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TMCNet:  GENTIVA HEALTH SERVICES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[May 12, 2014]

GENTIVA HEALTH SERVICES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "assumes," "trends" and similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company's current plans, expectations and projections about future events.


However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: • general economic and business conditions; • demographic changes; • changes in, or failure to comply with, existing governmental regulations; • 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 severe weather conditions, 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.

Forward-looking statements are found throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report.

Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission ("SEC"), the Company does not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its Annual Report on Form 10-K for the year ended December 31, 2013 and in various other filings with the SEC. The reader is encouraged to review these risk factors and filings.

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

The Company's results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 and in other filings with the SEC.

34 --------------------------------------------------------------------------------Overview Gentiva Health Services, Inc. ("Gentiva" or the "Company") is a leading provider of home health services, hospice services and community care services serving patients through approximately 500 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 Patient Protection and Affordable Care Act ("Affordable Care Act"), which represents a $39.5 billion 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.

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 16,000 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. In addition, the Company expanded its service offerings in 2013 to include community care services through its Harden acquisition in order to expand it presence along the continuum of care. 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, Hospice and Community Care segments. 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. See Note 16 to the Company's consolidated financial statements for a description of the Company's reporting segments.

Results of Operations The comparison of results of operations between 2014 and 2013 has been impacted significantly by the following items: • The Company recorded net charges relating to restructuring, acquisition and integration activities of $5.3 million for first quarter of 2014 and $0.1 million in the first quarter of 2013.

• The Company completed a significant acquisition and closed a significant number of branch operations affecting the reporting periods presented as follows: • The Company completed the acquisition of Harden HealthcareHoldings, Inc. and its home health, hospice and community care businesses on October 18, 2013. Annualized net revenues of Harden at acquisition date approximated $145 million from home health, $110 million from hospice and $221 million from community 35-------------------------------------------------------------------------------- care. Net revenues specific to Harden for the first quarter of 2014 are not available as subsequent to the acquisition date the Company has undertaken significant consolidations and closures of Harden branches in overlapping and smaller markets for which reporting of separate results is no longer available.

• During the fourth quarter of 2013 and continuing through the first quarter of 2014, the Company undertook a branch rationalization initiative to review under performing branches and has closed or consolidated 94 branches through the first quarter of 2014. As a result of the branch rationalization activities, the Company's net revenues comparisons were negatively impacted for the first quarter of 2014 by approximately $8.0 million as compared to the corresponding period of 2013.

• At March 31, 2013, the Company performed an interim impairment test of its Hospice reporting unit. Based on the results of the interim impairment test, the Company recorded a non-cash impairment charge relating to goodwill of approximately $220.8 million. As part of that analysis, the Company reviewed the valuation of its owned real estate utilized in the Hospice business. The analysis indicated that two of the Company's hospice inpatient units had estimated fair values lower than their carrying values and, as such, the Company recorded a non-cash impairment charge of approximately $1.9 million.

• In addition, the Company conducted an evaluation of the various systems used to support its field operations. In connection with that review, the Company made a strategic decision to replace its business intelligence software platform and, as such, recorded a non-cash impairment charge related to developed software of approximately $1.6 million.

Net Revenues A summary of the Company's net revenues by segment follows (in millions): First Quarter Percentage 2014 2013 Variance Home Health $ 256.0 $ 236.1 8.4 % Hospice 174.4 179.5 (2.9 )%Community Care 57.1 - - % Total net revenues $ 487.5 $ 415.6 17.3 % Net revenues by major payer source are as follows (in millions): First Quarter 2014 2013 Home Home Health Hospice Community Care Total Health Hospice Total Medicare $ 208.8 $ 163.2 $ - $ 372.0 $ 193.1 $ 167.3 $ 360.4 Medicaid and Local Government 8.5 6.2 56.4 71.1 11.2 7.0 18.2 Commercial Insurance and Other: Paid at episodic rates 15.6 - - 15.6 14.3 - 14.3 Other 23.1 5.0 0.7 28.8 17.5 5.2 22.7 Total net revenues $ 256.0 $ 174.4 $ 57.1 $ 487.5 $ 236.1 $ 179.5 $ 415.6 For the first quarter of 2014 as compared to the first quarter of 2013, net revenues increased by $71.9 million, or 17.3 percent, to $487.5 million from $415.6 million, primarily related to the acquisition of Harden on October 18, 2013.

