter of 2011. The Company’s effective rate for the first quarter of 2011 was 39.2 percent. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 39.2 percent for the first three months of 2011 is primarily due to state income taxes (approximately 4.7 percent), offset by other items (approximately 0.5 percent).

 

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Note 16. Business Segment Information

The Company’s operations involve servicing its patients and customers through its Home Health segment and its Hospice segment.

Home Health

The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs and its consulting business. The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies, located in 39 states, from which the Company provides various combinations of skilled nursing and therapy services and paraprofessional nursing services to adult and elder patients. The Company’s direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:

 

   

Gentiva Orthopedics, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;

 

   

Gentiva Safe Strides®, which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling;

 

   

Gentiva Cardiopulmonary, which helps patients and their physicians manage heart and lung health in a home-based environment;

 

   

Gentiva Neurorehabilitation, which helps patients who have experienced a neurological injury or condition by removing the obstacles to healing in the patient’s home; and

 

   

Gentiva Senior Health, which addresses the needs of patients with age-related diseases and issues to effectively and safely stay in their homes.

In addition, the Company provides consulting services to home health agencies which include operational support, billing and collection activities, and on-site agency support and consulting. For 2011, the Company’s Rehab Without Walls® and homemaker services business in Illinois are reflected as discontinued operations in accordance with applicable accounting guidance. See Note 4 for additional information.

Hospice

The Hospice segment serves terminally ill patients and their families through Medicare-certified providers operating in 29 states. Comprehensive management of the healthcare services and products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending on a patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), medical social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals. The Hospice segment also delivers services to its customers through focused specialty programs that include:

 

   

Dementia Specialty Program, which provides an individualized disease management program addressing the physical needs specific to Alzheimer’s and dementia patients and support mechanisms for their caregivers;

 

   

Cancer Specialty Program, which provides advanced pain and symptom management for patients coping with the effects of cancer;

 

   

Cardiac Specialty Program, which helps patients and their physicians aggressively manage symptoms associated with heart disease, focusing on quality of life and pain control; and

 

   

Pulmonary Specialty Program, which addresses the needs of patients who have experienced a respiratory crisis by increasing quality of life and promoting comfort by specialized symptom management.

Corporate Expenses

Corporate expenses consist of costs relating to executive management and corporate and administrative support functions that are not directly attributable to a specific segment, including equity-based compensation expense. Corporate and administrative support functions represent primarily information services, accounting and finance, tax compliance, risk management, procurement, marketing, clinical administration, training, legal and human resource benefits and administration.

 

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Other Information

The Company’s senior management evaluates performance and allocates resources based on operating contributions of the reportable segments, which exclude corporate expenses, depreciation, amortization and net interest costs, but include revenues and all other costs (including special items) directly attributable to the specific segment. Segment assets represent net accounts receivable, identifiable intangible assets, goodwill, and certain other assets associated with segment activities. All other assets are assigned to corporate assets for the benefit of all segments for the purposes of segment disclosure.

Segment net revenues by major payer source were as follows (in millions):

 

     First Quarter  
     2012      2011  
     Home                    Home                
     Health      Hospice      Total      Health      Hospice      Total  

Medicare

   $ 190.6       $ 182.0       $ 372.6       $ 201.6       $ 181.0       $ 382.6   

Medicaid and Local Government

     11.9         7.6         19.5         13.2         7.8         21.0   

Commercial Insurance and Other:

                 

Paid at episodic rates

     20.0         —           20.0         18.7         —           18.7   

Other

     17.5         6.1         23.6         22.5         6.3         28.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 240.0       $ 195.7       $ 435.7       $ 256.0       $ 195.1       $ 451.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Segment information about the Company’s operations is as follows (in thousands):

 

     Home Health     Hospice     Total  

For the three months ended March 31, 2012

      

Net revenues

   $ 239,964      $ 195,688      $ 435,652   
  

 

 

   

 

 

   

 

 

 

Operating contribution

   $ 25,876 (1)    $ 32,482 (1)    $ 58,358   
  

 

 

   

 

 

   

Corporate expenses

         (21,844 )(1) 

Depreciation and amortization

         (7,430

Interest expense and other, net of interest income

         (21,502 )(2) 
      

 

 

 

Income from continuing operations before income taxes

       $ 7,582   
      

 

