Gentiva Reports Preliminary Results - Analyst Blog

On Tuesday, Gentiva Health Services Inc. (GTIV) released its preliminary operating results for the second quarter of 2010. The final second quarter results are expected on July 29, 2010. Gentiva has reiterated its fiscal 2010 outlook for adjusted income from continuing operations and reduced the revenue guidance for fiscal 2010.
 
Second quarter of 2010
 
Gentiva anticipates total revenues to climb 4% to reach approximately $297 million, compared with $284.8 million over the year ago quarter. The increase in revenues has been contributed by home health episodic revenues of $229 million and hospice revenues of $21 million, which are expected to increase approximately 7% and 14%, respectively, from the year-ago quarter.
 
Inclusive of stock-based compensation expenses of $1.6 million and $1.7 million, respectively, in the 2010 and 2009 second quarters, adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) are expected to increase about 23% to approximately $43.2 million in the quarter from $35.0 million in the second quarter of 2009. Adjusted EBITDA excludes net charges relating to restructuring, legal settlements and merger and acquisition activities.
 
Consequently, Gentiva expects adjusted EBITDA margin to increase to approximately 14.5%, compared with 12.3% in the year-ago period.
 
Further, adjusted income from continuing operations is projected to grow to approximately $22.6 million, up 26% from $17.9 million in the year- ago period. Also, adjusted income from continuing operations is expected to be well ahead of $0.61 per share in the prior year to $0.74 per share in the second quarter of 2010. These estimates exclude net charges and the impact of any losses on sales of assets.
 
In addition, Gentiva expects to post cash and cash equivalents of approximately $191 million as on July 4, 2010 compared with $168.9 million as on April 4, 2010 and $152.4 million as on January 3, 2010.
 
Fiscal 2010
 
Gentiva continues to reiterate its fiscal 2010 guidance for adjusted income from continuing operations in the range of $2.67-$2.75 per share. The guidance excludes the costs of restructuring, legal settlements and merger and acquisition activities, the results of discontinued operations and the impact of pending and future acquisitions.
 
However, Gentiva has slashed its full-year revenue guidance due to slower than anticipated growth in home health episodic volumes and the expected seasonality in third quarter volumes. Gentiva now provides a revenue outlook in the range of $1.20 billion-$1.23 billion, down from $1.23 billion-$1.26 billion, projected previously.
 
Gentiva, however, expects to further revise its fiscal 2010 outlook after the completion of the Odyssey HealthCare Inc. (ODSY) acquisition expected during the third quarter of 2010.
 
Gentiva agreed to buy Odyssey in May for approximately $1 billion in an all-cash transaction worth about $370.4 million, or $27 per share. Accordingly, after the acquisition of Odyssey, Gentiva expects to become a leading hospice care provider in the US and projects a collective average daily patient census of approximately 14,000 by expanding its operations in about 30 states.
 
Accordingly, the combined firm is projected to earn about $1.8 billion in annual revenue, dramatically up from $1.15 billion earned by Gentiva alone in 2009.
 
Further, management expects 60% of this revenue to come from home healthcare revenue and the remainder from hospice care. Going forward, Gentiva anticipates the impact of the deal to be accretive to operating earnings within the first year, although certain one-time charges are also projected.
 
Gentiva also acquired the assets of United Home Care Group, a Medicare certified home health services business in May to expand its presence in Louisiana.
 
However, this deal is projected to have a neutral impact on Gentiva’s earnings in 2010 but beyond 2010, it is expected to be accretive to earnings.
 
Our Take
 
The health care providing industry is consolidating through a flood of mergers and acquisitions (M&A) of home health and hospice providers. Gentiva’s impressive showing in the first quarter of 2010 with earnings of $0.65 per share and revenues of $297.1 million paved the way for more acquisitions, which were driven by higher volumes and revenues from its home health and hospice operations.
 
Gentiva has acquired United Home and we now expect more M&A activities in this space, particularly after the reimbursement rate cuts that are being introduced under healthcare reforms.
 
Gentiva’s diversified product portfolio is impressive and its history of generating significant leverage on acquisitions and modestly strong fundamentals inspire our optimism about the stock.