10-K 1 gtiv-2012x10xk.htm FORM 10-K GTIV-2012-10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $.10 per share
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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  ý    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 (§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  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K.    ý
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 Exchange Act Rule 12b-2).
Large accelerated filer  ¨    Accelerated filer   ý    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).   Yes  ¨    No  ý
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 29, 2012, the last business day of registrant’s most recently completed second fiscal quarter, was $197,199,983 based on the closing price of the common stock on The Nasdaq Global Select Market on such date.
The number of shares outstanding of the registrant’s common stock, as of March 1, 2013, was 30,891,615.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information to be included in the registrant’s definitive Proxy Statement, to be filed not later than 120 days after the end of the fiscal year covered by this Report, for the registrant’s 2013 Annual Meeting of Shareholders is incorporated by reference into PART III.
 




PART I

Item 1.
Business
As used in this annual report on Form 10-K, the terms “we,” “us,” “our,” the “Company” and “Gentiva” refer to Gentiva Health Services, Inc. and its consolidated subsidiaries unless otherwise noted.
Special Caution Regarding Forward-Looking Statements
Certain statements contained in this annual report on Form 10-K, 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. These factors include, among others, the following:
general economic and business conditions;
demographic changes;
changes in, or failure to comply with, existing governmental regulations;
impact on the Company of healthcare reform legislation and its implementation through governmental regulations;
legislative proposals for healthcare reform;
changes in Medicare, Medicaid and commercial payer reimbursement levels;
the outcome of any inquiries into the Company’s operations and business practices by governmental authorities;
compliance with any corporate integrity agreement affecting the Company's operations;
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, terrorist acts or cyber attacks;
availability, effectiveness, stability and security of the Company's information technology systems;
ability to successfully integrate the operations of acquisitions the Company may make and achieve expected synergies and operational efficiencies within expected time-frames;
ability to maintain compliance with financial covenants under the Company’s credit agreement;
effect on liquidity of the Company’s debt service requirements; and
changes in estimates and judgments associated with critical accounting policies and estimates.
For a detailed discussion of these and other factors that could cause the Company’s actual results to differ materially from the results contemplated by the forward-looking statements, please refer to Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report.
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 within this annual report on Form 10-K and various filings with the SEC. The reader is encouraged to review these risk factors and filings.

2


Introduction
Gentiva Health Services, Inc. (“Gentiva” or the “Company”) is a leading provider of home health services and hospice services serving patients through approximately 430 locations in 40 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; and other therapies and services. Gentiva’s revenues are generated primarily from federal and state government programs and, to a lesser extent, commercial insurance and individual consumers.
The Company’s operations involve servicing patients and customers through (i) its Home Health segment and (ii) its Hospice segment. Discontinued operations represent services and products provided to patients through the Company's respiratory therapy and home medical equipment and infusion therapy (“HME and IV”) businesses, the Company’s Rehab Without Walls® business and the Company’s homemaker services business in Illinois ("IDOA").
During 2012, the Company completed three acquisitions for total cash consideration of $22.3 million. These transactions were done primarily to extend the Company's geographic coverage areas in both home health and hospice. A summary of the transactions for 2012, 2011 and 2010 and the cash consideration paid are as follows (in millions):
Acquisitions:
Geographic Service Area
 
Date
 
Consideration

Family Home Care Corporation
Washington and Idaho
 
August 31, 2012
 
$
12.3

North Mississippi Hospice
Mississippi
 
August 31, 2012
 
4.5

Advocate Hospice
Indiana
 
July 22, 2012
 
5.5

Odyssey HealthCare of Augusta, LLC
Georgia
 
April 29, 2011
 
0.3

Odyssey HealthCare, Inc.
Nationwide
 
August 17, 2010
 
1,087.0

United Health Care Group, Inc.
Louisiana
 
May 15, 2010
 
6.0

Heart to Heart Hospice of Starkville, LLC
Mississippi
 
March 5, 2010
 
2.5

In connection with the acquisition of Odyssey in August 2010, the Company entered into a new $875 million Credit Agreement and issued $325 million of senior unsecured notes.
In addition, during 2012 the Company sold various home health and hospice operations based in Louisiana and Phoenix and sold its consulting business. A summary of the Company's operations which were sold during 2012, 2011 and 2010 is as follows (in millions):
Dispositions:
Date
 
Consideration

Phoenix area hospice operations
November 30, 2012
 
$
3.5

Gentiva Consulting
May 31, 2012
 
0.3

Louisiana home health and hospice operations
Second Quarter 2012
 
6.4

Certain home health branches-Utah, Michigan, Nevada and Brooklyn, New York
Fourth Quarter 2011
 
1.6

Iowa home health branch
January 30, 2010
 
0.3

Furthermore, during 2011 and 2010, the Company sold its IDOA business based in Illinois, Rehab Without Walls® business and its HME and IV businesses in order to focus on its core businesses, home health and hospice. A summary of these transactions follow (in millions):
Discontinued operations:
Date
 
Consideration

IDOA
October 14, 2011
 
$
2.4

Rehab Without Walls®
September 10, 2011
 
9.8

HME and IV businesses
February 1, 2010
 
16.4

The Company considered these business units as operating segments and, as such, the financial results of these businesses were reported as discontinued operations for all periods presented in the Company’s consolidated financial statements.
During 2011, the Company sold its equity investment in CareCentrix Holdings Inc. The Company recorded accumulated and unpaid dividends on the preferred shares of approximately $8.6 million for the year ended December 31, 2011, which are reflected in dividend income in the Company’s consolidated statement of comprehensive income. The Company also recorded a net gain of approximately $67.1 million, which is reflected in equity in net earnings of CareCentrix, including gain on sale in

3


the Company’s consolidated statement of comprehensive income. See Note 7 to the Company's consolidated financial statements for more information.
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 to the Company's consolidated financial statements for more information.
Business Segments
The Company’s operations involve servicing its patients and customers through its Home Health segment and its Hospice segment. This presentation aligns financial reporting with the manner in which the Company manages its business operations with a focus on the strategic allocation of resources and separate branding strategies between the business segments.
Financial information with respect to the business segments, including their contributions to net revenues and operating income for each of the three years in the period ended December 31, 2012, is contained under “Results of Operations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 19 “Business Segment Information” to the Company’s consolidated financial statements.
Home Health
The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs. As of December 31, 2012, the Home Health segment conducted its business through approximately 265 locations located in 38 states.
The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies from which the Company provides various combinations of skilled nursing and therapy services and paraprofessional nursing services to adult and elder patients. Reimbursement sources primarily include government programs, such as Medicare and Medicaid and, secondarily, private sources, such as health insurance plans, managed care organizations, long term care insurance plans and personal funds. Gentiva’s direct home nursing and therapy services operations are organized in one division, which is staffed with clinical, operational, human resource, finance and sales teams. The division is separated into five geographical regions, which are further separated into geographical operating areas. Each operating area includes branch locations through which home healthcare agencies operate. Each agency is led by a director and is staffed with clinical and administrative support staff as well as clinical associates who deliver direct patient care. The clinical associates are employed on either a full-time basis or are paid on a per visit, per diem or per hour basis.
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.
Discontinued operations represent services and products provided to patients through the Company's respiratory therapy and home medical equipment and infusion therapy (“HME and IV”) businesses, the Company’s Rehab Without Walls® business and the Company’s IDOA business. Prior periods have been reclassified to conform with current presentation. See Note 4 to the Company’s consolidated financial statements for additional information.
Hospice
The Hospice segment serves terminally ill patients and their families through approximately 165 locations operating in 30 states. Like Home Health, Hospice operations are also organized in a single division, which is staffed with clinical, operational, human resource, finance and sales teams. The division is separated into four geographic regions, which in turn are further separated into geographic operating areas, each of which includes branch locations through which our hospice agencies operate. Each agency is led by a director and is staffed with clinical and administrative support staff as well as clinical associates who deliver direct patient care.

4


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. Hospice services are provided primarily in the patient’s home or other residence, such as an assisted living residence or nursing home, or in a hospital. The Medicare hospice benefit is designed for patients expected to live six months or less. Hospice services for a patient can continue, however, for more than six months, so long as the patient remains eligible as reflected by a physician’s certification.
The Hospice segment has under development focused specialty programs that include:
Memory Care Specialty Program, which will provide an individualized disease management program addressing the physical needs specific to Alzheimer’s and dementia patients and support mechanisms for their caregivers; and
Cardiac Specialty Program, which will help patients and their physicians aggressively manage symptoms associated with heart disease, focusing on quality of life and pain control.
Payers
A summary of the Company’s net revenues by major payer classification follows:
 
For the Year Ended
 
2012
 
2011
 
2010
 
Home
Health
 
Hospice
 
Home
Health
 
Hospice
 
Home
Health
 
Hospice
Medicare
79
%
 
93
%
 
79
%
 
93
%
 
77
%
 
93
%
Medicaid and Local Government
5

 
4

 
5

 
4

 
6

 
4

Commercial Insurance and Other:
 
 
 
 
 
 
 
 
 
 
 
Paid at episodic rates
9

 

 
8

 

 
8

 

Other
7

 
3

 
8

 
3

 
9

 
3

Total net revenues
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
Trademarks
The Company has various trademarks registered with the U.S. Patent and Trademark Office, including CASEMATCH®, CROSS IN CIRCLE DESIGN®, GENTIVA®, GENTIVA AND CROSS IN CIRCLE DESIGN®, GENTIVA UNIVERSITY®, GREAT HEALTHCARE HAS COME HOME®, HEALTHFIELD®, LIFESMART®, ODYSSEY HEALTHCARE, INC.®, ODYSSEY HEALTHCARE AND DESIGN®, SAFE STRIDES®, VISTACARE® and VISTACARE AND DESIGN®. Certain of the Company’s subsidiaries operate under trade names, including GILBERT’S(SM), MID-SOUTH(SM), PHYSICIANS HOME HEALTH CARE (SM), TAR HEEL (SM), TOTAL CARE (SM) and WIREGRASS (SM).
A federally registered trademark in the United States is effective for ten years subject only to a required filing and the continued use of the mark by the Company, with the right of perpetual renewal. A federally registered trademark provides a presumption of validity and ownership of the mark by the Company in connection with its goods or services and constitutes constructive notice throughout the United States of such ownership. A registration also provides nationwide trademark rights as of the filing date of the application. Management believes that the Company’s name and trademarks are important to its operations and intends to continue to renew its trademark registrations.
Business Environment
Factors that the Company believes have contributed and will contribute to the development of its Home Health and Hospice business segments include:
recognition that home health and hospice services can be a cost-effective alternative to more expensive institutional care;
aging demographics;
changing family structures in which more aging people will be living alone and may be in need of assistance;
increasing consumer and physician awareness and interest in home health and hospice services;
the psychological benefits of recuperating from an illness or accident or receiving care for a chronic condition in one’s own home;
clinical specialization; and

5


medical and technological advances that allow more health care procedures and monitoring to be provided at home.
Marketing and Sales
Home Health and Hospice. In general, the Company’s home health and hospice businesses obtain patients and clients through personal and corporate sales presentations, telephone marketing calls, direct mail solicitation, referrals from other clients and advertising in a variety of local and national media, including the Yellow Pages, newspapers, magazines, trade publications and radio. The Company maintains a dedicated sales force responsible for generating local, regional and national referrals, as well as an Internet website (www.gentiva.com) that describes the Company, its services and products. Marketing efforts also involve personal contact with physicians, hospital discharge planners and case managers for managed healthcare programs, such as those involving health maintenance organizations and preferred provider organizations, and insurance company representatives. Referral sources for hospice services also include nursing homes, assisted living facilities, community social service organizations and faith-based organizations.
Competitive Position
Home Health. The home health services industry in which the Company operates is highly competitive and fragmented. Home healthcare providers range from facility-based agencies (hospital, nursing home, rehabilitation facility, government agency) to independent companies to visiting nurse associations and nurse registries. They can be not-for-profit organizations or for-profit organizations. There are relatively few barriers to entry in some of the home health services markets in which the Company operates. In addition to several publicly-held companies, the Company’s primary competitors for its home healthcare business are hospital-based home health agencies, local home health agencies and visiting nurse associations, both for profit and not-for-profit. Based on available information, the Company believes that its home health services business held approximately a 4 percent Medicare home health reimbursement market share in 2011. The Company competes with other home healthcare providers on the basis of availability of personnel, quality and expertise of services and the value and price of services. The Company believes that it has a favorable competitive position, attributable mainly to the consistently high quality and targeted services it has provided over the years to its patients, as well as to its screening and evaluation procedures and training programs for clinical associates who provide direct care to patients.
The Company expects that industry forces will impact it and its competitors. The Company’s competitors will likely strive to improve their service offerings and price competitiveness in non-government reimbursed programs. The Company also expects its competitors to develop new strategic relationships with providers, referral sources and payers, which could result in increased competition. The introduction of new and enhanced services, acquisitions and industry consolidation and the development of strategic relationships by the Company’s competitors could cause a decline in sales or loss of market acceptance of the Company’s services or price competition, or make the Company’s services less attractive.
Hospice. The hospice care industry is very competitive and fragmented. The Company competes with not-for-profit and charity-funded hospice programs that may have strong ties to their local medical communities and with for-profit programs that may have significantly greater financial and marketing resources than the Company. The Company also competes with a number of hospitals, nursing homes, long-term care facilities, home health agencies and other healthcare providers that offer hospice care or “hospice-like” care to patients who are terminally ill. Based on available information, the Company believes that its hospice operations held approximately a 5 percent Medicare hospice reimbursement market share in 2011.
Source and Availability of Personnel
Home Health and Hospice. To maximize the cost effectiveness and productivity of clinical associates, the Company utilizes customized processes and procedures that have been developed and refined over the years. Personalized matching to recruit and select applicants who fit the patients’ individual needs is achieved through initial applicant profiles, personal interviews, skill evaluations and background and reference checks. The Company utilizes its proprietary CaseMatch® software scheduling program, which gives local Company offices the ability to identify those clinical associates who can be assigned to patient cases.
Clinical associates are recruited through a variety of sources, including advertising in local and national media, job fairs, solicitations on websites, direct mail and telephone solicitations, as well as referrals obtained directly from clients and other caregivers. Clinical associates are paid on a per visit, per hour or per diem basis, or are employed on a full-time salaried basis. The Company, along with its competitors, is currently experiencing a shortage of licensed professionals, which could have a material adverse effect on the Company’s business.

6


Number of Persons Employed
At December 31, 2012 and December 31, 2011, the Company employed full-time administrative, sales associates and clinical associates on both a salaried and pay-per-visit basis, who were also eligible for benefits, approximately as follows:
 
As of December 31
 
2012
 
2011
Clinical associates:
 
 
 
Home Health:
 
 
 
Salaried employees
600

 
500

Pay per visit
4,400

 
4,300

Total Home Health
5,000

 
4,800

Hospice
4,400

 
4,800

Total clinical associates
9,400

 
9,600

Administrative and sales associates
5,200

 
5,200

Total
14,600

 
14,800

The Company also employs clinical associates on a temporary basis, as needed, to provide home health and hospice services. In 2012, the average number of temporary clinical associates employed on a weekly basis in the Company’s home health and hospice businesses was approximately 2,600, compared to approximately 2,500 in 2011.
The Company averaged 400 temporary clinical associates on a weekly basis associated with the Rehab Without Walls® and IDOA businesses in 2011 (during the period in which the Company owned such businesses).
The Company believes that its relationships with its employees are generally good.
Government Regulations
The Company’s business is subject to extensive federal, state and, in some instances, local regulations and standards which govern, among other things:
Medicare, Medicaid, TRICARE (the Department of Defense’s managed healthcare program for military personnel and their families) and other government-funded reimbursement programs;
reporting requirements, certification and licensing standards for certain home health agencies and hospice; and
in some cases, certificate-of-need requirements.
The Company’s compliance with these regulations and standards may affect its participation in Medicare, Medicaid, TRICARE and other federal and state healthcare programs. For example, to participate in the Medicare program, a Medicare beneficiary must be under the care of a physician, have an intermittent need for skilled nursing or physical or other therapy care, must be homebound and must receive home healthcare services from a Medicare certified home healthcare agency. The Company is also subject to a variety of federal and state regulations which prohibit fraud and abuse in the delivery of healthcare services. These regulations include, among other things:
prohibitions against the offering or making of direct or indirect payments to actual or potential referral sources for obtaining or influencing patient referrals;
rules generally prohibiting physicians from making referrals under Medicare for clinical services to a home health agency with which the physician or his or her immediate family member has certain types of financial relationships;
laws against the filing of false claims; and
laws against making payment or offering items of value to patients to induce their self-referral to the provider.
As part of the extensive federal and state regulations and standards, 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 receipt or an adjustment to the amount of reimbursements due or received under Medicare, Medicaid, TRICARE and other federal and state healthcare programs. Violation of the applicable federal and state healthcare regulations can result in the Company’s 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 regulations and standards.

