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EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(A) - GENTIVA HEALTH SERVICES INCdex312.htm
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EX-32.2 - CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350 - GENTIVA HEALTH SERVICES INCdex322.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350 - GENTIVA HEALTH SERVICES INCdex321.htm
Table of Contents

 

 

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 27, 2009

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)

Registrant’s 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  ¨    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 registrant’s Common Stock, as of November 2, 2009, was 29,309,811.

 

 

 


Table of Contents

INDEX

 

          Page No.

PART I - FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Consolidated Balance Sheets (Unaudited) – September 27, 2009 and December 28, 2008

   3
  

Consolidated Statements of Income (Unaudited) – Three and Nine Months Ended September 27, 2009 and September 28, 2008

   4
  

Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 27, 2009 and September 28, 2008

   5
  

Notes to Consolidated Financial Statements (Unaudited)

   6-24

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   24-38

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   38

Item 4.

  

Controls and Procedures

   38-39

PART II - OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   39

Item 1A.

  

Risk Factors

   39

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   39

Item 3.

  

Defaults Upon Senior Securities

   39

Item 4.

  

Submission of Matters to a Vote of Security Holders

   39

Item 5.

  

Other Information

   39

Item 6.

  

Exhibits

   40

SIGNATURES

   41

EXHIBIT INDEX

   42

 

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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 27, 2009     December 28, 2008  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 120,298      $ 69,201   

Short-term investments

     5,000        —     

Receivables, less allowance for doubtful accounts of $7,318 and $8,227 at September 27, 2009 and December 28, 2008, respectively

     175,728        177,201   

Deferred tax assets

     12,434        11,933   

Prepaid expenses and other current assets

     16,487        13,141   
                

Total current assets

     329,947        271,476   

Long-term investments

     —          11,050   

Note receivable from affiliate

     25,000        25,000   

Investment in affiliate

     24,043        23,264   

Fixed assets, net

     69,100        63,815   

Intangible assets, net

     253,836        250,432   

Goodwill

     311,135        308,213   

Other assets

     23,876        20,247   
                

Total assets

   $ 1,036,937      $ 973,497   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 7,982      $ 8,027   

Payroll and related taxes

     24,734        17,869   

Deferred revenue

     39,893        32,976   

Medicare liabilities

     6,493        6,680   

Obligations under insurance programs

     38,530        39,628   

Other accrued expenses

     34,409        40,895   
                

Total current liabilities

     152,041        146,075   

Long-term debt

     237,000        251,000   

Deferred tax liabilities, net

     70,559        64,262   

Other liabilities

     20,998        17,189   

Shareholders’ equity:

    

Common stock, $.10 par value; authorized 100,000,000 shares; issued 29,697,843 and 28,993,390 shares at September 27, 2009 and December 28, 2008, respectively

     2,970        2,899   

Additional paid-in capital

     349,168        334,687   

Retained earnings

     211,579        161,057   

Accumulated other comprehensive loss

     —          (1,170

Treasury stock, 461,552 and 129,703 shares at September 27, 2009 and December 28, 2008, respectively

     (7,378     (2,502
                

Total shareholders’ equity

     556,339        494,971   
                

Total liabilities and shareholders’ equity

   $ 1,036,937      $ 973,497   
                

See notes to consolidated financial statements.

 

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Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

     For the Three Months Ended     For the Nine Months Ended  
     September 27, 2009     September 28, 2008     September 27, 2009     September 28, 2008  

Net revenues

   $ 295,592      $ 345,243      $ 882,612      $ 1,011,089   

Cost of services and goods sold

     143,490        194,263        425,474        572,106   
                                

Gross profit

     152,102        150,980        457,138        438,983   

Selling, general and administrative expenses

     (126,624     (127,909     (379,165     (371,358

Gain on sale of assets, net

     —          107,872        5,747        107,872   

Interest income

     687        338        2,305        1,278   

Interest expense and other

     (1,985     (4,191     (7,865     (15,876
                                

Income before income taxes

     24,180        127,090        78,160        160,899   

Income tax expense

     9,013        6,218        28,417        20,280   
                                

Income before equity in net earnings of affiliate

     15,167        120,872        49,743        140,619   

Equity in net earnings of affiliate

     238        20        779        20   
                                

Net income

   $ 15,405      $ 120,892      $ 50,522      $ 140,639   
                                

Net income per common share:

        

Basic

   $ 0.53      $ 4.21      $ 1.74      $ 4.94   
                                

Diluted

   $ 0.52      $ 4.07      $ 1.70      $ 4.80   
                                

Weighted average shares outstanding:

        

Basic

     29,154        28,687        29,019        28,489   
                                

Diluted

     29,800        29,718        29,648        29,320   
                                

See notes to consolidated financial statements.

 

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Table of Contents

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands, except share amounts)

(Unaudited)

 

     For the Nine Months Ended  
     September 27, 2009     September 28, 2008  

OPERATING ACTIVITIES:

    

Net income

   $ 50,522      $ 140,639   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     16,705        16,494   

Amortization of debt issuance costs

     952        1,474   

Provision for doubtful accounts

     6,307        9,536   

Equity-based compensation expense

     4,140        4,711   

Windfall tax benefits associated with equity-based compensation

     (743     (2,087

Impairment loss on auction rate securities

     1,000        —     

Gain on sale of assets, net

     (5,747     (107,872

Equity in net earnings of affiliate

     (779     (20

Deferred income tax expense

     5,015        11,868   

Changes in assets and liabilities, net of effects from acquisitions and dispositions:

    

Accounts receivable

     (4,441     (28,666

Prepaid expenses and other current assets

     (4,495     (2,204

Accounts payable

     (130     361   

Payroll and related taxes

     6,865        8,499   

Deferred revenue

     6,694        4,216   

Medicare liabilities

     (187     (770

Cost of claims incurred but not reported

     —          (2,829

Obligations under insurance programs

     (1,098     3,009   

Other accrued expenses

     (5,527     (6,099

Other, net

     813        836   
                

Net cash provided by operating activities

     75,866        51,096   
                

INVESTING ACTIVITIES:

    

Purchase of fixed assets

     (18,157     (19,082

Proceeds from sale of assets, net of cash transferred

     6,219        81,760   

Acquisition of businesses, net of cash acquired

     (10,325     (60,634

Purchase of short-term investments available-for-sale

     —          (28,000

Maturities of short-term investments available-for-sale

     7,000        46,250   
                

Net cash (used in) provided by investing activities

     (15,263     20,294   
                

FINANCING ACTIVITIES:

    

Proceeds from issuance of common stock

     9,228        9,721   

Windfall tax benefits associated with equity-based compensation

     743        2,087   

Borrowings under revolving credit facility

     —          24,000   

Home Health Care Affiliates debt repayments

     —          (7,420

Repayments under the Company’s term loan

     (14,000     (73,000

Debt issuance costs

     —          (557

Repurchases of common stock

     (4,813     —     

Repayment of capital lease obligations

     (664     (899
                

Net cash used in financing activities

     (9,506     (46,068
                

Net change in cash and cash equivalents

     51,097        25,322   

Cash and cash equivalents at beginning of period

     69,201        36,181   
                

Cash and cash equivalents at end of period

   $ 120,298      $ 61,503   
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Interest paid

   $ 7,067      $ 17,945   

Income taxes paid

   $ 27,359      $ 8,363   

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITY:

    

Note receivable received in connection with the sale of CareCentrix

   $ —        $ 25,000   

Fair value of preferred stock received in connection with sale of CareCentrix

   $ —        $ 23,299   

Fixed assets acquired under capital lease

   $ 29      $ 675   

On June 25, 2009, June 25, 2008, and February 28, 2008, 4,021, 21,413, and 45,229 shares of common stock, respectively, were received from the Healthfield escrow account to satisfy certain pre-acquisition liabilities paid by the Company and were recorded as treasury stock.

See notes to consolidated financial statements.

 

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Gentiva Health Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

  1. Background and Basis of Presentation

Gentiva® Health Services, Inc. (“Gentiva” or the “Company”) provides comprehensive home health services throughout most of the United States. The Company conducts its operations through (i) its Home Health business segment, (ii) various smaller operating segments, including hospice, respiratory services and home medical equipment (“HME”), infusion therapy services and consulting, which are classified in the aggregate as “All Other” for segment reporting purposes, and (iii) for periods prior to September 25, 2008, its CareCentrix business segment. See Note 16 for a description of the Company’s operating segments and financial information about its reportable segments.

Effective September 25, 2008, the Company completed the disposition of 69 percent of its equity ownership interest in the Company’s CareCentrix ancillary care benefit management business for total consideration of approximately $135 million. The Company’s consolidated statements of income for the third quarter and the nine months ended September 28, 2008 presented herein included the results of CareCentrix. The Company’s consolidated statements of income for the third quarter and the nine months ended September 27, 2009 included the Company’s equity in the net earnings of CareCentrix Holdings Inc., a holding company which owns CareCentrix. See Note 5.

In addition, the Company has completed various other transactions impacting the Company’s results of operations and financial condition as further described in Note 4. The impact of these transactions has been reflected in the Company’s results of operations and financial condition from their respective closing dates.

The accompanying interim consolidated financial statements are unaudited, and have been prepared by Gentiva using accounting principles consistent with those described in the Company’s Annual Report on Form 10-K for the year ended December 28, 2008 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 presentation of financial position, results of operations and cash flows for each period presented. Certain information and disclosures normally included in the statement of financial position, results of operations and cash flows prepared in conformity with accounting principles generally accepted in the United States of America 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 Company evaluated all subsequent events through the time that it filed its consolidated financial statements in this Form 10-Q with the SEC on November 6, 2009.

 

  2. New Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All guidance included in such Codification will be considered authoritative at that time, even guidance that comes from what is currently deemed to be a non-authoritative section of a standard. Recognition of the Codification in financial statements is applicable for interim and annual periods ending after September 15, 2009. The Company adopted this guidance in the third quarter of fiscal 2009, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued authoritative guidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance in the second quarter of fiscal 2009, and it did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued authoritative guidance to require fair value disclosures of financial instruments in interim financial statements as well as in annual financial statements. The Company adopted this guidance in the second quarter of fiscal 2009, and it did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued additional authoritative guidance on valuation techniques for estimating the fair value of assets or liabilities when there has been a significant decrease in volume and level of market activity. The Company adopted this guidance in the second quarter of fiscal 2009.

        In April 2009, the FASB issued authoritative guidance which addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which

 

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the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted this guidance in the first quarter of fiscal 2009, and it did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued authoritative guidance that changes existing guidance for determining whether debt securities are other-than-temporarily impaired and replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not be required to sell the security before recovery of its cost basis. Assuming these two criteria are met, the guidance requires entities to separate an other-than-temporary impairment of a debt security into two components. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive income (loss). The Company adopted the guidance during the second quarter of 2009, as further described in Note 6.

In April 2008, the FASB issued authoritative guidance which amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions, and increases the disclosure requirements related to renewal or extension assumptions. The Company has adopted this guidance for all intangible assets acquired on or after January 1, 2009, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued authoritative guidance that establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained, noncontrolling equity investments when a subsidiary is deconsolidated. It further establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance is effective for fiscal years beginning after December 15, 2008. The Company adopted this guidance in the first quarter of fiscal 2009, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued authoritative guidance related to business combination which established principles and requirements as to how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired and also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This guidance is effective for fiscal years beginning after December 15, 2008. The Company adopted this guidance in the first quarter of fiscal 2009, and the adoption did not have a material impact on the Company’s consolidated financial statements.

 

  3. 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.

The Company had operating funds of approximately $5.3 million and $4.6 million at September 27, 2009 and December 28, 2008, respectively, which exclusively relate to a non-profit hospice operation managed in Florida. 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.

Investments

The Company currently holds an approximate 30 percent equity ownership interest in CareCentrix Holdings Inc. The Company’s ongoing ownership interest is subject to dilution following any equity issuances to employees of CareCentrix Holdings Inc. and any other parties. The Company accounts for its investment in this unconsolidated affiliate using the equity method of accounting, since the Company has the ability to exercise significant influence, but not control, over the affiliate. Significant influence is deemed to exist because the Company’s ownership interest in the voting stock of the affiliate is between 20 percent and 50 percent as well as through the Company’s representation on the affiliate’s Board of Directors. The Company’s equity ownership interest in CareCentrix Holdings Inc. is recorded in investment in affiliate in the accompanying consolidated balance sheets at September 27, 2009 and December 28, 2008.

The Company’s other short term and long term investments consist of AAA rated municipal bonds with an auction reset feature (“ARS”) and other debt securities with an original maturity of more than three months and less than one year on the acquisition date. Investments in debt securities, if any, would be classified by individual security into one of three separate categories: available-for-sale, held-to-maturity or trading.

 

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At September 27, 2009 and December 28, 2008, the Company held $5.0 million and $13.0 million, respectively, of investments categorized as available-for-sale. Available-for-sale investments are carried on the balance sheet at fair value. Unrealized gains and losses on available-for-sale investments are reflected in accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. ARS are variable-rate debt securities with an interest rate that resets every 7, 28 or 35 days. In a stable market, these securities are expected to trade at par and are callable at par on any interest payment date at the option of the issuer. Interest is paid at the end of each auction period. In February 2008, auctions began to fail for these securities. Based on the overall failure rate of these auctions, the frequency of the failures, and the maturities of the municipal bonds (which range between three and 27 years), the Company then classified the ARS as long-term investments on the Company’s consolidated balance sheet.

In October 2009, the issuer of the Company’s remaining ARS repurchased the security at par value of $5 million and, as such, the Company reversed the valuation allowance of approximately $0.8 million recorded in accumulated other comprehensive loss and classified the ARS as short-term investments on the Company’s consolidated balance sheet as of September 27, 2009. See Note 6.

Inventory

Inventories, which are included in prepaid expenses and other current assets, are stated at lower of cost or market. Cost is determined using the specific identification method. Inventories amounted to $2.5 million at September 27, 2009 and $2.4 million at December 28, 2008.

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.

As of September 27, 2009 and December 28, 2008, fixed assets, net were $69.1 million and $63.8 million, respectively, and included capitalized software of $35.8 million and $31.8 million, respectively, which is in development and is not yet being fully depreciated. During the second quarter of 2009, the Company began depreciating its clinical management software at such time that the technology became available in a branch for its intended use. Depreciation expense relating to this item approximated $0.1 million for the third quarter and first nine months of fiscal 2009.

Debt Issuance Costs

The Company amortizes deferred debt issuance costs over the term of its credit agreement. The Company had unamortized debt issuance costs of $3.0 million at September 27, 2009 and $3.8 million at December 28, 2008, recorded in other assets.

Home Medical Equipment

HME, which is included in fixed assets, is stated at cost and consists of medical equipment, such as hospital beds and wheelchairs, provided to in-home patients in the Company’s respiratory therapy and HME operations. Depreciation is provided using the straight-line method over the estimated useful lives of the equipment. At September 27, 2009 and December 28, 2008, the net book value of HME included in fixed assets, net in the accompanying consolidated balance sheets, was $5.7 million and $5.4 million, respectively.