 

 

Segment assets

   $ 246,294      $ 919,629      $ 1,165,923   
  

 

 

   

 

 

   

Corporate assets

         295,450   
      

 

 

 

Total assets

       $ 1,461,373   
      

 

 

 

For the three months ended March 31, 2011

      

Net revenues

   $ 256,039      $ 195,070      $ 451,109   
  

 

 

   

 

 

   

 

 

 

Operating contribution

   $ 41,882 (1)    $ 36,137 (1)    $ 78,019   
  

 

 

   

 

 

   

Corporate expenses

         (22,805 )(1) 

Depreciation and amortization

         (7,594

Interest expense and other, net of interest income

         (26,883 )(2) 
      

 

 

 

Income from continuing operations before income taxes and equity in earnings of CareCentrix

       $ 20,737   
      

 

 

 

Segment assets

   $ 662,295      $ 1,065,074      $ 1,727,369   
  

 

 

   

 

 

   

Corporate assets

         398,794   
      

 

 

 

Total assets

       $ 2,126,163   
      

 

 

 

 

(1) For the three months ended March 31, 2012 and 2011, the Company recorded charges relating to cost savings initiatives and other restructuring costs, acquisition and integration costs and legal settlements of $5.4 million and $3.8 million, respectively. See Note 8 for additional information.

 

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

 

     First Quarter  
     2012     2011  

Home Health

   $ 5.8      $ 0.3   

Hospice

     (0.2     0.7   

Corporate expenses

     (0.2     2.8   
  

 

 

   

 

 

 

Total

   $ 5.4      $ 3.8   
  

 

 

   

 

 

 

 

(2) For the first quarter of 2012 interest expense and other, net included charges of $0.5 million relating to the write-off of deferred debt issuance costs associated with the revolving credit facility. In addition, interest expense and other, net for the first quarter of 2011 included fees of $3.8 million associated with terminating the Company’s interest rate swaps in connection with the refinancing of the Company’s Term Loan A and Term Loan B under the Company’s senior secured credit agreement. See Note 11 for additional information.

Note 17. Supplemental Guarantor and Non-Guarantor Financial Information

Gentiva’s guarantor subsidiaries are guarantors to the Company’s debt securities which are registered under the Securities Act of 1933, as amended. The condensed consolidating financial statements presented below are provided pursuant to Rule 3-10 of Regulation S-X. Separate financial statements of each subsidiary guaranteeing Gentiva’s debt securities are not presented because the guarantor subsidiaries are jointly and severally, fully and unconditionally liable under the guarantees, and 100 percent owned by the Company. There are no restrictions on the ability to obtain funds from these subsidiaries by dividends or other means.

The following condensed consolidating financial statements include the balance sheets as of March 31, 2012 and December 31, 2011, statements of comprehensive income for the three months ended March 31, 2012 and 2011 and statements of cash flows for the three months ended March 31, 2012 and 2011 of (i) Gentiva Health Services, Inc. (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) its guarantor subsidiaries, (iii) its non-guarantor subsidiaries, and (iv) the eliminations necessary to arrive at the information for the Company on a consolidated basis.

 

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Condensed Consolidating Balance Sheet

March 31, 2012

(In thousands)

 

     Gentiva Health      Guarantor      Non-Guarantor            Consolidated  
     Services, Inc.      Subsidiaries      Subsidiaries      Eliminations     Total  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 31,128       $ —         $ 41,634       $ —        $ 72,762   

Receivables, net

     —           305,683         26,430         (19,345     312,768   

Deferred tax assets, net

     —           15,085         2,387         —          17,472   

Prepaid expenses and other current assets

     —           40,709         8,374         (357     48,726   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     31,128         361,477         78,825         (19,702     451,728   

Note receivable from CareCentrix

     —           25,000         —           —          25,000   

Fixed assets, net

     —           45,367         315         —          45,682   

Intangible assets, net

     —           211,702         100         —          211,802   

Goodwill

     —           635,605         6,064         —          641,669   

Investment in subsidiaries

     1,114,111         27,297         —           (1,141,408     —     

Other assets

     —           85,485         7         —          85,492   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,145,239       $ 1,391,933       $ 85,311       $ (1,161,110   $ 1,461,373   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current liabilities:

             