Home Health Home Health segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. First quarter 2014 net revenues were $256.0 million, an increase of $19.9 million, or 8.4 percent, from $236.1 million in the prior year period. The increase is primarily attributable to the Harden acquisition partially offset by (i) the net decrease in Medicare reimbursement rates, effective January 1, 2014 and (ii) the effect of the 2 percent Medicare rate reduction, known as sequestration, effective April 1, 2013.

36 -------------------------------------------------------------------------------- The Company's episodic revenues increased 8.2 percent for the first quarter of 2014. A summary of the Company's combined Medicare and non-Medicare Prospective Payment System ("PPS") business paid at episodic rates follows (in millions): First Quarter Percentage 2014 2013 Variance Home Health Medicare $ 208.8 $ 193.1 8.1 % Non-Medicare PPS 15.6 14.3 9.4 % Total $ 224.4 $ 207.4 8.2 % Key Company statistics related to episodic revenues were as follows: First Quarter Percentage 2014 2013 Variance Episodes: Medicare 75,500 67,300 12.1 % Non-Medicare PPS 7,100 4,900 31.0 % Total episodes 82,600 72,200 14.5 % Revenue per episode $ 2,715 $ 2,875 (5.5 )% Episode volume for the first quarter of 2014 increased 14.5 percent as compared to the corresponding period of 2013. Admissions increased by 8.0 percent for the first quarter, from 50,400 in the first quarter of 2013 to 54,400 in the first quarter of 2014. There were approximately 1.52 and 1.43 episodes for each admission during the first quarter of 2014 and 2013, respectively.

Revenues generated from Medicare were $208.8 million during the first quarter of 2014, an increase of 8.1 percent as compared to $193.1 million in the corresponding period of 2013. Medicare revenues represented approximately 82 percent of total Home Health revenues for both the first quarter of 2014 and 2013. In both the first quarter of 2014 and 2013, Medicare and non-Medicare PPS revenues as a percent of total Home Health revenues were 88 percent.

Revenues from Medicaid and Local Government payer sources were $8.5 million in the first quarter of 2014 as compared to $11.2 million in the first quarter of 2013. Revenues from Commercial Insurance and Other payer sources, excluding non-Medicare PPS revenues, were $23.1 million and $17.5 million for the first quarter of 2014 and 2013, respectively.

Hospice Hospice revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. First quarter of 2014 net revenues were $174.4 million as compared to $179.5 million in the corresponding period of 2013. The decrease is primarily attributable to lower average daily census, partially offset by the acquisition of Harden and an increase in the average length of stay for the first quarter of 2014 as compared to the first quarter of 2013 Key Company statistics relating to Hospice were as follows: First Quarter Percentage 2014 2013 Variance Patient days (in thousands) 1,168 1,146 1.9 % Revenue per Patient Day $ 149 $ 157 (4.7 )% For the first quarter of 2014, Average Daily Census ("ADC") approximated 13,000 patients as compared to 12,700 patients for the first quarter of 2013. The average length of stay of patients at discharge was 104 days for the first quarter of 2014 versus 99 days for the first quarter of 2013.

37 -------------------------------------------------------------------------------- Medicare revenues were $163.2 million in the first quarter of 2014 as compared to $167.3 million in the corresponding period of 2013. Medicaid revenues were $6.2 million for the first quarter of 2014 as compared to $7.0 million for the corresponding period of 2013. Commercial Insurance and Other revenues in the first quarter of 2014 were $5.0 million as compared to $5.2 million in the corresponding period of 2013.

Community Care Community Care segment revenues are derived from two payer groups: Medicaid and Local Government and Commercial Insurance and Other. Net revenues for the first quarter of 2014 were $57.1 million consisting of $56.4 million of Medicaid and Local Government and $0.7 million of Commercial Insurance and Other. Billed hours for the first quarter of 2014 were 4,200 and revenue per billed hour was $14.

