Form 10-Q GENTIVA HEALTH SERVICES For: Sep 30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
OR
� | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ������������ to ������������
Commission File No.�1-15669
Gentiva Health Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware | � | 36-4335801 |
(State or other jurisdiction of incorporation or organization) | � | (I.R.S. Employer Identification No.) |
3350 Riverwood Parkway, Suite 1400, Atlanta, GA 30339-3314
(Address of principal executive offices)�(Zip Code)
Registrants telephone number, including area code: (770)�951-6450
Indicate by check mark whether the registrant (1)�has filed all reports required to be filed by Section�13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)�has been subject to such filing requirements for the past 90 days.����Yes��x����No���
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).����Yes��x�����No���
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large�accelerated�filer | � | � | �� | Accelerated�filer | x | |
Non-accelerated filer | � | � | �� | Smaller�reporting�company | � | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).����Yes�������No��x
The number of shares outstanding of the registrants Common Stock, as of November�10, 2014, was 36,966,127.
INDEX
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Item�3. | ||
Item�4. | ||
Item�1. | ||
Item�1A. | ||
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PART I - FINANCIAL INFORMATION
Item 1. | Financial Statements |
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
September�30, 2014 | December 31, 2013 (Restated) | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 114,206 | $ | 86,957 | |||
Accounts receivable, less allowance for doubtful accounts of $10,303 and $10,680 at September 30, 2014 and December�31, 2013, respectively | 285,718 | 289,905 | |||||
Deferred tax assets, net | 24,270 | 28,153 | |||||
Prepaid expenses and other current assets | 48,776 | 64,746 | |||||
Total current assets | 472,970 | 469,761 | |||||
Notes receivable from CareCentrix | 25,000 | 28,471 | |||||
Fixed assets, net | 42,048 | 49,375 | |||||
Intangible assets, net | 247,033 | 253,727 | |||||
Goodwill | 374,024 | 383,487 | |||||
Other assets | 64,151 | 68,647 | |||||
Total assets | $ | 1,225,226 | $ | 1,253,468 | |||
LIABILITIES AND SHAREHOLDERS' DEFICIT | |||||||
Current liabilities: | |||||||
Current portion of long-term debt | $ | 51,138 | $ | 45,325 | |||
Accounts payable | 16,370 | 15,659 | |||||
Payroll and related taxes | 45,736 | 64,857 | |||||
Deferred revenue | 47,919 | 43,864 | |||||
Medicare liabilities | 17,640 | 23,894 | |||||
Obligations under insurance programs | 78,310 | 82,634 | |||||
Accrued nursing home costs | 19,014 | 22,219 | |||||
Accrued interest expense | 7,788 | 17,239 | |||||
Other accrued expenses | 59,039 | 59,779 | |||||
Total current liabilities | 342,954 | 375,470 | |||||
Long-term debt | 1,105,750 | 1,124,432 | |||||
Deferred tax liabilities, net | 6,264 | 8,483 | |||||
Other liabilities | 55,456 | 53,084 | |||||
Equity: | |||||||
Gentiva shareholders deficit: | |||||||
Common stock, $0.10 par value; authorized 100,000,000 shares; issued 38,272,830 and 37,713,302 shares at September�30, 2014 and December�31, 2013, respectively | 3,827 | 3,771 | |||||
Additional paid-in capital | 466,777 | 462,262 | |||||
Treasury stock, 1,370,544 and 1,337,882 shares at September�30, 2014 and December�31, 2013, respectively | (19,165 | ) | (18,773 | ) | |||
Accumulated deficit | (740,449 | ) | (758,136 | ) | |||
Total Gentiva shareholders deficit | (289,010 | ) | (310,876 | ) | |||
Noncontrolling interests | 3,812 | 2,875 | |||||
Total deficit | (285,198 | ) | (308,001 | ) | |||
Total liabilities and shareholders' deficit | $ | 1,225,226 | $ | 1,253,468 | |||
See notes to consolidated financial statements.
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Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
� | For the Three Months Ended | For the Nine Months Ended | |||||||||||||
� | September 30, 2014 | September 30, 2013 (Revised) | September 30, 2014 | September 30, 2013 (Revised) | |||||||||||
Net revenues | $ | 498,006 | $ | 410,492 | $ | 1,483,551 | $ | 1,240,507 | |||||||
Cost of services sold | 270,659 | 220,478 | 811,077 | 660,998 | |||||||||||
Gross profit | 227,347 | 190,014 | 672,474 | 579,509 | |||||||||||
Selling, general and administrative expenses | (188,494 | ) | (161,078 | ) | (567,722 | ) | (483,243 | ) | |||||||
Goodwill and other long-lived asset impairment | (210,672 | ) | |||||||||||||
Interest income | 633 | 639 | 1,899 | 2,066 | |||||||||||
Interest expense and other | (25,352 | ) | (22,981 | ) | (75,805 | ) | (68,849 | ) | |||||||
Income (loss) before income taxes and equity in net loss of CareCentrix | 14,134 | 6,594 | 30,846 | (181,189 | ) | ||||||||||
Income tax expense | (5,601 | ) | (2,943 | ) | (12,499 | ) | (2,827 | ) | |||||||
Equity in net loss of CareCentrix, net of tax | (490 | ) | (490 | ) | |||||||||||
Net income (loss) | 8,043 | 3,651 | 17,857 | (184,016 | ) | ||||||||||
Net loss (income) attributable to noncontrolling interests | 2 | (88 | ) | (170 | ) | (425 | ) | ||||||||
Net income (loss) attributable to Gentiva shareholders | $ | 8,045 | $ | 3,563 | $ | 17,687 | $ | (184,441 | ) | ||||||
Total comprehensive income (loss) | $ | 8,043 | $ | 3,651 | $ | 17,857 | $ | (184,016 | ) | ||||||
Earnings per share | |||||||||||||||
Net income (loss) attributable to Gentiva shareholders: | |||||||||||||||
Basic | $ | 0.22 | $ | 0.12 | $ | 0.49 | $ | (5.97 | ) | ||||||
Diluted | $ | 0.21 | $ | 0.11 | $ | 0.48 | $ | (5.97 | ) | ||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 36,369 | 31,037 | 36,285 | 30,921 | |||||||||||
Diluted | 37,546 | 31,532 | 37,052 | 30,921 | |||||||||||
See notes to consolidated financial statements.
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Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)�
� | For the Nine Months Ended | ||||||
� | September 30, 2014 | September 30, 2013 (Revised) | |||||
OPERATING ACTIVITIES: | |||||||
Net income (loss) | $ | 17,857 | $ | (184,016 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Depreciation and amortization | 21,207 | 14,541 | |||||
Amortization of debt issuance costs | 4,813 | 9,687 | |||||
Provision for doubtful accounts | 3,927 | 3,766 | |||||
Equity-based compensation expense | 6,643 | 5,984 | |||||
Windfall tax benefits associated with equity-based compensation | (56 | ) | (92 | ) | |||
Goodwill and other long-lived asset impairment | 210,672 | ||||||
Equity in net loss of CareCentrix, net of tax | 490 | ||||||
Deferred income tax expense (benefit) | 7,715 | (6,696 | ) | ||||
Changes in assets and liabilities, net of effects from acquisitions and dispositions: | |||||||
Accounts receivable | 260 | 5,126 | |||||
Prepaid expenses and other current assets | 16,281 | 62 | |||||
Accounts payable | 711 | (1,471 | ) | ||||
Payroll and related taxes | (19,121 | ) | (12,171 | ) | |||
Deferred revenue | 4,055 | 1,582 | |||||
Medicare liabilities | (6,254 | ) | (12,156 | ) | |||
Obligations under insurance programs | (4,324 | ) | 5,555 | ||||
Accrued nursing home costs | (3,205 | ) | 2,430 | ||||
Other accrued expenses | (9,915 | ) | (26,793 | ) | |||
Other, net | 4,955 | 2,559 | |||||
Net cash provided by operating activities | 46,039 | 18,569 | |||||
INVESTING ACTIVITIES: | |||||||
Purchase of fixed assets | (9,268 | ) | (14,214 | ) | |||
Proceeds from sale of businesses, net of cash transferred | 508 | ||||||
Proceeds from sale of assets | 2,004 | ||||||
Acquisition of businesses, net of cash acquired | (4,638 | ) | |||||
Net cash used in investing activities | (7,264 | ) | (18,344 | ) | |||
FINANCING ACTIVITIES: | |||||||
Proceeds from issuance of common stock | 1,937 | 2,459 | |||||
Windfall tax benefits associated with equity-based compensation | 56 | 92 | |||||
Payment of contingent consideration accrued at acquisition date | (1,675 | ) | |||||
Repayment of long-term debt | (13,744 | ) | (25,000 | ) | |||
Debt issuance costs | (150 | ) | (449 | ) | |||
Minority interest capital contribution | 1,160 | 1,600 | |||||
Distribution to minority interests | (393 | ) | (563 | ) | |||
Other | (392 | ) | (447 | ) | |||
Net cash used in financing activities | (11,526 | ) | (23,983 | ) | |||
Net change in cash and cash equivalents | 27,249 | (23,758 | ) | ||||
Cash and cash equivalents at beginning of period | 86,957 | 207,052 | |||||
Cash and cash equivalents at end of period | $ | 114,206 | $ | 183,294 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||
Interest paid | $ | 80,148 | $ | 68,374 | |||
Income taxes paid | $ | 416 | $ | 924 | |||
See notes to consolidated financial statements.
