Amedisys Beats, Margins Down

Home healthcare provider Amedisys (AMED - Snapshot Report) reported a drastic 65.8% year-over-year decline in EPS to 27 cents in the second quarter of 2012. However the EPS was 2 cents ahead of the Zacks Consensus Estimate. The drastic reduction in the year-over-year EPS was primarily due to significant margin contraction during the quarter.

Amedisys primarily derives revenue from its home health and hospice agencies. Net service revenue stood at $378.5 million in the reported quarter, beating the Zacks Consensus Estimate of $376 million and up 2.7% year over year.

Although Episodic-based sales in home health dropped 8.9% to $275.9 million yet it was partially offset by a 60% increase in Medicare revenue growth within the company’s hospice division to $69.8 million.

The company reported a huge 460-basis point (bp) contraction in the gross margin to 43.9% in the second quarter of 2012. Expenses on salaries and benefits during the quarter increased 9.9% to $86.5 million with 4.6% increase in other expenses to $47.3 million.

However, non-cash compensation expenses declined 28.1% year over year to $2.3 million. Adjusted operating margin (excluding the effect of depreciation and amortization and provision for doubtful accounts) witnessed a massive 620 bps year-over-year decline to 7.95%.

Amedisys exited the reported quarter with cash and cash equivalents of $37.2 million, down from $48.0 million at the end of fiscal 2011.

Guidance

Amedisys reiterated its EPS guidance of 95 cents–$1.10 for fiscal 2012. However, the company narrowed its revenue guidance for fiscal 2012 to $1.490–$1.525 billion (earlier range being $1.475–$1.525 billion). The current Zacks Consensus Estimates for EPS and revenues of $1.01 and $1.498 billion, respectively, are within the guidance range.

Our Take

The highly uncertain home nursing reimbursement environment, coupled with significant reduction in Medicare reimbursement in 2011 and 2012 has affected Amedisys’ performance over the past few quarters. We expect the healthcare reimbursement pressure to persist even in fiscal 2013, thereby weakening the company’s performance.

Additionally, we believe that the implementation of the face-to-face rule has added to the pressure on the company’s margins as the training and implementation involved in the program increased costs.

Moreover, competition remains stiff, as the company is pitted against companies like Gentiva Health Services Inc. (GTIV - Analyst Report). Last week Gentiva reported its second quarter 2012 results, posting a year-over-year sales decline of 4.7% to $427.7 million, largely due to a 7.3% decline in the Home Health Episodic segment revenue arising from reduced Medicare reimbursement rates.

Presently, Amedisys retains a short-term Zacks #3 Rank (Hold).