Gross Profit The following table reflects gross profit by business segment for 2014 and 2013 (in millions): First Quarter 2014 2013 Variance Gross Profit: Home Health $ 123.7 $ 114.8 $ 8.9 Hospice 73.9 79.2 (5.3 ) Community Care 16.8 - 16.8 Total $ 214.4 $ 194.0 $ 20.4 As a percent of revenue: Home Health 48.3 % 48.6 % (0.3 )% Hospice 42.4 % 44.2 % (1.8 )% Community Care 29.5 % - % 29.5 % Total 44.0 % 46.7 % (2.7 )% Gross profit increased by $20.4 million, or 10.5 percent, for the first quarter of 2014 as compared to the first quarter of 2013. As a percentage of revenues, gross profit of 44.0 percent in the first quarter of 2014 represented a 2.7 percentage point decrease as compared to the first quarter of 2013, primarily driven by the lower gross margin associated with the Company's Community Care business and declines in the Hospice gross margins as noted below.

For the first quarter of 2014, gross profit as a percentage of revenues within the Home Health segment declined by 0.3 percent as compared to the corresponding period of 2013. The decrease resulted primarily from the net decrease in Medicare reimbursement rates for 2014 and the effect of the 2 percent Medicare rate reduction, known as sequestration, effective April 1, 2013.

Hospice gross profit as a percentage of revenues decreased 1.8 percentage points for the first quarter of 2014 as compared to the first quarter of 2013. The decrease was primarily due to higher labor costs and increased pharmacy expenses as compared to the prior year period.

Gross profit was impacted by depreciation expense of approximately $0.2 million in the first quarter of both 2014 and 2013.

Selling, General and Administrative Expenses Selling, general and administrative expenses increased 18.2 percent, or $29.1 million, to $189.0 million for the first quarter of 2014, as compared to $159.9 million for the first quarter of 2013.

If charges, as noted below, relating to cost savings initiatives and acquisition and integration activities of $5.3 million in the first quarter of 2014 and $0.1 million in the first quarter of 2013 were excluded, the increase in selling, general and administrative expenses would have been approximately 15.0 percent, or $23.9 million, for the first quarter of 2014, as compared to the first quarter of 2013. The increase in selling, general and administrative expenses is primarily associated with the Harden acquisition.

The increase in the first quarter of 2014, as compared to the first quarter of 2013, was primarily attributable to (i) Home Health field operating, selling and administrative costs ($7.9 million), (ii) Community Care field operating, selling and 38 -------------------------------------------------------------------------------- administrative costs ($7.5 million), (iii) cost savings initiatives and other restructuring costs ($5.2 million), (iv) corporate administrative expenses ($3.6 million), (v) Hospice field operating, selling and administrative costs ($1.8 million), (vi) depreciation and amortization ($1.7 million), (vii) increase in provision for doubtful accounts ($1.0 million) and (viii) equity-based compensation expense ($0.4 million).

Depreciation and amortization expense included in selling, general and administrative expenses was $6.3 million in the first quarter of 2014 as compared to $4.6 million for the corresponding period of 2013.

Goodwill and Other Long-Lived Asset Impairment During the first quarter of 2013, the Company recorded non-cash charges of $224.3 million related to goodwill and other long lived assets.

At March 31, 2013, the Company determined that a triggering event had occurred due to lower than expected average daily census and higher than expected discharge rates during the quarter and performed an interim impairment test of its Hospice reporting unit. Based on the results of the interim impairment test, the Company's Hospice reporting unit had an estimated fair value of approximately $552 million. As such, the Company recorded a non-cash impairment charge relating to goodwill of approximately $220.8 million. As part of that analysis, the Company reviewed the valuation of its owned real estate utilized in the Hospice business. The analysis indicated that two of the Company's hospice inpatient units had estimated fair values lower than their carrying values and, as such, the Company recorded a non-cash impairment charge of approximately $1.9 million.