Current portion of long-term debt

   $ 9,193       $ —         $ —         $ —        $ 9,193   

Accounts payable

     —           34,494         794         (19,345     15,943   

Other current liabilities

     —           178,522         54,589         (357     232,754   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     9,193         213,016         55,383         (19,702     257,890   

Long-term debt

     928,932         —           —           —          928,932   

Deferred tax liabilities, net

     —           30,050         —           —          30,050   

Other liabilities

        34,756         20           34,776   

Total Gentiva shareholders’ equity

     207,114         1,114,111         27,297         (1,141,408     207,114   

Noncontrolling interests

     —           —           2,611         —          2,611   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     207,114         1,114,111         29,908         (1,141,408     209,725   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,145,239       $ 1,391,933       $ 85,311       $ (1,161,110   $ 1,461,373   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Condensed Consolidating Balance Sheet

December 31, 2011

(In thousands)

 

     Gentiva Health      Guarantor      Non-Guarantor            Consolidated  
     Services, Inc.      Subsidiaries      Subsidiaries      Eliminations     Total  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 124,101       $ —         $ 40,811       $ —        $ 164,912   

Receivables, net

     —           283,552         18,168         (11,131     290,589   

Deferred tax assets, net

     —           24,560         1,891         —          26,451   

Prepaid expenses and other current assets

     —           32,619         6,904         (1,144     38,379   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     124,101         340,731         67,774         (12,275     520,331   

Note receivable from CareCentrix

     —           25,000         —           —          25,000   

Fixed assets, net

     —           45,917         329         —          46,246   

Intangible assets, net

     —           214,774         100         —          214,874   

Goodwill

     —           635,605         6,064         —          641,669   

Investment in subsidiaries

     1,063,962         25,173         —           (1,089,135     —     

Other assets

     —           82,200         8         —          82,208   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,188,063       $ 1,369,400       $ 74,275       $ (1,101,410   $ 1,530,328   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current liabilities:

             

Current portion of long-term debt

   $ 14,903       $ —         $ —         $ —        $ 14,903   

Accounts payable

     —           22,913         831         (11,131     12,613   

Other current liabilities

     —           223,165         45,655         (1,144     267,676   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     14,903         246,078         46,486         (12,275     295,192   

Long-term debt

     973,222         —           —           —          973,222   

Deferred tax liabilities, net

     —           32,498         —           —          32,498   

Other liabilities

        26,862         23           26,885   

Total Gentiva shareholders’ equity

     199,938         1,063,962         25,173         (1,089,135     199,938   

Noncontrolling interests

     —           —           2,593         —          2,593   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     199,938         1,063,962         27,766         (1,089,135     202,531   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,188,063       $ 1,369,400       $ 74,275       $ (1,101,410   $ 1,530,328   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended March 31, 2012

(In thousands)

 

     Gentiva Health     Guarantor     Non-Guarantor           Consolidated  
     Services, Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  

Net revenues

   $ —        $ 424,353      $ 14,312      $ (3,013   $ 435,652   

Cost of services sold

     —          229,527        6,347        (3,013     232,861   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          194,826        7,965        —          202,791   

Selling, general and administrative expenses

     —          (169,549     (4,158     —          (173,707

Interest (expense) income and other, net

     (21,543     —          41        —          (21,502

Equity in earnings of subsidiaries

     17,561        2,059        —          (19,620     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (3,982     27,336        3,848        (19,620     7,582   

Income tax benefit (expense)

     8,822        (9,775     (1,576     —          (2,529
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     4,840        17,561        2,272        (19,620     5,053   

Noncontrolling interests

     —          —          (213     —          (213
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Gentiva shareholders

   $ 4,840      $ 17,561      $ 2,059      $ (19,620   $ 4,840   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 4,840      $ 17,561      $ 2,272      $ (19,620   $ 5,053   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Comprehensive Income

For the Three Months March 31, 2011

(In thousands)

 

     Gentiva Health     Guarantor     Non-Guarantor           Consolidated  
     Services, Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  

Net revenues

   $ —        $ 440,782      $ 13,338      $ (3,011   $ 451,109   

Cost of services sold

     —          227,269        6,498        (3,011     230,756   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          213,513        6,840        —          220,353   