7


Home Health
The Centers for Medicare & Medicaid Services (“CMS”) have implemented various payment updates to the base rates for Medicare home health including (i) annual market basket updates, (ii) annual reductions in rates to reduce aggregate case mix increases that CMS believes are unrelated to patients’ health status (“case mix creep adjustment”), (iii) adjustments to rates associated with changes to the home health outlier policy and (iv) wage index and other changes. In addition, as a result of the passage of the Patient Protection and Affordable Care Act (the “Affordable Care Act”), a 3.0 percent increase in Medicare payments for home health services in defined rural-areas of the country (“the rural add-on provision”) was implemented effective April 1, 2010. During 2012, approximately 24 percent of the Company’s episodic revenue was generated in designated rural areas.
On October 31, 2011, CMS issued the final rule to update and revise Medicare home health payments for calendar year 2012. This is comprised of a net market basket update of 1.40 percent, which includes the 1 percent reduction mandated by the Affordable Care Act, offset by a case mix creep adjustment of 3.79 percent in 2012. The net effect of these changes decreased the base rate for an episode of service by 2.39 percent to $2,139. The final rule also shifted case mix points from high case mix and high therapy episodes to low case mix and non-therapy episodes. The shift from high therapy episodes and the removal of two hypertension codes also had a negative impact on the Company’s revenues in 2012 in addition to the base rate decrease. Overall, Gentiva experienced a 5.2 percent decrease in 2012 related to the above Medicare home health reimbursement adjustments.
On November 2, 2012, CMS issued a final rule to update and revise Medicare home health payments for 2013. This is comprised of a net market basket update of 1.30 percent, which includes the 1 percent reduction mandated by the Affordable Care Act, offset by a case mix creep adjustment of 1.32 percent. The net effect of these changes decreases the base rate for an episode of service by 0.02 percent to $2,138, subject to further impact from wage index adjustments. In addition, on March 1, 2013, the automatic reductions in Federal spending, known as "sequestration", were put in place which mandates an additional 2 percent reduction in Medicare home health payments, beginning April 1, 2013, although CMS has not yet issued implementation guidance.
A summary of the components of the annual Medicare home health reimbursement base episodic rate adjustments, without giving effect to any impact of sequestration, follows:
Calendar Year
Net Market
Basket
Update
 
Case Mix
Creep
Adjustment
 
Outlier
Payment
Adjustment
 
Rural
Add-on / Other 
 
Net
Reimbursement
Change
 
Base
Episodic
Rate
2013
1.30
%
 
(1.32
)%
 

 

 
(0.02
)%
 
$
2,138

2012
1.40
%
 
(3.79
)%
 

 

 
(2.39
)%
 
$
2,139

2011
1.10
%
 
(3.79
)%
 
(2.50
)%
 
0.30
%
 
(4.89
)%
 
$
2,192

2010
2.00
%
 
(2.75
)%
 
2.50
 %
 
0.50
%
 
2.25
 %
 
$
2,313

Actual episodic rates will vary from the base episodic rates noted in the table above due to (i) the determination of case mix which reflects the clinical condition, functional abilities and service needs of each individual patient, (ii) wage indices applicable to the geographic region where the services are performed and (iii) the impact of the rural add-on provision.
As a condition for Medicare payment, the Affordable Care Act mandates that prior to certifying a patient’s eligibility for the home health benefit, the certifying physician must document that the physician or an allowed non-physician practitioner, had a face-to-face encounter with the patient. The encounter must occur within 90 days prior to the start of care or 30 days after the start of care. In addition, the Affordable Care Act requires that a hospice physician or nurse practitioner have a face-to-face encounter with hospice patients during the 30-day period prior to the 180th day recertification and each subsequent recertification, and that the certifying hospice physician attest that such a visit took place. The face-to-face requirements for home health and hospice providers became effective January 1, 2011. However, CMS delayed full enforcement of the requirements until April 1, 2011.
The Affordable Care Act also imposed additional therapy assessment requirements. A professional qualified therapist assessment must take place at least once every 30 days during a therapy patient’s course of treatment. For those qualified patients needing 13 or more or 19 or more therapy visits, a qualified therapist must perform the therapy service required, re-assess the patient, and measure and document the effectiveness of the 13th visit and the 19th visit for all therapy disciplines caring for the patient. The new therapy assessment requirements were effective April 1, 2011.

8


Hospice
In July 2011, CMS released a final rule, effective for services provided October 1, 2011 through September 30, 2012, that provided for a 2.5 percent increase for Medicare hospice rates, consisting of a 3.0 percent market basket increase, offset by a 0.5 percent decrease due to updated wage index data and a budget neutrality adjustment factor. In July 2012, CMS released a final rule, effective for services provided October 1, 2012 through September 30, 2013, that provides for a 0.9 percent increase for Medicare hospice rates, consisting of a 2.6 percent market basket increase offset by a 0.7 percent productivity adjustment factor, a 0.6 percent budget neutrality adjustment factor, estimated wage index changes of 0.1 percent and a reduction of 0.3 percent defined by the Affordable Care Act. In addition, on March 1, 2013, the automatic reductions in Federal spending, known as "sequestration," were put in place which mandates an additional 2 percent reduction in Medicare hospice payments, beginning April 1, 2013, although CMS has not yet issued implementation guidance.
Overall payments made by Medicare for hospice services are subject to cap amounts calculated by Medicare. Total Medicare payments for hospice services are compared to the aggregate cap amount for the hospice cap period. In July 2012, CMS announced the cap amount for the 2012 cap year of $25,377 per beneficiary, which ran from November 1, 2011 through October 31, 2012.
Seasonality
During the third quarter, the Company has historically experienced a moderate seasonal decline in volume, as well as a decline in gross profit percentage for its Home Health services, due to increased labor costs associated with higher utilization of paid time off by the Company’s clinical associates during this period. During the fourth quarter, the Company’s Hospice business historically experiences a decline in admissions surrounding the holiday season.
Available Information
The Company’s Internet address is www.gentiva.com. The Company makes available free of charge on or through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such material has been filed with, or furnished to, the SEC. The Company also makes available on or through its website its press releases, an investor presentation, Section 16 reports and certain corporate governance documents as well as other information about the Company and health information useful to consumers.
Item 1A.
Risk Factors
This annual report on Form 10-K contains forward-looking statements which involve a number of risks, uncertainties and assumptions, as discussed in more detail above under Item 1 “Business—Special Caution Regarding Forward-Looking Statements.” Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation, the risk factors discussed below and elsewhere in this annual report.
The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. Any of the following risks could materially adversely affect our business, financial condition or results of operations. In such case, you may lose all or part of your investment in our Company’s securities.
Risks Related to Our Business and Industry
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the Credit Agreement and Senior Notes.
We are highly leveraged. As of December 31, 2012, our total indebtedness was approximately $935.2 million. We also have an additional $110 million available for borrowing under our revolving credit facilities (without taking into account approximately $45.4 million of letters of credit that we have issued).
Our high degree of leverage could have important consequences, including:
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
making it more difficult for us to make payments on the Senior Notes;

9


increasing our vulnerability to adverse changes in general economic and industry conditions;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and
placing us at a competitive disadvantage compared to our competitors who are less highly leveraged than us.
Our ability to satisfy our obligations and to reduce our total debt depends on future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow, and future financings may not be able to provide sufficient proceeds, to meet these obligations or to execute our business strategy successfully.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our Credit Agreement and the indenture governing the Senior Notes restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.
Our debt agreements contain restrictions that will limit our flexibility in operating our business.
Our Credit Agreement and the indenture governing the Senior Notes contain various covenants that limit our and our subsidiaries’ ability to, among other things:
incur additional indebtedness or issue certain preferred shares;
pay dividends on, repurchase, or make distributions in respect of our capital stock or make other restricted payments;
make certain investments;
sell certain assets;
create liens;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates; and
designate our subsidiaries as unrestricted subsidiaries.
In addition, our Credit Agreement requires us to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests. A breach of any of these covenants or failure to maintain or satisfy a financial ratio or test could result in a default under one or more of these agreements. Upon the occurrence of an event of default under our Credit Agreement, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our Credit Agreement could proceed against the collateral granted to them to secure that indebtedness. If the lenders under our Credit Agreement accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our Credit Agreement as well as our unsecured indebtedness, including the Senior Notes.
Despite our high indebtedness, we and our subsidiaries may still be able to incur additional amounts of debt, which could increase the risks associated with our substantial indebtedness.
Under the terms of our Credit Agreement and the indenture governing the Senior Notes, we and our subsidiaries may be able to incur additional indebtedness in the future. In addition, as of December 31, 2012, we had $110 million available for borrowing under our revolving credit facility (without taking into account approximately $45.4 million of letters of credit that we have issued). These borrowings and any other secured indebtedness permitted under agreements governing our indebtedness would be effectively senior to the Senior Notes and their guarantees to the extent of the assets securing such indebtedness. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we now face would increase.

10


We may not be able to achieve the benefits that we expect to realize as a result of acquisitions we may make. Failure to achieve such benefits could have an adverse effect on our financial condition and results of operations.
We may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from acquisitions, either in the amount or within the time frame that we expect. In addition, the costs of achieving these benefits may be higher than, and the timing may differ from, what we expect. Our ability to realize anticipated cost savings, synergies, and revenue enhancements may be affected by a number of factors, including, but not limited to, the following:
the use of more cash or other financial resources on integration and implementation activities than we expect;
increases in other expenses unrelated to the acquisition, which may offset the cost savings and other synergies from the acquisition;
our ability to eliminate duplicative back office overhead and redundant selling, general, and administrative functions; and
our ability to avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction.
If we fail to realize anticipated cost savings, synergies, or revenue enhancements, our financial results may be adversely affected, and we may not generate the cash flow from operations that we anticipate.
We may not be able to successfully integrate businesses that we may acquire.
Our ability to successfully implement our business plan and achieve targeted financial results is dependent on our ability to successfully integrate businesses that we may acquire. The process of integrating acquired businesses, involves risks. These risks include, but are not limited to:
demands on management related to the significant increase in the size of our business;
diversion of management’s attention from the management of daily operations;
difficulties in the assimilation of different corporate cultures and business practices;
difficulties in conforming the acquired company’s accounting policies to ours;
retaining employees who may be vital to the integration of departments, information technology systems, including accounting systems, technologies, books and records, procedures and maintaining uniform standards, such as internal accounting controls, procedures, and policies; and
costs and expenses associated with any undisclosed or potential liabilities.
Failure to successfully integrate acquired businesses may result in reduced levels of revenue, earnings, or operating efficiency than might have been achieved if we had not acquired such businesses.
In addition, any future acquisitions could result in the incurrence of additional debt and related interest expense, contingent liabilities, and amortization expenses related to intangible assets, which could have a material adverse effect on our financial condition, operating results and cash flow.
Our growth strategy may not be successful.
The future growth of our business and our future financial performance will depend on, among other things, our ability to increase our revenue base through a combination of internal growth and strategic ventures, including acquisitions. Future revenue growth cannot be assured, as it is subject to various risk factors, including:
our ability to achieve anticipated operational benefits, including leveraging referral sources;
the effects of competition;
pending initiatives concerning the levels of Medicare, Medicaid and private health insurance reimbursement and uncertainty concerning reimbursements in the future;
our ability to generate new and retain existing contracts with major payer sources;
our ability to attract and retain qualified personnel, especially in a business environment experiencing a shortage of clinical professionals;
our ability to identify, negotiate and consummate desirable acquisition opportunities on reasonable terms;
our ability to integrate effectively and retain the businesses acquired by us through acquisitions we have made or may make; and
the requirement for obtaining Medicare licenses and certificates of need to operate in certain jurisdictions.

11


An element of our growth strategy is expansion of our business by developing new hospice programs in new markets and growth in our existing markets. This aspect of our growth strategy may not be successful, which could adversely impact our growth and profitability. We cannot assure you that we will be able to:
identify markets that meet our selection criteria for new hospice programs;
hire and retain a qualified management team to operate each of our new hospice programs;
manage a large and geographically diverse group of hospice programs;
become Medicare and Medicaid certified in new markets;
generate sufficient hospice admissions in new markets to operate profitably in these new markets; or
compete effectively with existing programs in new markets.
It is likely that a number of acquisition opportunities may involve hospices operated by not-for-profit entities. In recent years, several states have increased review and oversight of transactions involving the sale of healthcare facilities and businesses by not-for-profit entities. Although the level of review varies from state to state, the current trend is to provide for increased governmental review, and in some cases approval, of transactions in which a not-for-profit entity sells a healthcare facility or business. This increased scrutiny may increase the difficulty in completing, or prevent the completion of, acquisitions in some states in the future.
If we are unable to maintain relationships with existing patient referral sources or to establish new referral sources, our growth and profitability could be adversely affected.
Our success is heavily dependent on referrals from physicians, nursing homes, assisted living facilities, adult care centers, hospitals, managed care companies, insurance companies and other patient referral sources in the communities where our home health and hospice locations serve, as well as on our ability to maintain good relations with these referral sources. Our referral sources are not contractually obligated to refer home health or hospice patients to us and may refer their patients to other home health or hospice care providers, or not at all. Our growth and profitability depend significantly on our ability to provide good patient and family care, to establish and maintain close working relationships with these patient referral sources and to increase awareness and acceptance of home health and hospice care by our referral sources and their patients. We cannot assure you that we will be able to maintain our existing referral source relationships or that we will be able to develop and maintain new relationships in existing or new markets. Our loss of existing relationships or our failure to develop new relationships could adversely affect our ability to expand our operations and operate profitably. Moreover, we cannot assure you that awareness or acceptance of home health and hospice care will increase.
Competition among home healthcare and hospice companies is intense.
The home health and hospice services industry is highly competitive. We compete with a variety of other companies in providing home health services and hospice services, some of which may have greater financial and other resources and may be more established in their respective communities. Competing companies may offer newer or different services from those offered by us and may thereby attract customers who are presently receiving our home health or hospice services.
In many areas in which our home health and hospice programs are located, we compete with a large number of organizations, including:
community-based home health and hospice providers;
national and regional companies;
hospital-based home health agencies, hospice and palliative care programs; and
nursing homes.
Some of our current and potential competitors have or may obtain significantly greater marketing and financial resources than we have or may obtain. Relatively few barriers to entry exist in our local markets. Accordingly, other companies, including hospitals and other healthcare organizations that are not currently providing home health and hospice care, may expand their services to include home health services, hospice care or similar services. We may encounter increased competition in the future that could negatively impact patient referrals to us, limit our ability to maintain or increase our market position and adversely affect our profitability.
Many states have certificate of need laws or other regulatory provisions that may adversely impact our ability to expand into new markets and thereby limit our ability to grow and to increase our net patient service revenue.
Many states have enacted certificate of need laws that require prior state approval to open new healthcare facilities or expand services at existing facilities. Those laws require some form of state agency review or approval before a hospice may

12


add new services or undertake significant capital expenditures. New York has additional barriers to entry. New York places restrictions on the corporate ownership of hospices. Accordingly, our ability to operate in New York is restricted. These laws could adversely affect our ability to expand into new markets and to expand our services and facilities in existing markets.
Further consolidation of managed care organizations and other third-party payers may adversely affect our profits.
Managed care organizations and other third-party payers have continued to consolidate in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a smaller number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. To the extent that such organizations terminate us as a preferred provider and/or engage our competitors as preferred or exclusive providers, our business could be adversely affected. In addition, private payers, including managed care payers, could seek to negotiate additional discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk through prepaid capitation arrangements, thereby potentially reducing our profitability.
The cost of healthcare is funded substantially by government and private insurance programs. If this funding is reduced or becomes limited or unavailable to our customers, our business may be adversely impacted.
Third-party payers include Medicare, Medicaid and private health insurance providers. Third-party payers are increasingly challenging prices charged for healthcare services. We cannot assure you that our services will be considered cost-effective by third-party payers, that reimbursement will be available or that payer reimbursement policies will not have a material adverse effect on our ability to sell our services on a profitable basis, if at all. We cannot control reimbursement rates, including Medicare market basket or other rate adjustments.
On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act (“Affordable Care Act”) and, on March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010 (collectively the “Health Care Reform Act”). The Health Care Reform Act mandates important changes to reimbursement for home health and hospice, including reductions in reimbursement levels. See “Risks Related to Healthcare Regulation” beginning on page 15.
On November 2, 2012, CMS issued a final rule to update and revise Medicare home health payments for calendar year 2013. This is comprised of a net market basket update of 1.30 percent, which includes the 1 percent reduction mandated by the Affordable Care Act, offset by a case mix creep adjustment of 1.32 percent. The net effect of these changes decreases the base rate for an episode of service by 0.02 percent, subject to further impact from wage index adjustments. In addition, on March 1, 2013, the automatic reductions in Federal spending, known as "sequestration", were put in place which mandates an additional 2 percent reduction in Medicare home health payments, beginning April 1, 2013. There can be no assurance these changes will not adversely affect us.
Possible changes in the case-mix of patients, as well as payer mix and payment methodologies, may have a material adverse effect on our profitability.
The sources and amounts of our patient revenues will be determined by a number of factors, including the mix of patients and the rates of reimbursement among payers. Changes in the case-mix of the patients as well as payer mix among private pay, Medicare and Medicaid may significantly affect our profitability. In particular, any significant increase in our Medicaid population or decrease in Medicaid payments could have a material adverse effect on our financial position, results of operations and cash flow, especially if states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates or service levels.
The healthcare industry continues to experience shortages in qualified home health service employees and management personnel.
We compete with other healthcare providers for our employees, both clinical associates and management personnel. As the demand for home health services and hospice services continues to exceed the supply of available and qualified staff, we and our competitors have been forced to offer more attractive wage and benefit packages to these professionals. Furthermore, the competitive arena for this shrinking labor market has created turnover as many seek to take advantage of the supply of available positions, each offering new and more attractive wage and benefit packages. In addition to the wage pressures inherent in this environment, the cost of training new employees amid the turnover rates may cause added pressure on our operating margins.