Obligations Under Self Insurance Programs

Workers’ compensation and professional and general liability costs were $4.5 million and $11.7 million for the third quarter and first nine months of 2009, respectively, as compared to $4.0 million and $12.6 million for the corresponding periods of 2008.

Employee health and welfare costs were $13.1 million and $41.2 million for the third quarter and first nine months of 2009, respectively, as compared to $12.5 million and $35.1 million for the corresponding periods of 2008.

Reclassifications and Revisions

Certain reclassifications have been made to the 2008 third quarter and first nine months statements of income to conform to the current year presentation. The primary impact of the reclassifications was to reduce (i) net revenues in All Other and (ii) cost of services and goods sold by approximately $2.3 million and $6.4 million in the 2008 third quarter and first nine months of 2008, respectively, relating to the reimbursement of nursing home room and board charges for hospice patients.

 

  4. Dispositions and Acquisitions

Pediatric and Adult Hourly Services Dispositions

During the first quarter of 2009, the Company sold assets associated with certain branch offices that specialized primarily in pediatric home health care services for total consideration of $6.5 million. The sales related to seven offices in five cities

 

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and included the adult home care services in the affected offices. The Company received $5.9 million in cash at the close of the sale and $0.6 million as a final payment in September 2009. The sales, after deducting related costs, resulted in a net gain before income taxes of $5.7 million. This gain is included in the gain on sale of assets, net in the Company’s consolidated statement of income and consolidated statement of cash flows for the nine months ended September 27, 2009.

CareCentrix Disposition

Effective September 25, 2008, the Company completed the disposition of 69 percent of its equity ownership interest in the Company’s CareCentrix ancillary care benefit management business for total consideration of approximately $135 million, consisting of (i) cash proceeds of $84 million, (ii) a $25 million note receivable, (iii) a working capital adjustment of $1.4 million, (iv) reimbursement of $1.5 million of transaction related expenses and (v) shares of preferred stock of CareCentrix Holdings, Inc.

During the third quarter and first nine months of 2008, the Company recorded a pre-tax gain on the CareCentrix disposition of approximately $107.9 million, including $6.5 million of transaction costs.

Acquisitions

The Company has closed several acquisitions since early 2008. For the first nine months of 2009, total cash consideration paid for acquired businesses amounted to $10.3 million, excluding transaction costs and subject to post-closing adjustments. The acquisitions completed during the 2009 period extended the Company’s operations primarily into geographic areas not previously serviced by the Company within states requiring a Certificate of Need (“CON”) to perform home health services. The aggregate purchase price was allocated to identifiable intangible assets ($7.1 million), goodwill ($3.1 million) and other assets ($0.1 million). The name of the acquired home health agency, the acquisition date and the geographic service area is summarized below:

 

Name of Agency

    

Acquisition Date

    

Geographic Service Area

Mid-State Home Health Agency     

June 20, 2009

     Central Louisiana
Nicholas County Home Health Agency     

July 1, 2009

     West Virginia
Magna Home Health     

August 22, 2009

     Central Mississippi/Western Alabama

For the first nine months of 2008, total cash consideration paid for acquired businesses amounted to $60.6 million. These acquisitions are further discussed below:

Home Health Care Affiliates, Inc.

Effective February 29, 2008, the Company completed the acquisition of 100 percent of the equity interest in Home Health Care Affiliates, Inc. (“HHCA”), a provider of home health and hospice services with 14 locations in Mississippi. Total consideration of $55.6 million, excluding transaction costs and subject to post-closing adjustments, consisted of cash of $48.0 million and assumption of HHCA’s existing debt and accrued interest, aggregating $7.4 million, which the Company paid off at the time of closing, net of cash acquired of $0.2 million. The Company funded the purchase price using (i) existing cash balances of $43.6 million and (ii) $12.0 million of borrowings under its existing revolving credit facility, net of debt issuance costs.

The Company acquired HHCA to expand and extend its services in the southeast United States. The Company had not previously provided any services in Mississippi, a state which requires providers to have a CON in order to operate a Medicare-certified home health agency. There have been no new CONs issued in Mississippi in recent years.

Physicians Home Health Care

Effective June 1, 2008, the Company completed the acquisition of CSMMI, Inc., d/b/a Physicians Home Health Care (“PHHC”), a provider of home health services with three locations in Colorado, pursuant to an asset purchase agreement. Total consideration of $12 million, excluding transaction costs and subject to post-closing adjustments, consisted of $11.1 million paid at the time of closing, net of cash acquired of $0.9 million. The Company funded the purchase price using borrowings under its existing revolving credit facility. The Company acquired PHHC to extend its home health services into the state of Colorado.

Hospice of Charleston

On August 2, 2008, the Company acquired certain assets of Hospice of Charleston, a non-profit homecare company that provided hospice services, as well as home health services, for approximately $1.2 million, which was funded from the Company’s existing cash reserves. The acquisition allowed the Company to expand its home health services to three CON counties in and around Charleston, South Carolina.

*  *  *  *  *

The financial results of the above acquired operations are included in the Company’s consolidated financial statements from their respective acquisition dates. The purchase prices were allocated to the underlying assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired is recorded as goodwill. The Company has determined the estimated fair values based on discounted cash flows, and management’s valuation of the intangible assets acquired.

 

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  5. Note Receivable from and Investment in Affiliate

The Company currently holds an approximate 30 percent equity ownership interest in CareCentrix Holdings Inc., whose CareCentrix subsidiary is a leading national provider of ancillary care benefit management services for major managed care organizations. The Company’s ongoing ownership interest is subject to dilution following any equity issuances to employees of CareCentrix Holdings Inc. and any other parties. The Company accounts for its investment in affiliate using the equity method of accounting and recognized approximately $0.2 million and $0.8 million of equity in the net earnings of affiliate for the third quarter and the first nine months of fiscal 2009, respectively.

The Company holds a $25 million convertible subordinated promissory note from CareCentrix, which bears interest at a fixed rate of 10 percent, payable quarterly provided that CareCentrix remains in compliance with its senior debt covenants. The principal is due on the earliest of March 25, 2014, a public offering by CareCentrix Holdings Inc., or a sale of CareCentrix Holdings Inc.

 

  6. Fair Value of Financial Instruments

The Company’s financial instruments are measured and recorded at fair value on a recurring basis, except for notes receivable from affiliate, investment in affiliate and long-term debt. The fair values for notes receivable from and investments in affiliate and non-financial assets, such as fixed assets, intangible assets and goodwill, are measured periodically and recorded only if an impairment charge is required. The carrying amount of the Company’s 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 of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy 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 1—Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2—Inputs 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 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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Financial Instruments Recorded at Fair Value

The Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis was as follows (in thousands):

 

    September 27, 2009   December 28, 2008
    Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total

Assets:

               

Money market funds

  $ 84,886   $ —     $ —     $ 84,886   $ 57,969   $ —     $ —     $ 57,969

Municipal bonds

    —       —       5,000     5,000     —       —       11,050     11,050
                                               

Total assets

  $ 84,886   $ —     $ 5,000   $ 89,886   $ 57,969   $ —     $ 11,050   $ 69,019
                                               

The Company has no financial liabilities which are measured on a recurring basis. Money market funds represent cash equivalents and were classified in cash and cash equivalents in the Company’s consolidated balance sheet at September 27, 2009. Municipal bonds, which are classified as short-term and long-term investments, consist of ARS whose underlying assets are student loans which are substantially backed by the federal government. These securities have been classified as Level 3 as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets (in thousands):

 

     Total  

Balance at December 28, 2008

   $ 11,050   

Unrealized gain in other comprehensive income

     950   

Settlements

     (7,000
        

Balance at September 27, 2009

   $ 5,000   
        

In October 2009, the issuer of the Company’s remaining ARS repurchased the security at par value of $5 million and, as such, the Company reversed the valuation allowance of approximately $0.8 million recorded in accumulated other comprehensive loss and classified the ARS as short-term investments on the Company’s consolidated balance sheet as of September 27, 2009.

During the second quarter, the Company contracted to sell $5.0 million of auction rate securities at 89 percent of par, which settled in July 2009. During the first quarter of 2009, the Company contracted to sell $3.0 million of auction rate securities at 85 percent of par; the sale transaction closed in early April 2009. In connection with these transactions, the Company recognized an impairment loss of approximately $1.0 million for the first nine months of 2009, which was reflected in interest expense and other in the Company’s consolidated statement of income.

Other Financial Instruments

The carrying amount and estimated fair value of the Company’s other financial instruments were as follows (in thousands):

 

     September 27, 2009    December 28, 2009
     Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value

Assets:

           

Notes receivable from affiliate

   $ 25,000    $ 25,000    $ 25,000    $ 25,000

Investment in affiliate

   $ 24,043    $ 24,043    $ 23,264    $ 23,264

Liabilities:

           

Long-term debt

   $ 237,000    $ 225,150    $ 251,000    $ 210,840

The fair value of long-term debt used Level 2 inputs under the fair value hierarchy and is based upon the market approach which permits the use of inputs such as bid and ask prices to determine fair value. The fair value estimates consider relevant market information when available. When relevant market information was unavailable, fair value estimates are determined based on present value of estimated cash flows and consider various factors, including current economic conditions and risk characteristics of the financial instruments.

 

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  7. Net Revenues and Accounts Receivable

Net revenues by major payer classification were as follows:

 

      Third Quarter     First Nine Months  

(Dollars in millions)

   2009    2008    Percentage
Variance
    2009    2008    Percentage
Variance
 

Medicare

                

Home Health

   $ 190.0    $ 165.2    15.0   $ 570.2    $ 471.5    20.9

All Other

     21.8      19.4    12.5        62.8      52.9    18.7   
                                        

Total Medicare

     211.8      184.6    14.8        633.0      524.4    20.7   

Medicaid and Local Government

     23.7      32.4    (26.9     76.7      97.0    (20.9

Commercial Insurance and Other:

                

Paid at episodic rates

     20.7      14.1    46.6        55.9      38.7    44.8   

Other

     39.4      114.1    (65.5     117.0      351.0    (66.7
                                        

Total Commercial Insurance and Other

     60.1      128.2    (53.2     172.9      389.7    (55.6
                                        

Total net revenues

   $ 295.6    $ 345.2    (14.4 %)    $ 882.6    $ 1,011.1    (12.7 %) 
                                        

Net revenues in the Home Health and All Other operating segments are derived from all major payer classes. CareCentrix net revenues in the third quarter and first nine months of 2008 were 100 percent attributable to the Commercial Insurance and Other payer source. CareCentrix is a party to a contract with CIGNA Health Corporation (“Cigna”), pursuant to which CareCentrix provided or contracted with third-party providers to provide direct home nursing services and related services, home infusion therapies, and certain other specialty medical equipment to patients insured by Cigna. Cigna accounted for approximately 18 percent and 19 percent of the Company’s total net revenues for the third quarter and first nine months of fiscal 2008, respectively.

Net revenues generated under capitated agreements with managed care payers were approximately 4 percent of total net revenues for the third quarter and first nine months of fiscal 2008. As a result of the disposition of CareCentrix, the Company’s net revenues associated with capitated agreements are immaterial for the fiscal 2009 periods.

Accounts receivable attributable to major payer sources of reimbursement were as follows (in thousands):

 

     September 27, 2009     December 28, 2008  

Medicare

   $ 120,565      $ 117,311   

Medicaid and Local Government

     14,888        21,384   

Commercial Insurance and Other

     47,593        46,733   
                

Gross Accounts Receivable

     183,046        185,428   

Less: Allowance for doubtful accounts

     (7,318     (8,227
                

Net Accounts Receivable

   $ 175,728      $ 177,201   
                

The Commercial Insurance and Other payer group included self-pay accounts receivable relating to patient co-payments of $3.8 million and $3.2 million as of September 27, 2009 and December 28, 2008, respectively.

 

  8. Restructuring, Integration and Other Special Charges

During the third quarter and first nine months of fiscal 2009, the Company recorded charges of $0.9 million and $2.4 million, respectively, as compared to $1.4 million and $2.1 million for the third quarter and first nine months of 2008, respectively, in connection with restructuring and integration activities, as well as professional fees and other costs associated with its merger and acquisition activities. Charges during the fiscal 2009 and 2008 periods included severance costs in connection with the termination of personnel and facility lease and other costs. Additional integration costs to be incurred during fiscal 2009, largely related to corporate and back office integration, are not expected to be material.

 

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The costs incurred and cash expenditures associated with integration and merger and acquisition activities by component were as follows (in thousands):

 

     Compensation
& Severance
Costs
    Facility
Lease
Costs
    Other
Special
Charges
    Total  

Ending balance at December 30, 2007

   $ 541      $ 259      $ —        $ 800   

Charge in 2008

     882        196        1,738        2,816   

Cash expenditures

     (1,324     (295     (1,738     (3,357
                                

Ending balance at December 28, 2008

     99        160        —          259   

Charge in first quarter 2009

     763        25        110        898   

Cash expenditure

     (333     (47     (110     (490
                                

Ending balance at March 29, 2009

     529        138        —          667   

Charge in second quarter 2009

     602        —          4        606   

Cash expenditure

     (270     (23     (4     (297
                                

Ending balance at June 28, 2009

     861        115        —          976   

Charge in third quarter 2009

     (2     546        336        880   

Cash expenditure

     (473     (88     (331     (892
                                

Ending balance at September 27, 2009

   $ 386      $ 573      $ 5      $ 964   
                                

The balance of unpaid charges relating to all restructuring, integration, and merger and acquisition activities aggregated $1.0 million at September 27, 2009 and $0.3 million at December 28, 2008, which was included in other accrued expenses in the Company’s consolidated balance sheets.