In addition, the Company conducted an evaluation of the various systems used to support its field operations. In connection with that review, the Company made a strategic decision to replace its business intelligence software platform and, as such, recorded a non-cash impairment charge, related to developed software, of approximately $1.6 million. The non-cash impairment charge is reflected in goodwill and other long-lived asset impairment in the Company's consolidated financial statements for the three months ended March 31, 2013.

Interest Income and Interest Expense and Other For the first quarter of 2014 and 2013, net interest expense and other was approximately $24.5 million and $22.3 million, respectively, consisting primarily of interest expense and other of $25.1 million and $23.1 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 and debt discounts. The Company's interest expense and other was partially offset by interest income of $0.6 million and $0.8 million, respectively, earned on investments and existing cash balances.

Income Tax (Expense) Benefit The Company recorded an income tax provision of $0.4 million for the first quarter of 2014. The Company's effective income tax rate for the first quarter of 2014 was 45.9 percent. The difference between the federal statutory income tax rate of 35.0 percent and the Company's effective rate of 45.9 percent for the first three months of 2014 is primarily due to state income taxes, net of federal benefit (approximately 5.3 percent), increase in tax reserves (approximately 16.1 percent) and other items (approximately 3.8 percent) offset by tax credits (approximately 14.3 percent).

The Company recorded an income tax benefit of $5.4 million for the first quarter of 2013. The Company's effective income tax rate for the first quarter of 2013 was 2.5 percent. The difference between the federal statutory income tax rate of 35.0 percent and the Company's effective rate of 2.5 percent for the first three months of 2013 was primarily due to the impact of impairment of goodwill and other long-lived assets (approximately 32.7 percent) and other items (approximately 0.1 percent), offset by state income taxes, net of federal benefit (approximately 0.3 percent).

Net Income (Loss) Attributable to Gentiva Shareholders For the first quarter of 2014, net income attributable to Gentiva shareholders was $0.3 million, or $0.01 per diluted share, compared with net loss of $207.2 million, or $6.73 per diluted share, for the corresponding period of 2013.

The Company uses adjusted income attributable to Gentiva shareholders, a non-GAAP financial measure, as a supplemental measure of Company performance.

The Company defines adjusted income attributable to Gentiva shareholders as income attributable to Gentiva shareholders, excluding (i) charges relating to cost savings initiatives and acquisition and integration activities, (ii) goodwill and other long-lived asset impairment and (iii) EBITDA impact of closed locations. The Company considers adjusted income attributable to Gentiva shareholders 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 39 -------------------------------------------------------------------------------- uses adjusted income 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 net income, operating income or cash flow statement data determined in accordance with accounting principles generally accepted in the United States.

Since adjusted income 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 cost savings initiatives and acquisition and integration activities, goodwill and other long-lived asset impairment and impact of closed locations as noted in the table below, adjusted income attributable to Gentiva shareholders was $4.8 million, or $0.13 per diluted share, for the first quarter of 2014 as compared to $7.1 million, or $0.23 per diluted share, for the corresponding period of 2013.

A reconciliation of adjusted income attributable to Gentiva shareholders to net income (loss), the most directly comparable GAAP financial measure, follows (in thousands, except per share amounts): For the Three Months Ended March 31, 2014 March 31, 2013 Per Per Gross Net of Tax DilutedShare Gross Net of Tax Diluted Share Adjusted income attributable to Gentiva shareholders $ 4,799 $ 0.13 $ 7,107 $ 0.23 Cost savings initiatives and acquisition and integration activities (5,341 ) (3,302 ) (0.09 ) (141 ) (86 ) - Goodwill and other long-lived asset impairment - - - (224,320 ) (214,198 ) (6.96 ) Impact of closed locations (1,876 ) (1,183 ) (0.03 ) - - - Income (loss) attributable to Gentiva shareholders 314 0.01 (207,177 ) (6.73 ) Add back: Net income attributable to noncontrolling interests 184 - 121 - Net income (loss) $ 498 $ 0.01 $ (207,056 ) $ (6.73 ) 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 November 2013 and generally effective until December 2016. 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 $925.0 million in senior secured credit facilities for the Company, comprising term loan facilities aggregating $825.0 million and a revolving credit facility of $100 million. See Note 11 to the Company's consolidated financial statements for additional information.

