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Author: Viking70 One star, 50 posts Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 21  
Subject: GTIV 2011 Q3 Date: 11/28/2011 4:31 PM
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GTIV recently reported their earnings for the 3Q, and they were pretty much a disaster.

Highlights (not sure they are actual “high”lights though):
• Total net revenues of $449.7 million, an increase of 18% compared to $379.7 million for the quarter ended October 3, 2010. (Note that 2011 Q2 Revenue was $457M, 2011 Q1 Revenue was $459M, and 2010 Q3 Revenue was $379.7M)
• Net revenues included home health episodic revenues of $219.6 million, a decline of 3% compared to $227.4M in the 2010 third quarter. Hospice revenues were $196.5 million in the third quarter of 2011, compared to $115.7 million in the 2010 third quarter. Hospice represented 44% of total net revenues in the third quarter of 2011, compared to 30% in the 2010 third quarter.
• Loss from continuing operations attributable to Gentiva shareholders of $479.7 million, or $15.68 per diluted share, which included:
o Impairment of goodwill, intangible assets and other long-lived assets of $547.1 million, or $17.88 per diluted share,
o a gain on sale of CareCentrix included in equity in net earnings of CareCentrix of $68.3 million, or $2.23 per diluted share
o pre-tax legal settlement, restructuring, and acquisition and integration costs of $9.8 million, or $0.32 per diluted share,
o tax reserves on OIG legal settlements of $5.5 million, or $0.18 per diluted share,
o pre-tax dividend income from the Company's CareCentrix's preferred stock holdings of $4.0 million, or $0.13 per diluted share,
o tax impact of items excluded from income from continuing operations attributable to Gentiva shareholders of $2.1 million, or $0.07 per diluted share.
• In the third quarter of 2010, income from continuing operations attributable to Gentiva shareholders was $8.1 million, or $0.27 per diluted share, which included $22.8 million pre-tax, or $0.75 per diluted share, relating to charges associated with restructuring, legal settlement and acquisition and integration costs.
• Adjusted income from continuing operations attributable to Gentiva shareholders of $8.3 million, compared with $21.6 million in the comparable 2010 period. On a diluted per share basis, adjusted income from continuing operations attributable to Gentiva shareholders was $0.27 for the third quarter of 2011 compared to income of $0.71 for the third quarter of 2010. Including the dividend income received from CareCentrix and the impact of the businesses moved to discontinued operations this quarter, adjusted income from continuing operations attributable to Gentiva shareholders would have been $0.37 for the third quarter of 2011.


During the third quarter of 2011, GTIV sold its remaining equity investment in CareCentrix Holdings Inc. GTIV continues to hold a $25 million note receivable with CareCentrix, Inc. at 10% interest. Additionally, during the quarter, GTIV sold its Rehab Without Walls® business and committed to a plan to exit one other small non-core business pursuant to asset purchase agreements, and as a result, the two business units are now classified as discontinued operations in the financial statements. GTIV expects net cash proceeds after tax of approximately $75 million from these transactions.

During the quarter, the GTIV undertook a comprehensive review of its branch structure, support infrastructure and other significant spend areas given the challenging rate environment. As a result GTIV will be closing or divesting 33 home health branches and 9 hospice branches, and significantly reducing staffing at our regional and areas support levels. Additionally, the Company is renegotiating key supplier contracts, streamlining support operations and implementing new policies and procedures to reduce non-essential spending across the Company. Related to the cost savings initiatives, the Company expects to record a charge of $20-$25 million in the fourth quarter of 2011 for severance, lease terminations and other items.

And here is the biggest problem: Due to the amount of the expected fourth quarter charges related to the cost savings initiatives, the GTIV will likely be out of compliance at December 31, 2011 with the maximum consolidated leverage ratio in the Credit Agreement, which reduces to 4.5x in the 2011 fourth quarter. The Company is in discussions with its lenders under the Credit Agreement to seek a waiver of compliance with its financial covenants for the fourth quarter of 2011.

During the third quarter of 2011, the Company performed an impairment test of its goodwill, intangibles and other long-lived assets in response to changes in the business climate including uncertainties around Medicare reimbursement. The Company's impairment test indicated that goodwill and certain identifiable intangible assets had carrying values that exceeded the estimated fair values of those assets. As such, the Company recorded non-cash impairment charges of approximately $643 million for the third quarter and first nine months of 2011.

Full-year 2011 net revenues are now expected to be in the range of $1.78 billion to $1.82 billion. Full-year adjusted income from continuing operations attributable to Gentiva shareholders is now expected to be in the range of $1.50 to $1.70 on a diluted share basis.


After reviewing GTIV’s status and going thru their press release, it is apparent that my investment thesis no longer holds true, and it is time for me to sell GTIV. Granted, it might pull out a miracle and get the ship headed in the right direction, but, frankly, there are better investments out there. The major problems I have are:
• GTIV will likely be out of compliance at December 31, 2011 with the maximum consolidated leverage ratio in the Credit Agreement. This has been on the horizon, and I guess it finally became reality
• As such, the Company recorded non-cash impairment charges of approximately $643 million for the third quarter and first nine months of 2011. To me this is ridiculous. How could this not have been known before? I think they were trying to hide the bloated goodwill until better times, but the failure to maintain the leverage ratio as identified in the Credit Agreement forced their hand.
• GTIV has a huge mountain of debt ($1.008 Billion at the end of Q3), which they are slowly paying down ($20M paid down during 2011 Q3—at this rate it will take 12.5 years to pay down)
• GTIV is not executing as expected although they think that they will see better results in the future.

I am closing my position in GTIV at a substantial loss. I think there is some upside from here if GTIV can get the ship turned around, but the goodwill impairment out of “nowhere” is it for me. I don’t feel that management can be trusted to be honest with shareholders at this point. Not saying that they are criminals, but I just can’t get behind anything they say at this point. There are just better investments out there with better upside potential with less risk than GTIV.
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