 

  9. Goodwill and Other Intangible Assets

The gross carrying amount and accumulated amortization of each category of identifiable intangible assets and goodwill as of September 27, 2009 and December 28, 2008 were as follows (in thousands):

 

     September 27, 2009     December 28, 2008      
     Home
Health
    All Other     Total     Home
Health
    All Other     Total     Useful Life

Amortized intangible assets:

              

Covenants not to compete

   $ 1,323      $ 275      $ 1,598      $ 1,198      $ 275      $ 1,473      5 Years

Less: accumulated amortization

     (1,061     (183     (1,244     (884     (142     (1,026  
                                                  

Net covenants not to compete

     262        92        354        314        133        447     

Customer relationships

     26,934        2,260        29,194        25,420        2,260        27,680      5-10 Years

Less: accumulated amortization

     (7,864     (866     (8,730     (5,819     (645     (6,464  
                                                  

Net customer relationships

     19,070        1,394        20,464        19,601        1,615        21,216     

Tradenames

     18,215        130        18,345        18,099        130        18,229      10 Years

Less: accumulated amortization

     (6,367     (21     (6,388     (5,005     (11     (5,016  
                                                  

Net tradenames

     11,848        109        11,957        13,094        119        13,213     
                                                  

Subtotal

     31,180        1,595        32,775        33,009        1,867        34,876     

Indefinite-lived intangible assets:

              

Certificates of need and licenses

     217,035        4,026        221,061        211,530        4,026        215,556      Indefinite
                                                  

Total identifiable intangible assets

   $ 248,215      $ 5,621      $ 253,836      $ 244,539      $ 5,893      $ 250,432     
                                                  

Goodwill

   $ 261,592      $ 49,543      $ 311,135      $ 258,612      $ 49,601      $ 308,213     
                                                  

For the third quarter and first nine months of fiscal 2009, the Company recorded amortization expense of approximately $1.3 million and $3.9 million, respectively, as compared to $1.3 million and $3.5 million for the corresponding periods of fiscal 2008. The estimated amortization expense for the remainder of 2009 is $1.3 million and for each of the next five succeeding years approximates $5.2 million for fiscal year 2010, $5.1 million for fiscal year 2011, $5.0 million for fiscal year 2012, $4.5 million for fiscal year 2013, and $4.2 million for fiscal year 2014.

 

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  10. Earnings Per Share

Basic and diluted earnings per share for each period presented have been computed by dividing net income 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 27, 2009   September 28, 2008   September 27, 2009   September 28, 2008

Net income

  $ 15,405   $ 120,892   $ 50,522   $ 140,639
                       

Basic weighted average common shares outstanding

    29,154     28,687     29,019     28,489

Shares issuable upon the assumed exercise of stock options and in connection with the employee stock purchase plan using the treasury stock method

    646     1,031     629     831
                       

Diluted weighted average common shares outstanding

    29,800     29,718     29,648     29,320
                       

Net income per common share:

       

Basic

  $ 0.53   $ 4.21   $ 1.74   $ 4.94

Diluted

  $ 0.52   $ 4.07   $ 1.70   $ 4.80

For both the third quarter and first nine months of fiscal 2009, approximately 0.9 million stock options were excluded from the computations of diluted earnings per share as their exercise price was higher than the Company’s average stock price during the respective periods.

 

  11. Long-Term Debt

Credit Arrangements

The Company’s credit agreement, which was entered into on February 28, 2006, provided for an aggregate borrowing amount of $445.0 million of senior secured credit facilities consisting of (i) a seven year term loan of $370.0 million repayable in quarterly installments of 1 percent per annum (with the remaining balance due at maturity on March 31, 2013) and (ii) a six year revolving credit facility of $75.0 million. On March 5, 2008, in accordance with the provisions of its credit agreement, the Company and certain of its lenders agreed to increase the revolving credit facility from $75.0 million to $96.5 million. Of the total revolving credit facility, $55 million is available for the issuance of letters of credit and $10 million was available for swing line loans.

Upon the occurrence of certain events, including the issuance of capital stock, the incurrence of additional debt (other than that specifically allowed under the credit agreement), certain asset sales where the cash proceeds are not reinvested, or if the Company has excess cash flow (as defined in the agreement), mandatory prepayments of the term loan are required in the amounts specified in the credit agreement.

In connection with the disposition of 69 percent of its equity ownership interest in its CareCentrix business, the Company entered into the First Amendment to Credit Agreement dated as of August 20, 2008, which, among other things, provided for lenders’ consent to the disposition and required the Company to apply $58 million of the cash proceeds it received to pay down the Company’s term loan. In addition, the Company was able to retain approximately $26 million of the cash proceeds for reinvestment into its businesses during the six month period following the disposition. In March 2009, at the end of the six month period, remaining proceeds of $11 million that were not invested were used for additional term loan repayments. In connection with the disposition of assets associated with certain branch offices that specialized primarily in pediatric home health services, the Company entered into the Second Amendment to Credit Agreement dated February 10, 2009, which provided the lenders’ consent to the disposition and required the Company to apply $3 million of the cash proceeds it received to pay down the Company’s term loan.

 

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Interest under the credit agreement accrues at Base Rate or Eurodollar Rate (plus an applicable margin based on the table presented below) for both the revolving credit facility and the term loan. Overdue amounts bear interest at 2 percent per annum above the applicable rate. The applicable margin component of interest rates under the credit agreement is based on the Company’s consolidated leverage ratio as follows:

 

Revolving Credit
Consolidated
Leverage Ratio

   Term Loan
Consolidated
Leverage Ratio
  Margin for
Base Rate Loans
    Margin for
Eurodollar Loans
 
³ 3.5    ³ 3.5   1.25   2.25
< 3.5 & ³ 3.0    < 3.5 & ³ 3.0   1.00   2.00
< 3.0 & ³ 2.5    < 3.0   0.75   1.75
< 2.5      0.50   1.50

The Company is also subject to a revolving credit commitment fee equal to 0.375 percent per annum of the average daily difference between the total revolving credit commitment and the total outstanding borrowings and letters of credit, excluding amounts outstanding under swing loans. As of December 30, 2007, the Company achieved a consolidated leverage ratio below 3.0 and as a result triggered a 25 basis point reduction in the margin on revolving credit and term loan borrowings, effective February 14, 2008. As of September 28, 2008, the Company’s consolidated leverage ratio fell below 2.5 and as a result lowered the Company’s revolving credit margin by an additional 25 basis points, effective November 11, 2008. As of September 27, 2009, the consolidated leverage ratio was 1.8.

The credit agreement requires the Company to meet certain financial tests. These tests include a consolidated leverage ratio and a consolidated interest coverage ratio. The credit agreement also contains additional covenants which, among other things, require the Company to deliver to the lenders specified financial information, including annual and quarterly financial information, and limit the Company’s ability to do the following, subject to various exceptions and limitations: (i) merge with other companies; (ii) create liens on its property; (iii) incur additional debt obligations; (iv) enter into transactions with affiliates, except on an arms-length basis; (v) dispose of property; (vi) make capital expenditures; and (vii) pay dividends or acquire capital stock of the Company or its subsidiaries. As of September 27, 2009, the Company was in compliance with the covenants in the credit agreement.

To assist in managing the potential interest rate risk associated with its floating rate term loan under the credit agreement, on July 3, 2006, the Company entered into a two year interest rate swap agreement with a notional value of $170 million, which terminated effective June 29, 2008. Under the swap agreement, the Company paid a fixed rate of 5.665 percent per annum plus an applicable margin (7.665 percent per annum for the period August 1, 2007 through February 13, 2008 and 7.415 percent per annum for the period February 14, 2008 through June 29, 2008) on the $170 million rather than a fluctuating rate plus an applicable margin.

Although the credit agreement requires the Company to make quarterly installment payments on the term loan with the remaining balance due at maturity on March 31, 2013, the administrative agent under the credit agreement determined in early 2008 that the Company had made sufficient prepayments to extinguish all required quarterly installment payments due under the credit agreement on the term loan, with any future prepayments to be applied against the balance due at maturity. During the quarter ended September 27, 2009, the Company made no payments on its term loan. As of September 27, 2009, the Company had outstanding borrowings of $237.0 million under the term loan and outstanding letters of credit of $36.5 million; as of such date, interest expense on term loan borrowings approximated 2.2 percent per annum and fees on outstanding letters of credit were 1.50 percent per annum.

The letters of credit, which expire one year from the date of issuance, were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. The Company also had outstanding surety bonds of $3.2 million and $1.9 million at September 27, 2009 and December 28, 2008, respectively.

Following the bankruptcy filing in September 2008 of Lehman Commercial Paper, Inc. (“LCPI”), a participating lending institution in the Company’s credit facility, the Company no longer has access to LCPI’s pro rata share of the unused revolving credit facility and will no longer have access to the facility’s swing line loan feature. At September 27, 2009, the Company’s unused and available credit line was $49.8 million. On November 1, 2009, CIT Group, Inc. (“CIT”), one of whose subsidiaries is a participating lending institution in the Company’s credit facility, filed for Chapter 11 bankruptcy protection. The CIT subsidiary’s pro rata share of the Company’s unused and available revolving credit facility was approximately $4.7 million at September 27, 2009.

Guarantee and Collateral Agreement

The Company has entered into a Guarantee and Collateral Agreement, among the Company and certain of its subsidiaries, in favor of the administrative agent under the credit agreement (the “Guarantee and Collateral Agreement”). The Guarantee and Collateral Agreement grants a collateral interest in all real property and personal property of the Company and its subsidiaries, including stock of its subsidiaries. The Guarantee and Collateral Agreement also provides for a guarantee of the Company’s obligations under the credit agreement by substantially all subsidiaries of the Company.

 

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Other

The Company has equipment capitalized under capital lease obligations. At September 27, 2009 and December 28, 2008, long-term capital lease obligations were $0.6 million and $1.2 million, respectively, and were recorded in other liabilities on the Company’s consolidated balance sheets. The current portion of obligations under capital leases was $0.8 million and $0.9 million at September 27, 2009 and December 28, 2008, respectively, and was recorded in other accrued expenses on the Company’s consolidated balance sheets.

 

  12. Shareholders’ Equity

Changes in shareholders’ equity for the nine months ended September 27, 2009 were as follows (in thousands, except share amounts):

 

     Common Stock    Additional
Paid-in
Capital
   Retained
Earnings
   Accumulated
Other

Comprehensive
Loss
    Treasury
Stock
    Total  
     Shares    Amount             

Balance at December 28, 2008

   28,993,390    $ 2,899    $ 334,687    $ 161,057    $ (1,170   $ (2,502   $ 494,971   

Comprehensive income:

                  

Net income

   —        —        —        50,522      —          —          50,522   

Change in estimate on auction rate securities

   —        —        —        —        1,170        —          1,170   
                                                  

Total comprehensive income

   —        —        —        50,522      1,170        —          51,692   

Income tax benefits associated with equity-based compensation

   —        —        1,183      —        —          —          1,183   

Equity-based compensation expense

   —        —        4,140      —        —          —          4,140   

Issuance of stock upon exercise of stock options and under stock plans for employees and directors

   704,453      71      9,158      —        —          —          9,229   

Treasury stock:

                  

Repurchase of common stock at cost (327,828 shares)

   —        —        —        —        —          (4,813     (4,813

Treasury stock received from Healthfield escrow (4,021 shares)

   —        —        —        —        —          (63     (63
                                                  

Balance at September 27, 2009

   29,697,843    $ 2,970    $ 349,168    $ 211,579    $ —        $ (7,378   $ 556,339   
                                                  

Comprehensive income amounted to $16.2 million and $120.9 million for the third quarter of fiscal 2009 and fiscal 2008, respectively, and $51.7 million and $141.2 million for the first nine months of fiscal 2009 and 2008, respectively.

The Company has an authorized stock repurchase program under which the Company can repurchase and retire up to 1,500,000 shares of its outstanding common stock. The repurchases can occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. The Company made no repurchases of its common stock during the third quarter of fiscal 2009. During the nine months ended September 27, 2009, the Company repurchased 327,828 shares of its outstanding common stock at an average cost of $14.68 per share and a total cost of approximately $4.8 million. As of September 27, 2009, the Company had remaining authorization to repurchase an aggregate of 355,568 shares of its outstanding common stock. The Company’s credit agreement provides, with certain exceptions, for a limit of $5.0 million per fiscal year for repurchases of the Company’s common stock.

 

  13. Equity-Based Compensation Plans

The Company provides several equity-based compensation plans under which the Company’s officers, employees and non-employee directors may participate, including: (i) the Amended and Restated 2004 Equity Incentive Plan (“2004 Plan”), (ii) the Stock & Deferred Compensation Plan for Non-Employee Directors 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) stock units and (vi) cash, as well as allow employees to purchase shares of the Company’s common stock under the ESPP at a pre-determined discount. On May 14, 2009, the shareholders of the Company authorized an additional 600,000 shares of the Company’s common stock for issuance under the 2004 Plan. The shareholders also authorized an amendment to the 2004 Plan to provide that stock options granted on and after February 25, 2009 will have a maximum term of seven years. Options granted prior to February 25, 2009 retain their ten year term.

The Company provides an ESPP under which the offering period is three months and the purchase price of shares is equal to 85 percent of the fair market value of the Company’s common stock on the last day of the three month offering period. All employees of the Company are eligible to purchase stock under the plan regardless of their actual or scheduled hours of service.

Stock option grants in fiscal 2009 and fiscal 2008 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. For the third quarter and first nine months of fiscal 2009, the Company recorded equity-based compensation expense of $0.7 million and $4.1 million, respectively, as compared to $1.5 million and $4.7 million for the corresponding periods of fiscal 2008, which is reflected as selling, general and

 

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administrative expense in the consolidated statements of income, as calculated on a straight-line basis over the vesting periods of the related options. During the third quarter of fiscal 2009, the Company recorded a positive adjustment to equity-based compensation expense of approximately $1.1 million due to a change in the estimated number of stock option forfeitures assumed in calculating equity-based compensation. The weighted-average fair values of the Company’s stock options granted during the first nine months of fiscal 2009 and fiscal 2008, calculated using the Black-Scholes option pricing model and other assumptions, are as follows:

 

     Nine Months Ended
     September 27, 2009    September 28, 2008

Weighted average fair value of options granted

   $ 8.85    $ 6.27

Risk-free interest rate

     1.56%      3.64%

Expected volatility

     34%      30%

Contractual life

     10 years      10 years

Expected dividend yield

     0%      0%

For stock options granted during the fiscal 2009 and 2008 periods, the expected life of an option is estimated to be 2.5 years following its vesting date, and forfeitures are reflected in the calculation using an estimate based on experience.

Under the Company’s ESPP, compensation expense is calculated for the fair value of the employee’s purchase rights using the Black-Scholes option pricing model. Assumptions for the respective offering periods of fiscal 2009 and fiscal 2008 are as follows:

 

     Nine Months Ended
     September 27, 2009    September 28, 2008
     1st Offering
Period
   2nd Offering
Period
   3rd Offering
Period
   1st Offering
Period
   2nd Offering
Period
   3rd Offering
Period

Risk-free interest rate

   0.20%    0.20%    0.12%    1.22%    1.94%    1.45%

Expected volatility

   116%    61%    54%    31%    35%    40%

Expected life

   0.25 years    0.25 years    0.25 years    0.25 years    0.25 years    0.25 years

Expected dividend yield

   0%    0%    0%    0%    0%    0%

A summary of Gentiva stock option activity as of September 27, 2009 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 28, 2008

   3,349,252      $ 15.80      

Granted

   898,700        26.67      

Exercised

   (405,232     12.70      

Cancelled

   (375,850     19.35      
                  

Balance as of September 27, 2009

   3,466,870      $ 18.59    6.9    $ 20,952,074
                        

Exercisable Options

   1,560,152      $ 13.99    4.9    $ 16,499,538
                        

During the first nine months of fiscal 2009, the Company granted 898,700 stock options to officers and employees under its 2004 Plan at an average exercise price of $26.67 and a weighted-average, grant-date fair value of $8.85. Included in this grant were 62,500 performance-based options granted to the Chief Executive Officer at an exercise price of $28.17. These options will vest when the Company’s Compensation, Corporate Governance and Nominating Committee certifies that certain defined performance targets based upon cumulative EBITDA margin growth over the 2008 base year have been met for the fiscal years 2010 through 2012, with 50 percent eligible to vest following fiscal year 2010 and 25 percent eligible to vest following each of fiscal years 2011 and 2012. The total intrinsic value of options exercised during the nine months ended September 27, 2009 and September 28, 2008 was $3.8 million and $7.1 million, respectively.