During the first three months of 2014, net cash used in operating activities was $17.7 million. In addition, the Company used $4.6 million for the repayment of debt, and $3.2 million for capital expenditures. During the three months ended March 31, 2014, the Company had proceeds of $0.6 million from purchases under the Company's Employee Stock Purchase Plan ("ESPP").

Net cash used in operating activities decreased by $2.8 million, from $20.6 million for the first three months of 2013 to $17.7 million for the first three months of 2014. The decrease was primarily due to the decline in current liabilities ($6.9 million) and accounts receivable ($1.4 million), partially offset by the change in net cash provided by operations prior to changes in assets and liabilities ($1.7 million), prepaid expenses and other current assets ($1.8 million) and other ($2.0 million).

40 --------------------------------------------------------------------------------Adjustments to add back non-cash items affecting net income (loss) are summarized as follows (in thousands): For the Three Months Ended March 31, 2014 March 31, 2013 Variance OPERATING ACTIVITIES: Net income (loss) $ 498 $ (207,056 ) $ 207,554 Adjustments to add back non-cash items affecting net income (loss): Depreciation and amortization 6,447 4,781 1,666 Amortization of debt issuance costs 1,576 3,331 (1,755 ) Provision for doubtful accounts 1,999 1,007 992 Equity-based compensation expense 2,221 1,813 408 Windfall tax benefits associated with equity-based compensation (6 ) (72 ) 66 Goodwill and other long-lived asset impairment - 224,320 (224,320 ) Deferred income tax expense (benefit) 4,301 (9,360 ) 13,661 Total cash provided by operations prior to changes in assets and liabilities $ 17,036 $ 18,764 $ (1,728 ) The $1.7 million difference in "Total cash provided by operations prior to changes in assets and liabilities" between the 2014 and 2013 periods is primarily related to net income (loss), after adjusting for components of income that do not have an impact on cash, such as depreciation and amortization, equity-based compensation expense, goodwill and other long-lived asset impairment and deferred income taxes.

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 Three Months Ended March 31, 2014 March 31, 2013 Variance OPERATING ACTIVITIES: Changes in current liabilities: Accounts payable $ (3,063 ) $ (193 ) $ (2,870 ) Payroll and related taxes (14,636 ) (10,977 ) (3,659 ) Deferred revenue 5,038 2,376 2,662 Medicare liabilities (1,762 ) 210 (1,972 ) Obligations under insurance programs (3,558 ) (1,991 ) (1,567 ) Accrued nursing home costs (1,250 ) 602 (1,852 ) Other accrued expenses (9,121 ) (25,285 ) 16,164Total changes in current liabilities $ (28,352 ) $ (35,258 ) $ 6,906 The primary drivers for the $6.9 million difference resulting from changes in current liabilities that impacted cash flow from operating activities include: • Accounts payable, which had a negative impact of $2.9 million between the 2014 and 2013 reporting periods, primarily related to timing of payments and increased volume related to the Harden acquisition in the 2014 period as compared to the 2013 period.

• Payroll and related taxes, which had a negative impact of $3.7 million between the 2014 and 2013 reporting periods, primarily due to timing of the Company's payroll processing and the impact of the addition of a significant number of employees acquired in the Harden transaction.

• Deferred revenue, which had a positive impact of $2.7 million between the 2014 and 2013 reporting periods.

• Medicare liabilities, which had a negative impact of $2.0 million between the 2014 and 2013 reporting periods.

• Obligations under insurance programs, which had a negative impact on the change in operating cash flow of $1.6 million between the 2014 and 2013 reporting periods, related to timing of payments under the Company's insurance programs.

41--------------------------------------------------------------------------------• Accrued nursing home costs, which had a negative impact on the change in operating cash flow of $1.8 million between the 2014 and 2013 reporting periods, due to the timing of payments.