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Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. | Background and Basis of Presentation |
Gentiva Health Services, Inc. ( Gentiva or the Company ) provides home health, hospice and community care services throughout most of the United States. The Companys operations involve servicing its patients and customers through its (i) Home Health segment, (ii)�Hospice segment and (iii) Community Care segment.
The accompanying interim consolidated financial statements are unaudited and have been prepared by the Company using accounting principles consistent with those described in the Companys Annual Report on Form 10-K/A for the year ended December 31, 2013 and pursuant to the rules and regulations of the Securities and Exchange Commission ( SEC ) and, in the opinion of management, include all adjustments necessary for a fair statement of financial position, results of operations and cash flows for each period presented. Certain information and disclosures normally included in the consolidated statements of financial position, comprehensive income and cash flows prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted as permitted by such rules and regulations. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements.
The Companys consolidated financial statements include the accounts and operations of the Company and its subsidiaries in which the Company owns more than a 50 percent interest. Noncontrolling interests, which relate to the minority ownership held by third party investors in certain of the Companys hospice and home health programs, are reported below net income (loss) under the heading Net loss (income) attributable to noncontrolling interests in the Companys consolidated statements of comprehensive income and presented as a component of equity in the Companys consolidated balance sheets. All balances and transactions between the consolidated entities have been eliminated.
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Note 1A. | Restatement and Revision of Previously Reported Consolidated Financial Statements |
The Company determined that historically it had incorrectly applied applicable accounting guidance in accounting for its indefinite-lived intangible assets related to closed or consolidated licenses on a pooled basis and did not write-off license costs when the Company closed or consolidated individual operating locations and to correct certain assumptions used in its valuation models for goodwill and indefinite-lived intangibles. The Company has determined it should amortize the full license cost over the period of closure or consolidation.
In connection with the restatement of the Company's consolidated financial statements as of and for the year ended December 31, 2013 and as of and for the quarter ended March 31, 2014, in this Form 10-Q the Company has revised its consolidated statement of comprehensive loss and consolidated statement of cash flows as of and for the six month and nine month periods ended June 30, 2013 and September 30, 2013, respectively.
The following schedules reconcile the amounts as previously reported in the applicable financial statement to the corresponding revised amounts:
For the Six Months Ended June 30, 2013 | ||||||||||||
Revised Consolidated Statement of Comprehensive Loss amounts (In thousands) | As Previously Reported | Revision Adjustments | Revised | |||||||||
Selling, general and administrative expenses | $ | (321,814 | ) | $ | (351 | ) | $ | (322,165 | ) | |||
Goodwill and other long-lived asset impairment | (224,320 | ) | 13,648 | (210,672 | ) | |||||||
Income (loss) before income taxes | (201,080 | ) | 13,297 | (187,783 | ) | |||||||
Income tax (expense) benefit | 587 | (471 | ) | 116 | ||||||||
Net income (loss) | (200,493 | ) | 12,826 | (187,667 | ) | |||||||
Net income (loss) attributable to Gentiva shareholders | (200,830 | ) | 12,826 | (188,044 | ) | |||||||
Total comprehensive income (loss) | (200,493 | ) | 12,826 | (187,667 | ) | |||||||
Basic Earnings Per Share: Net loss attributable to Gentiva shareholders | $ | (6.51 | ) | $ | 0.42 | $ | (6.09 | ) | ||||
Diluted Earnings Per Share: Net loss attributable to Gentiva shareholders | $ | (6.51 | ) | $ | 0.42 | $ | (6.09 | ) | ||||
For the Nine Months Ended September 30, 2013 | ||||||||||||
Revised Consolidated Statement of Comprehensive Loss amounts (In thousands) | As Previously Reported | Revision Adjustments | Revised | |||||||||
Selling, general and administrative expenses | $ | (482,634 | ) | $ | (609 | ) | $ | (483,243 | ) | |||
Goodwill and other long-lived asset impairment | (224,320 | ) | 13,648 | (210,672 | ) | |||||||
Income (loss) before income taxes | (194,228 | ) | 13,039 | (181,189 | ) | |||||||
Income tax (expense) benefit | (2,457 | ) | (370 | ) | (2,827 | ) | ||||||
Net income (loss) | (196,685 | ) | 12,669 | (184,016 | ) | |||||||
Net income (loss) attributable to Gentiva shareholders | (197,110 | ) | 12,669 | (184,441 | ) | |||||||
Total comprehensive income (loss) | (196,685 | ) | 12,669 | (184,016 | ) | |||||||
Basic Earnings Per Share: Net loss attributable to Gentiva shareholders | $ | (6.38 | ) | $ | 0.41 | $ | (5.97 | ) | ||||
Diluted Earnings Per Share: Net loss attributable to Gentiva shareholders | $ | (6.38 | ) | $ | 0.41 | $ | (5.97 | ) | ||||
For the Six Months Ended June 30, 2013 | |||||||||
Revised Consolidated Statement of Cash Flows (In thousands) | As Previously Reported | Revision Adjustments | Revised | ||||||
Net income (loss) | (200,493 | ) | 12,826 | (187,667 | ) | ||||
Depreciation and Amortization | 9,511 | 351 | 9,862 | ||||||
Goodwill and other long-lived asset impairment | 224,320 | (13,648 | ) | 210,672 | |||||
Deferred income tax expense (benefit) | (7,983 | ) | 471 | (7,512 | ) | ||||
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For the Nine Months Ended September 30, 2013 | |||||||||
Revised Consolidated Statement of Cash Flows (In thousands) | As Previously Reported | Revision Adjustments | Revised | ||||||
Net income (loss) | (196,685 | ) | 12,669 | (184,016 | ) | ||||
Depreciation and Amortization | 13,932 | 609 | 14,541 | ||||||
Goodwill and other long-lived asset impairment | 224,320 | (13,648 | ) | 210,672 | |||||
Deferred income tax expense (benefit) | (7,066 | ) | 370 | (6,696 | ) | ||||
Note 2. | Accounting Policies |
Cash and Cash Equivalents
The Company considers all investments with a maturity date three months or less from their date of acquisition to be cash equivalents, including money market funds invested in U.S. Treasury securities, short-term treasury bills and commercial paper. Cash and cash equivalents also included amounts on deposit with several major financial institutions in excess of the maximum amount insured by the Federal Deposit Insurance Corporation. Management believes that these major financial institutions are viable entities.
The Company had operating funds of approximately $4.2 million and $5.5 million at September 30, 2014 and December 31, 2013, respectively, which relate exclusively to a non-profit hospice operation managed in Florida.
Investments
As of December 31, 2013, the Company held an investment, at cost, in CareCentrix Holdings Inc. of $0.9 million for shares that it expected to receive in settlement of certain tax amounts owed to the Company as set forth in the stock purchase agreement. During the third quarter of 2014, the Company finalized the settlement with CareCentrix. See Note 7 for additional information.
At September 30, 2014 and December 31, 2013, the Company had assets of $36.1 million and $34.7 million, respectively, held in a Rabbi Trust for the benefit of participants in the Companys non-qualified defined contribution retirement plan. The corresponding amounts payable to the plan participants are equivalent to the underlying value of the assets held in the Rabbi Trust. Assets held in a Rabbi Trust and amounts payable to plan participants are classified in other assets and other liabilities, respectively, in the Companys consolidated balance sheets.
Debt Issuance Costs
The Company amortizes deferred debt issuance costs over the term of its credit agreement and senior notes. As of September 30, 2014 and December 31, 2013, the Company had unamortized debt issuance costs of $24.4 million and $28.3 million, respectively, recorded in other assets in the Companys consolidated balance sheets.
Fixed Assets
Fixed assets, including costs of Company developed software, are stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the improvement. Repairs and maintenance costs are expensed as incurred. As of September 30, 2014 and December 31, 2013, fixed assets, net were $42.0 million and $49.4 million, respectively.
