Gentiva Health Services Inc. (GTIV) reported its first-quarter adjusted earnings of $15.7 million or 51 cents per share, lagging the Zacks Consensus Estimate of 59 cents. This also compares with the income of $19.7 million or 65 cents in the year-ago quarter.

The decline in adjusted earnings was due to approximately $3.8 million of charges associated with the completion of the refinancing of outstanding debt under its senior secured credit agreement in March, 2011.

Excluding the write-off of prepaid financing fees and the costs of terminating the company’s interest rate swap contracts, Gentiva’s adjusted income from continuing operations would have been 59 cents in the reported quarter.

The adjusted earnings exclude the impact of the legal settlement, restructuring, acquisition and integration costs. Including one-time charges, Gentiva posted net income of $13.5 million or 44 cents per share, as opposed to the prior-year income of $10.3 million or 34 cents per share.

Including the after-tax impact of discontinuing operations in the first quarter of 2010, net income of Gentiva was $9.3 million or 31 cents per share in the prior year quarter.

Behind the Headlines

Gentiva’s total net revenues for the quarter climbed 54.0% year over year to $458.8 million, lagging the Zacks Consensus Estimate of $473.0 million.

The decline in revenue was due to lower revenue from the Home Health Episodic segment which declined 4% year over year to $220.4 million in the reported quarter. However, revenue in the Hospice segment came in at $195.1 million, reflecting a year-over-year increase from $19.7 million in the prior-year quarter, owing to the acquisition of Odyssey Healthcare Inc. in August, 2010.

Gentiva witnessed selling, general and administrative (SG&A) expenses of $175.2 million in the reported quarter from $139.2 million in the year-ago quarter.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) attributable to continuing operations increased 61.0% to $59.7 million from $37.2 million in the prior-year quarter. Adjusted EBITDA excludes charges associated with restructuring, acquisition and integration activities and the cost of legal settlements.

Evaluation of Capital and Balance Sheet

Gentiva exited the quarter with cash and cash equivalents of approximately $91.8 million and outstanding debt under its credit agreement of $1.048 billion. Gentiva has repaid $56.9 million on its revolving credit facility and term loans, after closing the Odyssey acquisition.

During the reported quarter, net cash provided by operating activities was $2.7 million, compared to $15.7 million in the prior-year period. Free cash flow was a negative $0.6 million, as against $12.5 million in the first quarter of 2010, primarily due to higher interest payments associated with the company’s term loans and senior notes issued in connection with the Odyssey acquisition and increased incentive payments in the current quarter.

As of March 31, 2011, Gentiva had total assets of $2.13 billion and shareholders’ equity of $657.6 million.

Outlook for Fiscal 2011    

Gentiva has reiterated its fiscal year 2011 guidance and continues to expect net revenues to be in the 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, 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 Odyssey acquisition and the impact of an approximate 5% decrease in Medicare home health reimbursement rates in 2011 as compared to 2010 based on the final rules issued by the Centers for Medicare & Medicaid Services (CMS) in November 2010.

Overall, we believe that 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) reported its first quarter 2011 results on April 26, 2011 with an EPS of 62 cents, missing the Zacks Consensus Estimate by 4 cents and 51.9% lower than the year-ago quarter.

Currently, Gentiva carries a Zacks #2 Rank, which translates into a short-term Buy recommendation, indicating a slight upward pressure on the stock over the near term.

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