• Other accrued expenses, which had a positive impact on the change in operating cash flow of $16.2 million between the 2014 and 2013 reporting periods, due primarily to increased incentive compensation and acquisition and integration reserves in the 2014 period as compared to the 2013 period.

Working capital at March 31, 2014 was approximately $99 million, an increase of $5 million as compared to approximately $94 million at December 31, 2013, primarily due to: • a $24 million decrease in cash and cash equivalents; • a $2 million increase in prepaid expenses and other current assets; • a $1 million increase in accounts receivable; • a $2 million decrease in deferred tax assets; and • a $28 million decrease in current liabilities, consisting of decreases in payroll and related taxes ($15 million), obligations under insurance programs ($4 million), other accrued expenses ($10 million), accounts payable ($3 million), nursing home costs ($1 million) and Medicare liabilities ($2 million), partially offset by increases in deferred revenue ($5 million) and current portion of long-term debt ($2 million). The changes in current liabilities are described above in the discussion on net cash provided by operating activities.

As of March 31, 2014, Days Sales Outstanding ("DSO") was 50 days, an increase of 1 day from December 31, 2013.

At the commencement of an episode of care under the Medicare and non-Medicare PPS for Home Health, the Company records accounts receivable and deferred revenue based on an expected reimbursement amount. Accounts receivable is adjusted upon the receipt of cash and deferred revenue is amortized into revenue over the average patient treatment period. For informational purposes, if net accounts receivable and deferred revenue were combined for purposes of determining an alternative DSO calculation, which measures open net accounts receivable divided by average daily recognized revenues, the alternative DSO would have been 42 days at both March 31, 2014 and December 31, 2013.

Accounts receivable attributable to major payer sources of reimbursement at March 31, 2014 and December 31, 2013 were as follows (in thousands): March 31, 2014 Total 0 - 90 days 91 - 180 days 181 - 365 days Over 1 year Medicare $ 215,797 $ 188,533 $ 18,957 $ 4,922 $ 3,385 Medicaid and Local Government 49,731 44,278 4,621 777 55 Commercial Insurance and Other 34,775 27,342 5,041 1,889 503 Self - Pay 2,934 1,740 787 358 49 Gross Accounts Receivable $ 303,237 $ 261,893 $ 29,406 $ 7,946 $ 3,992 December 31, 2013 Total 0 - 90 days 91 - 180 days 181 - 365 days Over 1 year Medicare $ 214,366 $ 186,154 $ 20,601 $ 5,552 $ 2,059 Medicaid and Local Government 48,183 44,234 3,251 637 61 Commercial Insurance and Other 35,659 28,072 5,807 1,789 (9 ) Self - Pay 2,377 1,413 669 241 54 Gross Accounts Receivable $ 300,585 $ 259,873 $ 30,328 $ 8,219 $ 2,165 42-------------------------------------------------------------------------------- The Company participates in Medicare, Medicaid and other federal and state healthcare programs. Revenue mix by major payer classifications by segment was as follows: First Quarter 2014 2013 Home Home Health Hospice Community Care Total Health Hospice Total Medicare 82 % 94 % - % 76 % 82 % 93 % 87 % Medicaid and Local Government 3 3 99 15 5 4 4 Commercial Insurance and Other: Paid at episodic rates 6 - - 3 6 - 3 Other 9 3 1 6 7 3 6 Total net revenues 100 % 100 % 100 % 100 % 100 % 100 % 100 % Home Health The Centers for Medicare & Medicaid Services ("CMS") has 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, (iv) wage index and other changes and (v) adjustments for defined rural areas of the country.