At March 31, 2013, the Company performed an interim impairment test of its Hospice reporting unit. As part of that analysis, the Company reviewed the valuation of its owned real estate utilized in the Hospice business. The analysis indicated that two of the Company's hospice inpatient units had estimated fair values lower than their carrying values and, as such, the Company recorded a non-cash impairment charge of approximately $1.9 million. These charges are recorded in goodwill and other long-lived asset impairment in the Company's consolidated financial statements for the nine months ended September 30, 2013.
In addition, the Company conducted an evaluation of the various systems used to support its field operations. In connection with that review, the Company made a strategic decision to replace its business intelligence software platform and, as such, recorded a non-cash impairment charge related to developed software, of approximately $1.6 million, which is reflected in goodwill and other long-lived asset impairment in the Company's consolidated financial statements for the nine months ended September 30, 2013.
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Goodwill and Other Indefinite-Lived Intangible Assets
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. The Company allocates goodwill to its various reporting units upon the acquisition of the assets or stock of another third party business operation. The Company compares the fair value of each reporting unit to its carrying amount to determine if there is a potential impairment of goodwill and other indefinite-lived intangible assets. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the operating unit is less than the carrying value of its goodwill. To determine the fair value of the Company's reporting units, the Company uses a present value (discounted cash flow) technique corroborated by market multiples when available, a reconciliation to market capitalization or other valuation methodologies, and reasonableness tests, as appropriate.
If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
At March 31, 2013, the Company performed an interim impairment test of its Hospice reporting unit. Based on the results of the interim impairment test, the Company recorded a non-cash impairment charge relating to goodwill of approximately $207.2 million, which is reflected in goodwill and other long-lived asset impairment in the Company's consolidated financial statements for the nine months ended September 30, 2013. See Note 9 for additional information.
Obligations Under Self Insurance Programs
As of September 30, 2014 and December 31, 2013, the Companys obligations under insurance programs were $78.3 million and $82.6 million, respectively. Workers compensation and professional and general liability expenses were $5.0 million and $15.0 million for the third quarter and first nine months of 2014, respectively, as compared to $6.6 million and $19.2 million for the corresponding periods of 2013. Employee health and welfare expenses were $21.4 million and $67.8 million for the third quarter and first nine months of 2014, respectively, as compared to $21.0 million and $64.0 million for the corresponding periods of 2013.
Nursing Home Costs
For patients receiving nursing home care under a state Medicaid program who elect hospice care under Medicare or Medicaid, the Company contracts with nursing homes for the nursing homes to provide patients room and board services. The state must pay the Company, in addition to the applicable Medicare or Medicaid hospice daily or hourly rate, an amount equal to at least 95 percent of the Medicaid daily nursing home rate for room and board furnished to the patient by the nursing home. Under the Companys standard nursing home contracts, the Company pays the nursing home for these room and board services at the Medicaid daily nursing home rate. Nursing home costs are partially offset by nursing home net revenue, and the net amount is included in cost of services sold in the Companys consolidated statements of comprehensive income. Net nursing home costs for the third quarter and first nine months of 2014 were $2.9 million and $7.3 million, respectively, as compared to $1.7 million and $7.2 million for the corresponding periods of 2013.
Note 3. | Recent Accounting Pronouncements |
On May 28. 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for reporting periods beginning after December 15, 2016.� Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
On July 18, 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740) (ASU 2013-11), which provides final guidance that requires an entity to net its liability for unrecognized tax positions against a net operating loss carryforward, a similar tax loss or a tax credit carryforward when settlement in this manner is available under the tax law. The provisions of this new guidance were effective as of the beginning of the Company's 2014 year. �The adoption of this new guidance did not have a material impact on the Companys consolidated financial statements.
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Note 4. | Acquisitions and Dispositions |
Wake Forest Baptist Health Care at Home, LLC
Effective February 2014, the Company sold its Wilkesboro, North Carolina branch to Wake Forest Baptist Health Care at Home, LLC for $2.9 million. Total Care Home Health of North Carolina, LLC, a wholly-owned subsidiary of the Company, owns a 60 percent interest in Wake Forest Baptist Health Care at Home, LLC, which provides home health services in the Winston-Salem and Wilkesboro, North Carolina geographical areas.
Effective August�23, 2013, the Company acquired 60 percent interest in the membership units of Wake Forest Baptist Health Care at Home, LLC for approximately $2.4 million, consisting of $2.2 million in cash and $0.2 million of other assets, and entered into an operating agreement with Wake Forest University Baptist Medical Center to provide home health services in the Winston-Salem, North Carolina geographical area.
Harden Healthcare Holdings, Inc.
Effective October�18, 2013, the Company completed the acquisition of certain net assets relating to the home health, hospice and community care businesses of Harden Healthcare Holdings, Inc. ("Harden") pursuant to an Agreement and Plan of Merger dated as of September 18, 2013. The Company completed the acquisition as an entrance into the community care business, primarily throughout Texas, Oklahoma and Missouri, and to expand its geographic coverage for its home health and hospice businesses. Total consideration for the acquisition was $426.8 million, exclusive of transaction costs, consisting of approximately $365.0 million in cash, $53.8 million in shares of Gentiva's common stock and additional contingent consideration of $9.5 million, recorded at estimated fair value of approximately $8.1 million. The contingent consideration includes (i) a consulting agreement entered into with Capstar Partners, LLC, (ii) a sub-lease termination agreement entered into with Capstar Investment Partners, L.P., both which carry performance criteria tied to certain levels of community care program reimbursement rates in the State of Texas, as defined in the agreements, and (iii) a consulting agreement entered into with a former executive of Harden.
During the third quarter of 2014, the Company, in connection with finalizing its valuation of Harden, recorded adjustments to the preliminary fair values assigned to the assets and liabilities acquired in the transaction. These adjustments related to (i) an increase in deferred taxes of $9.7 million, (ii) a $0.3 million increase in identifiable intangible assets and (iii) a $0.2 million increase in other accrued liabilities with a corresponding decrease in goodwill. In addition, the Company recorded an increase in the accounts receivable fair value reserve of $1.5 million within the Home Health segment and a corresponding decrease in the accounts receivable fair value reserve for the Community Care segment.
Appalachian Regional Health Systems
Effective September�30, 2013, the Company completed its acquisition of the assets and business of Appalachian Regional Health Systems, a provider of home health services with offices in Boone and Newland, North Carolina. Total consideration of $2.7 million, subject to post-closing adjustments, consisted of $2.1 million from the Company's existing cash reserves and $0.6 million held in escrow for certain post closing matters. The purchase price was allocated to goodwill ($2.6 million) and identifiable intangible assets ($0.1 million).
Hope Hospice, Inc.
Effective April�30, 2013, the Company completed its acquisition of the assets and business, pursuant to an asset purchase agreement, of Hope Hospice, Inc., a provider of hospice services located in Rochester, Indiana. Total non-cash consideration of $1.0 million consisted of the assumption of Hope Hospice's outstanding debt and existing liabilities as of the closing date. The purchase price was allocated to Medicare licenses ($0.5 million), accounts receivable ($0.3 million) and goodwill ($0.2 million).
Note 5. | Fair Value of Financial Instruments |
The Companys financial instruments are measured and recorded at fair value on a recurring basis, except for the notes receivable from CareCentrix and long-term debt. The fair values for the notes receivable from CareCentrix and non-financial assets, such as fixed assets, intangible assets and goodwill, are measured periodically and adjustments recorded only if an impairment charge is required. The carrying amount of the Companys accounts receivable, accounts payable and certain other current liabilities approximates fair value due to their short maturities.
