Gentiva Health Services Inc. (GTIV) reported its fourth-quarter adjusted earnings of $21.5 million or 70 cents per share, well ahead of the Zacks Consensus Estimate of 66 cents. This also compares favorably with the income of $18.8 million or 63 cents in the year-ago quarter.

Gentiva also posted adjusted earnings of $86.1 million or $2.82 per share, exceeding the Zacks Consensus Estimate of $2.78 and the prior year income of $65.3 million or $2.19 per share.

Earnings ramped up due to strong growth in Hospice and Home Health Episodic volumes as well as progressive operating margins.

Gentiva’s adjusted earnings exclude after-tax impact from restructuring, acquisition and integration costs of $2.6 million or 51 cents per share in the reported quarter and $27.8 million or 97 cents per share in the fiscal year 2010. The fiscal year 2010 also excludes the gain on sale of assets.

The fourth quarter of 2009 excludes $0.24 million from gain on sale of assets and the after-tax impact from restructuring, acquisition and integration costs, while $4.5 million excludes from the fiscal year 2009 results. The results, however, include the impact of the acquisition of Odyssey Healthcare Inc., which was completed in August 17, 2010.

Discontinued operations represent results of the respiratory therapy and home medical equipment and infusion therapy businesses of Gentiva, sold on February 1, 2010. Gentiva incurred after-tax losses on discontinuing operations of $2.7 million or 9 cents per share in the reported quarter, as against the $10.4 million or 34 cents per share in the prior-year quarter.

In fiscal 2010, discontinued operations reflected a net loss of $5.6 million or 18 cents per share as opposed to a net loss of $10.6 million or 36 cents per share in 2009.

Including one-time charges for restructuring, legal settlements and acquisition and integration activities along with gains on sales of assets and discontinuing operations, Gentiva reported a net income of $15.8 million or 51 cents per share as opposed to $8.7 million or 29 cents per share in the prior-year quarter. In fiscal 2010, net income reported was $52.2 million or $1.71 per share versus net income of $59.2 million or $1.98 per share in 2009.

Behind the Headlines

Gentiva’s total net revenues for the quarter climbed 50.0% year over year to $465.0 million, exceeding the Zacks Consensus Estimate of $463.0 million. Net revenues of Gentiva in the fiscal 2010 were $1.447 billion, which slightly exceeded the Zacks Consensus Estimate of $1.445 million and the prior year revenue by 26%.

Revenues from the Home Health Episodic segment declined 5% year over year to $224.6 million in the reported quarter, while it jumped 6% year over year to $909.2 million.

Revenues in the Hospice segment came in at $195.2 million, which reflected a year-over-year increase of approximately 6% from Gentiva’s existing hospice business as well as $174.3 million in revenues from the Odyssey acquisition.

Gentiva witnessed selling, general and administrative (SG&A) expenses of $180.0 million in the reported quarter from $131.2 million in the year-ago quarter, while Gentiva incurred SG&A expenses of $616.5 million in 2010 as against the $490.9 million in 2009.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) attributable to continuing operations increased 91.0% to $64.9 million from $34.0 million in the prior-year quarter, while it increased approximately 57% in 2010 to $200.2 million from $127.3 million in 2009. Adjusted EBITDA excludes charges associated with restructuring, merger and acquisition activities.

Gentiva exited the quarter with cash and cash equivalents of approximately $104.8 million and outstanding debt under its credit agreement of $1.052 billion. The company repaid $53.4 million out of the $1.105 billion borrowed in connection with the financing of the Odyssey acquisition.

As of December 31, 2010, Gentiva had total assets of $2.12 billion and shareholders’ equity of $638.2 million.

Outlook for Fiscal 2011    

Gentiva expects net revenues to be in range of $1.90 billion−$1.95 billion and adjusted income from continuing operations − excluding the costs of restructuring, legal settlements and acquisition and integration activities, the results of discontinued operations and the impact of any future acquisitions − to be in the range of $2.70−$2.80 per share for fiscal 2011.

The results include the impact of the closing of the Odyssey transaction and the final rules regarding Medicare home health reimbursement rates for 2011, which were issued by the Centers for Medicare & Medicaid Services (CMS) on November 2, 2010.

Accordingly, CMS announced a 2% market basket update to Medicare’s CY10 home health prospective payment system (HH PPS) rates and modifications to the home health outlier policy.

The changes are designed to ensure appropriate payments, prevent fraud and abuse and protect beneficiaries under the Medicare home health program. However, Gentiva foresees its profits to be negatively affected by the reimbursement rate cuts, as home health agencies (HHA) receive additional payments for 60-day home care that carry unusually high costs.

According to the guidelines issued, CMS will cap these additional payments in CY10 at 10% per HHA and target total aggregate payments at 2.5% of all HH PPS payments.

Nevertheless, 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.

The acquisition of Odyssey has made Gentiva a leading hospice care provider in the U.S. Gentiva now projects a collective average daily patient census of approximately 14,000 by expanding its operations in about 30 states. Gentiva expects to bring its innovative specialty home health programs and other services to patients by broadening its scope of operations.

Its competitor, Amedisys, Inc. (AMED) will report its fourth quarter 2010 results on February 22, 2010.

Currently, Gentiva carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the stock over the near term.

 
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