On November 22, 2013, the CMS issued the final rule for 2014 home health prospective payment system rates, which included (i) a market basket increase of 2.3 percent, (ii) rebasing of Medicare reimbursement rates, with annual reductions of 3.5 percent for each of the next four years beginning January 2014, (iii) changes in the Wage Index with no overall impact and (iv) rebasing all case mix weights to 1.0 from an average case mix weight of 1.3464 in 2012, as provided for under the Affordable Care Act. CMS has provided that the case mix weight rebasing is offset by increasing the base episodic rate by a similar amount which will increase the base episodic rate for 2014 to $2,869 from the 2013 rate of $2,138. The rule also provided for changes in low utilization payments amounts ("LUPAs") and the removal of 170 diagnosis codes, among other changes. CMS predicts that, on average, home health agencies will experience an approximate 1.05 percent reduction in reimbursement for 2014. On April 1, 2013, the automatic reductions in Federal spending, known as "sequestration" were put in place, which mandated an additional 2 percent reduction in Medicare home health payments.

Actual episodic rates will vary from the base episodic rates due to (i) the determination of case mix which reflects the clinical condition, functional abilities and service needs of each individual patient and (ii) wage indices applicable to the geographic region where the services are performed and other adjustments provided for under the CMS regulations.

Hospice On May 2, 2014, CMS released a preliminary rule, effective for hospice services provided October 1, 2014 through September 30, 2015, which provides for a 1.3 percent increase for Medicare hospice rates, consisting of a 2.7 percent market basket increase, offset by a 0.7 percent budget neutrality adjustment factor and estimated wage index changes of 0.7 percent.

In August 2013, CMS released a final rule, effective for hospice services provided October 1, 2013 through September 30, 2014, which provides for a 1.0 percent increase for Medicare hospice rates, consisting of a 2.5 percent market basket increase, offset by a 0.8 percent budget neutrality adjustment factor and estimated wage index changes of 0.7 percent. In addition, on April 1, 2013, the automatic reductions in Federal spending, known as "sequestration," were put in place, which mandated an additional 2 percent reduction in Medicare hospice payments.

Community Care Reimbursement for community care services that we provide is primarily through Medicaid and managed care providers and rates can vary state by state. There are currently various legislative efforts under way to increase minimum wage laws that could significantly impact the wage rates for personal care attendants the Company utilizes to provide such services.

There are certain standards and regulations that the Company must adhere to in order to continue to participate in Medicare, Medicaid and other federal and state healthcare programs. As part of these standards and regulations, the Company is 43 -------------------------------------------------------------------------------- subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies. Periodic and random audits conducted or directed by these agencies could result in a delay in or adjustment to the amount of reimbursements received under these programs. Violation of the applicable federal and state health care regulations can result in our exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties. The Company believes that it is currently in compliance with these standards and regulations.

Credit Arrangements At March 31, 2014, the Company's credit arrangements included a senior secured credit agreement providing (i) a six-year $670 million Term Loan B facility, (ii) a five-year $155 million Term Loan C facility and (iii) a five-year $100 million revolving credit facility (collectively, the "Credit Agreement"), and $325 million aggregate principal amount of 11.5 percent Senior Notes due 2018 (the "Senior Notes"). The Credit Agreement's revolving credit facility also includes borrowing capacity of $80 million available for letters of credit and $15 million for borrowings on same-day notice, referred to as swing line loans.

As of March 31, 2014, advances under the revolving credit facility may be made, and letters of credit may be issued, up to the $100 million borrowing capacity of the facility at any time prior to the facility expiration date of October 18, 2018. Outstanding letters of credit were $51.6 million and $52.0 million at March 31, 2014 and December 31, 2013, respectively. The letters of credit were issued to guarantee payments under the Company's workers' compensation program and for certain other commitments. As of March 31, 2014, the Company's unused and available borrowing capacity under the Credit Agreement was $21.4 million.

As governed by the indenture covering the Company's unsecured senior notes, the Company has a maximum permitted borrowing capacity, as defined, under its Credit Agreement which may limit the Company's ability to borrow up to the full capacity of the revolving credit facility.

The Term Loan B facility is subject to mandatory principal payments of $6.7 million per year, payable in equal quarterly installments, with the remaining balance of the original $670 million loan payable on October 18, 2019. The Term Loan C facility is subject to annual mandatory principal payments, payable in equal quarterly installments. The mandatory principal payments for 2014 are $11.6 million and increase each year through the maturity date of the loan, October 18, 2018.