Fair value is defined under authoritative guidance as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use
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of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The three levels of inputs are as follows:
" | Level 1Quoted prices in active markets for identical assets or liabilities. |
" | Level 2Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
" | Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Financial Instruments Recorded at Fair Value
The Companys fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis was as follows (in thousands):�
� | September 30, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||
� | Level 1 | Level�2 | Level�3 | Total | Level 1 | Level�2 | Level�3 | Total | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||
Money market funds | $ | 23,091 | $ | $ | $ | 23,091 | $ | 23,695 | $ | $ | $ | 23,695 | |||||||||||||||||||
Rabbi Trust: | |||||||||||||||||||||||||||||||
Mutual funds | 31,175 | 31,175 | 28,945 | 28,945 | |||||||||||||||||||||||||||
Money market funds | 4,963 | 4,963 | 5,737 | 5,737 | |||||||||||||||||||||||||||
Total assets | $ | 59,229 | $ | $ | $ | 59,229 | $ | 58,377 | $ | $ | $ | 58,377 | |||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||
Payables to plan participants | $ | 36,138 | $ | $ | $ | 36,138 | $ | 34,682 | $ | $ | $ | 34,682 | |||||||||||||||||||
Acquisition contingent liability | 8,514 | 8,514 | 8,110 | 8,110 | |||||||||||||||||||||||||||
Total liabilities | $ | 36,138 | $ | $ | 8,514 | $ | 44,652 | $ | 34,682 | $ | $ | 8,110 | $ | 42,792 | |||||||||||||||||
Assets held in the Rabbi Trust are held for the benefit of participants in the Companys non-qualified defined contribution retirement plan. The value of assets held in the Rabbi Trust is based on quoted market prices of securities and investments, including money market accounts and mutual funds, maintained within the Rabbi Trust. The corresponding amounts payable to plan participants are equivalent to the underlying value of assets held in the Rabbi Trust. Assets held in the Rabbi Trust and amounts payable to plan participants are classified in other assets and other liabilities, respectively, in the Companys consolidated balance sheets. Money market funds held in the Companys account represent cash equivalents and were classified in cash and cash equivalents in the Companys consolidated balance sheets at September 30, 2014 and December 31, 2013.
The estimated fair value of the acquisition contingent liabilities were determined using a discounted cash flow approach utilizing level 2 and level 3 inputs which included observable market discount rates, fixed payment schedules, and assumptions based on achieving certain pre-defined performance criteria. See Note 4 for further information.
The following table provides a summary of changes in fair value of the Company's Level 3 financial assets (in thousands):
Estimated Fair Value | |||||
Balance at December 31, 2013 | $ | 8,110 | |||
Payment of contingent liability | (125 | ) | |||
Included in earnings | 279 | (1)� | |||
Harden acquisition contingent liability adjustment | 250 | ||||
Balance at September 30, 2014 | $ | 8,514 | |||
(1) | Accretion of the present value of the contingent liability is recorded in interest expense and other in the Company's consolidated statements of comprehensive income. A 1 percent change in the discount rate would have an impact on the fair value of the contingent liability of approximately $0.2 million. |
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Other Financial Instruments
The carrying amount and estimated fair value of the Companys other financial instruments were as follows (in thousands):
� | September 30, 2014 | December 31, 2013 | |||||||||||||
� | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||
Assets: | |||||||||||||||
Note receivable from CareCentrix | $ | 25,000 | $ | 26,055 | $ | 25,000 | $ | 26,403 | |||||||
Seller financing note receivable from CareCentrix | 3,471 | 3,471 | |||||||||||||
Liabilities: | |||||||||||||||
Long-term obligations | $ | 1,163,256 | $ | 1,182,837 | $ | 1,177,000 | $ | 1,183,863 | |||||||
The estimated fair value of the note receivable from CareCentrix was determined from Level 3 inputs based on an income approach using the discounted cash flow method. The fair value represents the net present value of (i)�the after tax cash flows relating to the note's annual income stream plus (ii)�the return of the invested principal using a maturity date of March�19, 2017, after considering assumptions relating to risk factors and economic conditions. See Note 7 for additional information.
In determining the estimated fair value of long-term debt, Level 2 inputs based on the use of bid and ask prices were considered. Due to the infrequent number of transactions that occur related to the long-term debt, the Company does not believe an active market exists for purposes of this disclosure.
Note 6. | Net Revenues and Accounts Receivable |
Net revenues in the Home Health and Hospice segments were derived from all major payer classes, while Community Care segment net revenues were derived primarily from Medicaid and Insurance payer classes. Net revenue by major payer classes were as follows (in millions):
Third Quarter | First Nine Months | ||||||||||||||||||||
� | 2014 | 2013 | Percentage Variance | 2014 | 2013 | Percentage Variance | |||||||||||||||
Medicare: | |||||||||||||||||||||
Home Health | $ | 214.9 | $ | 191.8 | 12.0 | �% | $ | 642.0 | $ | 577.7 | 11.1 | �% | |||||||||
Hospice | 161.6 | 163.8 | (1.3 | )% | 486.3 | 498.8 | (2.5 | )% | |||||||||||||
Total Medicare | 376.5 | 355.6 | 5.9 | �% | 1,128.3 | 1,076.5 | 4.8 | �% | |||||||||||||
Medicaid and Local Government | 70.9 | 17.4 | 307.0 | �% | 212.8 | 54.4 | 291.4 | �% | |||||||||||||
Commercial Insurance and Other: | |||||||||||||||||||||
Paid at episodic rates | 21.5 | 15.1 | 42.8 | �% | 55.0 | 43.3 | 27.0 | �% | |||||||||||||
Other | 29.1 | 22.4 | 29.7 | �% | 87.5 | 66.3 | 31.8 | �% | |||||||||||||
Total Commercial Insurance and Other | 50.6 | 37.5 | 35.0 | �% | 142.5 | 109.7 | 29.9 | �% | |||||||||||||
Total net revenues | $ | 498.0 | $ | 410.5 | 21.3 | �% | $ | 1,483.6 | $ | 1,240.5 | 19.6 | �% | |||||||||
For the third quarter and first nine months of 2014, the Company recorded hospice Medicare cap expense of $0.4 million and $1.5 million, respectively, as compared to hospice Medicare cap credits of $2.9 million and $4.5 million for the third quarter and first nine months of 2013, respectively, which are reflected in net revenues in the Companys consolidated statements of comprehensive income. For the Medicare cap year 2014, which began November 1, 2013, the Company has recorded $1.8 million in Medicare cap expense and has seven hospice providers currently estimated to be in excess of Medicare cap limits.
The Medicare payment cap, which is calculated for each provider by the Medicare fiscal intermediary at the end of the hospice cap period, is determined under the proportional method. The proportional method allocates each beneficiary's Medicare payment cap based on the ratio of the number of days the beneficiary received hospice services from the Company over the total number of days the beneficiary received hospice services from all providers. The Medicare payment cap amount is then further allocated between the hospice cap periods based on the ratio of the number of days the Company provided hospices services during each cap period. The sum of each beneficiary's Medicare cap payment, as determined above, represents the aggregate Medicare payment cap. Medicare revenue paid to a provider during the hospice cap period cannot exceed the aggregate Medicare payment cap. As of September 30, 2014 and December 31, 2013, the Company had Medicare
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cap liabilities of $3.7 million and $6.5 million, respectively, which are reflected in Medicare liabilities in the Companys consolidated balance sheets.
Odyssey HealthCare, Inc. ("Odyssey"), prior to its acquisition by Gentiva, filed appeals with Centers for Medicare & Medicaid Services ("CMS") to change the methodology previously used to calculate the Medicare payment cap in order to utilize the proportional method of determining the payment cap, as described above. This method allocates the Medicare payment cap over the cap years that the beneficiary is on service. In connection with those appeals, the Company has received final settlement letters for many of its providers and recorded approximately $3.4 million and $5.9 million as net revenue for the third quarter and first nine months of 2013, respectively, in the Company's consolidated statements of comprehensive income.
Corporate Integrity Agreement
Under Odyssey's five-year Corporate Integrity Agreement ("CIA") with the Office of Inspector General of the United States Department of Health and Human Services ("OIG"), which became effective on February 15, 2012, Odyssey must engage a third party to perform verification and unallowable cost reviews. In addition, Odyssey's eligibility review team must review the eligibility of Odyssey's Medicare beneficiaries for the hospice services those beneficiaries received and prepare an eligibility review report. Odyssey must submit to the OIG annually a report with respect to the status of, and findings regarding, Odyssey's compliance activities. Any overpayments identified by Odyssey are paid back to the various Medicare administrative contractors by April 1st of the following year. If Odyssey fails to comply with the terms of the CIA, it will be subject to penalties. In connection with these eligibility reviews, the Company reduced reserves by approximately $0.4 million for the third quarter of 2014 and recorded reserves of approximately $1.9 million for the first nine months of 2014. The Company recorded reserves of $3.5 million and $5.0 million for the third quarter and first nine months of 2013, respectively, which are reflected as a reduction of net revenues in the Company's consolidated statements of comprehensive income.
PRRB Appeal
During the third quarter of 2013, the Company finalized its year 2000 cost reports, which are now being settled by CMS. In connection with the settlements, the Company recorded a positive adjustment of approximately $4.0 million to net revenues for the third quarter and first nine months of 2013, in the Company's consolidated statements of comprehensive income. See Note 14 for additional information.