Selling, general and administrative expenses

     —          (169,125     (3,608     —          (172,733

Interest (expense) and other, net

     (26,889     —          6        —          (26,883

Equity in earnings of subsidiaries

     29,612        2,043        —          (31,655     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     2,723        46,431        3,238        (31,655     20,737   

Income tax benefit (expense)

     10,729        (17,701     (1,147     —          (8,119

Equity in net earnings of CareCentrix

     —          554        —          —          554   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     13,452        29,284        2,091        (31,655     13,172   

Discontinued operations, net of tax

     —          328        119        —          447   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     13,452        29,612        2,210        (31,655     13,619   

Noncontrolling interests

     —          —          (167     —          (167
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Gentiva shareholders

   $ 13,452      $ 29,612      $ 2,043      $ (31,655   $ 13,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 12,974      $ 29,612      $ 2,210      $ (31,655   $ 13,141   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2012

(In thousands)

 

    Gentiva Health     Guarantor     Non-Guarantor           Consolidated  
    Services, Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  

OPERATING ACTIVITIES:

         

Net cash (used in) provided by operating activities

  $ (5,497   $ (30,212   $ 1,004      $ —        $ (34,705
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

         

Purchase of fixed assets

    —          (3,787     (6     —          (3,793
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —          (3,787     (6     —          (3,793
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES:

         

Proceeds from issuance of common stock

    705        —          —          —          705   

Repayment of long-term debt

    (50,000     —          —          —          (50,000

Debt issuance costs

    (4,125     —          —          —          (4,125

Repayment of capital lease obligations

    (37     —          —          —          (37

Other

    —          (20     (175     —          (195

Net payuments related to intercompany financing

    (34,019     34,019        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (87,476     33,999        (175     —          (53,652
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

    (92,973     —          823          (92,150

Cash and cash equivalents at beginning of period

    124,101        —          40,811        —          164,912   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 31,128      $ —        $ 41,634      $ —        $ 72,762   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2011

(In thousands)

 

     Gentiva Health     Guarantor     Non-Guarantor            Consolidated  
     Services, Inc.     Subsidiaries     Subsidiaries     Eliminations      Total  

OPERATING ACTIVITIES:

           

Net cash (used in) provided by operating activities

   $ (8,295   $ 10,853      $ 163      $ —         $ 2,721   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

INVESTING ACTIVITIES:

           

Purchase of fixed assets

     —          (3,211     (106     —           (3,317
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (3,211     (106     —           (3,317
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

FINANCING ACTIVITIES:

           

Proceeds from issuance of common stock

     4,652        —          —          —           4,652   

Windfall tax benefits associated with equity-based compensation

     194        —          —          —           194   

Repayment of long-term debt

     (3,438     —          —          —           (3,438

Debt issuance costs

     (13,457     —          —          —           (13,457

Repayment of capital lease obligations

     (76     —          —          —           (76

Other

     —          64        (303     —           (239

Net payments related to intercompany financing

     7,706        (7,706     —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (4,419     (7,642     (303     —           (12,364
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and cash equivalents

     (12,714     —          (246     —           (12,960

Cash and cash equivalents at beginning of period

     63,816        —          40,936        —           104,752   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 51,102      $ —        $ 40,690      $ —         $ 91,792   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Note 18. Subsequent Event

Sale of Louisiana Branches

In January 2012, the Company entered into an asset purchase agreement to sell eight home health and two hospice branches in Louisiana for total consideration of $5.0 million. That agreement was terminated and on March 26, 2012, the Company entered into an asset purchase agreement with a different purchaser to sell eight home health and four hospice branches in Louisiana for total consideration of approximately $6.5 million.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “assumes,” “trends” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company’s current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:

 

   

general economic and business conditions;

 

   

demographic changes;

 

   

changes in, or failure to comply with, existing governmental regulations;

 

   

impact on the Company of healthcare reform legislation and its implementation through governmental regulations;

 

   

legislative proposals for healthcare reform;

 

   

changes in Medicare, Medicaid and commercial payer reimbursement levels;

 

   

the outcome of any inquiries into the Company’s operations and business practices by governmental authorities;

 

   

effects of competition in the markets in which the Company operates;

 

   

liability and other claims asserted against the Company;

 

   

ability to attract and retain qualified personnel;

 

   

ability to access capital markets;

 

   

availability and terms of capital;

 

   

loss of significant contracts or reduction in revenues associated with major payer sources;

 

   

ability of customers to pay for services;

 

   

business disruption due to natural disasters, pandemic outbreaks, or terrorist acts;

 

   

ability to successfully integrate the operations of acquisitions the Company may make and achieve expected synergies and operational efficiencies within expected time-frames;

 

   

ability to maintain compliance with financial covenants under the Company’s credit agreement;

 

   

effect on liquidity of the Company’s debt service requirements; and

 

   

changes in estimates and judgments associated with critical accounting policies and estimates.