 

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As of September 27, 2009, the Company had $6.4 million of total unrecognized compensation cost related to nonvested stock options. This compensation expense is expected to be recognized over a weighted-average period of 1.1 years. The total fair value of options that vested during the first nine months of fiscal 2009 was $4.2 million.

 

  14. Legal Matters

Litigation

In addition to the matters referenced in this Note 14, the Company is party to certain legal actions arising in the ordinary course of business, including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. Management does not expect that these other legal actions will have a material adverse effect on the business or financial condition of the Company.

Indemnifications

Healthfield

Upon the closing of the acquisition of Healthfield on February 28, 2006, an escrow fund was created to cover potential claims by the Company after the closing. Covered claims, which are also subject to the Company’s contractual indemnification rights, include, for example, claims for breaches of representations under the acquisition agreement and claims relating to legal proceedings existing as of the closing date, taxes for the pre-closing periods and medical malpractice and workers’ compensation claims relating to any act or event occurring on or before the closing date. The escrow fund initially consisted of 1,893,656 shares of Gentiva’s common stock valued at $30 million and $5 million in cash. The first $5 million of any disbursements consist of shares of Gentiva’s common stock; the next $5 million of any disbursements consist of cash; and any additional disbursements consist of shares of Gentiva’s common stock. The escrow fund is subject to staged releases of shares of Gentiva’s common stock and cash in the escrow fund to certain principal stockholders of Healthfield, less the amount of claims the Company makes against the escrow fund. Disbursements made to the Company from the escrow fund covering interim claims the Company had made against the escrow fund are as follows (in thousands, except share amounts):

 

     Fair Value    Shares

December 29, 2006

   $ 767    47,489

June 29, 2007

     232    11,574

February 28, 2008

     972    45,229

June 25, 2008

     426    21,413

December 22, 2008

     105    3,998

June 25, 2009

     62    4,021
           

Total

   $ 2,564    133,724
           

The Company has recorded the shares received as treasury stock in the Company’s consolidated balance sheets.

Home Health Care Affiliates, Inc. and Physicians Home Health Care

The Company acquired HHCA, a provider of home health and hospice services in the state of Mississippi, in February 2008. Upon the closing of HHCA, an escrow fund, consisting of $8.3 million in cash, was created generally to cover potential claims by the Company after the closing. Covered claims, which are also subject to the Company’s contractual indemnification rights, include, for example, breaches of representations, warranties or covenants under the purchase agreement, taxes for pre-closing periods and claims for legal proceedings arising from any condition, act or omission occurring on or before the closing date. In May 2008, $1.5 million of cash was disbursed to the Company from the escrow fund covering certain claims the Company had made against the escrow fund, and $1.3 million of cash was released from the escrow fund to the owners of the selling company. In August 2009, the balance of the escrow fund relating to the acquisition of HHCA was released to the owners of the selling company.

The Company acquired the assets of PHHC, a provider of home health services in Colorado, effective June 1, 2008. PHHC and HHCA had common ownership interests prior to their acquisition by the Company. Upon the acquisition of PHHC, the escrow fund that related to the acquisition of HHCA was increased by an additional $1.2 million in cash to cover potential claims by the Company that relate to the acquisition of PHHC. The escrow fund remains open with respect to those claims.

CareCentrix

        The Company has agreed to indemnify the Buyer Parties (as such term is defined in the Stock Purchase Agreement dated as of August 20, 2008 covering the CareCentrix transaction) for any inaccuracy in or breach of any representation or warranty of the Company in such Stock Purchase Agreement and for any breach or nonperformance of any covenant or obligation made or incurred by the Company in such Stock Purchase Agreement. The Company has also agreed to indemnify the Buyer Parties for certain liabilities, if any, that may arise from an arbitration proceeding in which the Company and CareCentrix are parties that relates to a commercial contractual dispute. The Company’s representations and warranties, with certain exceptions, generally survive for the

 

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period of eighteen months from the closing of the CareCentrix transaction, which occurred on September 25, 2008. With certain exceptions, the Company is generally not liable to indemnify for any inaccuracy in or breach of its representations or warranties in the Stock Purchase Agreement until the aggregate amount of claims for indemnification exceeds $1.5 million, and then, only for claims in excess of $1.5 million up to an aggregate maximum amount equal to $15 million.

Pediatric and Adult Hourly Services Disposition

The Company has agreed to guarantee the indemnification obligations of certain of the Company’s subsidiaries to the purchaser of assets associated with certain branch offices that specialized primarily in pediatric home health care services and adult home care services that were sold effective March 14, 2009. The indemnification obligations generally related to representations, warranties, covenants and agreements made by such subsidiaries in the related asset purchase agreement, as well as to such subsidiaries’ related pre-closing operations, liabilities, claims and proceedings. The representations and warranties made by the Company’s subsidiaries, with certain exceptions, generally survive for a period of two years from the closing date. The maximum aggregate liability of the Company for any breaches of such representations or liabilities is $6.0 million.

Government Matters

PRRB Appeal

In connection with the audit of the Company’s 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary’s methodology. The Company believed the methodology it used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the Provider Reimbursement Review Board (“PRRB”) concerning this issue with respect to cost reports for the years 1997, 1998 and 1999. The Company’s consolidated financial statements for the years 1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal intermediary. In June 2003, the Company and its Medicare fiscal intermediary signed an Administrative Resolution relating to the issues covered by the appeals pending before the PRRB. Under the terms of the Administrative Resolution, the fiscal intermediary agreed to reopen and adjust the Company’s cost reports for the years 1997, 1998 and 1999 using a modified version of the methodology used by the Company prior to 1997. This modified methodology will also be applied to cost reports for the year 2000, which are currently under audit. The Administrative Resolution required that the process to (i) reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs through the issuance of Notices of Program Reimbursement and (iii) make appropriate payments to the Company, be completed in early 2004. Cost reports relating to years subsequent to 1997 were to be reopened after the process for the 1997 cost reports was completed.

The fiscal intermediary completed the reopening of all 1997, 1998 and 1999 cost reports and determined that the adjustment to allowable costs aggregated $15.9 million which the Company has received and recorded as adjustments to net revenues in the fiscal years 2004 through 2006. The time frame for resolving all items relating to the 2000 cost reports cannot be determined at this time.

Subpoena

In April 2003, the Company received a subpoena from the Department of Health and Human Services, Office of the Inspector General, Office of Investigations (“OIG”). The subpoena seeks information regarding the Company’s implementation of settlements and corporate integrity agreements entered into with the government, as well as the Company’s treatment on cost reports of employees engaged in sales and marketing efforts. With respect to the cost report issues, the government has preliminarily agreed to narrow the scope of production to the period from January 1, 1998 through September 30, 2000. In February 2004, the Company received a subpoena from the U.S. Department of Justice (“DOJ”) seeking additional information related to the matters covered by the OIG subpoena. The Company has provided documents and other information requested by the OIG and DOJ pursuant to their subpoenas and similarly intends to cooperate fully with any future OIG or DOJ information requests. To the Company’s knowledge, the government has not filed a complaint against the Company. The timing and financial impact, if any, of the resolution of this matter cannot be determined at this time.

 

  15. Income Taxes

The Company recorded a federal and state income tax provision of $9.0 million for the third quarter of fiscal 2009, of which $5.5 million represented a current tax provision and $3.5 million represented a deferred tax provision. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 37.3 percent for the third quarter of 2009 is due to state income taxes, net of Federal benefit (approximately 5.0 percent) offset by the utilization of research and development credits (approximately 2.2 percent) and other items (approximately 0.5 percent).

        For the nine months ended September 27, 2009, the Company recorded a federal and state income tax provision of $28.4 million representing a current tax provision of $23.4 million and a deferred tax provision of $5.0 million. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 36.4 percent for the first nine months of 2009 is due to state income taxes, net of Federal benefit (approximately 5.0 percent) and other items (approximately 0.7 percent) offset by a

reduction of the capital loss carryforward valuation allowance (approximately 3.6 percent) and the utilization of research and development credits (approximately 0.7 percent).

 

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The Company recorded a federal and state income tax provision of $6.2 million for the third quarter of fiscal 2008, of which $5.2 million represented a current tax provision and $1.0 million represented a deferred tax provision. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 4.9 percent for the third quarter of 2008 is due to the CareCentrix transaction (approximately 33.6 percent), offset by state taxes and other items (approximately 3.5 percent).

For the nine months ended September 28, 2008, the Company recorded a federal and state income tax provision of $20.3 million, representing a current provision of $8.4 million and a deferred tax provision of $11.9 million. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 12.6 percent for the first nine months of 2008 is due to the CareCentrix transaction (approximately 24.3 percent), offset by state taxes and other items (approximately 1.9 percent).

Deferred tax assets and deferred tax liabilities were as follows (in thousands):

 

     September 27, 2009     December 28, 2008  

Deferred tax assets:

    

Current:

    

Reserves and allowances

   $ 7,348      $ 7,543   

Other

     5,086        4,390   
                

Total current deferred tax assets

     12,434        11,933   

Noncurrent:

    

Intangible assets

     30,046        35,781   

State net operating loss carryforwards

     6,940        7,140   

Less: state NOL valuation allowance

     (3,808     (3,808

Capital loss carryforward

     6,031        8,861   

Less: capital loss valuation allowance

     (5,699     (8,528

Other

     4,291        3,615   
                

Total noncurrent deferred tax assets

     37,801        43,061   
                

Total deferred tax assets

     50,235        54,994   
                

Deferred tax liabilities:

    

Noncurrent:

    

Fixed assets

     (4,639     (3,575

Intangible assets

     (86,116     (87,660

Developed software

     (14,953     (13,295

Acquisition reserves

     (1,411     (1,545

Other

     (1,241     (1,248
                

Total non-current deferred tax liabilities

     (108,360     (107,323
                

Net deferred tax liabilities

   $ (58,125   $ (52,329
                

At September 27, 2009, the Company had a capital loss carryforward of $15.1 million that will expire in 2013. The deferred tax asset relating to this capital loss carryover is $6.0 million. A valuation allowance of $5.7 million has been recorded to reduce this deferred tax asset to its estimated realizable value since the capital loss carryover may expire before realization.

In addition, the Company had state net operating loss carryforwards of approximately $139 million, which expire between 2009 and 2028. Deferred tax assets relating to state net operating loss carryforwards approximated $6.9 million. A valuation allowance of $3.8 million has been recorded to reduce this deferred tax asset to its estimated realizable value since certain state net operating loss carryforwards may expire before realization.

The IRS federal income tax audit for years 2005 and 2006 is expected to be finalized by the end of fiscal 2009. The audit results may have an impact on the effective tax rate.

 

  16. Business Segment Information

The Company’s operations involve servicing patients and customers through (i) its Home Health business segment, (ii) various smaller operating segments, including hospice, respiratory services and home medical equipment (“HME”), infusion therapy services and consulting, which are classified in the aggregate as “All Other” for segment reporting purposes, and (iii) for periods prior to September 25, 2008, its CareCentrix business segment.

Home Health

The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs, and its Rehab Without Walls ® unit.

The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies, located in 39 states, from which the Company provides various combinations of skilled nursing and therapy services, paraprofessional nursing services and, to a lesser extent, homemaker services generally to adult and elder patients. The Company’s direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:

 

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Gentiva Orthopedics, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;

 

   

Gentiva Safe Strides ® , which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling;

 

   

Gentiva Cardiopulmonary, which helps patients and their physicians manage heart and lung health in a home-based environment;

 

   

Gentiva Neurorehabilitation, which helps patients who have experienced a neurological injury or condition by removing the obstacles to healing in the patient’s home; and

 

   

Gentiva Senior Health, which addresses the needs of patients with age-related diseases and issues to effectively and safely stay in their homes.

Through its Rehab Without Walls ® unit, the Company also provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases.

CareCentrix

Prior to September 25, 2008, the CareCentrix segment encompassed Gentiva’s ancillary care benefit management and the coordination of integrated homecare services for managed care organizations and health benefit plans. CareCentrix operations provided an array of administrative services and coordinated the delivery of home nursing services, acute and chronic infusion therapies, HME, respiratory products, orthotics and prosthetics, and services for managed care organizations and health benefit plans. CareCentrix accepted case referrals from a wide variety of sources, verified eligibility and benefits and transferred case requirements to the providers for services to the patient. CareCentrix provided services to its customers, including the fulfillment of case requirements, care management, provider credentialing, eligibility and benefits verification, data reporting and analysis, and coordinated centralized billing for all authorized services provided to the customer’s enrollees.

All Other

Hospice

Hospice serves terminally ill patients in the southeast United States. Comprehensive management of the healthcare services and products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending on a patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), medical social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals.

Respiratory Therapy and Home Medical Equipment

Respiratory therapy and HME services are provided to patients at home through branch locations primarily in the southeast United States. Patients are offered a broad portfolio of products and services that serve as an adjunct to traditional home health nursing and hospice care. Respiratory therapy services are provided to patients who suffer from a variety of conditions including asthma, chronic obstructive pulmonary diseases, cystic fibrosis and other respiratory conditions. HME includes hospital beds, wheelchairs, ambulatory aids, bathroom aids, patient lifts and rehabilitation equipment.

Infusion Therapy

Infusion therapy is provided to patients at home through pharmacy locations in the southeast United States. Infusion therapy serves as a complement to the Company’s traditional service offerings, providing clients with a comprehensive home health provider while diversifying the Company’s revenue base. Services provided include: (i) enteral nutrition, (ii) antibiotic therapy, (iii) total parenteral nutrition, (iv) pain management, (v) chemotherapy, (vi) patient education and training and (vii) nutrition management.

Consulting

The Company provides consulting services to home health agencies through its Gentiva Consulting unit. These services include billing and collection activities, on-site agency support and consulting, operational support and individualized strategies for reduction of days sales outstanding.

Corporate Expenses

        Corporate expenses consist of costs relating to executive management and corporate and administrative support functions that are not directly attributable to a specific segment, including equity-based compensation expense. Corporate and administrative support functions represent primarily information services, accounting and reporting, tax and risk management, procurement, marketing, compliance, legal and human resource benefits and administration.