Accounts Receivable
Accounts receivable attributable to major payer sources of reimbursement were as follows (in thousands):
September�30, 2014 | December�31, 2013 | ||||||
Medicare | $ | 200,902 | $ | 214,366 | |||
Medicaid and Local Government | 51,113 | 48,183 | |||||
Commercial Insurance and Other | 44,006 | 38,036 | |||||
Gross accounts receivable | 296,021 | 300,585 | |||||
Less: Allowance for doubtful accounts | (10,303 | ) | (10,680 | ) | |||
Net accounts receivable | $ | 285,718 | $ | 289,905 | |||
As of September 30, 2014 and December 31, 2013, the Commercial Insurance and Other payer group included self-pay accounts receivable relating to patient co-payments of $2.1 million and $2.4 million, respectively.
Note 7. | Investment in and Notes Receivable from CareCentrix |
The Company holds a $25.0 million subordinated promissory note from CareCentrix, Inc. In connection with the sale of the Companys ownership interest in CareCentrix Holdings on September 19, 2011, the maturity date of the note was extended to the earlier of March�19, 2017 or a sale of CareCentrix Holdings. The note bears interest at a fixed rate of 10 percent, which is payable quarterly, provided that CareCentrix remains in compliance with its senior debt covenants. Interest on the CareCentrix promissory note, which is included in interest income in the Companys consolidated statements of comprehensive income, amounted to $0.6 million and $1.9 million for the third quarter and first nine months, respectively, of both 2014 and 2013.
Pursuant to the terms of the stock purchase agreement, approximately $10.6 million of the sale price due to the Company was placed into an escrow fund for future indemnification claims. As of September 30, 2014, approximately $0.7 million of the escrow fund was paid out to cover expenses related to an indemnified claim.
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On August 24, 2012, the Company received notification from CareCentrix of its election to draw seller financing from the escrow fund pursuant to the terms of the stock purchase agreement. As such, the Company reclassified its escrow receivable of approximately $9.9 million from prepaid expenses and other current assets to a seller financing note from CareCentrix on the Company's consolidated balance sheet as of September 30, 2012. The seller financing note receivable, which bears interest at 18 percent, matures on the earlier of March�19, 2017 or upon the sale of CareCentrix Holdings. Interest on this note is payable quarterly, in kind, and will accrete as additional principal on the note. The Company expects to record interest income at the time of receipt as the note is part of the proposed settlement discussed below.
On September 17, 2012, the Company received a formal notice of claims for indemnification from CareCentrix. In the notice, CareCentrix asserted that the total claimed amounts exceed the total amount in escrow and demanded that the entire principal amount of the seller financing note receivable be reduced to zero. In anticipation of a settlement of claims alleged by the owner of CareCentrix and working capital adjustments as set forth in the stock purchase agreement, during the fourth quarter of 2012, the Company recorded a $6.5 million adjustment to the seller financing note receivable to reflect its revised estimated fair value of $3.4 million. The Company also established an investment in CareCentrix of $0.9 million for shares that it may receive as part of any settlement. During the third quarter of 2014, the Company received cash of approximately $3.6 million in settlement of the seller financing note receivable and the Company's investment in CareCentrix. In connection with the settlement, the Company recorded a loss of approximately $0.5 million in equity in net loss of CareCentrix, net of tax in the Company's consolidated statement of comprehensive income.
The Companys financing receivables consist of the previously described $25.0 million subordinated promissory note from CareCentrix, Inc. dated September 19, 2011. The Company measures impairment based on the present value of expected cash flows after considering assumptions relating to risk factors and economic conditions. On an ongoing basis, the Company assesses the credit quality based on the Companys review of CareCentrix, Inc.s financial position and receipt of interest payments when due. Based on the Companys analysis, as of September 30, 2014 and December 31, 2013, the Company had no allowances for credit losses.
Note 8. | Cost Savings Initiatives and Acquisition and Integration Activities |
The Company recorded net charges relating to cost savings initiatives and acquisition and integration activities of $0.5 million and $10.5 million for the third quarter and first nine months of 2014, respectively, and $1.7 million and $2.6 million for the third quarter and first nine months of 2013, respectively, which were recorded in selling, general and administrative expenses in the Companys consolidated statements of comprehensive income.
Cost Savings Initiatives
During the fourth quarter of 2013, the Company undertook a corporate restructuring initiative, referred to as "One Gentiva", to better align its home health, hospice and community care businesses under a common regional management structure. In addition, the Company undertook a branch rationalization initiative to review under performing branches. As a result of this review, the Company closed or consolidated 94 branches through the third quarter of 2014. As such, the Company recorded charges of $0.2 million and $4.3 million for the third quarter and first nine months of 2014, respectively, primarily related to severance and facility lease costs. The Company substantially completed these costs savings initiatives during the second quarter of 2014.
For the third quarter and first nine months of 2013, the Company recorded charges related to cost savings initiatives of $0.1 million and $0.3 million, respectively. These costs primarily related to a 2012 initiative to reduce ongoing operating costs related to branch structure and support infrastructure. The Company substantially completed these cost savings initiatives during the second quarter of 2013.
Acquisition and Integration Activities
The Company recorded charges of $0.3 million and $6.2 million for the third quarter and first nine months of 2014, respectively, and $1.6 million and $2.3 million for the third quarter and first nine months of 2013, respectively, primarily related to the Company's acquisition of Harden. These costs consisted of (i) severance and lease costs associated with consolidation of branches in overlapping markets and consolidation of back office functions and (ii) legal, accounting and other professional fees and expenses associated with the transaction. The Company expects to complete its integration activities in early 2015.
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The costs incurred and cash expenditures associated with these activities by component were as follows (in thousands):�
Cost Savings Initiatives | Acquisition�& Integration | Total | |||||||||
Balance at December�31, 2012 | $ | 1,685 | $ | 1,011 | $ | 2,696 | |||||
Charge in first quarter 2013 | 47 | 94 | 141 | ||||||||
Cash expenditures | (1,104 | ) | (322 | ) | (1,426 | ) | |||||
���Ending balance at March�31, 2013 | 628 | 783 | 1,411 | ||||||||
Charge in second quarter 2013 | 138 | 606 | 744 | ||||||||
Cash expenditures | (685 | ) | (234 | ) | (919 | ) | |||||
���Ending balance at June�30, 2013 | 81 | 1,155 | 1,236 | ||||||||
Charge in third quarter 2013 | 77 | 1,622 | 1,699 | ||||||||
Cash expenditures | (240 | ) | (283 | ) | (523 | ) | |||||
���Non-cash reclassification | 476 | (476 | ) | ||||||||
���Ending balance at September 30, 2013 | $ | 394 | $ | 2,018 | $ | 2,412 | |||||
Balance at December�31, 2013 | $ | 6,722 | $ | 9,703 | $ | 16,425 | |||||
Charge in first quarter 2014 | 2,713 | 2,628 | 5,341 | ||||||||
Cash expenditures | (3,443 | ) | (3,472 | ) | (6,915 | ) | |||||
Non-cash expenditures | (60 | ) | (86 | ) | (146 | ) | |||||
���Ending balance at March�31, 2014 | 5,932 | 8,773 | 14,705 | ||||||||
Charge in second quarter 2014 | 1,409 | 3,250 | 4,659 | ||||||||
Cash expenditures | (2,994 | ) | (3,717 | ) | (6,711 | ) | |||||
Non-cash expenditures | (276 | ) | 5 | (271 | ) | ||||||
���Ending balance at June�30, 2014 | 4,071 | 8,311 | 12,382 | ||||||||
Charge in third quarter 2014 | 195 | 284 | 479 | ||||||||
Cash expenditures | (1,302 | ) | (1,908 | ) | (3,210 | ) | |||||
Non-cash expenditures | 35 | 3 | 38 | ||||||||
���Ending balance at September�30, 2014 | $ | 2,999 | $ | 6,690 | $ | 9,689 | |||||
The balance of unpaid charges relating to cost savings initiatives and other restructuring costs and acquisition and integration activities approximated $9.7 million at September 30, 2014 and $16.4 million at December 31, 2013, which were included in other accrued expenses in the Companys consolidated balance sheets.
Note 9. | Goodwill and Identifiable Intangible Assets |
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. The Company allocates goodwill to its various reporting units upon the acquisition of the assets or stock of another third party business operation. The Company compares the fair value of each reporting unit to the carrying amount of their allocated net assets to determine if there is a potential impairment of goodwill. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of its goodwill.
To determine the fair value of the Company's reporting units, the Company uses a present value (discounted cash flow) technique corroborated by market multiples when available, a reconciliation to market capitalization or other valuation methodologies and reasonableness tests, as appropriate. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. The future occurrence of a potential indicator of impairment, such as, but not limited to, a significant adverse change in legal factors or business climate, reductions of projected patient census, an adverse action or assessment by a regulator, as well as other unforeseen factors, would require an interim assessment for some or all of the reporting units.
