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Gentiva Health Services, Inc. (GTIV - Analyst Report) reported third-quarter 2013 adjusted earnings of 15 cents per share, which missed the Zacks Consensus Estimate of 22 cents and declined from the year-ago earnings of 32 cents per share.

Including cost savings, restructuring, legal settlement and acquisition and integration costs, Gentiva posted net income of 12 cents per share, rebounding from a loss of 2 cents per share in the third quarter of 2012. Improvement in the home health business, increase in Medicare admissions and expense management initiatives mainly led to the upside.

Gentiva’s net revenues declined 3.3% year over year to $410.5 million. Net revenues also missed the Zacks Consensus Estimate of $414 million. The year-over-year decline was largely due to a cut in home health Medicare rates along with the impact of the sequestration rate cut on Medicare-based revenues and the sale and closure of some branches in 2012.

Home Health Episodic segment revenues remained flat at $206.9 million. Despite soft hospital and physician volumes , results in this segment were consistent with the last few quarters. Additionally, expense management activities undertaken by this group are expected to help the company improve the operational efficiency of this segment.

Meanwhile, Hospice segment revenues declined 7.5% year over year to $175.6 million.  This segment has been struggling with volumes. Industry headwinds like the new regulatory requirements and negative publicity in the hospice benefit segment are adversely affecting the growth rate of this segment and hence are a matter of concern for the company.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) attributable to continuing operations decreased 23.4% year over year to $35.3 million.

Financial Update

Gentiva exited the reported quarter with cash and cash equivalents of approximately $183.3 million, down from $185.1 million as of Jun 30, 2013. Outstanding debt was $910.2 million, unchanged from Jun 30, 2013.

During the reported quarter, net cash from operating activities amounted to $8.4 million, lower than $25.5 million in the prior-year period. Free cash flow also declined to $1.7 million from $23.2 million in the third quarter of 2012.

As of Sep 30, 2013, Gentiva had total assets of $1.25 billion and shareholder equity of $46.9 million, as compared with $1.51 billion and $234.7 million, respectively, as of Dec 31, 2012.

Outlook

Gentiva’s net revenue guidance for 2013 was upped to $1.72 billion - $1.74 billion from $1.67–$1.70 billion guided earlier. The company increased its guidance range based on the expected impact of the proposed 2014 Medicare home health and hospice reimbursement rules on fourth-quarter results and the Harden acquisition. The current Zacks Consensus Estimate is $1.7 billion, lower than the guided range. Gentiva expects adjusted income attributable to Gentiva shareholders between 90 cents and $1.00 per share, compared to the previous guided range of 90 cents to $1.10 per share. The current Zacks Consensus Estimate of 92 cents per share lies within the guided range.

Our Take

Gentiva’s third quarter earnings missed our earnings estimates and declined from the year-ago period as well. The top line also suffered the same fate. However, increased revenue guidance on account of the Harden acquisition and the effect of certain rules related to the U.S. healthcare reform that are awaiting implementation in 2014 reflect the company’s effort to overcome headwinds.

During the quarter, Gentiva formed a joint venture (JV) with Wake Forest Baptist Medical Center, the Winston–Salem based fully integrated medical center that conducts medical education and research, a clinical enterprise and promotes the commercialization of research discoveries. Gentiva also completed the acquisition of Harden Healthcare Holdings Inc. The acquisition should enhance Gentiva’s Medicare exposure and enhance the long-term growth of the company.

Owing to the increasing healthcare needs of the aging population and the existing rate pressures, the healthcare industry provides ample growth opportunities at present. The Harden acquisition and the Wake Forest Baptist JV should allow Gentiva to capitalize on these opportunities. Also, Gentiva’s portfolio should expand as it will be in a position to offer its services to the dual eligibles. Additionally, the corporate restructuring initiative should help the company strengthen its operations by bringing its home health, hospice and community care businesses under a common regional management and thus help satisfy the demands of an emerging pre- and post-acute care healthcare market.

Others

AmSurg Corp.’s (AMSG - Analyst Report) third-quarter 2013 earnings per share of 53 cents were up 10% year over year, marking the company’s second consecutive quarter of double-digit growth. Earnings, which were in line with the Zacks Consensus Estimate, also touched the upper end of the company’s guidance range of 51−53 cents.

Zacks Rank

Gentiva carries a Zacks Rank #3 (Hold). Some health service providers worth considering are HEALTHSOUTH Corp. (HLS - Snapshot Report) and US Physical Therapy Inc. (USPH - Snapshot Report) – both carrying a Zacks Rank #2 (Buy).

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