 

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Other Information

The Company’s senior management evaluates performance and allocates resources based on operating contributions of the reportable segments, which exclude corporate expenses, depreciation, amortization and interest expense and other, net, but include revenues and all other costs (including special items and restructuring and integration costs) directly attributable to the specific segment. Segment assets represent net accounts receivable, inventory, HME, identifiable intangible assets, goodwill and certain other assets associated with segment activities. All other assets are assigned to corporate assets for the benefit of all segments for the purposes of segment disclosure.

For the third quarter and first nine months of fiscal 2009, net revenues relating to the Company’s participation in Medicare amounted to $211.8 million and $633.0 million, respectively, of which $190.0 million and $570.2 million, respectively, were included in the Home Health segment and $21.8 million and $62.8 million, respectively, were included in All Other.

Revenues from Cigna amounting to $61.0 million for the third quarter of fiscal 2008 and $189.5 million for the first nine months of fiscal 2008 were included in the CareCentrix segment.

Net revenues associated with All Other are as follows (in thousands):

 

     Three Months Ended    Nine Months Ended
     September 27, 2009    September 28, 2008    September 27, 2009    September 28, 2008

Hospice

   $ 18,667    $ 16,437    $ 54,528    $ 44,774

Respiratory services and HME

     11,632      10,889      32,964      31,311

Infusion therapies

     3,160      2,828      8,510      8,490

Consulting services

     1,123      1,111      3,138      3,246
                           

Total net revenues

   $ 34,582    $ 31,265    $ 99,140    $ 87,821
                           

 

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Segment information about the Company’s operations is as follows (in thousands):

 

     Home Health     CareCentrix (1)    All Other    Total  

For the three months ended September 27, 2009 (unaudited)

          

Net revenue - segments

   $ 261,444      $ —      $ 34,582    $ 296,026   
                        

Intersegment revenues

             (434
                

Total net revenue

           $ 295,592   
                

Operating contribution

   $ 41,380 (2)    $ —      $ 4,963    $ 46,343   
                        

Corporate expenses

             (15,305 )(2) 

Depreciation and amortization

             (5,560

Interest expense and other, net

             (1,298
                

Income before income taxes

           $ 24,180   
                

For the three months ended September 28, 2008 (unaudited)

          

Net revenue - segments

   $ 239,344      $ 75,546    $ 31,265    $ 346,155   
                        

Intersegment revenues

             (912
                

Total net revenue

           $ 345,243   
                

Operating contribution

   $ 38,841 (2)    $ 5,225    $ 2,923    $ 46,989   
                        

Corporate expenses

             (18,177 )(2) 

Depreciation and amortization

             (5,741

Gain on sale of assets, net

             107,872   

Interest expense and other, net

             (3,853
                

Income before income taxes

           $ 127,090   
                

For the nine months ended September 27, 2009 (unaudited)

          

Net revenue - segments

   $ 784,770      $ —      $ 99,140    $ 883,910   
                        

Intersegment revenues

             (1,298
                

Total net revenue

           $ 882,612   
                

Operating contribution

   $ 133,238 (2)    $ —      $ 12,084    $ 145,322   
                        

Corporate expenses

             (50,644 )(2) 

Depreciation and amortization

             (16,705

Gain on sale of assets, net

             5,747   

Interest expense and other, net

             (5,560 )(3) 
                

Income before income taxes

           $ 78,160   
                

Segment assets

   $ 668,429      $ —      $ 80,539    $ 748,968   
                        

Corporate assets

             287,969   
                

Total assets

           $ 1,036,937   
                

For the nine months ended September 28, 2008 (unaudited)

          

Net revenue - segments

   $ 693,220      $ 232,717    $ 87,821    $ 1,013,758   
                        

Intersegment revenues

             (2,669
                

Total net revenue

           $ 1,011,089   
                

Operating contribution

   $ 109,466 (2)    $ 18,074    $ 9,046    $ 136,586   
                        

Corporate expenses

             (52,467 )(2) 

Depreciation and amortization

             (16,494

Gain on sale of assets, net

             107,872   

Interest expense and other, net

             (14,598
                

Income before income taxes

           $ 160,899   
                

Segment assets

   $ 665,203      $ —      $ 80,082    $ 745,285   
                        

Corporate assets

             227,618   
                

Total assets

           $ 972,903   
                

 

(1) CareCentrix results are included in the above table for the three and nine months ended September 28, 2008. Effective September 25, 2008, the Company completed the disposition of 69 percent of its equity ownership interest in the Company’s CareCentrix ancillary care benefit management business.

 

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(2) For the third quarter and first nine months of fiscal years 2009 and 2008, operating contribution and corporate expenses were impacted by the following costs incurred in connection with integration, and merger and acquisition activities (dollars in millions):

 

     3rd Quarter    Nine Months
     2009    2008    2009    2008

Home Health

   $ 0.9    $ 0.1    $ 1.4    $ 0.3

Corporate expenses

     —        1.3      1.0      1.8
                           

Total

   $ 0.9    $ 1.4    $ 2.4    $ 2.1
                           

 

(3) For the first nine months of fiscal year 2009, interest expense and other, net includes impairment losses of $1.0 million recognized in connection with the sale of a portion of the Company’s ARS. See Note 6.

 

  17. Subsequent Event

In October 2009, the Company completed its acquisition of the Medicare certified assets of Coordinated Home Health Care, Inc., with three offices in New Mexico and Texas, pursuant to an asset purchase agreement. These offices will expand the Company’s coverage in these two states. The acquisition is not expected to have a material impact on the Company’s consolidated financial statements in 2009.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “assumes,” “trends” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company’s current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:

 

   

general economic and business conditions;

 

   

demographic changes;

 

   

changes in, or failure to comply with, existing governmental regulations;

 

   

legislative proposals for healthcare reform;

 

   

changes in Medicare and Medicaid reimbursement levels;

 

   

effects of competition in the markets in which the Company operates;

 

   

liability and other claims asserted against the Company;

 

   

ability to attract and retain qualified personnel;

 

   

ability to access capital markets;

 

   

availability and terms of capital;

 

   

loss of significant contracts or reduction in revenues associated with major payer sources;

 

   

ability of customers to pay for services;

 

   

business disruption due to natural disasters, pandemic outbreaks or terrorist acts;

 

   

ability to successfully integrate the operations of acquisitions the Company may make and achieve expected synergies and operational efficiencies within expected time-frames;

 

   

effect on liquidity of the Company’s debt service requirements; and

 

   

changes in estimates and judgments associated with critical accounting policies and estimates.

Forward-looking statements are found throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking

statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company does not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its Annual Report on Form 10-K for the fiscal year ended December 28, 2008 and various filings with the SEC. The reader is encouraged to review these risk factors and filings.

 

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General

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of Gentiva’s results of operations and financial position. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this report.

The Company’s results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2008 and in other filings with the SEC.

Overview

Gentiva Health Services, Inc. is a leading provider of comprehensive home health services. Gentiva serves patients through more than 380 locations located in 39 states.

The Company provides a single source for skilled nursing; physical, occupational, speech and neurorehabilitation services; hospice services; social work; nutrition; disease management education; help with daily living activities; respiratory therapy and HME; infusion therapy services; and other therapies and services. Gentiva’s revenues are generated from federal and state government programs, commercial insurance and individual consumers.

Until September 25, 2008, the Company operated CareCentrix, which provided an array of administrative services and coordinated the delivery of home nursing services, acute and chronic infusion therapies, home medical equipment (“HME”), respiratory products, orthotics and prosthetics, and services for managed care organizations and health plans. Effective September 25, 2008, the Company completed the disposition of 69 percent of its equity ownership interest in the Company’s CareCentrix ancillary care benefit management business.

The federal and state government programs are subject to legislative and other risk factors that can make it difficult to determine future reimbursement rates for Gentiva’s home health services to patients. For example, Congress currently has under discussion a number of healthcare reform measures, some of which include reimbursement changes to home health and hospice that can, if enacted, negatively impact Gentiva and other providers. The legislative environment is presently very fluid, and the Company is monitoring the situation closely.

The commercial insurance industry is continually seeking ways to control the cost of services to patients that it covers. One of the ways it seeks to control costs is to require greater efficiencies from its providers, including home healthcare companies. Various states have addressed budget pressures by considering or implementing reductions in various healthcare programs, including reductions in rates or changes in patient eligibility requirements. The Company has also decided to reduce participation in certain Medicaid and other state and county programs.

Gentiva believes that several marketplace factors can contribute to its future growth. First, the Company is a leader in a highly fragmented home healthcare industry populated by approximately 13,500 providers of varying size and resources. Second, the cost of a home healthcare visit to a patient can be significantly lower than the cost of an average day in a hospital or skilled nursing institution. And third, the demand for home care is expected to grow, primarily due to an aging U.S. population. The Company expects to capitalize on these factors through a determined set of strategies, as follows: growing revenues from services provided to the geriatric population, with a particular emphasis on expanding the penetration of the Company’s innovative specialty programs; focusing on clinical associate recruitment, retention and productivity; continuing technology initiatives that can make Gentiva more efficient and profitable; evaluating and closing opportunistic acquisitions; and further strengthening the Company’s balance sheet to support future growth. The Company anticipates executing these strategies by continuing to expand its sales presence, developing and marketing its managed care services, making operational improvements and deploying new technologies, providing employees with leadership training and instituting retention initiatives, ensuring strong ethics and corporate governance, and focusing on shareholder value.

Management intends the discussion of the Company’s financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the Company’s financial statements.

The Company’s operations involve servicing patients and customers through (i) its Home Health business segment, (ii) various smaller operating segments, including hospice, respiratory services and HME, infusion therapy services and consulting, which are classified in the aggregate as “All Other” for segment reporting purposes, and (iii) for periods prior to September 25, 2008, its CareCentrix business segment.

 

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Home Health

The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs, and its Rehab Without Walls ® unit. The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies, located in 39 states, from which the Company provides various combinations of skilled nursing and therapy services, paraprofessional nursing services and, to a lesser extent, homemaker services generally to adult and elder patients. The Company’s direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:

 

   

Gentiva Orthopedics, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;

 

   

Gentiva Safe Strides ® , which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling;

 

   

Gentiva Cardiopulmonary, which helps patients and their physicians manage heart and lung health in a home-based environment;

 

   

Gentiva Neurorehabilitation, which helps patients who have experienced a neurological injury or condition by removing the obstacles to healing in the patient’s home; and

 

   

Gentiva Senior Health, which addresses the needs of patients with age-related diseases and issues to effectively and safely stay in their homes.

Through its Rehab Without Walls ® unit, the Company also provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases.

CareCentrix

The CareCentrix segment encompassed Gentiva’s ancillary care benefit management and the coordination of integrated homecare services for managed care organizations and health benefit plans. CareCentrix operations provided an array of administrative services and coordinated the delivery of home nursing services, acute and chronic infusion therapies, HME, respiratory products, orthotics and prosthetics, and services for managed care organizations and health benefit plans. CareCentrix accepted case referrals from a wide variety of sources, verified eligibility and benefits and transferred case requirements to the providers for services to the patient. CareCentrix provided services to its customers, including the fulfillment of case requirements, care management, provider credentialing, eligibility and benefits verification, data reporting and analysis, and coordinated centralized billing for all authorized services provided to the customers’ enrollees.

All Other

Hospice

Hospice serves terminally ill patients in the southeast United States. Comprehensive management of the healthcare services and products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending on a patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), medical social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals.

Respiratory Therapy and Home Medical Equipment

Respiratory therapy and HME services are provided to patients at home through branch locations primarily in the southeast United States. Patients are offered a broad portfolio of products and services that serve as an adjunct to traditional home health nursing and hospice care. Respiratory therapy services are provided to patients who suffer from a variety of conditions including asthma, chronic obstructive pulmonary diseases, cystic fibrosis and other respiratory conditions. HME includes hospital beds, wheelchairs, ambulatory aids, bathroom aids, patient lifts and rehabilitation equipment.

Infusion Therapy

Infusion therapy is provided to patients at home through pharmacy locations in the southeast United States. Infusion therapy serves as a complement to the Company’s traditional service offerings, providing clients with a comprehensive home health provider while diversifying the Company’s revenue base. Services provided include: (i) enteral nutrition, (ii) antibiotic therapy, (iii) total parenteral nutrition, (iv) pain management, (v) chemotherapy, (vi) patient education and training and (vii) nutrition management.

 

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Consulting

The Company provides consulting services to home health agencies through its Gentiva Consulting unit. These services include billing and collection activities, on-site agency support and consulting, operational support and individualized strategies for reduction of days sales outstanding.

Significant Developments

Dispositions

Pediatric and Adult Hourly Services Dispositions

During the first quarter of 2009, the Company sold assets associated primarily with certain branch offices that specialized primarily in pediatric home health care services for total consideration of $6.5 million. The sales related to seven offices in five cities and included the adult home care services in the affected offices. Annual revenues generated from the assets that were sold approximated $24 million for the twelve months prior to the sales’ effective dates. The Company received $5.9 million in cash at the close of the sale and $0.6 million as the final payment in September 2009. The sales, after deducting related costs, resulted in a net gain before income taxes of $5.7 million. This gain is included in the gain on sale of assets, net in the Company’s consolidated statement of income and consolidated statement of cash flows for the nine months ended September 27, 2009.

CareCentrix Disposition

Effective September 25, 2008, the Company completed the disposition of 69 percent of its equity ownership interest in the Company’s CareCentrix ancillary care benefit management business for total consideration of approximately $135 million.

The Company’s consolidated statements of income for the third quarter and nine months ended September 28, 2008 presented herein include the results of CareCentrix operations, including net revenues of $75.6 million and $232.7 million, respectively. The Company’s consolidated statements of income for the third quarter and nine months ended September 27, 2009 presented herein include the Company’s equity in the net earnings of CareCentrix Holdings Inc., a holding company which owns CareCentrix.

Acquisitions

The Company has closed several acquisitions since early 2008. In comparing results of operations between the 2008 and 2009 reporting periods, incremental net revenues relating to acquired businesses approximated $2.1 million and $16.7 million for the third quarter and first nine months of 2009, respectively.

For the first nine months of 2009, total cash consideration paid for acquired businesses amounted to $10.3 million, excluding transaction costs and subject to post-closing adjustments. The acquisitions completed during the 2009 period extended the Company’s operations primarily into geographic areas not previously serviced by the Company within states requiring a Certificate of Need (“CON”) to perform home health services. The name of the acquired home health agency, the acquisition date and the geographic service area is summarized below:

 

Name of Agency

 

Acquisition Date

 

Geographic Service Area

Mid-State Home Health Agency  

June 20, 2009

  Central Louisiana
Nicholas County Home Health Agency  

July 1, 2009

  West Virginia
Magna Home Health  

August 22, 2009

  Central Mississippi /Western Alabama

For the first nine months of 2008, total cash consideration paid for acquired businesses amounted to $60.6 million. These acquisitions are further described below:

Home Health Care Affiliates, Inc.