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If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
The Company's operations include three reporting units: Home Health, Hospice and Community Care. At March 31, 2013, the Company determined that a triggering event had occurred due to lower than expected average daily census and higher than expected discharge rates during the quarter and performed an interim impairment test of its Hospice reporting unit. For purposes of the interim impairment test, the Company applied certain assumptions that included, but were not limited to, patient census projections, gross margin assumptions, operating efficiencies and economies of scale. To determine fair value, the Company considered the income approach, which determines fair value based on estimated future cash flows of the reporting unit, discounted by an estimated weighted-average cost of capital ( discount rate ), which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. The Company used a discount rate of 9.5 percent to calculate the fair value of its Hospice reporting unit. Based on the results of the interim impairment test, the Company's Hospice reporting unit had an estimated fair value of approximately $555 million. As such, the Company recorded a non-cash impairment charge relating to goodwill of approximately $207.2 million, which is reflected in goodwill and other long-lived asset impairment in the Company's consolidated comprehensive statement of income for the nine months ended September 30, 2013.
The gross carrying amount and accumulated amortization of each category of identifiable intangible assets as of September 30, 2014 and December 31, 2013 were as follows (in thousands):�
� | September 30, 2014 | December 31, 2013 (Restated) | Useful Life | ||||||||||||||||||||||||||||||
� | Home Health | Hospice | Community Care | Total | Home Health | Hospice | Community Care | Total | |||||||||||||||||||||||||
Amortized intangible assets: | |||||||||||||||||||||||||||||||||
Covenants not to compete | $ | 2,157 | $ | 16,183 | $ | 1,029 | $ | 19,369 | $ | 2,157 | $ | 16,183 | $ | 1,029 | $ | 19,369 | 2-5�Yrs | ||||||||||||||||
Less: accumulated amortization | (1,709 | ) | (15,837 | ) | (327 | ) | (17,873 | ) | (1,553 | ) | (15,720 | ) | (91 | ) | (17,364 | ) | |||||||||||||||||
Net covenants not to compete | 448 | 346 | 702 | 1,496 | 604 | 463 | 938 | 2,005 | |||||||||||||||||||||||||
Customer relationships | 27,196 | 910 | 28,106 | 27,196 | 910 | 28,106 | 5-10�Yrs | ||||||||||||||||||||||||||
Less: accumulated amortization | (21,703 | ) | (549 | ) | (22,252 | ) | (19,997 | ) | (481 | ) | (20,478 | ) | |||||||||||||||||||||
accumulated impairment losses | (27 | ) | (27 | ) | (27 | ) | (27 | ) | |||||||||||||||||||||||||
Net customer relationships | 5,466 | 361 | 5,827 | 7,172 | 429 | 7,601 | |||||||||||||||||||||||||||
Tradenames | 19,267 | 17,528 | 11,922 | 48,717 | 19,267 | 17,528 | 11,922 | 48,717 | 5-10�Yrs | ||||||||||||||||||||||||
Less: accumulated amortization | (12,795 | ) | (4,368 | ) | (1,134 | ) | (18,297 | ) | (11,992 | ) | (3,763 | ) | (227 | ) | (15,982 | ) | |||||||||||||||||
accumulated impairment losses | (6,421 | ) | (13,122 | ) | (19,543 | ) | (6,421 | ) | (13,122 | ) | (19,543 | ) | |||||||||||||||||||||
Net tradenames | 51 | 38 | 10,788 | 10,877 | 854 | 643 | 11,695 | 13,192 | |||||||||||||||||||||||||
Licenses | 714 | 9,289 | 10,003 | 714 | 8,021 | 8,735 | |||||||||||||||||||||||||||
Less: accumulated amortization | (714 | ) | (8,782 | ) | (9,496 | ) | (588 | ) | (6,812 | ) | (7,400 | ) | |||||||||||||||||||||
Net licenses | 507 | 507 | 126 | 1,209 | 1,335 | ||||||||||||||||||||||||||||
Amortized intangible assets | 5,965 | 1,252 | 11,490 | 18,707 | 8,756 | 2,744 | 12,633 | 24,133 | |||||||||||||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||
Licenses and certificates of need | 245,086 | 104,364 | 26,011 | 375,461 | 245,086 | 105,632 | 26,011 | 376,729 | |||||||||||||||||||||||||
Less: accumulated impairment ����������losses | (144,672 | ) | (2,463 | ) | (147,135 | ) | (144,672 | ) | (2,463 | ) | (147,135 | ) | |||||||||||||||||||||
Net licenses and certificates of need | 100,414 | 101,901 | 26,011 | 228,326 | 100,414 | 103,169 | 26,011 | 229,594 | |||||||||||||||||||||||||
Total identifiable intangible assets | $ | 106,379 | $ | 103,153 | $ | 37,501 | $ | 247,033 | $ | 109,170 | $ | 105,913 | $ | 38,644 | $ | 253,727 | |||||||||||||||||
The Company recorded amortization expense of approximately $2.5 million and $6.7 million for the third quarter and first nine months of 2014, respectively, and $1.2 million and $4.0 million for the third quarter and first nine months of 2013, respectively. The estimated amortization expense for the remainder of 2014 is $1.6 million and for each of the next five succeeding years approximates $4.1 million for 2015, $3.1 million for 2016, $2.4 million for 2017, $1.6 million for 2018, and $1.3 million for 2019.
16
The gross carrying amount of goodwill as of September 30, 2014 and December 31, 2013 and activity during the first nine months of 2014 were as follows (in thousands):�
Goodwill, Gross | Accumulated Impairment Losses | ||||||||||||||||||||||||||||||
Home Health | Hospice | Community Care | Total | Home Health | Hospice | Total | Net | ||||||||||||||||||||||||
Balance at December 31, 2013 (Restated) | $ | 386,719 | $ | 944,187 | $ | 116,534 | $ | 1,447,440 | $ | (263,370 | ) | $ | (800,583 | ) | $ | (1,063,953 | ) | $ | 383,487 | ||||||||||||
Harden purchase accounting adjustment | (3,023 | ) | (3,021 | ) | (3,419 | ) | (9,463 | ) | (9,463 | ) | |||||||||||||||||||||
Balance at September�30, 2014: | $ | 383,696 | $ | 941,166 | $ | 113,115 | $ | 1,437,977 | $ | (263,370 | ) | $ | (800,583 | ) | $ | (1,063,953 | ) | $ | 374,024 | ||||||||||||
Note 10. | Earnings Per Share |
Basic and diluted earnings per share for each period presented have been computed by dividing net income (loss) attributable to Gentiva shareholders by the weighted average number of shares outstanding for each respective period. The computations of the basic and diluted per share amounts were as follows (in thousands, except per share amounts):�
� | For the Three Months Ended | For the Nine Months Ended | |||||||||||||
� | September 30, 2014 | September 30, 2013 (Revised) | September 30, 2014 | September 30, 2013 (Revised) | |||||||||||
Net income (loss) attributable to Gentiva shareholders | $ | 8,045 | $ | 3,563 | $ | 17,687 | $ | (184,441 | ) | ||||||
Basic weighted average common shares outstanding | 36,369 | 31,037 | 36,285 | 30,921 | |||||||||||
Shares issuable upon the assumed exercise of stock options and under stock plans for employees and directors using the treasury stock method | 1,177 | 495 | 767 | ||||||||||||
Diluted weighted average common shares outstanding | 37,546 | 31,532 | 37,052 | 30,921 | |||||||||||
Earnings per share: | |||||||||||||||
Basic | $ | 0.22 | $ | 0.12 | $ | 0.49 | $ | (5.97 | ) | ||||||
Diluted | $ | 0.21 | $ | 0.11 | $ | 0.48 | $ | (5.97 | ) | ||||||
Anti-dilutive shares by type: | |||||||||||||||
Stock options | 1,492 | 3,054 | 2,674 | 2,947 | |||||||||||
Performance share units | 80 | ||||||||||||||
Restricted stock | 232 | ||||||||||||||
Total anti-dilutive shares | 1,492 | 3,054 | 2,674 | 3,259 | |||||||||||
For the third quarter and first nine months of 2014, approximately 1.5 million and 2.7 million, respectively, of stock options were excluded from the computations of diluted earnings per share, as their inclusion would be anti-dilutive. For the third quarter and first nine months of 2013, approximately 3.1 million and 3.3 million, respectively, of stock options, performance share units and restricted stock awards were excluded from the computations of diluted earnings per share as their inclusion would be anti-dilutive.