13


An economic downturn, state budget pressures, sustained unemployment and continued deficit spending by the federal government may result in a reduction in reimbursement and covered services.
An economic downturn can have a detrimental effect on our revenues. Historically, state budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we can expect continuing cost containment pressures on Medicaid outlays for our services in the states in which we operate. In addition, an economic downturn, coupled with sustained unemployment, may also impact the number of enrollees in managed care programs as well as the profitability of managed care companies, which could result in reduced reimbursement rates.
The existing federal deficit, as well as deficit spending by the government as the result of adverse developments in the economy or other reasons, can lead to continuing pressure to reduce government expenditures for other purposes, including government-funded programs in which we participate, such as Medicare and Medicaid. Such actions in turn may adversely affect our results of operations.
A prolonged disruption of the capital and credit markets may adversely affect our future access to capital and our cost of capital.
Volatility and disruption of the capital and credit markets in the United States can adversely affect access to capital and increase the cost of capital. We have used the capital and credit markets for liquidity and to execute our business strategies, which include increasing our revenue base through a combination of internal growth and strategic ventures, including acquisitions. We believe that we have adequate capital and liquidity to conduct any foreseeable initiatives that may develop over the near term; however, should current economic and market conditions deteriorate, our future cost of debt or equity capital and future access to capital markets may be adversely affected.
If an impairment of goodwill or intangible assets were to occur, our earnings would be negatively impacted.
Goodwill and intangible assets represent a significant portion of our assets as a result of acquisitions. Goodwill and intangible assets, net amounted to $656.4 million and $193.6 million, respectively, at December 31, 2012. We have assigned to our reportable business segments the appropriate amounts of goodwill and intangible assets based upon allocations of the purchase prices of individual acquisition transactions. As described in the notes to our financial statements, these assigned values are reviewed on an annual basis or at the time events or circumstances indicate that the carrying amount of an asset may not be recoverable.
To determine the fair value of the Company's reporting units, the Company uses a present value (discounted cash flow) technique corroborated by market multiples when available, a reconciliation to market capitalization or other valuation methodologies and reasonableness tests, as appropriate. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. The future occurrence of a potential indicator of impairment, such as, but not limited to, a significant adverse change in legal factors or business climate, reductions of projected patient census, an adverse action or assessment by a regulator, as well as other unforeseen factors, would require an interim assessment for some or all of the reporting units.
During 2012, the Company initiated an effort to re-brand all of its branch operations under the single Gentiva name. In connection with this re-branding effort, the Company recorded a $19.1 million non-cash write-off of remaining trade name balances for the year 2012. Should business conditions or other factors deteriorate and negatively impact the estimated realizable value of future cash flows of our business segments, we could be required to further write off a substantial portion of our assets. Depending upon the magnitude of the write-off, our results of operations could be negatively affected.
If we must write off a significant amount of long-lived assets, our earnings will be negatively impacted.
We have long-lived assets consisting of fixed assets, which include software development costs related to various information technology systems. The net carrying value of fixed assets amounted to $41.4 million at December 31, 2012, which included deferred software development costs of $2.0 million primarily related to replacement of the Company’s financial, human resources and management information systems. We review these amounts at the time events or circumstances indicate that the carrying amount of an asset may not be recoverable. If a future determination that a significant impairment in value of our long-lived assets has occurred, such determination could require us to write off a substantial portion of our assets. Depending upon the magnitude of the write-off, our financial results could be negatively affected.

14


There are risks of business disruption and cost overruns associated with new business systems and technology initiatives.
We implemented new financial, payroll and human resources systems during 2011. Implementation and future development costs in excess of expectations or the failure of new systems and other technology initiatives to operate in accordance with expectations could have a material adverse impact on our financial results and operations.
We have risks related to obligations under our insurance programs.
We are obligated for certain costs under various insurance programs, including employee health and welfare, workers’ compensation, automobile and professional liability. We may be subject to workers’ compensation claims and lawsuits alleging negligence or other similar legal claims. We maintain various insurance programs to cover these risks with insurance policies subject to substantial deductibles and retention amounts. We also may be subject to exposure relating to employment law and other related matters for which we do not maintain insurance coverage. We believe that our present insurance coverage and reserves are sufficient to cover currently estimated exposures; however, should we experience a significant increase in losses resulting from workers’ compensation, professional liability or employee health and welfare claims, the resulting increase in provisions and/or required reserves could negatively affect our profitability.
An adverse ruling against us in certain litigation could have an adverse effect on our financial condition and results of operations.
We are involved in litigation incidental to the conduct of our business, including collective and class action lawsuits alleging violations by us of the Federal Fair Labor Standards Act and certain state wage and hour laws and a putative shareholder class action lawsuit alleging violations by us of the Securities Act of 1933 and Securities Exchange Act of 1934 and may be subject to additional lawsuits in the future. The damages claimed against us in such litigation are substantial. A more detailed description of these lawsuits and others is contained in Item 3, Legal Proceedings.
We cannot assure you that we will prevail in the pending cases. In addition to the possibility of an adverse outcome, such litigation is costly to manage, investigate and defend, and the related defense costs, diversion of management’s time and related publicity may adversely affect the conduct of our business and the results of our operations.
We may experience disruption to our business and operations from the effects of natural disasters or terrorist acts.
The occurrence of natural disasters, terrorist acts or “mass illnesses” such as the pandemic flu, and the erosion to our business caused by such an occurrence, may adversely impact our profitability. In the affected areas, our offices may be forced to close for limited or extended periods of time, and we may face the reduced availability of clinical associates.
Our ability to conduct operations depends on the security and stability of our technology infrastructure. A failure in the security of our technology infrastructure or a significant disruption in service within our operations could materially adversely affect our business, the results of our operations and our financial position.
We rely on information technology systems to process, transmit and store electronic information in our operations. We have designed our information technology systems to protect against failures in security and service disruption. Despite the precautions we take, we may be subject to computer viruses, worms or other malicious codes, unauthorized access attempts, and cyber- or phishing-attacks, which, if successful, could compromise our confidential information, including health information and identifiable personal information, disrupt our operations and subject us to additional liability, including governmental fines and penalties. Additionally, if our information technology systems fail to function properly or become unavailable for use, our operations could be materially affected. Any such security breach or service disruption in turn could materially adversely impact our business and financial results and harm our reputation.
Risks Related to Healthcare Regulation
Federal or state healthcare reform laws could adversely affect our operating results and financial condition.
In March 2010, President Obama signed into law the Health Care Reform Act. This culmination of a year-long legislative process will have a significant impact on the health care delivery system. Much of that impact, specifically as related to home health services and hospice services, is unknown.
The Health Care Reform Act, among other things, sets out a plan for a type of universal healthcare coverage. A number of states, including California, Colorado, Connecticut, Massachusetts, New York and Pennsylvania, are also contemplating significant reform of their health insurance markets. The Health Care Reform Act, along with possible changes at the state level, will affect both public programs and privately-financed health insurance arrangements. Both the federal law and the state

15


proposals will increase the number of insured persons by expanding the eligibility levels for public programs and compelling individuals and employers to purchase health coverage. At the same time, these laws seek to reform the underwriting and marketing practices of health plans. These laws could further increase pricing pressure on existing commercial payers. As a result, commercial payers may likely seek to lower their rates of reimbursement for the services we provide.
The Health Care Reform Act mandates changes to home health and hospice benefits under Medicare. For home health, the Health Care Reform Act mandates creation of a value-based purchasing program, development of quality measures, a decrease in home health reimbursement beginning with federal year 2014 that will be phased-in over a four-year period, and a reduction in the outlier cap. In addition, the Health Care Reform Act requires the Secretary of Health and Human Services to test different models for delivery of care, some of which would involve home health services. It also requires the Secretary to establish a national pilot program for integrated care for patients with certain conditions, bundling payment for acute hospital care, physician services, outpatient hospital services (including emergency department services), and post-acute care services, which would include home health. The Health Care Reform Act further directs the Secretary to rebase payments for home health, which will result in a decrease in home health reimbursement beginning in 2014 that will be phased-in over a four-year period. The Secretary is also required to conduct a study to evaluate cost and quality of care among efficient home health agencies regarding access to care and treating Medicare beneficiaries with varying severity levels of illness, and provide a report to Congress no later than March 1, 2014. Beginning October 1, 2012, the annual market basket rate increase for hospice providers is reduced by a formula that could cause payment rates to be lower than in the prior year.
Given the relatively recent enactment of the Health Care Reform Act, and taking into account proposed state reforms, we cannot predict how our business will be affected by the full implementation of these and future actions. The Health Care Reform Act, in connection with state initiatives, may increase our costs, decrease our revenues, expose us to expanded liability or require us to revise the ways in which we conduct our business, any of which could adversely affect our operating results and financial condition.
Legislative and regulatory actions resulting in changes in reimbursement rates or methods of payment from Medicare and Medicaid, or implementation of other measures to reduce reimbursement for our services, may have a material adverse effect on our revenues and operating margins. Reimbursement to us for our hospice services is subject to Medicare cap amounts, which are calculated by Medicare.
In 2012, 90 percent of Gentiva’s total net revenues were generated from Medicare, Medicaid and local government programs. The healthcare industry is experiencing a trend toward cost containment, as the government seeks to stabilize or reduce reimbursement and utilization rates.
In addition, the timing of payments made under these programs is subject to regulatory action and governmental budgetary constraints. For certain Medicaid programs, the time period between submission of claims and payment has increased. Further, within the statutory framework of the Medicare and Medicaid programs, there are a substantial number of areas subject to administrative rulings and interpretations that may further affect payments made under those programs. Additionally, the federal and state governments may in the future reduce the funds available under those programs or require more stringent utilization and quality reviews of providers. These pressures may be increased as a result of the Health Care Reform Act. Moreover, we cannot assure you that adjustments from regulatory actions or Medicare or Medicaid audits, including the payment of fines or penalties to the federal or state governments, will not have a material adverse effect on our liquidity or profitability.
Overall payments made by Medicare to us for hospice services are subject to cap amounts calculated by Medicare. Total Medicare payments to us for hospice services are compared to the cap amount for the hospice cap period, which runs from November 1 of one year through October 31 of the next year. CMS usually announces the cap amount in the month of July or August in the cap period and not at the beginning of the cap period. We must estimate the cap amount for the cap period before CMS announces the cap amount and are at risk if our estimate exceeds the later announced cap amount. CMS can also make retroactive adjustments to cap amounts announced for prior cap periods. Payments to us in excess of the cap amount must be returned by us to Medicare. In July 2012, CMS announced that the Medicare cap would be $25,377 per beneficiary for the 2012 cap year, which is November 1, 2011 through October 31, 2012. A second hospice cap amount limits the number of days of inpatient care to not more than 20 percent of total patient care days within the cap period.
As part of its review of the Medicare hospice benefit, MedPAC recommended to Congress in its “Report to Congress: Medicare Payment Policy—March 2009” (“2009 MedPAC Report”) that Congress direct the Secretary of Health and Human Services to change the Medicare payment system for hospice to:
have relatively higher payments per day at the beginning of a patient’s hospice care and relatively lower payments per day as the length of the duration of the hospice patient’s stay increases; and

16


include relatively higher payments for the costs associated with patient death at the end of the hospice patient’s stay.
In January 2013, MedPAC reaffirmed the foregoing recommendations and recommended that the hospice rate should not be updated for fiscal 2014.
In addition, the Health Care Reform Act includes several provisions that would adversely impact hospice providers, including a provision to reduce the annual market basket update for hospice providers by a productivity adjustment. We cannot predict at this time whether the recommendations included in the 2009 MedPAC Report will be enacted, whether any additional healthcare reform initiatives will be implemented, or whether the Health Care Reform Act or other changes in the administration of governmental healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system will adversely affect our revenues. Further, due to budgetary concerns, several states have considered or are considering reducing or eliminating the Medicaid hospice benefit. Reductions or changes in Medicare or Medicaid funding could significantly reduce our net patient service revenue and our profitability.
On November 2, 2012, CMS issued a final rule to update and revise Medicare home health payments for calendar year 2013. This is comprised of a net market basket update of 1.30 percent, which includes the 1 percent reduction mandated by the Affordable Care Act, offset by a case mix creep adjustment of 1.32 percent in 2013. The net effect of these changes decreases the base rate for an episode of service by 0.02 percent to $2,138, subject to further impact from wage index adjustments. Reductions in amounts paid by government programs for our services or changes in methods or regulations governing payments could cause our net patient service revenue and profits to materially decline.
Approximately 20 percent of our hospice revenues are derived from patients who reside in nursing homes. Changes in the laws and regulations regarding payments for hospice services and “room and board” provided to our hospice patients residing in nursing homes could reduce our net patient service revenue and profitability.
For hospice patients receiving nursing home care under certain state Medicaid programs who elect hospice care under Medicare or Medicaid, the state must pay us, in addition to the applicable Medicare or Medicaid hospice per diem rate, an amount equal to at least 95 percent of the Medicaid per diem nursing home rate for “room and board” furnished to the patient by the nursing home. We contract with various nursing homes for the nursing homes’ provision of certain “room and board” services that the nursing homes would otherwise provide Medicaid nursing home patients. We bill and collect from the applicable state Medicaid program an amount equal to at least 95 percent of the amount that would otherwise have been paid directly to the nursing home under the state’s Medicaid plan. Under our standard nursing home contracts, we pay the nursing home for these “room and board” services at 100 percent of the Medicaid per diem nursing home rate.
Government studies conducted in the last several years have suggested that the reimbursement levels for hospice patients living in nursing homes may be excessive. In particular, the federal government has expressed concern that hospice programs may provide fewer services to patients residing in nursing homes than to patients living in other settings due to the presence of the nursing home’s own staff to address problems that might otherwise be handled by hospice personnel. Because hospice programs are paid a fixed per diem amount, regardless of the volume or duration of services provided, the government is concerned that hospice programs may be increasing their profitability by shifting the cost of certain patient care services to nursing homes.
The reduction or elimination of Medicare payments for hospice patients residing in nursing homes would significantly reduce our net patient service revenue and profitability. In addition, changes in the way nursing homes are reimbursed for “room and board” services provided to hospice patients residing in nursing homes could affect our ability to obtain referrals from nursing homes. A reduction in referrals from nursing homes would adversely affect our net patient service revenue and profitability.
We conduct business in a heavily regulated industry, and changes in regulations and violations of regulations may result in increased costs or sanctions.
Our business is subject to extensive federal, state and, in some cases, local regulation. Compliance with these regulatory requirements, as interpreted and amended from time to time, can increase operating costs or reduce revenue and thereby adversely affect the financial viability of our business. Because these laws are amended from time to time and are subject to interpretation, we cannot predict when and to what extent liability may arise. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies, including fines, the revocation of licenses or decertification. Unanticipated increases in operating costs or reductions in revenue could adversely affect our liquidity.

17


If we fail to comply with the terms of our Corporate Integrity Agreement, it could subject us to substantial monetary penalties or suspension or termination from participation in the Medicare and Medicaid programs.
We entered into a five-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the United States Department of Health and Human Services ("OIG"), which became effective on February 15, 2012, concurrent with the execution of a settlement agreement with the United States, acting through the United States Department of Justice and on behalf of the OIG. The CIA imposes certain auditing, self-reporting and training requirements with which we must comply. If we fail to comply with the terms of its CIA, it could subject us to substantial monetary penalties and/or suspension or termination from participation in the Medicare and Medicaid programs. The imposition of monetary penalties would adversely affect our profitability. A suspension or termination of participation in the Medicare and Medicaid programs would have a material adverse affect on our profitability and financial condition.
If any of our home health or hospice programs fail to comply with the Medicare conditions of participation, that program could be terminated from the Medicare program, thereby adversely affecting our net patient service revenue and profitability.
Each of our home health or hospice programs must comply with the extensive conditions of participation of the Medicare benefit. If any of our home health or hospice programs fails to meet any of the Medicare conditions of participation, that program may receive a notice of deficiency from the applicable state surveyor. If that home health or hospice program then fails to institute a plan of correction and correct the deficiency within the correction period provided by the state surveyor, that program could be terminated from receiving Medicare payments. For example, under the Medicare hospice program, each of our hospice programs must demonstrate that volunteers provide administrative and direct patient care services in an amount equal to at least 5 percent of the total patient care hours provided by its employees and contract staff at the hospice program. If we are unable to attract a sufficient number of volunteers at one of our hospice programs to meet this requirement, that program could be terminated from the Medicare benefit if the program fails to address the deficiency within the applicable correction period. Any termination of one or more of our home health or hospice programs from the Medicare program for failure to satisfy the conditions of participation could adversely affect our patient service revenue and profitability and financial condition. We believe that we are in compliance with the conditions of participation; however, we cannot predict how surveyors will interpret all aspects of the Medicare conditions of participation.
We are subject to certain ongoing investigations, and we are subject to periodic audits and requests for information by the Medicare and Medicaid programs or government agencies, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements.
The operations of our home health business and hospice business are subject to federal and state laws prohibiting fraud by healthcare providers, including laws containing criminal provisions, which prohibit filing false claims or making false statements in order to receive payment or obtain certification under Medicare and Medicaid programs, or failing to refund overpayments or improper payments. Violation of these criminal provisions is a felony punishable by imprisonment and/or fines. We may also be subject to fines and treble damage claims if we violate the civil provisions that prohibit knowingly filing a false claim or knowingly using false statements to obtain payment. State and federal governments are devoting increased attention and resources to anti-fraud initiatives against healthcare providers. The Health Insurance Portability and Accountability Act of 1996, the Balanced Budget Act of 1997 and the Health Care Reform Act expanded the penalties for healthcare fraud, including broader provisions for the exclusion of providers from Medicare and Medicaid programs and other federal and state health care programs.
Additionally, the Health Care Reform Act requires providers, such as home health agencies and hospice providers, to notify the Secretary of Health and Human Services, fiscal intermediary, contractor or other appropriate person of any overpayment and the reason for the overpayment, and to return the overpayment, within the later of 60 days from the time the overpayment is identified or the due date of the provider’s cost report. Failure to comply may result in prosecution under the false claims act and exclusion from participation in Medicare, Medicaid and other federal and state health care programs.
CMS has contracted with various Third Party Administrators (“TPAs”) including Recovery Audit Contractors (“RACs”), Zone Program Integrity Contractors (“ZPICs”) and others to perform post-payment reviews of health care providers. For example, in January 2010, CMS announced that it has approved two issues for the RACs to begin reviewing with respect to hospice providers. These initial hospice reviews focus on durable medical equipment services and other Medicare Part A and B services provided to hospice patients that are related to a patient’s terminal prognosis and the financial obligation of the hospice provider to determine whether the hospice provider arranged for and paid for the services as required. Various states have also begun to engage TPAs to conduct post-payment reviews of Medicaid claims data. We expect in the future that CMS and the states will likely expand the scope of the reviews conducted by the TPAs. We cannot predict whether reviews by TPAs of our