Effective February 29, 2008, the Company completed the acquisition of Home Health Care Affiliates, Inc. (“HHCA”), a provider of home health and hospice services in the state of Mississippi.

Physicians Home Health Care

Effective June 1, 2008, the Company completed the acquisition of CSMMI, Inc., d/b/a Physicians Home Health Care (“PHHC”), a provider of home health services with three locations in Colorado, pursuant to an asset purchase agreement.

 

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Hospice of Charleston

On August 2, 2008, the Company acquired certain assets of Hospice of Charleston, a non-profit homecare company that provided hospice services, as well as home health services, for approximately $1.2 million, which was funded from the Company’s existing cash reserves. The acquisition allowed the Company to expand its home health services to three CON counties in and around Charleston, South Carolina.

The impact of these transactions has been reflected in the Company’s results of operations and financial condition from their respective closing dates. See Note 4.

Results of Operations

The historical results that follow present a discussion of the Company’s consolidated operating results using the historical results of Gentiva prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for the periods presented.

Revenues

A summary of the Company’s net revenues by segment follows:

 

      Third Quarter     First Nine Months  

(Dollars in millions)

   2009     2008     Percentage
Variance
    2009     2008     Percentage
Variance
 

Home Health

   $ 261.4      $ 239.3      9.2   $ 784.8      $ 693.2      13.2

CareCentrix

     —          75.6      —          —          232.7      —     

All Other

     34.6        31.2      10.6        99.1        87.8      12.9   

Intersegment revenues

     (0.4     (0.9   (52.4     (1.3     (2.6   (51.4
                                            

Total net revenues

   $ 295.6      $ 345.2      (14.4 %)    $ 882.6      $ 1,011.1      (12.7 %) 
                                            

A summary of the Company’s net revenues by payer follows:

            
     Third Quarter     First Nine Months  

(Dollars in millions)

   2009     2008     Percentage
Variance
    2009     2008     Percentage
Variance
 

Medicare

            

Home Health

   $ 190.0      $ 165.2      15.0   $ 570.2      $ 471.5      20.9

All Other

     21.8        19.4      12.5        62.8        52.9      18.9   
                                            

Total Medicare

     211.8        184.6      14.8        633.0        524.4      20.7   

Medicaid and Local Government

     23.7        32.4      (26.9     76.7        97.0      (20.9

Commercial Insurance and Other:

            

Paid at episodic rates

     20.7        14.1      46.6        55.9        38.7      44.8   

Other

     39.4        114.1      (65.5     117.0        351.0      (66.7
                                            

Total Commercial Insurance and Other

     60.1        128.2      (53.2     172.9        389.7      (55.6
                                            

Total net revenues

   $ 295.6      $ 345.2      (14.4 %)    $ 882.6      $ 1,011.1      (12.7 %) 
                                            

Net revenues decreased by $49.6 million or 14.4 percent for the third quarter of 2009 as compared to the third quarter of 2008. Excluding prior year’s third quarter revenues from the Company’s CareCentrix business unit and the related adjustment to intersegment revenues, net revenues increased approximately $25.3 million or 9.4 percent in the third quarter of 2009.

Net revenues decreased by $128.5 million or 12.7 percent for the first nine months of 2009 as compared to the first nine months of 2009. Excluding prior year’s first nine months revenues from the Company’s CareCentrix business unit and the related adjustment to intersegment revenues, net revenues increased approximately $102.6 million or 13.1 percent in the first nine months of 2009.

 

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Home Health

Home Health segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. Third quarter 2009 net revenues were $261.4 million, up $22.1 million, or 9 percent, from $239.3 million in the prior year period. For the first nine months of fiscal 2009, net revenues were $784.8 million, a $91.6 million or 13 percent increase compared to $693.2 million for the corresponding period of fiscal 2008.

The Company’s episodic revenues grew at 17.5 percent and 22.7 percent for the third quarter and first nine months of 2009, respectively. A summary of the Company’s combined Medicare and non-Medicare Prospective Payment System (“PPS”) business paid at episodic rates follows:

 

     Third Quarter     First Nine Months  

(Dollars in millions)

   2009    2008    Percentage
Variance
    2009    2008    Percentage
Variance
 

Medicare

   $ 190.0    $ 165.2    15.0   $ 570.2    $ 471.5    20.9

Paid at episodic rates

     20.7      14.1    46.6        55.9      38.7    44.8   
                                        

Total

   $     210.7    $      179.3            17.5   $     626.1    $      510.2            22.7
                                        

Key Company statistics related to episodic revenues were as follows:

 

     Third Quarter     First Nine Months  
     2009    2008    Percentage
Variance
    2009    2008    Percentage
Variance
 

Episodes

     66,700      61,600    8.3     200,400      182,500    9.8

Revenue per episode

   $ 3,160    $ 2,910    8.6   $ 3,120    $ 2,790    11.8

Factors contributing to the improvements in revenue per episode for the third quarter of 2009 include growth in the Company’s therapy-based specialty programs that have a higher level of reimbursement, and a shift in mix toward higher acuity cases. Episodic revenue growth, excluding the impact of recent acquisitions, was approximately 17 percent for the third quarter of 2009 and 21 percent in the first nine months of 2009.

In the third quarter and first nine months of 2009, Medicare and non-Medicare PPS revenues as a percent of total Home Health revenues were 81 percent and 80 percent, respectively, as compared to 75 percent and 74 percent, respectively, for the corresponding periods in 2008. In the third quarter and first nine months of 2009, revenues from specialty programs as a percent of total Medicare Home Health revenues were 38 percent and 37 percent, respectively, as compared to 32 percent and 30 percent, respectively, for the corresponding periods of 2008.

Revenues from Medicaid and Local Government payer sources were $21.3 million and $69.9 million in the third quarter and first nine months of 2009, respectively, as compared to $30.6 million and $91.0 million in the third quarter and first nine months of 2008, respectively. Revenues from Commercial Insurance and Other payer sources, excluding non-Medicare PPS revenues, were $29.4 million in the third quarter of 2009 as compared to $29.4 million in the third quarter of 2008. For the first nine months of 2009 as compared to the corresponding period of 2008, revenues from Commercial Insurance and Other payer sources were $88.8 million and $92.0 million, respectively.

The disposition in the first quarter of the majority of the Company’s assets associated primarily with certain branch offices that specialized primarily in pediatric home health care services, as well as certain other contracts, contributed to the decreases in Medicaid and Local Government revenues of $4.5 million and $10.3 million, respectively, for the third quarter and first nine months of fiscal 2009 and in Commercial Insurance and Other revenues by $1.5 million and $3.6 million, respectively, for the third quarter and first nine months of fiscal 2009. Additional decreases in the Medicaid and Local Government and Commercial Insurance and Other payer sources resulted primarily from the Company’s ongoing strategy to reduce or eliminate certain lower gross margin business as the Company continues to pursue more favorable commercial pricing and a higher mix of Medicare and non-Medicare PPS business.

CareCentrix

CareCentrix segment revenues were derived from the Commercial Insurance and Other payer group only. Third quarter 2008 net revenues were $75.6 million. For the first nine months of fiscal 2008, net revenues were $232.7 million.

 

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All Other

All Other revenues are derived from all three payer groups. Third quarter and first nine months of fiscal 2009 net revenues were $34.6 million and $99.1 million, respectively, as compared to $31.2 million and $87.8 million, respectively, in the corresponding periods of 2008. The increase for the third quarter of 2009 was attributable primarily to a $2.2 million increase in hospice revenues, of which approximately $0.6 million related to revenues from acquisitions completed during 2008, and a $1.1 million increase in respiratory therapy services and HME and infusion therapy revenues. The increase for the first nine months of 2009 was attributable primarily to a $9.8 million increase in hospice revenues, of which approximately $4.4 million related to revenues from acquisitions completed during 2008, and a $1.6 million increase in respiratory therapy services and HME revenues, offset somewhat by declines in other segment component revenues as compared to the corresponding period of 2008.

In All Other, Medicare revenues were $21.8 million and $62.8 million, respectively, in the third quarter and first nine months of 2009 as compared to $19.4 million and $52.9 million, respectively, in the corresponding periods of 2008. Medicaid revenues were $2.4 million and $6.8 million for the third quarter and first nine months of 2009, respectively, as compared to $1.9 million and $6.0 million for the third quarter and first nine months of 2008, respectively. Commercial Insurance and Other revenues in the third quarter and first nine months of 2009 were $10.4 million and $29.5 million, respectively, as compared to $9.9 million and $28.9 million for the third quarter and first nine months of 2008, respectively.

Gross Profit

 

      Third Quarter     First Nine Months  

(Dollars in millions)

   2009     2008     Variance     2009     2008     Variance  

Gross profit

   $ 152.1      $ 151.0      $ 1.1      $ 457.1      $ 439.0      $ 18.1   

As a percent of revenue

     51.5     43.7     7.8     51.8     43.4     8.4

Gross profit increased by $1.1 million or 0.8 percent for the third quarter of 2009 as compared to the third quarter of 2008. For the first nine months of 2009, gross profit increased by $18.1 million or 4.1 percent. Excluding prior year’s third quarter and first nine months gross profit from the Company’s CareCentrix unit, gross profit increased by approximately $14.8 million or 10.8 percent and $60.7 million or 15.3 percent, respectively.

As a percentage of revenues, gross profit of 51.5 percent in the third quarter of 2009 represented a 7.8 percentage point increase as compared to the third quarter of 2008. For the first nine months of 2009, gross profit of 51.8 percent represented an 8.4 percentage point increase compared to the first nine months of 2008. Approximately 7.1 and 7.4 percentage points of these increases are attributable to the fact that the third quarter and first nine months of fiscal 2009 no longer included the impact of the lower margin CareCentrix business. From a total Company perspective, the remaining increases in gross profit percentage were attributable primarily to (i) significant changes in revenue mix, (ii) an ongoing initiative to change the pay structure of Home Health clinicians from a salaried basis to a pay-per-visit basis which allows the Company to better match revenues with expenses and (iii) improved processes and management over various components of cost of services and goods sold, such as mileage expenses, productive materials and workers compensation and professional and general liability costs. These increases in gross margin percentage were partially offset by the impact of incremental costs resulting from (i) an increase in visits per episode of nearly 9 percent in both the third quarter and nine month periods, (ii) a change in the mix of clinician visits with a greater emphasis on higher cost disciplines, (iii) increased labor costs associated with higher utilization of paid time off by clinical associates during the third quarter and (iv) a significant increase in employee health and welfare costs.

The changes in revenue mix in the Home Health segment resulted from (i) organic revenue growth in Medicare, particularly in the Company’s specialty programs, and the non-Medicare PPS business, and (ii) the elimination or reduction of certain low margin Medicaid and local government business and commercial business, including pediatric and adult hourly services and other business in home health branch offices that were sold in the first quarter of 2009. These changes contributed to an overall increase in gross margin within the Home Health segment from 51.9 percent and 51.7 percent in the third quarter and for the first nine months of 2008, respectively, to 52.0 percent and 52.5 percent in the third quarter and for the first nine months of 2009, respectively.

CareCentrix gross profit as a percentage of revenues was 18.1 percent for the third quarter and 18.3 percent for the first nine months of 2008.

Gross profit as a percentage of revenues in All Other increased from 42.4 percent and 43.8 percent in the third quarter and first nine months of 2008, respectively, to 47.4 percent and 45.6 percent in the third quarter and first nine months of 2009, respectively. Gross profit in All Other was impacted by depreciation expense of $1.1 million and $3.5 million in the third quarter and first nine months of 2009, respectively, as compared to $1.3 million and $3.7 million in the third quarter and first nine months of 2008, respectively.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $1.3 million to $126.6 million for the quarter ended September 27, 2009, as compared to $127.9 million for the quarter ended September 28, 2008, and increased $7.8 million to $379.2 million for the nine months ended September 27, 2009, as compared to $371.4 million for the nine months ended September 27, 2008. Excluding prior year’s third quarter and first nine months selling, general and administrative expenses relating to CareCentrix ($8.6 million and $24.9 million, respectively) and estimated corporate expenses to support CareCentrix ($1.9 million and $5.7 million, respectively), selling, general and administrative expenses increased approximately $9.2 million or 8 percent and $38.4 or 11 percent, respectively.

The decrease of $1.3 million for the third quarter of 2009 as compared to the corresponding period of 2008 was primarily attributable to (i) selling expenses and field operating costs resulting from the CareCentrix disposition in September 2008 ($8.6 million), (ii) costs associated with pediatric home health care branches that were sold during the first quarter of 2009 ($1.1 million), (iii) equity based compensation expense ($0.8 million), (iv) corporate expenses, excluding restructuring and integration costs, as noted below ($0.7 million), (v) restructuring and integration costs ($0.5 million) and (vi) All Other field operating and selling costs, exclusive of acquisitions ($0.1 million). These decreases in costs were partially offset by increases in (i) Home Health segment field operating and selling costs, exclusive of acquisitions, to support higher revenue volume in the 2009 period as compared to the 2008 period ($7.5 and $1.8 million, respectively), (ii) incremental costs in the 2009 period associated with acquired operations ($0.8 million, including $0.1 million of selling expenses, $0.5 million of Home Health operating costs and $0.2 million of All Other operating costs), and (iii) incremental provision for doubtful accounts associated with the Company’s All Other business units ($0.4 million).

The increase of $7.8 million for the first nine months of 2009 as compared to the corresponding period of 2008 was primarily attributable to (i) Home Health segment and All Other field operating costs, exclusive of acquisitions, to support higher revenue volume in the 2009 period as compared to the 2008 period ($23.0 million and $0.8 million, respectively), (ii) incremental costs in the 2009 period associated with acquired operations ($6.4 million, including $1.0 million of selling expenses, $4.2 million of Home Health operating costs and $1.2 million of All Other operating costs), (iii) incremental selling expenses in Home Health, exclusive of acquisitions, relating to increased headcount ($5.9 million), (iv) depreciation and amortization ($0.4 million) and (v) restructuring and integration costs ($0.2 million). These increases in costs were partially offset by reductions in (i) selling expenses and field operating costs resulting from the CareCentrix disposition in September 2008 ($24.9 million), (ii) costs associated with pediatric home health care branches that were sold during the first quarter of 2009 ($2.6 million), (iii) equity compensation ($0.6 million), (iv) corporate expenses, excluding restructuring and integration costs, as noted above ($0.5 million) and (v) the provision for doubtful accounts due to improved collections and a continued transition from legacy Healthfield billing systems ($0.3 million).

Depreciation and amortization expense included in selling, general and administrative expenses was $4.3 million and $12.6 million in the third quarter and first nine months of 2009, respectively, as compared to $4.3 million and $12.1 million for the corresponding periods of 2008, respectively.

Gain on Sale of Assets, Net

For the third quarter and first nine months of 2008, the Company recorded a pre-tax gain of approximately $107.9 million, net of transaction-related costs of approximately $6.5 million, in connection with the sale of a majority equity ownership interest in the Company’s CareCentrix ancillary care benefit management business. Since the Company’s tax basis in CareCentrix exceeded total consideration relating to the transaction, no tax expense was recorded and a capital loss carryforward was created in connection with the CareCentrix disposition.