As of March 31, 2014, the mandatory aggregate principal payments of long-term debt were $20.3 million due during the twelve months ending March 31, 2015, $27.0 million due during the twelve months ending March 31, 2016, $31.9 million due during the twelve months ending March 31, 2017, $45.5 million due during the twelve months ending March 31, 2018, $60.9 million due during the twelve months ending March 31, 2019 and $634.8 million thereafter under the Credit Agreement, and $325.0 million due in September 2018 under the Senior Notes. The weighted average cash interest rate on outstanding borrowings was 7.7 percent per annum at March 31, 2014 and 8.2 percent per annum at December 31, 2013.

Debt Covenants The Company's Credit Agreement requires the Company to maintain a maximum consolidated leverage ratio and contains certain customary affirmative covenants and events of default.

Maximum Consolidated Four Fiscal Quarters Ending Leverage Ratio March 31, 2014 to March 31, 2015 ? 6.75:1 June 30, 2015 to March 31, 2016 ? 6.50:1 June 30, 2016 to March 31, 2017 ? 6.25:1 June 30, 2017 to December 31, 2017 ? 6.00:1 March 31, 2018 and each fiscal quarter thereafter ? 5.75:1 As of March 31, 2014, the Company's consolidated leverage ratio was 5.8x. As of March 31, 2014, the Company was in compliance with all covenants in the Credit Agreement. See Note 11 to the Company's consolidated financial statements for further information on the Company's debt covenants.

Insurance Programs The Company may be subject to workers' compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover these risks with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred.

The Company estimates the cost of both reported claims and claims incurred but not reported, up to specified 44 -------------------------------------------------------------------------------- deductible limits and retention amounts, based on its own specific historical claims experience and current enrollment statistics, industry statistics and other information. These estimates and the resulting reserves are reviewed and updated periodically.

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

Capital Expenditures The Company's capital expenditures for the three months ended March 31, 2014 were $3.2 million as compared to $2.7 million for the three months ended March 31, 2013. The Company intends to make investments and other expenditures to upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry, among other things. In this regard, management expects that capital expenditures will range between $14 million and $16 million for the remainder of 2014. Management expects that the Company's capital expenditure needs will be met through operating cash flow and available cash reserves.

Cash Resources and Obligations The Company had cash and cash equivalents of approximately $62.9 million as of March 31, 2014, including operating funds of approximately $4.4 million exclusively relating to a non-profit hospice operation managed in Florida.

The Company anticipates that repayments to Medicare for (i) payments received in excess of hospice cap limits, (ii) partial episode payments and (iii) prior year cost report settlements will be made periodically. These amounts are included in Medicare liabilities in the accompanying consolidated balance sheets.

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

Management expects that the Company's working capital needs for 2014 will be met through operating cash flow and existing cash resources. The Company may also consider other alternative uses of cash including, among other things, acquisitions, voluntary prepayments on the term loans, additional share repurchases and cash dividends. These uses of cash may require the approval of the Company's Board of Directors and may require the approval of its lenders. If cash flows from operations, cash resources or availability under the Credit Agreement fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing, pursue the sale of certain assets or other investments or consider other alternatives designed to enhance liquidity.

Item 3. Quantitative and Qualitative Disclosures About Market Risk Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company is exposed to market risk from fluctuations in interest rates. The interest rate on the Company's borrowings under the Credit Agreement can fluctuate based on both the interest rate option (i.e., base rate or Eurodollar rate plus applicable margins) and the interest period. As of March 31, 2014, the total amount of outstanding debt subject to interest rate fluctuations was $840.5 million. A hypothetical 100 basis point change in short-term interest rates as of that date would result in an increase or decrease in interest expense of $8.4 million per year, assuming a similar capital structure.

Item 4. Controls and Procedures Evaluation of disclosure controls and procedures The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective as of the end of such period to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

45-------------------------------------------------------------------------------- Changes in internal control over financial reporting As required by the Exchange Act Rule 13a-15(d), the Company's Chief Executive Officer and Chief Financial Officer evaluated the Company's internal control over financial reporting to determine whether any change occurred during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during such quarter.

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