Forward-looking statements are found throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company does not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its Annual Report on Form 10-K for the year ended December 31, 2011 and in various other filings with the SEC. The reader is encouraged to review these risk factors and filings.

General

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of Gentiva’s results of operations and financial position. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this report.

The Company’s results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and in other filings with the SEC.

 

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Overview

Gentiva Health Services, Inc. (“Gentiva” or the “Company”) is a leading provider of home health services and hospice services serving patients through approximately 420 locations in 41 states.

The Company provides a single source for skilled nursing; physical, occupational, speech and neurorehabilitation services; hospice services; social work; nutrition; disease management education; help with daily living activities; and other therapies and services. Gentiva’s revenues are generated from federal and state government programs, commercial insurance and individual consumers.

The federal and state government programs under which the Company generates a majority of its net revenues are subject to legislative and other risk factors that can make it difficult to determine future reimbursement rates for Gentiva’s services to its patients. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (“Affordable Care Act”), which represents a $39.5 billion reduction in Medicare home health spending over an extended period. The law phases in the reductions over seven years, including rebasing of Medicare reimbursement rates over a four year period beginning in 2014, with reductions resulting from rebasing not to exceed 3.5 percent in any one year. The Affordable Care Act is currently under review by the United States Supreme Court. The Company anticipates that many of the provisions of the Affordable Care Act may be subject to further clarification and modification through the rule-making process.

The commercial insurance industry is continually seeking ways to control the cost of services to patients that it covers. One of the ways it seeks to control costs is to require greater efficiencies from its providers, including home healthcare companies. Various states have addressed budget pressures by considering or implementing reductions in various healthcare programs, including reductions in rates or changes in patient eligibility requirements. The Company has also decided to reduce participation in certain Medicaid and other state and county programs.

The Company believes that several marketplace factors can contribute to its future growth. First, the Company is a leader in a highly fragmented home healthcare and hospice industry populated by more than 20,000 Medicare certified providers of varying size and resources. Second, the cost of a home healthcare visit to a patient can be significantly lower than the cost of an average day in a hospital or skilled nursing institution and third, the demand for home care is expected to grow, primarily due to an aging U.S. population. The Company expects to capitalize on these factors through a determined set of strategic priorities, as follows: growing revenues from services provided to the geriatric population, with a particular emphasis on expanding the penetration of the Company’s innovative specialty programs; being the leader in growth in the local markets the Company serves; focusing on clinical associate recruitment, retention and productivity; evaluating and closing opportunistic acquisitions; seeking further operating leverage through more efficient utilization of existing resources; implementing and leveraging technology to support the Company’s various initiatives; strengthening the Company’s balance sheet to support future growth; and educating our legislative and policymaking leaders on the value of the home health and hospice benefits to our nation’s seniors. The Company anticipates executing these strategies by continuing to expand its sales presence, making operational improvements and deploying new technologies, providing employees with leadership training and instituting retention initiatives, ensuring strong ethics and corporate governance, and focusing on shareholder value.

Management intends the discussion of the Company’s financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the Company’s financial statements.

The Company’s operations involve servicing its patients and customers through its Home Health segment and its Hospice segment. This presentation aligns financial reporting with the manner in which the Company manages its business operations with a focus on the strategic allocation of resources and separate branding strategies between the business segments. Discontinued operations represent services and products provided to patients through the Company’s Rehab Without Walls® business, the Company’s homemaker agency business in Illinois and the Company’s HME and IV business. See Note 4 to the Company’s consolidated financial statements for additional information.