18


home health and hospice programs’ reimbursement claims will result in material recoupments, which could have a material adverse effect on our financial condition and results of operations.
For a description of certain governmental investigations to which Odyssey is currently subject, please see Item 3, Legal Proceedings.
Although we believe we have established policies and procedures that are sufficient to help ensure that we will operate in substantial compliance with anti-fraud and abuse requirements, in the future, different interpretations or enforcement of laws, rules and regulations governing the healthcare industry could subject our current business practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services and capital expenditure programs, increase our operating expenses and distract our management. If we fail to comply with these extensive laws and government regulations, we could become ineligible to receive government program payments, suffer civil and criminal penalties or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under these laws or regulations.
We are also subject to federal and state laws that govern financial and other arrangements among healthcare providers.
Federal law prohibits the knowing and willful offer, payment, solicitation or receipt, directly or indirectly, of remuneration to induce, arrange for, or in return for, the referral of federal health care program beneficiaries for items or services paid for by a federal health care program. State laws also prohibit such payments for Medicaid beneficiaries and some states have expanded anti-kickback statutes. The federal law known as the “Stark Law” prohibits certain financial arrangements with physicians. State laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to encourage the referral of patients to a particular provider for medical products and services. Furthermore, some states have enacted laws similar to the Stark Law, which restrict certain business relationships between physicians and other providers of healthcare services. Many states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs, civil and criminal penalties, and exclusion from participation in Medicare, Medicaid and other federal and state health care programs.
We face additional federal requirements (and their additional costs) that mandate major changes in the transmission and retention of health information and in notification requirements for any health information security breaches.
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) was enacted to ensure that employees can retain and at times transfer their health insurance when they change jobs and to simplify healthcare administrative processes. The enactment of HIPAA also expanded protection of the privacy and security of personal medical data and required the adoption of standards for the exchange of electronic health information. Among the standards that the Secretary of the Department of Health and Human Services (“HHS”) has adopted pursuant to HIPAA are standards for electronic transactions and code sets, unique identifiers for providers, employers, health plans and individuals, security and electronic signatures, privacy and enforcement. Although HIPAA was intended to ultimately reduce administrative expenses and burdens faced within the healthcare industry, we believe that implementation of this law has resulted in additional costs. Failure to comply with HIPAA could result in fines and penalties that could have a material adverse effect on us.
The Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), enacted as part of the American Recovery and Reinvestment Act of 2009, effective February 22, 2010, sets forth health information security breach notification requirements and increased penalties for violation of HIPAA. The HITECH Act requires patient notification for all breaches, media notification of breaches of over 500 patients and at least annual reporting of all breaches to the Secretary of HHS. Penalties under the HITECH Act range from $100 per violation and an annual maximum of $25,000 for the first tier of sanctions to a fourth-tier sanction minimum of $50,000 per violation and an annual maximum of $1.5 million for the identical violation. Failure to comply with HIPAA could result in fines and penalties that could have a material adverse effect on us.
Risks Related to Our Common Stock
The market price of our common stock may be volatile and experience substantial fluctuations, and an investor could lose all or part of his or her investment.
Our common stock is traded on The NASDAQ Global Select Market, and the market price for our common stock has been volatile. For example, during 2012 the market price for a share of our common stock ranged from a low of $5.13 to a high of $12.85. During 2011, the market price for a share of our common stock ranged from a low of $2.81 to a high of $29.21. The

19


market price of our common stock may continue to fluctuate substantially based on a number of factors, including, but not limited to:
our operating and financial performance;
changes, or proposed changes, in government reimbursement rates and regulations;
stock market conditions generally and specifically as they relate to the home health and hospice services industry;
developments in litigation and government investigations;
changes in financial estimates and recommendations by securities analysts who follow our stock;
economic and political uncertainties in the marketplace generally; and
future issuances of common stock or other securities.
We do not expect to pay dividends on our common stock in the foreseeable future, and investors will be able to receive cash in respect of their shares of our common stock only upon the sale of the shares.
Except for a special cash dividend paid in 2002, we have never paid any cash dividends on our common stock, and we have no intention in the foreseeable future to pay any cash dividends on our common stock. Future payments of dividends, if any, and the amount of the dividends will be determined by our Board of Directors from time to time based on our results of operations, financial condition, cash requirements, future prospects and other factors our Board of Directors deems relevant. Additionally, our Credit Agreement and the indenture governing our Senior Notes contain restrictions on our ability to declare and pay dividends. See “—Risks Related to Our Business and Industry—Our debt agreements contain restrictions that will limit our flexibility in operating our business.” Therefore, an investor in our common stock would be able to obtain an economic benefit from purchasing our common stock only if the trading price of the shares increases after such purchase and the investor sells the shares at the increased price.
Provisions in our organizational documents, Delaware law and our debt agreements could delay or prevent a change in control of Gentiva, which could adversely affect the price of our common stock.
Provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws and anti-takeover provisions of the General Corporation Law of the State of Delaware could discourage, delay or prevent an unsolicited change in control in Gentiva, which could adversely affect the price of our common stock. These provisions may also have the effect of making it more difficult for third parties to replace our current management without the consent of the Board of Directors. Provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws that could delay or prevent an unsolicited change in control include:
the ability of our Board of Directors to issue up to 25,000,000 shares of preferred stock and to determine the terms, rights and preferences of the preferred stock without stockholder approval; and
the prohibition on the right of stockholders to call meetings or act by written consent and limitations on the right of stockholders to present proposals or make nominations at stockholder meetings.
Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15 percent or more of our outstanding common stock. In addition, our Credit Agreement and the indenture governing our Senior Notes contain various covenants that limit our ability, among other things, to consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets. See “—Risks Related to Our Business and Industry—Our debt agreements contain restrictions that will limit our flexibility in operating our business.”
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
The Company’s corporate headquarters is leased and is located at 3350 Riverwood Parkway, Suite 1400, Atlanta, Georgia 30339. The Company also has a major regional administrative office that is leased and is located in Overland Park, Kansas. The Company also maintains more than 500 leases for other offices and locations on various terms expiring on various dates. In addition, Gentiva owns property in Dothan, Alabama that is used in the Company’s hospice operations.
Item 3.
Legal Proceedings
The following matter was terminated during the fourth quarter of fiscal 2012:

20


On July 13, 2010, the Securities and Exchange Commission (“SEC”) informed the Company that the SEC had commenced an investigation relating to the Company’s participation in the Medicare Home Health Prospective Payment System ("HH PPS"), and, on July 16, 2010, the Company received a subpoena from the SEC requesting certain documents in connection with its investigation. The SEC subpoena, among other things, focused on issues related to the number of and reimbursement received for therapy visits before and after changes in the Medicare reimbursement system, relationships with physicians, compliance efforts including compliance with fraud and abuse laws, and certain documents previously sent to the Senate Finance Committee. On November 28, 2012, the Company was advised by the staff of the SEC that the SEC’s investigation related to the Company’s participation in HH PPS had been completed and that the staff did not intend to recommend any enforcement action by the SEC.
_____________________________
Litigation
In addition to the matters referenced in this Item 3, 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, financial condition, results of operations, liquidity or capital resources of the Company.
On May 10, 2010, a collective and class action complaint entitled Lisa Rindfleisch et al. v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of New York against the Company in which five former employees (“Plaintiffs”) alleged wage and hour law violations. The former employees claimed they were paid pursuant to “an unlawful hybrid” compensation plan that paid them on both a per visit and an hourly basis, thereby voiding their exempt status and entitling them to overtime pay. Plaintiffs alleged continuing violations of federal and state law and sought damages under the Fair Labor Standards Act (“FLSA”), as well as under the New York Labor Law and North Carolina Wage and Hour Act (“NCWHA”). On October 8, 2010, the Court granted the Company’s motion to transfer the venue of the lawsuit to the United States District Court for the Northern District of Georgia. On April 13, 2011, the Court granted Plaintiffs’ motion for conditional certification of the FLSA claims as a collective action. On May 26, 2011, the Court bifurcated the FLSA portion of the suit into a liability phase, in which discovery closed on January 15, 2013, and a potential damages phase, to be scheduled pending outcome of the liability phase. Following a motion for partial summary judgment by the Company regarding the New York state law claims, Plaintiffs agreed voluntarily to dismiss those claims in a filing on December 12, 2011. Plaintiffs filed a motion for certification of a North Carolina state law class for NCWHA claims on January 20, 2012. On August 29, 2012, the Court denied Plaintiffs' motion for certification of a North Carolina state law class. The Company filed a motion for partial summary judgment on Plaintiffs’ claims under the NCWHA on March 22, 2012, which the Court granted on January 16, 2013. Plaintiffs also filed a motion for partial summary judgment with regard to the Company’s liability for Plaintiffs’ FLSA claims on April 3, 2012 and continue to maintain class certification of allegedly similar employees and seek attorneys’ fees, back wages and liquidated damages going back three years under the FLSA. The parties’ deadline for filing dispositive motions related to the liability phase of the lawsuit was February 14, 2013.
Based on the information the Company has at this time in the Rindfleisch lawsuit, the Company is unable to assess the probable outcome or potential liability, if any, arising from this proceeding on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for this lawsuit at this time. The Company intends to defend itself vigorously in this lawsuit.
On June 11, 2010, a collective and class action complaint entitled Catherine Wilkie, individually and on behalf of all others similarly situated v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of California against the Company in which a former employee alleged wage and hour violations under the FLSA and California law. The complaint alleged that the Company paid some of its employees on both a per visit and hourly basis, thereby voiding their exempt status and entitling them to overtime pay. The complaint further alleged that California employees were subject to violations of state laws requiring meal and rest breaks, overtime pay, accurate wage statements and timely payment of wages. The plaintiff sought class certification, attorneys’ fees, back wages, penalties and damages going back three years on the FLSA claim and four years on the state wage and hour claims. The parties held mediation discussions on August 3, 2011 and March 7, 2012. The parties have finalized the terms of a monetary settlement, and the Company has paid $5 million in escrow to settle all claims in the lawsuit, including the plaintiff’s attorney’s fees and costs. The court granted preliminary approval of the settlement on October 5, 2012, and a hearing on the motion for final court approval of the settlement is scheduled for March 25, 2013.
On December 29, 2011, Odyssey HealthCare, Inc. was served with a complaint captioned United States of America and the State of Illinois ex rel. Laurie Geschrey and Laurie Janus v. Generations Healthcare, LLC, Odyssey HealthCare, Inc.,

21


Narayan Ponakala and Catherine Ponakala , which was filed on April 19, 2010 as a qui tam action in the United States District Court for the Northern District of Illinois, Eastern Division, Case No. 10 C 2413, under the provisions of the Federal False Claims Act, the Illinois Whistleblower Reward and Protection Act and the Illinois Whistleblower Act. The plaintiffs, two former employees of Generations Healthcare, LLC, a hospice company whose assets were acquired by Odyssey on December 31, 2009, are the relators and allege that defendants committed fraud against the United States and the State of Illinois by, among other things, recruiting and certifying patients as being eligible for hospice care when they were known not to be eligible and falsifying patients’ medical records in support of the claims for reimbursement. Relators further allege that Odyssey was aware of Generations Healthcare’s alleged fraudulent business practices. Both the United States and the State of Illinois declined to intervene in the action, and the complaint was unsealed on December 1, 2011. Relators seek statutory damages, which are three times the amount of any actual damages suffered by the United States and the State of Illinois, the maximum statutory civil penalty due under the statutes plus all costs and attorneys fees. Additionally, relators seek back pay plus interest and other damages because of defendants’ alleged retaliation against relators.
Odyssey filed a motion to dismiss the complaint against it on March 23, 2012. On August 14, 2012, the Court denied that motion as it related to Odyssey. Plaintiffs filed an amended complaint, which added a new retaliation claim. On October 3, 2012, defendants moved to dismiss the new retaliation claim and answered the remaining claims, but the Court has not yet ruled on that motion. Written discovery between the parties has begun. Odyssey is also pursuing indemnification from Generations Healthcare and its owners, who are defendants in this action. Given the preliminary stage of this action, the Company is unable to assess the probable outcome or potential liability, if any, arising from this action on the business, financial condition, results of operations, liquidity or capital resources of the Company or Odyssey. Odyssey intends to defend itself vigorously in the action.
Federal Securities Class Action Litigation
Between November 2, 2010 and October 25, 2011, five shareholder class actions were filed against Gentiva and certain of its current and former officers and directors in the United States District Court for the Eastern District of New York. Each of these actions asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with the Company’s participation in the Medicare Home Health Prospective Payment System (“HH PPS”). Following consolidation of the actions, and the appointment of Los Angeles City Employees’ Retirement System as lead plaintiff and Kaplan Fox & Kilsheimer LLP as lead counsel, on April 16, 2012, a consolidated shareholder class action complaint, captioned In re Gentiva Securities Litigation , Civil Action No. 10-CV-5064, was filed in the United States District Court for the Eastern District of New York. The complaint, which names Gentiva and certain current and former officers and directors as defendants, asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Sections 11 and 15 of the Securities Act of 1933, in connection with the Company’s participation in the HH PPS. The complaint alleges, among other things, that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purposes of triggering higher reimbursement rates under the HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock during the period between July 31, 2008 and October 4, 2011. On June 15, 2012, defendants filed a motion to dismiss the complaint. That motion is fully briefed and is now pending before the court.
Given the preliminary stage of the action, the Company is unable to assess the probable outcome or potential liability, if any, arising from the action on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for the action at this time. The defendants intend to defend themselves vigorously in the action.
Shareholder Derivative Litigation
On October 7 and October 13, 2011, two actions were filed against certain of Gentiva’s current and former directors and officers in the United States District Court for the Northern District of Georgia, alleging, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The actions also asserted a claim under Section 14(a) of the Securities Exchange Act of 1934. The actions were consolidated and, on March 5, 2012, plaintiffs filed a consolidated complaint (the “Georgia Federal Court Action”). The Georgia Federal Court Action, which named certain of Gentiva’s current and former directors and officers as defendants, alleged, among other things, that Gentiva’s board of directors had actual or constructive knowledge that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock. The complaint further alleged that the Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders was materially false and misleading. On April 16, 2012, defendants filed a motion to dismiss the Georgia Federal Court Action, and, on February 11, 2013, the court granted defendants' motion to dismiss with prejudice.