Note 11. | Long-Term Debt |
Credit Arrangements
At September 30, 2014, the the Companys credit arrangements included a senior secured credit agreement providing (i)�a six-year $670 million Term Loan B facility, (ii)�a five-year $155 million Term Loan C facility and (iii)�a five-year $100 million revolving credit facility (collectively, the Credit Agreement ), and $325 million aggregate principal amount of 11.5 percent Senior Notes due 2018 (the Senior Notes ). The Credit Agreements revolving credit facility also includes borrowing capacity of $80 million available for letters of credit and $15 million for borrowings on same-day notice, referred to as swing line loans.
17
As of September 30, 2014 and December 31, 2013, the Companys long-term debt consisted of the following (in thousands):
September�30, 2014 | December�31, 2013 | ||||||
Credit Agreement: | |||||||
Term Loan B, maturing October�18, 2019, net of unamortized discount of $5,780 and $6,508 as of September 30, 2014 and December 31, 2013, respectively | $ | 659,196 | $ | 663,492 | |||
Term Loan C, maturing October 18, 2018, net of unamortized discount of $589 and $735 as of September 30, 2014 and December 31, 2013, respectively | 145,692 | 154,265 | |||||
11.5% Senior Notes due 2018 | 325,000 | 325,000 | |||||
Revolving Credit Facility | 27,000 | 27,000 | |||||
Total debt | 1,156,888 | 1,169,757 | |||||
Less: current portion of long-term debt | (51,138 | ) | (45,325 | ) | |||
Total long-term debt | $ | 1,105,750 | $ | 1,124,432 | |||
As of September 30, 2014, advances under the revolving credit facility could be made, and letters of credit could be issued, up to the $100 million borrowing capacity of the facility at any time prior to the facility expiration date of October�18, 2018. Outstanding letters of credit were $56.2 million and $52.0 million at September 30, 2014 and December 31, 2013, respectively. The letters of credit were issued to guarantee payments under the Companys workers compensation program and for certain other commitments. As of September 30, 2014, the Companys unused and available borrowing capacity under the Credit Agreement was $16.8 million. As governed by the indenture covering the unsecured Senior Notes, the Company has a maximum permitted borrowing capacity, as defined, which may limit the Company's ability to borrow up to the full capacity of the revolving credit facility.
The Term Loan B facility is subject to mandatory principal payments of $6.7 million per year, payable in equal quarterly installments, with the remaining balance of the original $670 million loan payable on October�18, 2019. The Term Loan C facility is subject to mandatory principal payments, payable in quarterly installments. The mandatory principal payments for 2014 are $11.6 million and increase each year through the maturity date of the loan, October 18, 2018.
As of September 30, 2014, the mandatory aggregate principal payments of long-term debt were $51.1 million due during the twelve months ending September 30, 2015, $29.0 million due during the twelve months ending September 30, 2016, $35.8 million due during the twelve months ending September 30, 2017, $60.9 million due during the twelve months ending September 30, 2018, $30.0 million due during the twelve months ending September 30, 2019 and $631.5 million thereafter under the Credit Agreement, and $325.0 million due in September 2018 under the Senior Notes. The weighted average cash interest rate on outstanding borrowings was 7.8 percent per annum at September 30, 2014 and 8.2 percent per annum at December 31, 2013.
The Company may voluntarily repay outstanding loans under the revolving credit facility or the term loans at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans. Prepayment and commitment reductions will be required in connection with (i)�certain asset sales, (ii)�certain extraordinary receipts such as certain insurance proceeds, (iii)�cash proceeds from the issuance of debt and (iv)�75 percent of Excess Cash Flow (as defined in the Credit Agreement) with two step-downs based on the Companys leverage ratio.
The interest rate per annum on borrowings under the Credit Agreement is based on, at the option of the Company, (i)�the Eurodollar Rate, adjusted for certain costs plus an Applicable Margin or (ii)�the Base Rate, plus an Applicable Rate. The Base Rate represents the highest of (x)�the Barclays Bank prime rate, (y)�the federal funds rate plus 0.50 percent or (z)�the Eurodollar Rate adjusted for certain costs plus 1.00 percent. In connection with determining the interest rates on the Term Loan B and Term Loan C facilities, in no event shall the Eurodollar Rate be less than 1.25 percent and the Base Rate be less than 2.25 percent. The Company may select interest periods of one, two, three or six months for Eurodollar Rate loans. Interest is payable at the end of the selected interest period. The Company must also pay a fee of 0.50 percent per annum on unused commitments under the revolving credit facility. As of September 30, 2014, the interest rate on Term Loan B borrowings was 6.50 percent, on Term Loan C borrowings was 5.75 percent and on revolving credit borrowings was 4.77 percent.
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The Applicable Rate component of the interest rate under the Company's Credit Agreement is based on the Company's consolidated leverage ratio as follows:
� | Applicable�Rates | ||||||||||
Eurodollar�Rate�for Revolving Credit Facility and Letter of Credit Fees | Base�Rate for Revolving Credit Facility | Term Loan B | Term Loan C | ||||||||
Consolidated Leverage Ratio | Eurodollar�Rate | Base�Rate | Eurodollar�Rate | Base�Rate | |||||||
> 4.0:1 | 4.50% | 3.50% | 5.25% | 4.25% | 4.50% | 3.50% | |||||
< 4.0:1 | 4.25% | 3.25% | 5.25% | 4.25% | 4.50% | 3.50% | |||||
Debt Covenants
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Companys and its subsidiaries ability to incur additional indebtedness or issue certain preferred stock, create liens on assets, enter into sale and leaseback transactions, engage in mergers or consolidations with other companies, sell assets, pay dividends, repurchase capital stock, make investments, loans and advances, make certain acquisitions, engage in certain transactions with affiliates, amend material agreements, repay certain indebtedness, change the nature of the Companys business, change accounting policies and practices, grant negative pledges and incur capital expenditures. The Credit Agreement also requires the Company to maintain a maximum consolidated leverage ratio, as calculated based on provisions in the Credit Agreement that provide for certain defined adjustments to consolidated EBITDA, and contains certain customary affirmative covenants and events of default.
Gentivas permitted maximum consolidated leverage ratio is set forth in the following table:�
Four Quarters Ending | Maximum�Consolidated Leverage Ratio |
March�31, 2014 to March�31, 2015 | d�6.75:1 |
June�30, 2015 to March�31, 2016 | d�6.50:1 |
June�30, 2016 to March�31, 2017 | d�6.25:1 |
June�30, 2017 to December�31, 2017 | d�6.00:1 |
March 31, 2018 and each fiscal quarter thereafter | d�5.75:1 |
As of September 30, 2014, the Companys consolidated leverage ratio was 5.8x. As of September 30, 2014, the Company was in compliance with all covenants in the Credit Agreement.
Guaranty Agreement and Security Agreement
Gentiva and substantially all of its subsidiaries (the Guarantor Subsidiaries ) entered into a guaranty agreement pursuant to which the Guarantor Subsidiaries have agreed, jointly and severally, fully and unconditionally to guarantee all of the Companys obligations under the Credit Agreement. Additionally, Gentiva and its Guarantor Subsidiaries entered into a security agreement pursuant to which a first-priority security interest was granted in substantially all of the Companys and its Guarantor Subsidiaries present and future real, personal and intangible assets, including the pledge of 100 percent of all outstanding capital stock of substantially all of the Companys domestic subsidiaries to secure full payment of all of the Companys obligations for the ratable benefit of the lenders.
Senior Notes
The Senior Notes are unsecured, senior subordinated obligations of the Company. The Senior Notes are guaranteed by all of Gentivas subsidiaries that are guarantors under the Credit Agreement. Interest on the Senior Notes accrues at a rate of 11.5 percent per annum and is payable semi-annually in arrears on March�1 and September�1. Gentiva will make each interest payment to the holders of record on the immediately preceding February�15 and August�15.
The Senior Notes mature on September�1, 2018 and are generally free to be transferred. Gentiva may redeem the Senior Notes, in whole or in part, at any time prior to the first interest payment of 2014, at a price equal to 100 percent of the principal amount of the Senior Notes redeemed plus an applicable make-whole premium based on the present value of the remaining payments discounted at the treasury rate plus 50 basis points plus accrued and unpaid interest, if any, to the date of redemption.