 

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Home Health

The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs and its consulting business. The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies, located in 39 states, from which the Company provides various combinations of skilled nursing and therapy services and paraprofessional nursing services to adult and elder patients. The Company’s direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:

 

   

Gentiva Orthopedics, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;

 

   

Gentiva Safe Strides®, which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling;

 

   

Gentiva Cardiopulmonary, which helps patients and their physicians manage heart and lung health in a home-based environment;

 

   

Gentiva Neurorehabilitation, which helps patients who have experienced a neurological injury or condition by removing the obstacles to healing in the patient’s home; and

 

   

Gentiva Senior Health, which addresses the needs of patients with age-related diseases and issues to effectively and safely stay in their homes.

Hospice

The Hospice segment serves terminally ill patients and their families through Medicare-certified providers operating in 29 states. Comprehensive management of the healthcare services and products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending on a patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), medical social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals. The Hospice segment also delivers services to its customers through focused specialty programs that include:

 

   

Dementia Specialty Program, which provides an individualized disease management program addressing the physical needs specific to Alzheimer’s and dementia patients and support mechanisms for their caregivers;

 

   

Cancer Specialty Program, which provides advanced pain and symptom management for patients coping with the effects of cancer;

 

   

Cardiac Specialty Program, which helps patients and their physicians aggressively manage symptoms associated with heart disease, focusing on quality of life and pain control; and

 

   

Pulmonary Specialty Program, which addresses the needs of patients who have experienced a respiratory crisis by increasing quality of life and promoting comfort by specialized symptom management.

Dispositions

Home Health and Hospice Branch Dispositions

In the fourth quarter of 2011, the Company entered into asset purchase agreements to sell the assets of certain home health branches in Utah, Michigan and Nevada, as well as a hospice branch in Texas. In addition, the Company entered into an option agreement to sell the assets of the Company’s home health branch in Brooklyn, New York pending approval by the Public Health Council and New York State Agencies.

 

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Table of Contents

Homemaker Services Agency Disposition

Effective October 14, 2011, the Company completed the sale of its IDOA business to Premier Home Health Care Services, Inc., pursuant to an asset purchase agreement, for total consideration of approximately $2.4 million, consisting of (i) cash proceeds of approximately $2.0 million and (ii) an escrow fund of approximately $0.4 million, to be received by the Company subject to certain post closing conditions. During the first quarter of 2012, the Company reduced the escrow fund receivable by approximately $0.1 million as a result of certain of the post closing conditions.

Rehab Without Walls® Disposition

Effective September 10, 2011, the Company completed the sale of its Rehab Without Walls® business to Southern Home Care Services, Inc., pursuant to an asset purchase agreement, for total consideration of approximately $9.8 million. The consideration consisted of (i) cash proceeds of approximately $9.2 million and (ii) an escrow fund of approximately $0.6 million that will be received by the Company subject to certain post closing obligations.

Results of Operations

Net Revenues

A summary of the Company’s net revenues by segment follows (in millions):

 

     First Quarter  
                   Percentage  
     2012      2011      Variance  

Home Health

   $ 240.0       $ 256.0         (6.3)

Hospice

     195.7         195.1         0.3
  

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 435.7       $ 451.1         (3.4)
  

 

 

    

 

 

    

 

 

 

Net revenues by major payer source are as follows (in millions):

 

      First Quarter  
     2012      2011  
     Home                    Home                
     Health      Hospice      Total      Health      Hospice      Total  

Medicare

   $ 190.6       $ 182.0       $ 372.6       $ 201.6       $ 181.0       $ 382.6   

Medicaid and Local Government

     11.9         7.6         19.5         13.2         7.8         21.0   

Commercial Insurance and Other:

                 

Paid at episodic rates

     20.0         —           20.0         18.7         —           18.7   

Other

     17.5         6.1         23.6         22.5         6.3         28.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 240.0       $ 195.7       $ 435.7       $ 256.0       $ 195.1       $ 451.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the first quarter of 2012, as compared to the first quarter of 2011, net revenues decreased by $15.4 million, or 3.4 percent, to $435.7 million from $451.1 million.

Home Health

Home Health segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. First quarter 2012 net revenues were $240.0 million, down $16.0 million or 6.3 percent, from $256.0 million in the prior year period. The decrease is primarily attributable to closed or divested branches, the net decrease in Medicare reimbursement rates and additional decreases in the Medicaid and Local Government and Commercial Insurance and Other payer sources as the Company continues its strategy to reduce or eliminate certain lower gross margin business.