22


On January 4, 2011 and October 31, 2011, two actions were filed against certain of Gentiva’s current and former directors in Superior Court of DeKalb County in the State of Georgia, alleging, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The actions were consolidated and, on February 9, 2012, plaintiffs filed a consolidated complaint (the “Georgia State Court Action”). The Georgia State Court Action, which named certain of Gentiva’s current and former directors as defendants, alleged, among other things, that Gentiva’s board of directors had actual or constructive knowledge that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock. On March 26, 2012, defendants filed a motion to dismiss the Georgia State Court Action and further requested a transfer to the Superior Court of Cobb County. On October 12, 2012, the Cobb County court granted defendants' motion to dismiss the consolidated complaint with prejudice. On November 30, 2012, one of the plaintiffs in the Georgia State Court Action made a demand on Gentiva's board of directors to take action to remedy the breaches of fiduciary duty alleged in the Georgia State Court Action.
Government Matters
Investigations Involving Odyssey
On February 14, 2008, Odyssey received a letter from the Medicaid Fraud Control Unit of the Texas Attorney General’s office notifying Odyssey that the Texas Attorney General was conducting an investigation concerning Medicaid hospice services provided by Odyssey, including its practices with respect to patient admission and retention, and requesting medical records of approximately 50 patients served by its programs in the State of Texas. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of this investigation, the Texas Attorney General’s views of the issues being investigated or any actions that the Texas Attorney General may take.
On May 5, 2008, Odyssey received a letter from the U.S. Department of Justice (“DOJ”) notifying Odyssey that the DOJ was conducting an investigation of VistaCare, Inc. (“VistaCare”) and requesting that Odyssey provide certain information and documents related to the DOJ’s investigation of claims submitted by VistaCare to Medicare, Medicaid and the U.S. government health insurance plan for active military members, their families and retirees, formerly the Civilian Health and Medical Program of the Uniformed Services (“TRICARE”), from January 1, 2003 through March 6, 2008, the date Odyssey completed the acquisition of VistaCare. Odyssey has been informed by the DOJ and the Medicaid Fraud Control Unit of the Texas Attorney General’s Office that they are reviewing allegations that VistaCare may have billed the federal Medicare, Medicaid and TRICARE programs for hospice services that were not reasonably or medically necessary or performed as claimed. The basis of the investigation is a qui tam lawsuit filed in the United States District Court for the Northern District of Texas by a former employee of VistaCare. The lawsuit alleges, among other things, that VistaCare submitted false claims to Medicare and Medicaid for hospice services that were not medically necessary and for hospice services that were referred in violation of the anti-kickback statute. The court unsealed the lawsuit on October 5, 2009 and Odyssey was served on January 28, 2010. In connection with the unsealing of the complaint, the DOJ filed a notice with the court declining to intervene in the qui tam action at such time. The Texas Attorney General also filed a notice of non-intervention with the court. These actions should not be viewed as a final assessment by the DOJ or the Texas Attorney General of the merits of this qui tam action. Odyssey continues to cooperate with the DOJ and the Texas Attorney General in their investigation. The relator has continued to pursue the qui tam lawsuit. Odyssey and VistaCare filed motions to dismiss the relator’s complaint on March 30, 2010 and April 2, 2012. The court issued orders on the motions to dismiss on March 9, 2011 and July 23, 2012. Consistent with the court’s orders, relator’s false claims act claims based on alleged medically unnecessary hospice services and for hospice services referred in violation of the anti-kickback statute are permitted to proceed to discovery. The case is currently set for trial on March 10, 2014. Odyssey and VistaCare deny the allegations made in this qui tam action and will vigorously defend against them. Based on the information available at this time, the Company cannot predict the outcome of the qui tam lawsuit, the governments’ continuing investigation, the DOJ’s or Texas Attorney General’s views of the issues being investigated, other than the DOJ’s and Texas Attorney General’s notice declining to intervene in the qui tam action, or any actions that the DOJ or Texas Attorney General may take.
On October 28, 2011, the Assistant United States Attorney for the Northern District of Texas notified Odyssey and the Company of the existence of a second qui tam lawsuit against VistaCare, doing business as VistaCare Hospice, Odyssey, and the Company, that had initially been filed on October 29, 2010, in the Northern District of Alabama, but transferred to the Northern District of Texas due to the similarity of allegations with the first qui tam lawsuit. A non-intervention order and unsealing of the second complaint was entered by the District Court for the Northern District of Texas on October 27, 2011. The Company believes this action should not be viewed as a final assessment by the DOJ of the merits of this qui tam action. On February 28, 2012, the court ordered a stay in this qui tam action until the court rules on the pending motion to dismiss in the first qui tam action. The court lifted the stay on July 23, 2012 following the court entry of an order ruling on the motion to dismiss in the first qui tam action. On October 24, 2012, all defendants moved to dismiss the complaint. In response to that motion, the relators amended their complaint. On December 3, 2012, all defendants moved to dismiss the relators’ amended complaint, and that motion remains pending before the court. At this time, there is no scheduling order in place or trial date in the case. The Company, Odyssey, and VistaCare deny the allegations made in the second qui tam action and will vigorously defend against them. Based on the limited

23


information available at this time, the Company cannot predict the outcome of this second qui tam lawsuit, the government’s continuing investigation, the DOJ’s views of the issues being investigated, other than the DOJ’s non-intervention in the qui tam action, or any actions the DOJ may take.
On January 5, 2009, Odyssey received a letter from the Georgia State Health Care Fraud Control Unit notifying Odyssey that the Georgia State Health Care Fraud Unit was conducting an investigation concerning Medicaid hospice services provided by VistaCare from 2003 through 2007 and requesting certain documents. Odyssey is cooperating with the Georgia State Health Care Fraud Control Unit and has complied with the document request. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of the investigation, the Georgia State Health Care Fraud Control Unit’s views of the issues being investigated or any actions that the Georgia State Health Care Fraud Control Unit may take.
On February 23, 2010, Odyssey received a subpoena from the Department of Health and Human Services, Office of Inspector General (“OIG”), requesting various documents and certain patient records of one of Odyssey’s hospice programs relating to services performed from January 1, 2006 through December 31, 2009. Odyssey is cooperating with the OIG and has completed its subpoena production. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of the investigation, the OIG’s views of the issues being investigated or any actions that the OIG may take.
The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made at this time with regard to the above investigations involving Odyssey. Based on the limited information that Odyssey has at this time regarding such investigations, the Company is unable to predict the impact, if any, that such investigations may have on Odyssey’s and the Company’s business, financial condition, results of operations, liquidity or capital resources.
_____________________________
Corporate Integrity Agreement
Odyssey HealthCare, Inc. (“Odyssey”), a wholly-owned subsidiary of the Company, entered into a five-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the United States Department of Health and Human Services (“OIG”), which became effective on February 15, 2012, concurrent with the execution of a settlement agreement with the United States, acting through the United States Department of Justice and on behalf of the OIG, that resolved the investigation regarding Odyssey’s provision of continuous care services prior to the Company’s acquisition of Odyssey in August 2010. Although the covered conduct related to services prior to the Company’s acquisition of Odyssey, the CIA, for operational and organizational consistency, relates to all of the Company’s hospice operations.
Under the CIA, Odyssey must maintain its compliance officer and its compliance committee, which must be chaired by the compliance officer and meet at least quarterly. Odyssey must also provide general and special training for covered persons, which include all employees of Odyssey and certain employees of the Company and members of the Company’s Board of Directors. Odyssey must engage an accounting, audit or consulting firm to perform verification and unallowable cost reviews. In addition, Odyssey’s eligibility review team must review the eligibility of Odyssey’s Medicare beneficiaries for the hospice services those beneficiaries received and prepare an eligibility review report. In the event that Odyssey changes locations, closes a business unit or location, purchases or establishes a new business unit or location, or sells any or all of its business units or locations, Odyssey must provide the OIG with at least 30 days’ notice. Odyssey must submit to the OIG annually a report with respect to the status of, and findings regarding, Odyssey’s compliance activities. If Odyssey fails to comply with the terms of the CIA, it will be subject to penalties.
Item 4.
Mine Safety Disclosures
Not applicable.
 


24


Executive Officers of Gentiva
The following table sets forth certain information regarding each of the Company’s executive officers as of March 11, 2013:
Name
 
Executive
Officer Since
 
Age
 
Position and Offices with the Company
Rodney D. Windley
 
2013
 
65
 
Executive Chairman
Tony Strange
 
2006
 
50
 
Chief Executive Officer and President and Director
Eric R. Slusser
 
2010
 
52
 
Executive Vice President, Chief Financial Officer and Treasurer
John N. Camperlengo
 
2008
 
49
 
Senior Vice President, General Counsel and Secretary
David A. Causby
 
2011
 
41
 
Senior Vice President and President, Home Health Division
Jeff Shaner
 
2011
 
40
 
Senior Vice President and President, Hospice Division
Charlotte A. Weaver
 
2008
 
65
 
Senior Vice President and Chief Clinical Officer
Rodney D. Windley
Mr. Windley has served as executive chairman of the Board of Directors of the Company since February 2013. He has served as a director of the Company since February 2006, when he was elected to the Board of Directors and appointed vice chairman of the Board of Directors in connection with the completion of the Company's acquisition of The Healthfield Group, Inc. He has served as a member of the Clinical Quality Committee of the Board of Directors since May 2008, serving as chairman since May 2009. Mr. Windley, Healthfield's founder, had served as its chairman and chief executive officer since its inception in 1986 until the completion of the acquisition. Mr. Windley is the chairman of Prom Queen, LLC, a private real estate holding and restaurant development company, chairman of RDW Ventures, LLC, a private equity firm, and chairman of Gulf Coast Hatteras, Inc., a private yacht and sport fishing dealership. Mr. Windley is president of the Georgia Association for Home Care and is also chair emeritus of Fragile Kids Foundation, Inc., having started the charity in 1992.
Tony Strange
Mr. Strange has served as chief executive officer and a director of the Company since January 2009 and as president of the Company since November 2007. He served as chairman of the Company from May 2011 to February 2013. He served as chief operating officer of the Company from November 2007 to May 2009 and as executive vice president of the Company and president of Gentiva Home Health from February 2006 to November 2007. From 2001 to 2006, Mr. Strange served as president and chief operating officer of Healthfield. Mr. Strange joined Healthfield in 1990 and served in other capacities, including regional manager, vice president of development and chief operating officer, until being named president in 2001.
Eric R. Slusser
Mr. Slusser has served as executive vice president, chief financial officer and treasurer of the Company since May 2010. He served as senior vice president, finance of the Company from October 2009 to May 2010. Mr. Slusser served as executive vice president and chief financial officer of Centene Corporation, a healthcare services company providing specialty and managed care health plan coverage, from July 2007 through May 2009, as executive vice president international development of Centene Corporation from May 2009 through October 2009 and as treasurer of Centene Corporation from February 2008 to July 2009. Mr. Slusser served as executive vice president of finance, chief accounting officer and controller of Cardinal Health, Inc., a diversified healthcare company providing healthcare products and services, from 2006 to 2007 and as senior vice president, chief accounting officer and controller of Cardinal Health from 2005 to 2006.
John N. Camperlengo
Mr. Camperlengo has served as general counsel and secretary of the Company since May 2010 and as senior vice president of the Company since May 2008. He served as chief compliance officer of the Company from May 2008 to March 2012 and deputy general counsel of the Company from May 2008 to May 2010. From November 2007 to May 2008, Mr. Camperlengo served as vice president and chief compliance officer of Duane Reade Holdings, Inc., a retail pharmacy chain. From 2005 to 2007, Mr. Camperlengo served as vice president and deputy general counsel and as chief compliance officer of the Company. He served as assistant vice president and associate general counsel of the Company from 2003 to 2005, having joined the Company as senior counsel in 2000.

25


David A. Causby
Mr. Causby has served as senior vice president and president, home health division, of the Company since May 2011. He served as senior vice president of operations for the home health division from 2008 to May 2011. He previously held various other positions with the Company, including vice president of operations for the home health division and vice president of operations for the western region and the Carolinas region. He joined Healthfield in 2003 as assistant vice president for the Carolinas.
Jeff Shaner
Mr. Shaner has served as senior vice president and president, hospice division, of the Company since May 2011. He served as senior vice president of operations for the hospice division from August 2010 to May 2011. From 2004 to 2010, Mr. Shaner held various operational positions with the Company, including vice president of operations for the home health division and vice president of operations for the southeast region. In 2002, he joined Total Care, Inc., which was subsequently acquired by Healthfield, as area vice president. Mr. Shaner also serves as president of the Gentiva Hospice Foundation.
Charlotte A. Weaver
Dr. Weaver has served as senior vice president and chief clinical officer of the Company since July 2008. From May 2007 to July 2008, Dr. Weaver served as vice president—executive director, nursing research of Cerner Corporation, an international supplier of healthcare software for electronic healthcare record and business operations. From 1999 to 2007, she served as vice president/chief nurse officer of Cerner Corporation.

PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock is quoted on The Nasdaq Global Select Market under the symbol “GTIV.”
The following table sets forth the high and low sales prices for shares of the Company’s common stock for each quarter during 2012 and 2011:
2012
High
 
Low
1st Quarter
$
8.99

 
$
6.25

2nd Quarter
9.04

 
5.13

3rd Quarter
12.85

 
6.05

4th Quarter
11.79

 
9.20

 
 
 
 
2011
High
 
Low
1st Quarter
$
28.91

 
$
22.94

2nd Quarter
29.21

 
18.78

3rd Quarter
21.83

 
5.13

4th Quarter
7.34

 
2.81

Holders
As of March 1, 2013, there were approximately 3,900 holders of record of the Company’s common stock, including participants in the Company’s employee stock purchase plan, brokerage firms holding the Company’s common stock in “street name” and other nominees.

26


Dividends
Except for a special cash dividend paid in 2002, the Company has never paid any cash dividends on its common stock and has no intention in the foreseeable future to pay any cash dividends on its common stock. Future payments, if any, of dividends and the amount of the dividends will be determined by the Board of Directors from time to time based on the Company’s results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant. In addition, the Company’s credit agreement and the indenture governing its Senior Notes also contain restrictions on the Company’s ability to declare and pay dividends. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Shareholder Return Performance Graph
The following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Gentiva Health Services, Inc., The NASDAQ Composite Index and a Peer Group



 
12/30/07
 
12/28/08
 
01/03/10
 
12/31/10
 
12/31/11
 
12/31/12
Gentiva Health Services, Inc.
100.00

 
144.09

 
144.36

 
142.17

 
36.08

 
53.71

NASDAQ Composite Index
100.00

 
59.03

 
82.25

 
97.32

 
96.63

 
110.78

Peer Group
100.00

 
89.81

 
101.81

 
97.79

 
55.37

 
74.03

The peer group, chosen by Gentiva, is comprised of the following publicly traded companies: Almost Family, Inc., Amedisys, Inc., Chemed Corporation and LHC Group, Inc.
The graph and table above, based on data furnished by Research Data Group, Inc., assume that $100 was invested on December 30, 2007 in each of Gentiva’s common stock, the NASDAQ Composite Index and the Peer Group and that all dividends (if any) were reinvested.

27


Item 6.
Selected Financial Data
The following table provides selected historical consolidated financial data of the Company as of and for each of the years in the five-year period ended December 31, 2012. The data has been derived from the Company’s audited consolidated financial statements. The historical financial information may not be indicative of the Company’s future performance. Prior to 2010, the Company’s fiscal year ended on the Sunday nearest to December 31st, which was January 3, 2010 for fiscal year 2009, December 28, 2008 for fiscal year 2008, and December 30, 2007 for fiscal year 2007. As a result of this policy, fiscal year 2009 included 53 weeks of activity. In 2010, the Company adopted a change to a calendar year reporting period from its then current fiscal year reporting. As such, fiscal year 2010 ended on December 31, 2010 instead of January 2, 2011, the date designated under its prior fiscal year end reporting calendar. Due to the change to a calendar year reporting period in 2010 and the extra week in 2009, the Company’s reporting periods included 365 days in fiscal year 2011, 362 days in fiscal year 2010, 371 days in fiscal year 2009 and 364 days in fiscal years 2008 and 2007.
 
For the Year
 
(in thousands, except per share amounts)
2012
 
2011

2010

2009
 
2008
 
Statement of Operations Data
 
 
 
 
 
 
 
 
 
 
Net revenues
$
1,712,804

  
$
1,798,778

 
$
1,414,459

(6)
$
1,118,811

 
$
1,209,521

(8)
Gross profit
804,063

  
850,323

 
734,385

(6)
584,614

 
544,142

(8)
Selling, general and administrative expenses
(655,766
)
(5) 
(730,407
)
(5) 
(606,864
)
(5),(6)
(480,461
)
(5) 
(458,884
)
(5),(8) 
Goodwill, intangibles and other long-lived asset impairment
(19,132
)
(3) 
(643,305
)
(3) 






Income (loss) from continuing operations attributable to Gentiva shareholders
26,796

(1),(2),(5) 
(458,840
)
(5) 
55,290

(5),(6)
67,331

(5)
149,093

(5),(8) 
Discontinued operations, net of tax (4)

 
8,315


(3,135
)

(8,149
)

4,357


Net income (loss) attributable to Gentiva shareholders
26,796

(1),(2),(5) 
(450,525
)
(5) 
52,155

(5),(6)
59,182

(5),(7) 
153,450

(5),(8) 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Gentiva shareholders
$
0.88


$
(15.13
)

$
1.86


$
2.31


$
5.22

  
Discontinued operations, net of tax


0.28


(0.11
)

(0.28
)

0.15

  
Net income (loss) attributable to Gentiva shareholders
0.88


(14.85
)

1.75


2.03


5.37

  
Weighted average shares outstanding—basic
30,509


30,336


29,724


29,103


28,578

  
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Gentiva shareholders
$
0.87


$
(15.13
)

$
1.81


$
2.26


$
5.06

  
Discontinued operations, net of tax


0.28


(0.10
)

(0.28
)

0.15

  
Net income (loss) attributable to Gentiva shareholders
0.87


(14.85
)

1.71


1.98


5.21

  
Weighted average shares outstanding—diluted
30,687


30,336


30,468


29,822


29,439

  
Balance Sheet Data (at end of year)
 
 
 
 
 
 
 
 
 
 
Cash items and short-term investments
$
207,052


$
164,912


$
104,752


$
152,410


$
69,201

  
Working capital
226,128


225,139


124,764


190,918


125,400

  
Total assets
1,510,934


1,530,328


2,120,128


1,060,603


973,497

  
Long-term debt and capital leases
910,182


973,261


1,026,760


232,466


252,188

  
Gentiva’s shareholders’ equity
233,162


199,938


635,574


571,163


494,971

  
Common shares outstanding
30,748


30,779


30,158


29,480


28,864

  

(1)
For the year ended December 31, 2012, net income includes an $8.0 million pre-tax gain related to the (i) sale of the Phoenix area hospice operations, (ii) the sale of the Gentiva consulting business and (iii) the sale of eight home health branches and four hospice branches in Louisiana. See Note 4 to the Company’s consolidated financial statements.
(2)
In anticipation of a settlement of claims alleged by the owner of CareCentrix and working capital adjustments as set forth in the stock purchase agreement, during the fourth quarter, the Company recorded a $6.5 million adjustment to the seller financing note receivable to reflect its revised estimated fair value of $3.4 million, which is recorded in equity in net loss of CareCentrix. See Note 7 to the Company's consolidated financial statements.