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On or after September�1, 2014, Gentiva may redeem all or part of the Senior Notes at redemption prices set forth below plus accrued and unpaid interest and Additional Interest, if any, as defined in the indenture relating to the Senior Notes during the twelve month period beginning on September�1 of the years indicated below:�
Year | Redemption Percentage |
2014 | 105.750% |
2015 | 102.875% |
2016 and thereafter | 100.000% |
Note 12. | Equity |
Changes in equity for the nine months ended September 30, 2014 and 2013 were as follows (in thousands, except share amounts):
� | Gentiva Shareholders | � | � | |||||||||||||||||||||||
� | Common Stock | Additional Paid-in Capital | Retained Earnings Accumulated (Deficit) | Treasury Stock | Noncontrolling Interests | � | ||||||||||||||||||||
� | Shares | Amount | Total | |||||||||||||||||||||||
Balance at December�31, 2012 (Revised) | 32,009,286 | $ | 3,201 | $ | 399,148 | $ | (153,075 | ) | $ | (17,852 | ) | $ | 1,538 | $ | 232,960 | |||||||||||
Comprehensive (loss) income: | ||||||||||||||||||||||||||
�����Net (loss) income | (184,441 | ) | 425 | (184,016 | ) | |||||||||||||||||||||
Total comprehensive (loss) income | (184,441 | ) | 425 | (184,016 | ) | |||||||||||||||||||||
Income tax expense associated with the exercise of non-qualified stock options | (330 | ) | (330 | ) | ||||||||||||||||||||||
Equity-based compensation expense | 5,984 | 5,984 | ||||||||||||||||||||||||
Net issuance of stock upon exercise of stock options and under stock plans for employees and directors | 640,805 | 64 | 2,392 | 2,456 | ||||||||||||||||||||||
Minority interest capital contribution | 1,600 | 1,600 | ||||||||||||||||||||||||
Distribution to partnership interests | (563 | ) | (563 | ) | ||||||||||||||||||||||
Treasury shares: | ||||||||||||||||||||||||||
Stock withheld (25,801 shares) for payroll tax withholdings related to equity-based compensation | 25,801 | 3 | (286 | ) | (283 | ) | ||||||||||||||||||||
Balance at September�30, 2013 (Revised) | 32,675,892 | $ | 3,268 | $ | 407,194 | $ | (337,516 | ) | $ | (18,138 | ) | $ | 3,000 | $ | 57,808 | |||||||||||
Balance at December�31, 2013 (Restated) | 37,713,302 | $ | 3,771 | $ | 462,262 | $ | (758,136 | ) | $ | (18,773 | ) | $ | 2,875 | $ | (308,001 | ) | ||||||||||
Comprehensive income: | ||||||||||||||||||||||||||
Net income | 17,687 | 170 | 17,857 | |||||||||||||||||||||||
Total comprehensive income | 17,687 | 170 | 17,857 | |||||||||||||||||||||||
Income tax expense associated with the exercise of non-qualified stock options | (2,261 | ) | (2,261 | ) | ||||||||||||||||||||||
Equity-based compensation expense | 6,643 | 6,643 | ||||||||||||||||||||||||
Net issuance of stock upon exercise of stock options and under stock plans for employees and directors | 559,528 | 56 | 1,881 | 1,937 | ||||||||||||||||||||||
Minority interest capital contribution | 1,160 | 1,160 | ||||||||||||||||||||||||
Acquisition of non-controlling interest | (1,748 | ) | (1,748 | ) | ||||||||||||||||||||||
Distribution to partnership interests | (393 | ) | (393 | ) | ||||||||||||||||||||||
Treasury shares: | ||||||||||||||||||||||||||
Stock withheld (32,662 shares) for payroll tax withholdings related to equity-based compensation | (392 | ) | (392 | ) | ||||||||||||||||||||||
Balance at September�30, 2014 | 38,272,830 | $ | 3,827 | $ | 466,777 | $ | (740,449 | ) | $ | (19,165 | ) | $ | 3,812 | $ | (285,198 | ) | ||||||||||
Comprehensive income amounted to $8.0 million and $17.9 million for the third quarter and first nine months of 2014, respectively, as compared to comprehensive income of $3.7 million and comprehensive loss of $184.0 million for the third quarter and first nine months of 2013, respectively.
The Company has an outstanding stock repurchase plan authorized by its Board of Directors to repurchase of up to $5,000,000 of shares of the Companys outstanding common stock (the 2012 Repurchase Program ). During the nine months
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ended September 30, 2014 and September 30, 2013, the Company did not repurchase shares of its outstanding common stock. As of September 30, 2014, the Company had remaining authorization under the 2012 Repurchase Program to repurchase common stock with an aggregate purchase price of up to $1.5 million, subject to the additional limitations set forth below.
The Companys Credit Agreement provides for repurchases of the Companys common stock not to exceed $7.5 million per year, and not to exceed $25.0 million per year if the consolidated leverage ratio is less than or equal to 3.5:1 immediately after giving effect on a pro forma basis to the repurchase. The indenture governing the Companys Senior Notes also contains limitations on the Companys repurchases of its common stock.
Note 13. | Equity-Based Compensation Plans |
The Company provides several equity-based compensation plans under which the Companys officers, employees and non-employee directors may participate, including (i)�the 2004 Equity Incentive Plan (amended and restated as of March 16, 2011, as further amended by Amendment Nos. 1 and 2 thereto) ( 2004 Plan ), (ii)�the Stock�& Deferred Compensation Plan for Non-Employee Directors ( DSU Plan ) and (iii)�the Employee Stock Purchase Plan ( ESPP ). Collectively, these equity-based compensation plans permit the grants of (i)�incentive stock options, (ii)�non-qualified stock options, (iii)�stock appreciation rights, (iv)�restricted stock, (v)�performance units, (vi)�stock units and (vii)�cash, as well as allow employees to purchase shares of the Companys common stock under the ESPP at a pre-determined discount.
For the third quarter and first nine months of 2014, the Company recorded equity-based compensation expense, as calculated on a straight-line basis over the vesting periods of the related equity instruments, of $2.3 million and $6.6 million, respectively, as compared to $2.0 million and $6.0 million for the corresponding periods of 2013, which were reflected as selling, general and administrative expense in the consolidated statements of comprehensive income.
Stock Options
The weighted average fair values of the Companys stock options granted during the first nine months of 2014 and 2013 calculated using the Black-Scholes option pricing model and other assumptions were as follows:�
� | Nine Months Ended | ||||||
� | September�30, 2014 | September�30, 2013 | |||||
Weighted average fair value of options granted | $ | 5.08 | $ | 10.74 | |||
Risk-free interest rate | 0.46% - 0.51% | 0.29%�-�0.54% | |||||
Expected volatility | 60% - 63% | 76% - 79% | |||||
Contractual life | 7 years | 7 years | |||||
Expected life | 3.4 - 5.4 years | 3.4�-�5.4�years | |||||
Expected dividend yield | % | % | |||||
During the first nine months of 2014, the Company issued 375,000 stock options that are both time-vesting (one-third each year) and carry a market vesting feature based on the average 30-day closing stock price of the Company's common stock based on stock price thresholds of $14, $16, and $18 (each covering one-third of the options granted). The fair value of the stock options granted ranged from $5.15 to $5.88 and was determined using the Monte Carlo stock option valuation model. Assumptions used in the model included volatility of 63 percent, risk-free interest rate of 1.32 percent, zero percent dividend yield, a forfeiture rate based on the Company's historical experience and a contractual life of seven years.
Stock option grants in 2011 through 2014 vest over a three-year period based on a vesting schedule that provides for one-third vesting after each year. In addition, the Company also issued stock options in 2013 and 2014 that are both time-vesting (one-third each year) and carry a market vesting feature based on the average 30-day closing stock price of the Company's common stock. Stock option grants in 2010 fully vest over a four-year period based on a vesting schedule that provides for one-half vesting after year two and an additional one-fourth vesting after each of years three and four. The Companys expected volatility assumptions are based on the historical volatility of the Companys stock price over a period corresponding to the expected term of the stock option. Forfeitures are estimated utilizing the Companys historical forfeiture experience. The expected life of the Companys stock options is based on the Companys historical experience of the exercise patterns associated with its stock options.
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A summary of Gentiva stock option activity as of September 30, 2014 and changes during the nine months then ended is presented below:
Number of Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||
Balance as of December 31, 2013 | 4,005,589 | $ | 15.40 | |||||||||
Granted | 737,500 | 10.90 | ||||||||||
Exercised | (27,268 | ) | 7.16 | |||||||||
Cancelled | (722,674 | ) | 19.65 | |||||||||
Balance as of September 30, 2014 | 3,993,147 | $ | 13.86 | 4.4 | $ | 20,692,356 | ||||||
Exercisable options | 2,404,269 | $ | 16.71 | 3.6 | $ | 9,208,192 | ||||||
Shares expected to vest as of September 30, 2014 | 1,534,806 | $ | ||||||||||