 

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The following table reflects the net revenues for the first three months of 2011 relating to businesses closed or divested in 2011 and in the first three months of 2012 (in millions):

 

Medicare

   $ (11.7

Medicaid and Local Government

     (0.4

Commercial Insurance and Other:

  

Paid at episodic rates

     (1.2

Other

     (2.3
  

 

 

 

Total net revenues

   $ (15.6
  

 

 

 

The Company’s episodic revenues decreased 4.4 percent for the first quarter of 2012. A summary of the Company’s combined Medicare and non-Medicare Prospective Payment System (“PPS”) business paid at episodic rates follows (dollars in millions):

 

     First Quarter  
                   Percentage  
     2012      2011      Variance  

Home Health

        

Medicare

   $ 190.6       $ 201.6         (5.5 )% 

Non-Medicare PPS

     20.0         18.7         6.7
  

 

 

    

 

 

    

 

 

 

Total

   $ 210.6       $ 220.3         (4.4 )% 
  

 

 

    

 

 

    

 

 

 

Key Company statistics related to episodic revenues were as follows:

 

     First Quarter  
                   Percentage  
     2012      2011      Variance  

Episodes

     73,400         72,800         0.8

Revenue per episode

   $ 2,875       $ 3,025         (5.0 %) 

Episode volume for the first quarter of 2012 increased slightly as compared to the first quarter of 2011. Admissions increased slightly by 0.9 percent, from 50,900 admissions in the first quarter of 2011 to 51,400 admissions in the first quarter of 2012. There were approximately 1.4 episodes for each admission during both the first quarter of 2012 and 2011.

In the first quarter of 2012, Medicare and non-Medicare PPS revenues as a percent of total Home Health revenues were 88 percent as compared to 86 percent for the corresponding period in 2011. In the first quarter of 2012, revenues from specialty programs as a percent of total Medicare and non-Medicare PPS Home Health revenues were 47 percent as compared to 46 percent for the first quarter of 2011.

Revenues from Medicaid and Local Government payer sources were $11.9 million in the first quarter of 2012, as compared to $13.2 million in the first quarter of 2011. Revenues from Commercial Insurance and Other payer sources, excluding non-Medicare PPS revenues, were $17.5 million in the first quarter of 2012 as compared to $22.5 million in the first quarter of 2011.

Net revenues from the Company’s Rehab Without Walls® unit were $5.4 million in the first three months of 2011. Net revenues from the Company’s homemaker services agency business in Illinois were $2.3 million in the first three months of 2011. These amounts are included within discontinued operations in the Company’s consolidated statements of comprehensive income.

 

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Hospice

Hospice revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. First quarter of 2012 net revenues were $195.7 million as compared to $195.1 million in the corresponding period of 2011.

The following table reflects the net revenues for the first three months of 2011 relating to businesses divested or closed in 2011 (in millions):

 

Medicare

   $ (3.9

Medicaid and Local Government

     (0.4

Commercial Insurance and Other

     (0.2
  

 

 

 

Total net revenues

   $ (4.5
  

 

 

 

Key Company statistics relating to Hospice were as follows:

 

     First Quarter  
     2012      2011      Percentage
Variance
 

Average Daily Census

     13,800         13,900         (0.7 )% 

Revenue per patient day

   $ 156       $ 156         0.0

For the first quarter of 2012 and 2011, Average Daily Census (“ADC”) approximated 13,800 and 13,900 patients, respectively. The average length of stay of patients at discharge was 93 days and 92 days, respectively, for the first quarter of 2012 and the first quarter of 2011.

Medicare revenues were $182.0 million in the first quarter of 2012 as compared to $181.0 million in the corresponding period of 2011. Medicaid revenues were $7.6 million for the first quarter of 2012 as compared to $7.8 million for the corresponding period of 2011. Commercial Insurance and Other revenues in the first quarter of 2012 were $6.1 million as compared to $6.3 million in the corresponding period of 2011.

Gross Profit

The following table reflects gross profit by business segment for 2012 and 2011 (dollars in millions):

 

     First Quarter  
     2012     2011     Variance  

Gross Profit:

      

Home Health

   $ 117.3      $ 134.7      $ (17.4

Hospice

     85.5        85.6        (0.1
  

 

 

   

 

 

   

 

 

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