28


(3)
For the year ended December 31, 2012, the Company recorded non-cash impairment charges associated with a write-off of its trade name intangibles of $19.1 million in connection with the Company's initiative to re-brand its operations under the Gentiva name.
For the year ended December 31, 2011, the Company recorded non-cash impairment charges associated with goodwill, intangibles and other long-lived assets of $643.3 million. This charge was the result of (i) changes in the Company's business climate, (ii) uncertainties around Medicare reimbursement as the federal government worked to reduce the federal deficit, (iii) a significant decline in the price of the Company's common stock during the fiscal year, (iv) a write-down of software and (v) a change in the estimated fair value of real estate. See Notes 8 and 9 to the Company’s consolidated financial statements.
(4)
During 2011, the Company sold its Rehab Without Walls® and homemaker service agency businesses. As such, the Company has reflected the financial results of these businesses as discontinued operations. In addition, in the fourth quarter of 2009, the Company committed to a plan to exit its HME and IV businesses. As such, the Company has reflected the financial results of the operating segments as discontinued operations, including a write-down of goodwill associated with these businesses of approximately $9.6 million for 2009. Results for all prior years have been reclassified to conform to this presentation. See Note 4 to the Company’s consolidated financial statements for additional information.
(5)
The Company recorded charges relating to cost savings initiatives and other restructuring costs, acquisition and integration costs, and legal settlements of $5.7 million, $49.1 million, $46.0 million, $2.4 million and $2.7 million, as summarized below. See Note 10 to the Company’s consolidated financial statements for additional information.
 
2012
 
2011
 
2010
 
2009
 
2008
Home Health
$
5.6

 
$
7.7

 
$
11.8

 
$
1.4

 
$
0.4

Hospice
0.4

 
3.7

 
0.3

 

 

Corporate expenses
(0.3
)
 
37.7

 
33.9

 
1.0

 
2.3

Total
$
5.7

 
$
49.1

 
$
46.0

 
$
2.4

 
$
2.7


(6)
Effective August 17, 2010, the Company completed the acquisition of 100 percent of the equity interest of Odyssey HealthCare Inc., a leading provider of hospice care, operating approximately 100 Medicare-certified providers in 30 states. The Company also completed several other smaller acquisitions in 2010. See Note 4 to the Company’s consolidated financial statements for additional information.
(7)
Net income includes a $6.0 million pre-tax gain related to the (i) sale of assets and certain branch offices that specialized primarily in pediatric home care services and (ii) sale of assets associated with two branch offices in upstate New York providing home health services under New York Medicaid programs. See Note 4 to the Company’s consolidated financial statements.
(8)
Statement of Operations Data for 2008 includes CareCentrix operating results through September 24, 2008 and includes the Company’s equity in the net loss of CareCentrix Holdings for the period September 25, 2008 through December 28, 2008. In addition, net income includes $107.9 million from a pre-tax gain related to the CareCentrix transaction and reflects an effective tax rate of 15.7 percent due primarily to the CareCentrix transaction. See Note 7 to the Company’s consolidated financial statements.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which 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.
Overview
Gentiva Health Services, Inc. (“Gentiva” or the “Company”) is a leading provider of home health services and hospice services serving patients through approximately 430 locations in 40 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; and other therapies and services. Gentiva’s revenues are generated from federal and state government programs, commercial insurance and individual consumers.
The federal and state government programs under which the Company generates a majority of its net revenues are subject to legislative and other risk factors that can make it difficult to determine future reimbursement rates for Gentiva’s services to its patients. In March 2010, President Obama signed into law the Affordable Care Act which represents a $39.5 billion

29


reduction in Medicare home health spending over an extended period. The law phases in the reductions over seven years, including rebasing of Medicare reimbursement rates over a four year period beginning in 2014, with reductions resulting from rebasing not to exceed 3.5 percent in any one year. The Company anticipates that many of the provisions of the Affordable Care Act may be subject to further clarification and modification through the rule-making process. In addition, on November 2, 2012, CMS issued a final rule to update and revise Medicare home health rates for calendar year 2013 and, in July 2012, released a final rule to update Medicare hospice rates, effective October 1, 2012 through September 30, 2013, as further discussed in the “Liquidity” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.
The Company believes that several marketplace factors can contribute to its future growth. First, the Company is a leader in a highly fragmented home healthcare and hospice industry populated by more than 15,000 Medicare certified 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 strategic priorities, 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; evaluating and closing opportunistic acquisitions; seeking further operating leverage through more efficient utilization of existing resources; implementing technology to support the Company’s various initiatives; and strengthening the Company’s balance sheet to support future growth. The Company anticipates executing these strategies by continuing to expand its sales presence, 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 its patients and customers through its Home Health segment and its Hospice segment. This presentation aligns financial reporting with the manner in which the Company manages its business operations with a focus on the strategic allocation of resources and separate branding strategies between the business segments. Discontinued operations represent services and products provided to patients through the Company’s Rehab Without Walls® business, the Company’s homemaker agency business and the Company’s HME and IV businesses. See Note 4 to the Company’s consolidated financial statements for additional information. Prior periods have been reclassified to conform with the current presentation.
Home Health
The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs. The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies, located in 38 states, from which the Company provides various combinations of skilled nursing and therapy services and paraprofessional nursing services 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.

30


In addition, through May 31, 2012 the Company provided consulting services to home health agencies which included operational support, billing and collection activities, and on-site agency support and consulting. For 2011 and 2010, the Company's Rehab Without Walls(R) and IDOA businesses and the HME and IV businesses are reflected as discontinued operations in the Company's consolidated financial statements. See Note 4 to the Company's consolidated financial statements.
Hospice
The Hospice segment serves terminally ill patients and their families through Medicare-certified providers operating in 30 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.
The Hospice segment has under development focused specialty programs that include:
Memory Care Specialty Program, which will provide an individualized disease management program addressing the physical needs specific to Alzheimer’s and dementia patients and support mechanisms for their caregivers; and
Cardiac Specialty Program, which will help patients and their physicians aggressively manage symptoms associated with heart disease, focusing on quality of life and pain control.
Significant Developments
Acquisitions
During 2012, the Company completed three acquisitions for total cash consideration of $22.3 million. These transactions were done primarily to extend the Company's geographic coverage areas in both home health and hospice. A summary of the transactions for 2012, 2011 and 2010 and the cash consideration paid are as follows (in millions):

31


Acquisitions:
Geographic Service Area
 
Date
 
Consideration

Family Home Care Corporation
Washington and Idaho
 
August 31, 2012
 
$
12.3

North Mississippi Hospice
Mississippi
 
August 31, 2012
 
4.5

Advocate Hospice
Indiana
 
July 22, 2012
 
5.5

Odyssey HealthCare of Augusta, LLC
Georgia
 
April 29, 2011
 
0.3

Odyssey HealthCare, Inc.
Nationwide
 
August 17, 2010
 
1,087.0

United Health Care Group, Inc.
Louisiana
 
May 15, 2010
 
6.0

Heart to Heart Hospice of Starkville, LLC
Mississippi
 
March 5, 2010
 
2.5

In addition, during 2012 the Company sold various home health and hospice operations based in Louisiana and Phoenix and sold off its consulting business. A summary of the Company's operations which were sold during 2012, 2011 and 2010 is as follows (in millions):
Dispositions:
Date
 
Consideration

Phoenix area hospice operations
November 30, 2012
 
$
3.5

Gentiva Consulting
May 31, 2012
 
0.3

Louisiana home health and hospice operations
Second Quarter 2012
 
6.4

Certain home health branches-Utah, Michigan, Nevada and Brooklyn, New York
Fourth Quarter 2011
 
1.6

Iowa home health branch
January 30, 2010
 
0.3

Furthermore, during 2011 and 2010, the Company sold its IDOA business based in Illinois, Rehab Without Walls® business and its HME and IV businesses in order to focus on its core businesses, home health and hospice. A summary of these transactions follows (in millions):
Discontinued operations:
Date
 
Consideration

IDOA
October 14, 2011
 
$
2.4

Rehab Without Walls®
September 10, 2011
 
9.8

HME and IV businesses
February 1, 2010
 
16.4

The Company considered these business units as operating segments and, as such, the financial results of these businesses were reported as discontinued operations for all periods presented in the Company’s consolidated financial statements.
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 for more information.
Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
The comparison of results of operations between 2012 and 2011 has been impacted significantly by the following items:
During the third quarter of 2012, the Company initiated an effort to re-brand all of its branch operations under the single Gentiva name. In connection with this re-branding effort, the Company recorded a $19.1 million non-cash write-off of remaining trade name balances, which is reflected in goodwill, intangibles and other long-lived asset impairment in the Company's consolidated statements of comprehensive income.
The Company recorded net charges relating to restructuring, acquisition and integration activities, and legal settlements of $5.7 million and $49.1 million for 2012 and 2011, respectively.
The Company closed a significant number of branch operations, sold a number of operating units and has completed several acquisitions affecting the reporting periods presented as follows:
During the fourth quarter of 2012, the Company sold its Phoenix area hospice operations.
During the third quarter of 2012, the Company completed the acquisitions of Family Home Care, North Mississippi Hospice and Advocate Hospice.
During the second quarter of 2012, the Company sold eight home health branches and four hospice branches in Louisiana.
During the fourth quarter of 2011, the Company closed 34 locations (25 home health and 9 hospice) and sold 9 home health branches as a result of a comprehensive review of its branch structure, support infrastructure

32


and other significant expenditures in response to the challenging Medicare reimbursement rate environment. In addition, during the first quarter of 2012 the Company closed four additional home health branches.
As a result of these activities, the Company’s net revenues comparisons were negatively impacted for 2012 by approximately $70.1 million as compared to the corresponding periods of 2011. See Note 4 to the Company's consolidated financial statements for more information.
In anticipation of a settlement of claims alleged by the owner of CareCentrix and working capital adjustments as set forth in the stock purchase agreement, during the fourth quarter, the Company recorded a $6.5 million adjustment to the seller financing note receivable to reflect its revised estimated fair value of $3.4 million, which is recorded in equity in net loss of CareCentrix;
The Company sold its equity investment in CareCentrix and recognized dividend income of approximately $8.6 million in 2011, representing a 12% cumulative preferred dividend received on the sale of the Company’s preferred stock investment in CareCentrix. The Company also recognized an approximate $67.1 million net gain on the sale of the remaining common and preferred stock of CareCentrix;
During the third quarter of 2011, the Company determined a triggering event had occurred and performed an interim impairment test of its identifiable intangible assets and goodwill. The triggering event was the change in business climate, including uncertainties around Medicare reimbursement as the federal government worked to reduce the federal deficit. The interim test concluded that the fair value of certain identifiable intangible assets, as well as goodwill, was less than their carrying value. As such, the Company recognized an impairment loss of approximately $602.1 million during the third quarter and first nine months of 2011.
In connection with the Odyssey acquisition, the Company conducted a strategic evaluation of its various field operating systems to review alternatives towards achieving a comprehensive platform, capable of handling both its Home Health and Hospice business segments. During the third quarter of 2011, the Company continued to progress with its review of alternatives to replacing various field operating systems and in connection with that review recorded a non-cash impairment charge of approximately $40.3 million related to developed software. In addition, the Company conducted a review of real estate it owned in Dothan, Alabama, which indicated that the estimated fair value of the real estate was lower than the carrying value and recorded a non-cash impairment charge of approximately $0.9 million. These charges are recorded in goodwill, intangible assets and other long-lived asset impairment in the Company's consolidated statements of comprehensive income for 2011.
The Company disposed of its Rehab Without Walls® business during the third quarter of 2011. The Company recognized a gain of approximately $9.1 million associated with the sale of this business. The Company also concluded that the assets of the homemaker services agency business in Illinois met the definition of assets held for sale and included both the Rehab Without Walls® business and the homemaker services agency business in discontinued operations for all periods presented.
Net Revenues
A summary of the Company’s net revenues by segment follows:
(Dollars in millions)
2012
 
2011
 
Percentage
Variance
Home Health
$
948.0

 
$
1,012.6

 
(6.4
)%
Hospice
764.8

 
786.2

 
(2.7
)%
Total net revenues
$
1,712.8

 
$
1,798.8

 
(4.8
)%
Net revenues by major payer source are as follows (in millions):
 
2012
 
2011
 
Home
Health
 
Hospice
 
Total
 
Home
Health
 
Hospice
 
Total
Medicare
$
749.0

 
$
715.5

 
$
1,464.6

 
$
799.2

 
$
729.1

 
$
1,528.3

Medicaid and Local Government
46.8

 
27.7

 
74.4

 
52.3

 
30.8

 
83.1

Commercial Insurance and Other:
 
 
 
 

 
 
 
 
 

Paid at episodic rates
85.2

 

 
85.2

 
77.7

 

 
77.7

Other
67.0

 
21.6

 
88.6

 
83.4

 
26.3

 
109.7

Total net revenues
$
948.0

 
$
764.8

 
$
1,712.8

 
$
1,012.6

 
$
786.2

 
$
1,798.8


33


For 2012 as compared to 2011, net revenues decreased by $86.0 million, or 4.8 percent, to $1.71 billion from $1.80 billion.
Home Health
The following table reflects the impact on net revenues for 2012 relating to businesses acquired, closed or divested in 2012 and 2011 (in millions):
 
2012
 
2011
 
Impact
Medicare
$
50.2

 
$
7.9

 
$
(42.3
)
Medicaid and Local Government
1.6

 
1.3

 
(0.2
)
Commercial Insurance and Other:
 
 
 
 
 
   Paid at episodic rates
6.0

 
1.1

 
(4.9
)
   Other
7.7

 
1.0

 
(6.7
)
Total net revenues
$
65.4

 
$
11.3

 
$
(54.1
)
Home Health segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government, and Commercial Insurance and Other. Net revenues in 2012 were $948.0 million, down $64.6 million, or 6.4 percent, from $1.01 billion in 2011. The decrease is primarily attributable to closed or divested branches, the net decrease in Medicare reimbursement rates and additional decreases in the Medicaid and Local Government and Commercial Insurance and Other payer sources as the Company continues its strategy to reduce or eliminate certain lower gross margin business.
The Company’s episodic revenues declined 4.9 percent during 2012. A summary of the Company’s combined Medicare and non-Medicare Prospective Payment System (“PPS”) business paid at episodic rates follows (dollars in millions):
 
2012
 
2011
 
Percentage
Variance
Home Health
 
 
 
 
 
Medicare
$
749.0

 
$
799.2

 
(6.3
)%
Non-Medicare PPS
85.2

 
77.7

 
9.7
 %
Total
$
834.2

 
$
876.9

 
(4.9
)%
Key Company statistics related to episodic revenues were as follows:
 
2012
 
2011
 
Percentage
Variance
Episodes
287,800

 
287,600

 
0.1
 %
Revenue per episode
$
2,900

 
$
3,050

 
(4.9
)%
Episode volume for the year ended December 31, 2012 increased 0.1 percent while admissions decreased by 0.8 percent, from 199,600 admissions in 2011 to 198,000 admissions in 2012. There were approximately 1.45 and 1.44 episodes for each admission during 2012 and 2011, respectively.
Revenues generated from Medicare were $749.0 million during 2012, a decrease of 6.3 percent as compared to $799.2 million in 2011. Medicare revenues represented approximately 79 percent of total Home Health revenues in both 2012 and 2011. In 2012, Medicare and non-Medicare PPS revenues as a percent of total Home Health revenues were 88 percent as compared to 87 percent for 2011.
Revenues from Medicaid and Local Government payer sources were $46.8 million for 2012 as compared to $52.3 million for 2011. Revenues from Commercial Insurance and Other payer sources, excluding non-Medicare PPS revenues, were $67.0 million and $83.4 million for 2012 and 2011, respectively. The reduction is a result of the Company’s decision to reduce participation in certain Medicaid and other state and county programs, its strategy to reduce or eliminate certain lower gross margin business and the impact of the closed or divested branches.
Net revenues from the Company’s Rehab Without Walls® unit were $15.3 million in 2011. Net revenues from the Company’s homemaker services agency business in Illinois were $7.5 million in 2011. These amounts are included within discontinued operations within the Company’s consolidated statements of comprehensive income.

34


Revenues from the Company's consulting services business, which was sold in May 2012, approximated $1.4 million and $3.7 million in 2012 and 2011, respectively.
Hospice
The following table reflects the impact on net revenues for 2012 relating to businesses acquired, closed or divested in 2012 and 2011 (in millions):
 
2012
 
2011
 
Variance
Medicare
$
7.0

 
$
21.4

 
$
(14.4
)
Medicaid and Local Government
0.1

 
1.1

 
(1.0
)
Commercial Insurance and Other:
0.2

 
0.8

 
(0.6
)
Total net revenues
$
7.3

 
$
23.3

 
$
(16.0
)
Hospice revenues are derived from all three payer groups. Net revenues in 2012 were $764.8 million as compared to $786.2 million in 2011. Key Company statistics relating to Hospice were as follows:
 
2012
 
2011
 
Percentage Variance
Patient days (in thousands)
4,959

 
5,092

 
(2.6
)%
Revenue per patient day
$
154

 
$
154

 
 %
For 2012, Average Daily Census (“ADC”) approximated 13,600 patients, compared to 14,000 patients for 2011. The average length of stay of patients at discharge was 96 days in 2012 and 89 days in 2011. In 2012 and 2011, approximately 98 percent and 97 percent, respectively, of hospice revenues were generated from routine home care while approximately 2 percent and 3 percent, respectively, of hospice revenues were generated from a combination of general inpatient care, continuous home care and respite care.
Medicare revenues were $715.5 million for 2012 as compared to $729.1 million for 2011. Medicaid and Local Government revenues amounted to $27.7 million for 2012 as compared to $30.8 million for 2011. Revenues derived from Commercial Insurance and Other payers for 2012 were $21.6 million as compared to $26.3 million for 2011.