The Company recorded a pre-tax gain of approximately $5.7 million during the first nine months of 2009, in connection with the sale of assets and certain branch offices that specialized primarily in pediatric home health care services. There was no income tax expense relating to the gain on the sale of assets due to the utilization of a portion of a capital loss carryforward that was created in 2008.

Interest Expense and Interest Income

For the third quarter and first nine months of fiscal 2009, net interest expense and other was approximately $1.3 million and $5.6 million, respectively, consisting primarily of interest expense and other of $2.0 million and $7.9 million, respectively, associated with borrowings and fees under the credit agreement and outstanding letters of credit and amortization of debt issuance costs, partially offset by interest income of $0.7 million and $2.3 million, respectively, earned on investments and existing cash balances. Interest expense and other for the nine months ended September 27, 2009 also included $1.0 million of realized losses on the Company’s auction rate securities. For fiscal 2008, net interest expense and other for the third quarter and first nine months was $3.9 million and $14.6 million, respectively, consisting primarily of interest expense and other of $4.2 million and $15.9 million, respectively, partially offset by interest income of $0.3 million and $1.3 million, respectively. The decrease in interest expense and other between the 2008 and 2009 periods related primarily to (i) lower Eurodollar rates in the 2009 period, (ii) lower outstanding borrowings under the

 

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Company’s term loan and revolving credit facility in the 2009 period and (iii) the reduction in the Company’s consolidated leverage ratio which has triggered reductions in the margins on term loan and revolving credit borrowings between the 2008 and 2009 periods, offset somewhat by the realized losses noted above.

Income before Income Taxes

Components of income before income taxes were as follows:

 

      Third Quarter     First Nine Months  

(Dollars in millions)

   2009     2008     Variance     2009     2008     Variance  

Operating Contribution:

            

Home Health

   $ 41.4      $ 38.9      $ 2.5      $ 133.2      $ 109.5      $ 23.7   

CareCentrix

     —          5.2        (5.2     —          18.1        (18.1

All Other

     5.0        2.9        2.1        12.1        9.0        3.1   
                                                

Total Operating Contribution

     46.4        47.0        (0.6     145.3        136.6        8.7   

Corporate expenses

     (15.3     (18.2     2.9        (50.6     (52.5     1.9   

Depreciation and amortization

     (5.6     (5.7     0.1        (16.7     (16.5     (0.2

Gain on sale of assets, net

     —          107.9        (107.9     5.8        107.9        (102.1

Interest expense, net

     (1.3     (3.9     2.6        (5.6     (14.6     9.0   
                                                

Income before income taxes

   $ 24.2      $ 127.1      $ (102.9   $ 78.2      $ 160.9      $ (82.7

As a percent of revenue

     8.2     36.8       8.9     15.9  

Income Taxes

The Company recorded a federal and state income tax provision of $9.0 million for the third quarter of fiscal 2009, of which $5.5 million represented a current tax provision and $3.5 million represented a deferred tax provision. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 37.3 percent for the third quarter of 2009 is due to state income taxes, net of Federal benefit (approximately 5.0 percent) offset by the utilization of research and development credits (approximately 2.2 percent) and other items (approximately 0.5 percent).

For the nine months ended September 27, 2009, the Company recorded a federal and state income tax provision of $28.4 million representing a current tax provision of $23.4 million and a deferred tax provision of $5.0 million. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 36.4 percent for the first nine months of 2009 is due to state income taxes, net of Federal benefit (approximately 5.0 percent) and other items (approximately 0.7 percent) offset by a reduction of the capital loss carryforward valuation allowance (approximately 3.6 percent) and the utilization of research and development credits (approximately 0.7 percent).

The Company recorded a federal and state income tax provision of $6.2 million for the third quarter of fiscal 2008, of which $5.2 million represented a current tax provision and $1.0 million represented a deferred tax provision. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 4.9 percent for the third quarter of 2008 is due to the CareCentrix transaction (approximately 33.6 percent), offset by state taxes and other items (approximately 3.5 percent).

For the nine months ended September 28, 2008, the Company recorded a federal and state income tax provision of $20.3 million, representing a current provision of $8.4 million and a deferred tax provision of $11.9 million. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 12.6 percent for the first nine months of 2008 is due to the CareCentrix transaction (approximately 24.3 percent), offset by state taxes and other items (approximately 1.9 percent).

Net Income

For the third quarter of fiscal 2009, net income was $15.4 million, or $0.52 per diluted share, compared with net income of $120.9 million, or $4.07 per diluted share, for the corresponding period of 2008. Third quarter 2008 results included a non-recurring gain of $107.9 million or $3.67 per diluted share relating to the sale of a majority equity ownership interest in CareCentrix in September 2008. In addition, net income for the third quarter of 2009 included a pre-tax charge of $0.9 million or $0.02 per diluted share and net income for the third quarter of 2008 included a pre-tax charge of $1.4 million or $0.02 per diluted share relating to costs associated with restructuring and merger and acquisition activities.

For the first nine months of fiscal 2009, net income was $50.5 million, or $1.70 per diluted share, compared with net income of $140.6 million, or $4.80 per diluted share, for the first nine months of fiscal 2008. Net income for the first nine months of 2009 included a pre-tax gain of $5.7 million, or $0.19 per diluted share, related to the sale of assets and certain branch offices that specialized primarily in pediatric home health care services. Net income for the first nine months of 2008 included $3.72 per diluted share relating to the gain on the CareCentrix sale as noted above. In addition, net income also included a pre-tax charge of $2.4 million, or $0.05 per diluted share, for the first nine months of 2009 and $2.1 million, or $0.04 per diluted share, for the corresponding period of 2008 relating to costs associated with restructuring and merger and acquisition activities.

 

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Liquidity and Capital Resources

Liquidity

The Company’s principal source of liquidity is the collection of its accounts receivable. For healthcare services, the Company grants credit without collateral to its patients, most of whom are insured under governmental payer or third party commercial arrangements. Additional liquidity is provided from existing cash balances and the Company’s credit, principally through its revolving credit facility, and could be provided in the future through the issuance of up to $300 million of debt or equity securities under a universal shelf registration statement filed with the SEC in September 2007.

During the first nine months of 2009, cash provided by operating activities was $75.9 million. In addition, the Company received net proceeds of $6.2 million from the sale of certain assets associated primarily with branch offices that specialized primarily in pediatric home health care services, generated cash from the issuance of common stock upon exercise of stock options and under the Company’s Employee Stock Purchase Plan (“ESPP”) of $9.2 million and received proceeds of $7.0 million from the sale of ARS. In the first nine months of 2009, the Company used $14.0 million for the repayment of debt, $4.8 million for repurchases of common stock, $18.2 million of cash for capital expenditures and $10.3 million for acquisition of businesses.

Net cash provided by operating activities increased by $24.8 million, from $51.1 million for the first nine months of 2008 to $75.9 million in the first nine months of 2009. The increase was primarily driven by improvements in accounts receivable ($24.3 million) represented by a $4.4 million increase in accounts receivable in the 2009 period as compared to an increase of $28.7 million in accounts receivable in the 2008 period, an increase in net cash provided by operations prior to changes in assets and liabilities ($2.6 million) and changes in current liabilities ($0.2 million), offset somewhat by changes in prepaid expenses and other assets ($2.3 million).

Adjustments to add back non-cash items affecting net income are summarized as follows (in thousands):

 

     Nine Months Ended  
     September 27, 2009     September 28, 2008     Variance  

OPERATING ACTIVITIES:

      

Net income

   $ 50,522      $ 140,639      $ (90,117

Adjustments to add back non-cash items affecting net income:

      

Depreciation and amortization

     16,705        16,494        211   

Amortization of debt issuance costs

     952        1,474        (522

Provision for doubtful accounts

     6,307        9,536        (3,229

Equity-based compensation expense

     4,140        4,711        (571

Windfall tax benefits associated with equity-based compensation

     (743     (2,087     1,344   

Impairment loss on auction rate securities

     1,000        —          1,000   

Gain on sale of assets, net

     (5,747     (107,872     102,125   

Equity in net earnings of affiliate

     (779     (20     (759

Deferred income tax expense

     5,015        11,868        (6,853
                        

Total cash provided by operations prior to changes in assets and liabilities

   $ 77,372      $ 74,743      $ 2,629   
                        

The $2.6 million difference in “Total cash provided by operations prior to changes in assets and liabilities” between the 2008 and 2009 periods is primarily related to improvements in net income after adjusting for components of income that do not have an impact on cash, such as depreciation and amortization, equity-based compensation expense, gain on sale of assets, net and deferred income taxes.

 

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A summary of the changes in current liabilities impacting cash flow from operating activities follows (in thousands):

 

     Nine Months Ended  
     September 27, 2009     September 28, 2008     Variance  

OPERATING ACTIVITIES:

      

Changes in current liabilities:

      

Accounts payable

   $ (130   $ 361      $ (491

Payroll and related taxes

     6,865        8,499        (1,634

Deferred revenue

     6,694        4,216        2,478   

Medicare liabilities

     (187     (770     583   

Cost of claims incurred but not reported

     —          (2,829     2,829   

Obligations under insurance programs

     (1,098     3,009        (4,107

Other accrued expenses

     (5,527     (6,099     572   
                        

Total changes in current liabilities

   $ 6,617      $ 6,387      $ 230   
                        

The primary drivers for the $0.2 million difference resulting from changes in current liabilities that impacted cash flow from operating activities include:

 

   

Accounts payable and payroll and related taxes, which had a negative impact of $2.2 million, between the 2008 and 2009 reporting periods, primarily related to the timing of payments.

 

   

Deferred revenue, which had a positive impact of $2.5 million between the 2008 and 2009 reporting periods, exclusive of businesses acquired, primarily due to growth in the Medicare and non-Medicare PPS business.

 

   

Medicare liabilities, which had a positive impact of $0.6 million between the 2008 and 2009 reporting periods.

 

   

Cost of claims incurred but not reported, which had a positive impact of $2.8 million on the changes in operating cash flows, as a result of the CareCentrix disposition.

 

   

Obligations under insurance programs, which had a negative impact on the change in operating cash flow of $4.1 million between the 2008 and 2009 reporting periods, primarily related to the timing of payments.

 

   

Other accrued expenses, which had a positive impact on the change in operating cash flow of $0.6 million between the 2008 and 2009 reporting periods, primarily related to reduced cash interest payments.

Working capital at September 27, 2009 was approximately $178 million, an increase of $53 million, as compared to approximately $125 million at December 28, 2008, primarily due to:

 

   

a $51 million increase in cash and cash equivalents;

 

   

a $5 million increase in short term investments;

 

   

a $1 million increase in deferred tax assets;

 

   

a $3 million increase in prepaid expenses and other current assets; offset somewhat by

 

   

a $1 million decrease in accounts receivable, primarily due to strong cash collections in the Company’s Home Health segment as well as resolution of temporary cash delays associated with the Company’s hospice operations; and

 

   

a $6 million increase in current liabilities, consisting of increases in deferred revenue ($7 million) and payroll and related taxes ($7 million), partially offset by decreases in obligations under insurance programs ($1 million) and other accrued expenses ($7 million). The changes in current liabilities are described above in the discussion on net cash provided by operating activities.

Days Sales Outstanding (“DSO”) as of September 27, 2009 were 54 days, compared to 57 days at December 28, 2008 and 61 days at September 28, 2008. DSO at September 27, 2009 for Home Health and All Other were 54 and 51 days, respectively, compared to 57 and 56 days, respectively, at December 28, 2008.

At the commencement of an episode of care under the Medicare and non-Medicare PPS for Home Health, the Company records accounts receivable and deferred revenue based on an expected reimbursement amount. Accounts receivable is adjusted upon the receipt of cash and deferred revenue is amortized into revenue over the average patient treatment period. For information purposes, if net accounts receivable and deferred revenue were combined for purposes of determining an alternative DSO calculation which measures open net accounts receivable divided by average daily recognized revenues, the alternative DSO would have been 42 days at September 27, 2009 and 46 days at December 28, 2008.

 

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Accounts receivable attributable to major payer sources of reimbursement at September 27, 2009 and December 28, 2008 were as follows (in thousands):

 

     September 27, 2009
     Total    0 - 90 days    91 - 180 days    181 - 365 days    Over 1 year

Medicare

   $ 120,565    $ 107,145    $ 9,381    $ 2,718    $ 1,321

Medicaid and Local Government

     14,888      12,246      1,210      1,081      351

Commercial Insurance and Other

     43,826      33,516      5,589      3,610      1,111

Self - Pay

     3,767      1,575      1,170      810      212
                                  

Gross Accounts Receivable

   $ 183,046    $ 154,482    $ 17,350    $ 8,219    $ 2,995
                                  
     December 28, 2008
     Total    0 - 90 days    91 - 180 days    181 - 365 days    Over 1 year

Medicare

   $ 117,311    $ 100,873    $ 11,043    $ 4,164    $ 1,231

Medicaid and Local Government

     21,384      16,269      2,481      2,114      520

Commercial Insurance and Other

     43,528      31,173      6,382      4,197      1,776

Self - Pay

     3,205      1,249      893      729      334
                                  

Gross Accounts Receivable

   $ 185,428    $ 149,564    $ 20,799    $ 11,204    $ 3,861
                                  

The Company participates in Medicare, Medicaid and other federal and state healthcare programs. Revenue mix by major payer classifications was as follows:

 

    Third Quarter Ended     Nine Months Ended  
    September 27, 2009     September 28, 2008     September 27, 2009     September 28, 2008  

Medicare

  72   54   72   52

Medicaid and Local Government

  8      9      9      10   

Commercial Insurance and Other:

       

Paid at episodic rates

  7      4      6      4   

Other

  13      33      13      34   
                       

Total net revenues

  100   100   100   100
                       

Segment revenue mix by major payer classifications was as follows:

 

     Third Quarter Ended     Nine Months Ended  
     2009     2008     2009     2008  
     Home
Health
    All
Other
    Home
Health
    All
Other
    Home
Health
    All
Other
    Home
Health
    All
Other
 

Medicare

   73   63   69   62   73   63   68   60

Medicaid and Local Government

   8      7      13      6      9      7      13      7   

Commercial Insurance and Other:

                

Paid at episodic rates

   8      —        6      —        7      —        6      —     

Other

   11      30      12      32      11      30      13      33   
                                                

Total net revenues

   100   100   100   100   100   100   100   100
                                                

CareCentrix revenues are all derived from the Commercial Insurance and Other payer group.

Effective January 1, 2008, CMS implemented refinements to the Medicare home health Prospective Payment System (“PPS”) including, among other things, a 3.0 percent market basket index update and a multi-year reduction in the home health system payment rates (2.75 percent for each of the years 2008 through 2010 and 2.71 percent in 2011) to offset coding changes since the original implementation of PPS in 2000, known as “case mix creep”. Effective January 1, 2009, the market basket index was updated by an additional 2.9 percent. In October 2009, CMS announced policy and payment updates for Medicare home health effective January 1, 2010. These final rules included a 2.0 percent market basket update, a modification to the home health outlier policy with a related increase in home health base rates of 2.5 percent and a continuation of its current policy of a 2.75 percent reduction in home health system payment rates.

On July 31, 2008, CMS announced that hospices serving Medicare beneficiaries would receive a 2.5 percent increase in their fiscal 2009 hospice payments. As a result of the federal stimulus package enacted in 2009, the fiscal 2009 updated increase for hospice services serving Medicare beneficiaries changed from 2.5 percent to 3.6 percent retroactive to October 1, 2008. On July 30, 2009,

 

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CMS announced that hospices serving Medicare beneficiaries would receive a net 1.4 percent increase in their fiscal 2010 hospice payments. Effective January 1, 2009, CMS implemented a 9.5 percent reduction in rates on certain HME.

There are certain standards and regulations that the Company must adhere to in order to continue to participate in Medicare, Medicaid and other federal and state healthcare programs. As part of these standards and regulations, the Company is subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies. Periodic and random audits conducted or directed by these agencies could result in a delay in or adjustment to the amount of reimbursements received under these programs. Violation of the applicable federal and state health care regulations can result in our exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties. The Company believes that it is currently in compliance with these standards and regulations. The Company’s HME and respiratory therapy business operates in certain markets that are subject to a competitive bidding process for Medicare.

Credit Arrangements

The Company’s credit agreement, which was entered into on February 28, 2006, provided for an aggregate borrowing amount of $445.0 million of senior secured credit facilities consisting of (i) a seven year term loan of $370.0 million repayable in quarterly installments of 1 percent per annum (with the remaining balance due at maturity on March 31, 2013) and (ii) a six year revolving credit facility of $75.0 million. On March 5, 2008, in accordance with the provisions of its credit agreement, the Company and certain of its lenders agreed to increase the revolving credit facility from $75.0 million to $96.5 million. Of the total revolving credit facility, $55 million is available for the issuance of letters of credit and $10 million was available for swing line loans.

Upon the occurrence of certain events, including the issuance of capital stock, the incurrence of additional debt (other than that specifically allowed under the credit agreement), certain asset sales where the cash proceeds are not reinvested, or if the Company has excess cash flow (as defined in the agreement), mandatory prepayments of the term loan are required in the amounts specified in the credit agreement.

In connection with the disposition of 69 percent of its equity ownership interest in its CareCentrix business, the Company entered into the First Amendment to Credit Agreement dated as of August 20, 2008, which, among other things, provided for lenders’ consent to the disposition and required the Company to apply $58 million of the cash proceeds it received to pay down the Company’s term loan. In addition, the Company was able to retain approximately $26 million of the cash proceeds for reinvestment into its businesses during the six month period following the disposition. In March 2009, at the end of the six month period, remaining proceeds of $11 million that were not invested were used for additional term loan repayments. In connection with the disposition of assets and the transfer of certain branch offices that specialized primarily in pediatric home health services, the Company entered into the Second Amendment to Credit Agreement dated February 10, 2009, which provided the lenders’ consent to the disposition and required the Company to apply $3 million of the cash proceeds it received to pay down the Company’s term loan.

Interest under the credit agreement accrues at Base Rate or Eurodollar Rate (plus an applicable margin based on the table presented below) for both the revolving credit facility and the term loan. Overdue amounts bear interest at 2 percent per annum above the applicable rate. The applicable margin component of interest rates under the credit agreement is based on the Company’s consolidated leverage ratio as follows:

 

Revolving Credit
Consolidated
Leverage Ratio

   Term Loan
Consolidated
Leverage Ratio
  Margin for
Base Rate Loans
    Margin for
Eurodollar Loans
 

³ 3.5

   ³ 3.5   1.25   2.25

< 3.5 & ³ 3.0

   < 3.5 & ³ 3.0   1.00   2.00

< 3.0 & ³ 2.5

   < 3.0   0.75   1.75

< 2.5

     0.50   1.50

The Company is also subject to a revolving credit commitment fee equal to 0.375 percent per annum of the average daily difference between the total revolving credit commitment and the total outstanding borrowings and letters of credit, excluding amounts outstanding under swing loans. As of December 30, 2007, the Company achieved a consolidated leverage ratio below 3.0 and as a result triggered a 25 basis point reduction in the margin on revolving credit and term loan borrowings, effective February 14, 2008. As of September 28, 2008, the Company’s consolidated leverage ratio fell below 2.5 and as a result lowered the Company’s revolving credit margin by an additional 25 basis points, effective November 11, 2008. As of September 27, 2009, the consolidated leverage ratio was 1.8.

The credit agreement requires the Company to meet certain financial tests. These tests include a consolidated leverage ratio and a consolidated interest coverage ratio. The credit agreement also contains additional covenants which, among other things, require the Company to deliver to the lenders specified financial information, including annual and quarterly financial information, and limit the Company’s ability to do the following, subject to various exceptions and limitations: (i) merge with other companies; (ii) create liens

 

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on its property; (iii) incur additional debt obligations; (iv) enter into transactions with affiliates, except on an arms-length basis; (v) dispose of property; (vi) make capital expenditures; and (vii) pay dividends or acquire capital stock of the Company or its subsidiaries. As of September 27, 2009, the Company was in compliance with the covenants in the credit agreement.

Although the credit agreement requires the Company to make quarterly installment payments on the term loan with the remaining balance due at maturity on March 31, 2013, the administrative agent under the credit agreement determined in early 2008 that the Company has made sufficient prepayments to extinguish all required quarterly installment payments due under the credit agreement on the term loan, with any future prepayments to be applied against the balance due at maturity. During the quarter ended September 27, 2009, the Company made no payments on its term loan. As of September 27, 2009, the Company had outstanding borrowings of $237.0 million under the term loan and outstanding letters of credit of $36.5 million; as of such date, interest expense on term loan borrowings approximated 2.2 percent per annum and fees on outstanding letters of credit were 1.50 percent per annum.

Following the bankruptcy filing in September 2008 of Lehman Commercial Paper, Inc. (“LCPI”), a participating lending institution in the Company’s credit facility, the Company no longer has access to LCPI’s pro rata share of the unused revolving credit facility and will no longer have access to the facility’s swing line loan feature. At September 27, 2009, the Company’s unused and available credit line was $49.8 million. On November 1, 2009, CIT Group, Inc. (“CIT”), one of whose subsidiaries is a participating lending institution in the Company’s credit facility, filed for Chapter 11 bankruptcy protection. The CIT subsidiary’s pro rata share of the Company’s unused and available credit facility was approximately $4.7 million at September 27, 2009.

Guarantee and Collateral Agreement

The Company has entered into a Guarantee and Collateral Agreement which grants a collateral interest in all real property and personal property of the Company and its subsidiaries, including stock of its subsidiaries, in favor of the administrative agent under the credit agreement. The Guarantee and Collateral Agreement also provides for a guarantee of the Company’s obligations under the credit agreement by substantially all subsidiaries of the Company.

Insurance Programs

The Company may be subject to workers’ compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover these risks with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The Company estimates the cost of both reported claims and claims incurred but not reported, up to specified deductible limits and retention amounts, based on its own specific historical claims experience and current enrollment statistics, industry statistics and other information. These estimates and the resulting reserves are reviewed and updated periodically.

The Company is responsible for the cost of individual workers’ compensation claims and individual professional liability claims up to $500,000 per incident which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The Company also maintains excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25,000,000 in excess of the underlying coverage limits. Payments under the Company’s workers’ compensation program are guaranteed by letters of credit.

Capital Expenditures

The Company’s capital expenditures for the nine months ended September 27, 2009 were $18.2 million as compared to $19.1 million for the same period in fiscal 2008. The Company intends to make investments and other expenditures to upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry, among other things. In this regard, management expects that capital expenditures will approximate $24 million for fiscal 2009. Management expects that the Company’s capital expenditure needs will be met through operating cash flow and available cash reserves.

Cash Resources and Obligations

The Company had cash and cash equivalents of approximately $120.3 million as of September 27, 2009, including operating funds of approximately $5.3 million exclusively relating to a non-profit hospice operation managed in Florida.

The Company held investments in auction rate securities of $5.0 million at September 27, 2009. In October 2009, the issuer of the Company’s remaining ARS repurchased the security at par value of $5 million. During the second quarter, the Company contracted to sell $5.0 million of auction rate securities at 89 percent of par, which settled in July 2009. During the first quarter of 2009, the Company contracted to sell $3.0 million of auction rate securities at 85 percent of par; the sale transaction closed in early April 2009. In connection with these transactions, the Company recognized an impairment loss of approximately $1.0 million for the first nine months of 2009, which was reflected in interest expense and other in the Company’s consolidated statements of income. See Notes 3 and 6 to the Company’s consolidated financial statements.

 

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The Company anticipates that repayments to Medicare for partial episode payments and prior year cost report settlements will be made periodically through 2009. These amounts are included in Medicare liabilities in the accompanying consolidated balance sheets.

During the nine months ended September 27, 2009, the Company repurchased 327,828 shares of its outstanding common stock at an average cost of $14.68 per share and a total cost of approximately $4.8 million. The Company’s credit agreement provides, with certain exceptions, for a limit of $5.0 million per fiscal year for the repurchases of the Company’s common stock.

Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements

As of September 27, 2009, the Company had outstanding borrowings of $237.0 million under the term loan of the credit agreement. Debt repayments, future minimum rental commitments for all non-cancelable leases and purchase obligations at September 27, 2009 are as follows (in thousands):

 

     Payment due by period

Contractual Obligations

   Total    Less than
1 year
   1-3 years    4-5 years    More than
5 years

Long-term debt obligations

   $ 237,000    $ —      $ —      $ 237,000    $ —  

Capital lease obligations

     1,431      817      551      63      —  

Operating lease obligations

     80,016      29,148      37,691      11,083      2,094

Purchase obligations

     5,822      2,588      3,234      —        —  
                                  

Total

   $ 324,269    $ 32,553    $ 41,476    $ 248,146    $ 2,094
                                  

During the quarter ended September 27, 2009, the Company made no prepayments on its term loan. The Company had total letters of credit outstanding of approximately $36.5 million at September 27, 2009 and $41.6 million at December 28, 2008. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. The Company has the option to renew these letters of credit or set aside cash funds in a segregated account to satisfy the Company’s obligations. The Company also had outstanding surety bonds of $3.2 million and $1.9 million at September 27, 2009 and December 28, 2008, respectively.

The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.

Management expects that the Company’s working capital needs for fiscal 2009 will be met through operating cash flow and existing cash resources. The Company may also consider other alternative uses of cash including, among other things, acquisitions, voluntary prepayments on the term loan, additional share repurchases and cash dividends. These uses of cash may require the approval of the Company’s Board of Directors and may require the approval of its lenders. If cash flows from operations, cash resources or availability under the credit agreement fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing or consider alternatives designed to enhance liquidity.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company is exposed to market risk from fluctuations in interest rates. The interest rate on the Company’s borrowings under the credit agreement can fluctuate based on both the interest rate option (i.e., base rate or Eurodollar rate plus applicable margins) and the interest period. As of September 27, 2009, the total amount of outstanding debt subject to interest rate fluctuations was $237.0 million. A hypothetical 100 basis point change in short-term interest rates as of that date would result in an increase or decrease in interest expense of $2.4 million per year, assuming a similar capital structure.

 

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of such period to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

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Changes in internal control over financial reporting

As required by the Exchange Act Rule 13a-15(d), the Company’s Chief Executive Officer and Chief Financial Officer evaluated the Company’s internal control over financial reporting to determine whether any change occurred during the quarter ended September 27, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during such quarter.

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

See Note 14 to the consolidated financial statements included in this report for a description of legal matters and pending legal proceedings, which description is incorporated herein by reference.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2008.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

None.

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit

Number

  

Description

  3.1    Amended and Restated Certificate of Incorporation of Company. (1)
  3.2    Amended and Restated By-Laws of Company. (1)
  4.1    Specimen of common stock. (4)
  4.2    Form of Certificate of Designation of Series A Junior Participating Preferred Stock. (2)
  4.3    Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (3)
10.1    Amendment to Employment Agreement dated as of September 3, 2009 with Ronald A. Malone. (5)+
10.2    Amendment to Change in Control Agreement dated as of September 3, 2009 with Ronald A. Malone. (5)+
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).*
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*

 

(1) Incorporated herein by reference to Form 8-K of Company dated and filed May 12, 2008.

 

(2) Incorporated herein by reference to Amendment No. 2 to the Registration Statement of Company on Form S-4 dated January 19, 2000 (File No. 333-88663).

 

(3) Incorporated herein by reference to Amendment No. 3 to the Registration Statement of Company on Form S-4 dated February 4, 2000 (File No. 333-88663).

 

(4) Incorporated herein by reference to Amendment No. 4 to the Registration Statement of Company on Form S-4 dated February 9, 2000 (File No. 333-88663).

 

(5) Incorporated herein by reference to Form 8-K of Company dated and filed September 3, 2009.

 

* Filed herewith

 

+ Management contract or compensatory plan or arrangement

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

GENTIVA HEALTH SERVICES, INC.

(Registrant)

Date: November 6, 2009     /s/ Tony Strange
    Tony Strange
    Chief Executive Officer and President
Date: November 6, 2009     /s/ John R. Potapchuk
    John R. Potapchuk
    Executive Vice President,
    Chief Financial Officer and Treasurer

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Description

  3.1    Amended and Restated Certificate of Incorporation of Company. (1)
  3.2    Amended and Restated By-Laws of Company. (1)
  4.1    Specimen of common stock. (4)
  4.2    Form of Certificate of Designation of Series A Junior Participating Preferred Stock. (2)
  4.3    Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (3)
10.1    Amendment to Employment Agreement dated as of September 3, 2009 with Ronald A. Malone. (5)+
10.2    Amendment to Change in Control Agreement dated as of September 3, 2009 with Ronald A. Malone. (5)+
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).*
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*

 

(1) Incorporated herein by reference to Form 8-K of Company dated and filed May 12, 2008.

 

(2) Incorporated herein by reference to Amendment No. 2 to the Registration Statement of Company on Form S-4 dated January 19, 2000 (File No. 333-88663).

 

(3) Incorporated herein by reference to Amendment No. 3 to the Registration Statement of Company on Form S-4 dated February 4, 2000 (File No. 333-88663).

 

(4) Incorporated herein by reference to Amendment No. 4 to the Registration Statement of Company on Form S-4 dated February 9, 2000 (File No. 333-88663).

 

(5) Incorporated herein by reference to Form 8-K of Company dated and filed September 3, 2009.

 

* Filed herewith

 

+ Management contract or compensatory plan or arrangement

 

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