Gross Profit
The following table reflects gross profit by business segment for 2012 and 2011 (dollars in millions): 
 
2012
 
2011
 
Variance
Gross Profit:
 
 
 
 
 
Home Health
$
462.9

 
$
508.0

 
$
(45.1
)
Hospice
341.2

 
342.3

 
(1.1
)
Total
$
804.1

 
$
850.3

 
$
(46.2
)
As a percent of revenue:
 
 
 
 
 
Home Health
48.8
%
 
50.2
%
 
(1.4
)%
Hospice
44.6
%
 
43.5
%
 
1.1
 %
Total
46.9
%
 
47.3
%
 
(0.4
)%
Gross profit in 2012 decreased by $46.2 million, or 5.4 percent, as compared to 2011.
As a percentage of revenues, gross profit of 46.9 percent in 2012 represented a 0.4 percentage point decrease as compared to 2011.
The overall decrease in gross profit within the Home Health segment as outlined above resulted from (i) the net decrease in Medicare reimbursement rates for 2012, partially offset by (ii) closed or divested branches with lower gross profit percentages and (iii) continued elimination or reduction of certain low margin Medicaid and local government business and commercial business.

35


Hospice gross profit as a percentage of revenues increased, as noted in the table above, for 2012 as compared to 2011. The increase was primarily due to (i) improved management of direct labor and supply costs and (ii) the impact of the closed and divested branches with lower gross profit percentages.
Gross profit was impacted by depreciation expense of $1.0 million and $0.9 million for 2012 and 2011, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 10.2 percent, or $74.6 million, to $655.8 million for 2012, as compared to $730.4 million for 2011.
If charges, as noted below, relating to cost savings initiatives and other restructuring costs, acquisition and integration costs and legal settlements of $5.7 million for 2012 and $49.1 million for 2011 were excluded, the decrease in selling, general and administrative expenses would have been approximately 4.6 percent, or $31.2 million, for 2012 as compared to 2011.
The decrease in selling, general and administrative expenses in 2012 as compared to 2011, was primarily attributable to (i) legal settlements ($21.0 million), (ii) Home Health field operating, selling and administrative costs ($40.7 million), (iii) cost savings initiatives and other restructuring costs ($22.4 million), (iv) decrease in provision for doubtful accounts ($4.5 million) and (v) depreciation and amortization ($3.6 million). These costs were partially offset by an increase in (i) corporate administrative expenses ($5.8 million), (ii) Hospice field operating, selling and administrative costs ($11.7 million) and (iii) equity-based compensation expense ($0.1 million). During 2012, selling, general and administrative expenses were negatively impacted by the costs associated with Amendment No. 3 to the Company’s credit agreement of approximately $1.2 million.
Depreciation and amortization expense included in selling, general and administrative expenses was $25.6 million in 2012, as compared to $29.2 million for 2011.
Gain on Sale of Assets and Businesses, Net
For the year ended December 31, 2012, the Company recorded a gain before income taxes of approximately $8.0 million, in connection with the sale of assets associated with (i) the sale of its Phoenix area hospice operations, (ii) the sale of the Gentiva consulting business and (iii) the sale of eight home health branches and four hospice branches in Louisiana.
For the year ended December 31, 2011, the Company recorded a gain before income taxes of approximately $1.1 million, in connection with the sale of assets associated with various home health and hospice branch dispositions, as well as property owned by the Company in Dothan, Alabama.
Dividend Income
The Company sold its equity investment in CareCentrix and recognized dividend income of approximately $8.6 million in 2011, representing a 12 percent cumulative preferred dividend received on the sale of the Company’s preferred stock investment in CareCentrix. The Company also recognized an approximate $67.1 million net gain on the sale of the common and preferred stock of CareCentrix, which is recorded as equity in net earnings of CareCentrix, including gain on sale in the Company's consolidated financial statements.
Interest Income and Interest Expense and Other
For 2012 and 2011, net interest expense and other was approximately $89.9 million and $88.6 million, respectively, consisting primarily of interest expense of $92.6 million and $91.3 million, respectively, associated with the term loan borrowings, fees associated with the Company’s credit agreement and outstanding letters of credit and amortization of debt issuance costs. Interest expense was partially offset by interest income of $2.7 million earned on investments and existing cash balances for each of 2012 and 2011.
Net interest expense and other included charges of $0.5 million for 2012 relating to the write-off of deferred debt issuance costs associated with the reduction in the Company’s revolving credit facility and charges of $3.8 million for 2011 relating to the write-off of deferred debt issuance costs and fees associated with the termination of the Company’s interest rate swaps in connection with the refinancing of the Company’s Term Loan A and Term Loan B facilities.
Income Tax Expense
The Company recorded an income tax provision of $17.3 million for 2012, representing a current tax benefit of $6.3 million and a deferred tax provision of $23.5 million. The Company’s effective income tax rate for 2012 was 36.5 percent. The difference between the federal statutory income tax rate of 35.0 percent and the Company’s effective rate of 36.5 percent for

36


2012 is primarily due to state income taxes, net of federal benefit (approximately 4.6 percent) and other items (approximately 0.9 percent), partially offset by changes in tax reserves (approximately 3.4 percent).
The Company recorded a federal and state income tax benefit of $75.8 million for 2011, representing a current tax provision of $10.2 million and a deferred tax benefit of $86.0 million. The difference between the federal statutory income tax rate of 35.0 percent and the Company’s effective rate of 12.6 percent for 2011 is primarily due to goodwill impairment (23.6 percent), a reduction in tax reserves and valuation allowances (approximately 0.6 percent) offset somewhat by state taxes, net of federal benefit and other items (approximately 1.8 percent).
Discontinued Operations, Net of Tax
For the year ended December 31, 2011, discontinued operations, net of tax reflected a gain of $8.3 million, or $0.28 per diluted share. For 2011, discontinued operations included a pre-tax gain of approximately $9.1 million on the sale of the Rehab Without Walls® business and a pre-tax gain of approximately $2.4 million on the sale of the IDOA business or $0.38 per diluted share.
Net Income (Loss) Attributable to Gentiva Shareholders
For 2012, net income attributable to Gentiva shareholders was $26.8 million, or $0.87 per diluted share, as compared to a net loss of $450.5 million, or $14.85 per diluted share, for 2011.
The Company uses adjusted income from continuing operations, a non-GAAP financial measure, as a supplemental measure of Company performance. The Company defines adjusted income from continuing operations attributable to Gentiva shareholders as income from continuing operations attributable to Gentiva shareholders, excluding (i) tax reserves relating to the OIG settlement, (ii) charges relating to cost savings and other restructuring, legal settlements, and acquisition and integration activities, (iii) gain on sale of businesses, (iv) dividend income, (v) gain on sale of CareCentrix included in equity in net earnings of CareCentrix, net of tax, and (vi) goodwill, intangibles and other long-lived asset impairment. The Company considers adjusted income from continuing operations to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of the Company’s business on a consistent basis across reporting periods, as it eliminates the effect of items that are not indicative of the Company’s core operating performance. Management uses adjusted income from continuing operations attributable to Gentiva shareholders to evaluate overall performance and compare current operating results with other companies in the healthcare industry and should not be considered in isolation or as a substitute for income from continuing operations, net income, operating income or cash flow statement data determined in accordance with accounting principles generally accepted in the United States. Since adjusted income from continuing operations attributable to Gentiva shareholders is not a measure of financial performance under accounting principles generally accepted in the United States and is susceptible to varying calculations, it may not be comparable to similarly titled measures in other companies.
After adjusting for certain items which include (i) tax reserves relating to the OIG settlement, (ii) charges relating to cost savings and other restructuring, legal settlements, and acquisition and integration activities, (iii) gain on sale of businesses, (iv) dividend income, (v) gain on sale of CareCentrix included in equity in net earnings of CareCentrix, net of tax, and (vi) goodwill, intangibles and other long-lived asset impairment, as noted in the table below, adjusted income from continuing operations attributable to Gentiva shareholders was $37.7 million, or $1.23 per diluted share, for 2012 as compared to $49.2 million, or $1.60 per diluted share, for the corresponding period of 2011.

37


A reconciliation of adjusted income from continuing operations attributable to Gentiva shareholders to income from continuing operations, the most directly comparable GAAP financial measure, follows (in thousands, except per share amounts): 
 
For the Year Ended
 
December 31, 2012
 
December 31, 2011
 
Gross
 
Net of Tax
 
Per
Diluted Share
 
Gross
 
Net of Tax
 
Per
Diluted Share
Adjusted income from continuing operations attributable to Gentiva shareholders
 
 
$
37,679

 
$
1.23

 
 
 
$
49,212

 
$
1.60

Goodwill, intangible and other long-lived asset impairment
(19,132
)
 
(11,352
)
 
(0.37
)
 
(643,305
)
 
(547,753
)
 
(18.06
)
Equity in net (loss) earnings of CareCentrix, including gain on sale

 
(2,301
)
 
(0.08
)
 

 
67,127

 
2.21

Gain on sale of assets and businesses
8,014

 
4,765

 
0.16

 
1,061

 
631

 
0.02

Cost savings initiatives and other restructuring, legal settlement and acquisition and integration costs
(5,670
)
 
(3,385
)
 
(0.11
)
 
(49,137
)
 
(29,679
)
 
(0.98
)
Tax reserves on OIG legal settlement
1,390

 
1,390

 
0.04

 
(3,813
)
 
(3,813
)
 
(0.12
)
Dividend income

 

 

 
8,590

 
5,435

 
0.18

Impact of exclusion of dilutive shares due to the anti-dilutive effect of the shares

 

 

 

 

 
0.02

Income (loss) from continuing operations attributable to Gentiva shareholders
 
 
26,796

 
0.87

 
 
 
(458,840
)
 
(15.13
)
Add back: Net income attributable to noncontrolling interests
 
 
884

 
0.03

 
 
 
641

 
0.02

Income (loss) from continuing operations
 
 
$
27,680

 
$
0.90

 
 
 
$
(458,199
)
 
$
(15.11
)

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
The comparison of results of operations between 2011 and 2010 has been impacted significantly by the following items:
During the third quarter of 2011, the Company determined a triggering event had occurred and performed an interim impairment test of its identifiable intangible assets and goodwill. The triggering event was the change in business climate, including uncertainties around Medicare reimbursement. The interim test concluded that the fair value of certain identifiable intangible assets, as well as goodwill, was less than their carrying value. As such, the Company recognized an impairment loss of approximately $602.1 million during the year ended December 31, 2011;
In connection with the Odyssey acquisition, the Company conducted a strategic evaluation of its various field operating systems to review alternatives towards achieving a comprehensive platform, capable of handling both its Home Health and Hospice business segments. During the third quarter of 2011, the Company completed its review of alternatives to replacing various field operating systems and, in connection with that review, recorded a non-cash impairment charge of approximately $40.3 million related to developed software. In addition, the Company conducted a review of real estate it owned in Dothan, Alabama, which indicated that the estimated fair value of the real estate was lower than the carrying value and recorded a non-cash impairment charge of approximately $0.9 million. These charges are recorded in goodwill, intangible assets and other long-lived asset impairment in the Company’s consolidated statements of comprehensive income for the year ended December 31, 2011;
The Company sold its equity investment in CareCentrix and recognized dividend income of approximately $8.6 million in 2011, representing a 12% cumulative preferred dividend received on the sale of the Company’s preferred stock investment in CareCentrix. The Company also recognized an approximate $67.1 million net gain on the sale of the remaining common and preferred stock of CareCentrix;
Incremental net revenues related to businesses acquired in the Hospice segment during 2010 approximated $437.9 million for 2011 as compared to 2010;
The Company recorded charges relating to cost savings and other restructuring, acquisition and integration activities, and legal settlements of $49.1 million in 2011 and $46.0 million in 2010;

38


The Company disposed of its Rehab Without Walls® business and recognized a gain of approximately $9.1 million associated with the sale of this business. The Company disposed of its homemaker services agency businesses and recognized a gain of approximately $2.4 million associated with the sale of this business. Both the Rehab Without Walls® business and the homemaker services agency business are included in discontinued operations for all periods presented;
The Company sold several of its home health and hospice branches in the fourth quarter of 2011 and recognized a gain of approximately $0.7 million. In addition, the Company sold certain owned property and recognized a gain of approximately $0.4 million associated with the sale of the property; and
As a result of the closure or divestiture of 34 home health and 9 hospice branches in the fourth quarter of 2011, the Company’s net revenues were negatively impacted by approximately $7.6 million.
Net Revenues
A summary of the Company’s net revenues by segment follows (dollars in millions):
 
2011
 
2010
 
Percentage
Variance
Home Health
$
1,012.6

 
$
1,063.0

 
(4.7
)%
Hospice
786.2

 
351.5

 
123.7
 %
Total net revenues
$
1,798.8

 
$
1,414.5

 
27.2
 %
Net revenues by major payer source are as follows (in millions): 
 
2011
 
2010
 
Home
Health
 
Hospice
 
Total
 
Home
Health
 
Hospice
 
Total
Medicare
$
799.2

 
$
729.1

 
$
1,528.3

 
$
822.7

 
$
326.2

 
$
1,148.9

Medicaid and Local Government
52.3

 
30.8

 
83.1

 
59.8

 
14.2

 
74.0

Commercial Insurance and Other:
 
 
 
 
 
 
 
 
 
 
 
Paid at episodic rates
77.7

 

 
77.7

 
86.4

 

 
86.4

Other
83.4

 
26.3

 
109.7

 
94.1

 
11.1

 
105.2

Total net revenues
$
1,012.6

 
$
786.2

 
$
1,798.8

 
$
1,063.0

 
$
351.5

 
$
1,414.5

For 2011 as compared to 2010, net revenues increased by $384.3 million, or 27.2 percent, to $1.799 billion from $1.415 billion.
Home Health
The following table reflects the impact on net revenues for 2011 relating to businesses acquired, closed or divested in 2010 and 2011 (in millions):
 
Acquired
 
Closed/
Divested
 
Total
Medicare
$
1.9

 
$
(4.6
)
 
$
(2.7
)
Medicaid and Local Government

 
(0.2
)
 
(0.2
)
Commercial Insurance and Other:
 
 
 
 

Paid at episodic rates
0.4

 
(0.5
)
 
(0.1
)
Other

 
(1.1
)
 
(1.1
)
Total net revenues
$
2.3

 
$
(6.4
)
 
$
(4.1
)
Home Health segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. Net revenues in 2011 were $1.013 billion, a decrease of $50 million, or 4.7 percent, from $1.063 billion in 2010.

39


The Company’s episodic revenues declined 3.6 percent during 2011. A summary of the Company’s combined Medicare and non-Medicare Prospective Payment System (“PPS”) business paid at episodic rates follows (in millions):
 
2011
 
2010
 
Percentage
Variance
Home Health
 
 
 
 
 
Medicare
$
799.2

 
$
822.7

 
(2.9
)%
Non-Medicare PPS
77.7

 
86.4

 
(10.2
)%
Total
$
876.9

 
$
909.1

 
(3.6
)%
Key Company statistics related to episodic revenues were as follows:
 
2011
 
2010
 
Percentage
Variance
Episodes
287,600

 
280,900

 
2.4
 %
Revenue per episode
$
3,050

 
$
3,240

 
(5.9
)%
Episode volume for the year ended December 31, 2011 increased 2.4 percent. Similarly, admissions increased by 2.3 percent, from 195,200 admissions in 2010 to 199,600 admissions in 2011. There were approximately 1.44 episodes for each admission during both 2010 and 2011.
Revenues generated from Medicare were $799.2 million during 2011, a decrease of 2.9 percent as compared to $822.7 million in 2010. Medicare revenues represented approximately 79 percent of total Home Health revenues in 2011 as compared to 77 percent of total Home Health revenues in 2010. In 2011, Medicare and non-Medicare PPS revenues as a percent of total Home Health revenues were 87 percent as compared to 85 percent for 2010. Revenues from specialty programs as a percent of total episodic Home Health revenues were 49 percent and 43 percent for 2011 and 2010, respectively.
Revenues from Medicaid and Local Government payer sources were $52.3 million for 2011 as compared to $59.8 million for 2010. The reduction is a result of the Company’s decision to reduce participation in certain Medicaid and other state and county programs. Revenues from Commercial Insurance and Other payer sources, excluding non-Medicare PPS revenues, were $83.4 million and $94.1 million for 2011 and 2010, respectively.
Net revenues from the Company’s Rehab Without Walls® unit were $15.3 million in 2011 and $23.2 million in 2010. Net revenues from the Company’s homemaker services agency business in Illinois were $7.5 million in 2011 and $9.4 million in 2010. These amounts are included within discontinued operations within the Company’s consolidated statements of operations.
Revenues from consulting services approximated $3.7 million and $4.2 million in 2011 and 2010, respectively.
Hospice
Hospice revenues are derived from all three payer groups. Net revenues in 2011 were $786.2 million as compared to $351.5 million in 2010. Key Company statistics relating to Hospice were as follows:
 
2011
 
2010
 
Percentage Variance
Patient days (in thousands)
5,092

 
2,357

 
116.0
%
Revenue per patient day
$
154

 
$
150

 
2.7
%
For 2011, Average Daily Census (“ADC”) approximated 14,000 patients, compared to 8,100 patients for 2010, reflecting Odyssey’s ADC of approximately 12,800 patients from the acquisition date, August 17, 2010, to December 31, 2010 and an ADC of approximately 1,700 for Gentiva’s existing Hospice business for 2010. The average length of stay of patients at discharge was 89 days in 2011 and 88 days in 2010. In 2011 and 2010, approximately 97 and 98 percent, respectively, of hospice revenues were generated from routine home care while approximately 3 percent and 2 percent, respectively, of hospice revenues were generated from a combination of general inpatient care, continuous home care and respite care.
Medicare revenues were $729.1 million for 2011 as compared to $326.2 million for 2010. Medicaid and Local Government revenues amounted to $30.8 million for 2011 as compared to $14.2 million for 2010. Revenues derived from Commercial Insurance and Other payers for 2011 were $26.3 million as compared to $11.1 million for 2010.
Net revenues for the legacy Gentiva hospice business was $87.2 million in 2011 compared to $79.8 million in 2010.

40


The following table reflects the impact on net revenues for 2011 relating to businesses acquired, closed or divested in 2010 and 2011 (in millions):
 
Acquired
 
Closed/
Divested
 
Total
Medicare
$
405.9

 
$
(0.8
)
 
$
405.1

Medicaid and Local Government
17.6

 
(0.1
)
 
17.5

Commercial Insurance and Other:
14.4

 
(0.3
)
 
14.1

Total net revenues
$
437.9

 
$
(1.2
)
 
$
436.7

Gross Profit
The following table reflects gross profit by business segment for 2011 and 2010 (in millions):
 
2011
 
2010
 
Variance
Gross Profit:
 
 
 
 
 
Home Health
$
508.0

 
$
574.2

 
$
(66.2
)
Hospice
342.3

 
160.2

 
182.1

Total
$
850.3

 
$
734.4

 
$
115.9

As a percent of revenue:
 
 
 
 
 
Home Health
50.2
%
 
54.0
%
 
(3.8
)%
Hospice
43.5
%
 
45.6
%
 
(2.1
)%
Total
47.3
%
 
51.9
%
 
(4.6
)%
Gross profit in 2011 increased $115.9 million, or 15.8 percent, as compared to 2010.
As a percentage of revenues, gross profit of 47.3 percent in 2011 represented a 4.6 percentage point decrease as compared to 2010.
The overall decrease in gross profit within the Home Health segment as outlined above resulted from the (i) 5.22 percent net decrease in Medicare reimbursement for 2011, partially offset by (ii) growth in the Company’s specialty programs, and (iii) elimination or reduction of certain low margin Medicaid and local government business and commercial business.
Hospice gross profit as a percentage of revenues decreased, as noted in the table above, for 2011 as compared to 2010. The decrease in gross profit percentage was primarily related to slightly higher labor costs in the markets served by Odyssey as well as the mix of patient care provided by Odyssey as compared to legacy Gentiva operations.
Gross profit was impacted by depreciation expense of $0.9 million and $0.8 million in 2011 and 2010, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 20.4 percent, or $123.5 million, to $730.4 million for 2011, as compared to $606.9 million for 2010.
If charges, as noted below, relating to cost savings initiatives, acquisition and integration, other restructuring and legal settlements of $49.1 million for 2011 and $46.0 million in 2010, were excluded, the increase in selling, general and administrative expenses would have been 21.5 percent, or $120.4 million, for 2011 as compared to 2010.
The increase in selling, general and administrative expenses in 2011, as compared to 2010, was primarily attributable to (i) Hospice field operating, selling and administrative costs ($109.6 million), of which $104.3 million was attributable to acquired operations, (ii) Home Health field operating, selling and administrative costs ($16.5 million), (iii) depreciation and amortization ($7.5 million), (iv) increase in provision for doubtful accounts ($2.4 million), (v) legal settlements ($12.3 million), (vi) cost savings initiatives ($13.2 million) and (vii) equity-based compensation expense ($1.3 million). These costs were partially offset by a decrease in (i) restructuring activities comprised of acquisition and integration activities, primarily relating to the Odyssey acquisition ($22.4 million) and (ii) corporate administrative expenses ($16.9 million).
Depreciation and amortization expense included in selling, general and administrative expenses were $29.2 million for 2011 as compared to $21.7 million for 2010.

41


Gain on Sale of Assets and Businesses, Net
For the year ended December 31, 2011, the Company recorded a gain before income taxes of approximately $1.1 million, in connection with the sale of assets associated with various home health and hospice branch dispositions, as well as property owned by the Company in Dothan, Alabama.
For the year ended December 31, 2010, the Company recorded a gain before income taxes of approximately $0.1 million, in connection with the sale of assets associated with a Home Health branch operation in Iowa.
Dividend Income
The Company sold its equity investment in CareCentrix and recognized dividend income of approximately $8.6 million in 2011, representing a 12 percent cumulative preferred dividend received on the sale of the Company’s preferred stock investment in CareCentrix. The Company also recognized an approximate $67.1 million net gain on the sale of the common and preferred stock of CareCentrix.
Interest Income and Interest Expense and Other
For 2011 and 2010, net interest expense was approximately $88.6 million and $39.0 million, respectively, consisting primarily of interest expense of $91.3 million and $41.7 million, respectively, associated with the term loan borrowings, fees associated with the Company’s credit agreement and outstanding letters of credit and amortization of debt issuance costs. Interest expense was partially offset by interest income of $2.7 million earned on investments and existing cash balances for each of 2011 and 2010. The increase in interest expense and other between 2011 and 2010 related primarily to the borrowings and higher interest rates under the Company’s new credit facility and Senior Notes in connection with the Odyssey acquisition in August 2010.
Income Tax Expense
The Company recorded a federal and state income tax benefit of $75.8 million for 2011, representing a current tax provision of $10.2 million and a deferred tax benefit of $86.0 million.
The difference between the federal statutory income tax rate of 35.0 percent and the Company’s effective rate of 12.6 percent for 2011 is primarily due to goodwill impairment (23.6 percent), a reduction in tax reserves and valuation allowances (approximately 0.6 percent) offset somewhat by state taxes, net of federal benefit and other items (approximately 1.8 percent).
The Company recorded a federal and state income tax provision of $34.1 million for 2010, representing a current tax provision of $35.2 million and a deferred tax benefit of $1.1 million. The difference between the federal statutory income tax rate of 35.0 percent and the Company’s effective rate of 38.5 percent for 2010 is primarily due to state taxes, net of federal benefit (approximately 4.8 percent), offset somewhat by a reduction in tax reserves, valuation allowances and other items (approximately 1.3 percent).
Discontinued Operations, Net of Tax
For the year ended December 31, 2011, discontinued operations, net of tax reflected a gain of $8.3 million, or $0.28 per diluted share, as compared to an operating loss of $3.1 million ,or $0.11 per diluted share, for 2010. For 2011, discontinued operations included a pre-tax gain of approximately $9.1 million on the sale of the Rehab Without Walls® business and a pre-tax gain of approximately $2.4 million on the sale of the IDOA business or $0.38 per diluted share. For 2010, discontinued operations included a pre-tax loss on the sale of the HME and IV businesses of $2.1 million or $0.07 per diluted share.
Net (Loss) Income Attributable to Gentiva Shareholders
For 2011, net loss attributable to Gentiva shareholders was $450.5 million, or $14.85 per diluted share. For 2010, net income attributable to Gentiva shareholders was $52.2 million, or $1.71 per diluted share.
The Company uses adjusted income from continuing operations as a supplemental measure of Company performance, a non-GAAP financial measure. The Company defines adjusted income from continuing operations attributable to Gentiva shareholders as income from continuing operations attributable to Gentiva shareholders, excluding charges relating primarily to (i) cost savings and other restructuring, acquisition and integration activities and legal settlements, (ii) dividend income, (iii) gain on sale of assets and businesses, net of taxes and (iv) goodwill, intangibles and other long-lived asset impairment. The Company considers adjusted income from continuing operations to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of the Company’s business on a consistent basis across reporting periods, as it eliminates the effect of items that are not indicative of the Company’s core operating performance. Management uses adjusted

42


income from continuing operations attributable to Gentiva shareholders to evaluate overall performance and compare current operating results with other companies in the healthcare industry and should not be considered in isolation or as a substitute for income from continuing operations, net income, operating income or cash flow statement data determined in accordance with accounting principles generally accepted in the United States. Since adjusted income from continuing operations attributable to Gentiva shareholders is not a measure of financial performance under accounting principles generally accepted in the United States and is susceptible to varying calculations, it may not be comparable to similarly titled measures in other companies.
After adjusting for certain items which include (i) goodwill, intangibles and other long-lived asset impairment, (ii) gain on sale of CareCentrix included in equity in net earnings of CareCentrix, (iii) dividend income, (iv) cost savings and other restructuring, acquisition and integration costs and legal settlements and (v) tax reserves on OIG legal settlements, as noted in the table below, adjusted income from continuing operations attributable to Gentiva shareholders was $49.2 million, or $1.60 per diluted share, as compared to $83.6 million, or $2.74 per diluted share, for the corresponding period of 2010.
A reconciliation of adjusted income from continuing operations attributable to Gentiva shareholders to (loss) income from continuing operations, the most directly comparable GAAP financial measure, follows (in thousands, except per share amounts):
 
For the Year Ended
 
December 31, 2011
 
December 31, 2010
 
Gross
 
Net of Tax
 
Per
Diluted Share
 
Gross
 
Net of Tax
 
Per
Diluted Share
Adjusted income from continuing operations attributable to Gentiva shareholders
 
 
$
49,212

 
$
1.60

 
 
 
$
83,585

 
$
2.74

Goodwill, intangible and other long-lived asset impairment
(643,305
)
 
(547,753
)
 
(18.06
)
 

 

 

Equity in net (loss) earnings of CareCentrix, including gain on sale

 
67,127

 
2.21

 

 

 

Gain on sale of assets and businesses
1,061

 
631

 
0.02

 
103

 
103

 

Cost savings initiatives and other restructuring, legal settlement and acquisition and integration costs
(49,137
)
 
(29,679
)
 
(0.98
)
 
(46,003
)
 
(28,398
)
 
(0.93
)
Tax reserves on OIG legal settlement
(3,813
)
 
(3,813
)
 
(0.12
)
 

 

 

Dividend income
8,590

 
5,435

 
0.18

 

 

 

Impact of exclusion of dilutive shares due to the anti-dilutive effect of the shares

 

 
0.02

 

 

 

(Loss) income from continuing operations attributable to Gentiva shareholders
 
 
(458,840
)
 
(15.13
)
 
 
 
55,290

 
1.81

Add back: Net income attributable to noncontrolling interests
 
 
641

 
0.02

 
 
 
526

 
0.02

(Loss) income from continuing operations
 
 
$
(458,199
)
 
$
(15.11
)
 
 
 
$
55,816

 
$
1.83


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 arrangements, 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 October 2010 and generally effective until November 2013. Any issuance of securities under the shelf registration statement would be subject to compliance with applicable strict limitations and requirements under the Company's credit arrangements and indenture covering its senior notes.
The Company’s credit agreement provides for $860.0 million in senior secured credit facilities for the Company, comprising term loan facilities aggregating $750.0 million and a revolving credit facility of $110 million, which was reduced from $125 million as a result of an amendment to the Company’s credit agreement entered into on March 6, 2012. The Company also realized $325.0 million in gross proceeds from the issuance and sale by the Company of senior unsecured notes in 2010. See Note 12 to the Company’s consolidated financial statements for additional information.

43


During 2012, net cash provided by operating activities was $126.0 million. In addition, the Company had proceeds of $9.2 million from the sale of businesses and $4.0 million from issuances under the Company’s Employee Stock Purchase Plan (“ESPP”). During 2012, the Company used $52.9 million for the repayment of debt, $22.3 million for acquisitions, $11.8 million for capital expenditures, $4.1 million for debt issuance costs and $5.0 million for repurchases of the Company’s common stock under the Company’s stock repurchase program.
Net cash provided by operating activities increased by $120.9 million, from $5.1 million for the year ended December 31, 2011 to $126.0 million for the year ended December 31, 2012. The increase was primarily due to improvements in net cash provided by operations prior to changes in assets and liabilities ($27.8 million), accounts receivable ($74.4 million), changes in current liabilities ($38.1 million), and other ($6.4 million), partially offset by changes in prepaid expenses and other current assets ($25.9 million).
Adjustments to add back non-cash items affecting net income (loss) are summarized as follows (in thousands):
 
For the Year Ended
 
December 31, 2012
 
December 31, 2011
 
Variance
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
27,680

 
$
(449,884
)
 
$
477,564

Adjustments to add back non-cash items affecting net income:
 
 
 
 
 
Depreciation and amortization
26,580

 
30,140

 
(3,560
)
Amortization and write-off of debt issuance costs
13,761

 
16,263

 
(2,502
)
Provision for doubtful accounts
4,066

 
8,541

 
(4,475
)
Equity-based compensation expense
7,645

 
7,548

 
97

Windfall tax benefits associated with equity-based compensation
(88
)
 
(192
)
 
104

Goodwill, intangibles and other long-lived asset impairment
19,132

 
643,305

 
(624,173
)
(Gain) loss on sale of assets and businesses, net
(8,014
)
 
(12,536
)
 
4,522

Equity in net (loss) earnings of CareCentrix, including gain on sale, net of tax
2,301

 
(68,381
)
 
70,682

Deferred income tax expense (benefit)
23,513

 
(86,012
)
 
109,525

Total cash provided by operations prior to changes in assets and liabilities
$
116,576

 
$
88,792

 
$
27,784

The $27.8 million difference in “Total cash provided by operations prior to changes in assets and liabilities” between the 2012 and 2011 periods is primarily related to 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, goodwill, intangibles and other long-lived asset impairment, gain on sale of businesses and deferred income taxes. 
Cash flow from operating activities between 2011 and 2012 was positively impacted by a decrease in accounts receivable represented by a $34.9 million source of cash in 2012 and a $39.5 million use of cash in 2011, excluding accounts receivable for acquisitions as of the respective transaction dates. The source of cash was primarily due to strong collections in the second half of 2012 relating to the resolution of the temporary increase the Company experienced in hospice with a vendor billing system upgrade and processing delays with the Company's Medicare intermediaries. Cash flow from operating activities between 2011 and 2012 was negatively impacted by $25.9 million from prepaid expenses and other assets as a result of net increases of approximately $15.4 million in 2012 as compared to net decreases in these accounts of approximately $10.5 million in 2011.

44


A summary of the changes in current liabilities, excluding the current portion of long-term debt, impacting cash flow from operating activities follows (in thousands):
 
For the Year Ended
 
December 31, 2012
 
December 31, 2011
 
Variance
OPERATING ACTIVITIES:
 
 
 
 
 
Changes in current liabilities:
 
 
 
 
 
Accounts payable
$
832

 
$
(2,949
)
 
$
3,781

Payroll and related taxes
3,275

 
(2,136
)
 
5,411

Deferred revenue
3,330

 
(2,273
)
 
5,603

Medicare liabilities
4,142

 
(8,170
)
 
12,312

Obligations under insurance programs
1,560

 
(6,923
)
 
8,483

Accrued nursing home costs
(5,795
)
 
(18
)
 
(5,777
)
Other accrued expenses
(23,323
)
 
(31,642
)
 
8,319

Total changes in current liabilities
$
(15,979
)
 
$
(54,111
)
 
$
38,132

The primary drivers for the $38.1 million difference resulting from changes in current liabilities that impacted cash flow from operating activities include:
Accounts payable, which had a positive impact of $3.8 million between the 2012 and 2011 reporting periods, primarily related to timing of payments.
Payroll and related taxes, which had a positive impact of $5.4 million between the 2012 and 2011 reporting periods, primarily due to timing of the Company’s payroll processing.
Deferred revenue, which had a positive impact of $5.6 million between the 2012 and 2011 reporting periods.
Medicare liabilities, which had a positive impact of $12.3 million between the 2012 and 2011 reporting periods.
Obligations under insurance programs, which had a positive impact on the change in operating cash flow of $8.5 million between the 2012 and 2011 reporting periods, primarily related to timing of payments under the Company’s insurance programs.
Accrued nursing home costs, which had a negative impact on the change in operating cash flow of $5.8 million between the 2012 and 2011 reporting periods, due to a decline in patient days in our hospice business and the timing of payments.
Other accrued expenses, which had a positive impact on the change in operating cash flow of $8.3 million between the 2012 and 2011 reporting periods, due primarily to increased incentive compensation reserves in the 2012 period and income tax payments in the 2011 period associated with the sale of the Company's equity interest in CareCentrix, somewhat offset by the impact of payments associated with the settlement of the Odyssey continuous care investigation and payments associated with the Company’s cost savings initiatives and other restructuring costs, acquisition and integration activities in the 2012 period.
Working capital at December 31, 2012 was approximately $226 million, an increase of $1 million as compared to approximately $225 million at December 31, 2011, primarily due to:
a $42 million increase in cash and cash equivalents;
a $7 million increase in prepaid expenses and other current assets;
a $39 million decrease in accounts receivable;
a $14 million decrease in deferred tax assets; and
a $5 million decrease in current liabilities, consisting of decreases in nursing home costs ($6 million), other accrued expenses ($22 million), partially offset by increases in current portion of long-term debt ($10 million), deferred revenue ($3 million), Medicare liabilities ($4 million),