Gentiva's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 4.14 | About: Gentiva Health (GTIV)

Gentiva Health Services Inc. (NASDAQ:GTIV)

Q4 2013 Results Earnings Conference Call

March 4, 2014 10:00 AM ET

Executives

John Camperlengo - General Counsel

Tony Strange - Chief Executive Officer

Eric Slusser - Chief Financial Officer

Analysts

Josh Kalenderian - Deutsche Bank

Ralph Giacobbe - Credit Suisse

Sheryl Skolnick - CRT Capital

Shubhomoy Mukherjee - Barclays

Whit Mayo - Robert Baird

Omar Vaishnavi - BlueMountain Capital

Operator

Good morning. My name is Kristy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gentiva Health Services Fourth Quarter and Full Year 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. (Operator Instructions)

As a reminder, this conference call is being recorded today, March 4, 2014. It is now my pleasure to turn the floor over to John Camperlengo, General Counsel. Sir, you may begin your conference.

John Camperlengo

Thank you, Kristy, and good morning, everyone. Welcome to Gentiva's fourth quarter and full year 2013 earnings conference call. Speaking on the call today are Tony Strange, our CEO; and Eric Slusser, our CFO.

We trust that each of you had a chance to review the company's earnings report, which was released this morning.

All statements made during this call relating to future results and events are forward-looking statements that are based on our current expectations. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings and in the cautionary statements contained in our press release on our website.

Our call today will be consistent with the SEC's Regulation FD. We encourage participants to ask their questions during the call since we have certain limitations on comments that can be made in individual inquiries.

Today's call also conforms to Regulation G regarding the reconciliation of GAAP and non-GAAP disclosure. As a result, we will not discuss non-GAAP financial measures on this call, except for those set forth in our press release.

You may access a telephone replay of this call later today through March 11th. A transcript of the call will be posted to our website and will be available for the next 12 months.

Following today's prepared remarks, we will open the call to questions. Please limit your initial comments to one question and one follow-up, so that we can accommodate as many callers as possible in the allotted time.

With that, I'll turn the call over to Gentiva's CEO, Tony Strange.

Tony Strange

Thank you, John, and good morning, everyone. Thank you for joining our fourth quarter 2013 earnings call. As you would expect there are a lot of moving parts in our results for the quarter. Our goal during the call this morning is to provide you with the details around our quarterly results, the actions that we have taken during the quarter to reduce expenses, as well as update our progress on our key initiatives.

On our last call, I discuss the rollout of One Gentiva and the acquisition of Harden Healthcare. I'll spend a few minutes updating both of these initiatives and how they will impact our 2014. And finally, I'd like to walk you through the outlook for ‘14 and provide some details around the assumptions and priorities that are included in this plan.

Let's start with our results, needless to say that the overall healthcare environment continues to be challenging, volumes in hospitals and physicians offices continued to be down and regulatory pressures on the Hospice industry continue to mute volume growth.

Overall, our volume trend this quarter are similar to recent quarters as Gentiva's Home Health business continues to perform well with steady growth and our Hospice business continues to struggle with volume. On the Harden the acquired Home Health and Community Care businesses are growing according to plan and the Harden Hospice business remains stable.

Revenues for the quarter were $493 million and adjusted EBITDA was $36 million or 7.3%, which include the partial quarter impact of Harden but exclude a Hospice billed revenue adjustment and a workers comp adjustment that Eric will cover further in his comments in just a few minutes.

These results are clearly below our expectation driven largely by the shortfall in Hospice volumes, compounded by not taking direct expenses out fast enough to correspond with the drop in ADC.

Late in the fourth quarter and end of January, we adjusted our Hospice direct expense levels to reflect the current census and took out incremental costs associated with our key fourth quarter initiatives.

With the benefit of these Hospice cost reductions, synergies from One Gentiva and Harden, the positive impact of exiting marginal markets and incremental growth from our new Community Care division, I believe that we are well-positioned to achieve our guidance for 2014.

Looking at the business in more detail, Hospice revenues for the quarter were $188 million and adjusted EBITDA was $20 million or 11%, excluding the two adjustments mentioned earlier, while admissions were up 7% year-over-year. This was driven by the addition of Harden. Excluding the impact of Harden and the sold or closed locations, admissions declined approximately 3% which drove a decline in census.

After the impact of closed consolidated and sold locations, the current Hospice census is approximately 12,900. The discharge rates due to death typically spike during the first quarter, which historically drives down census. Despite this phenomenon our census has remained stable over the first eight weeks of this year. While it's too soon to declare that our census has reached its lowest levels, I am encouraged by the most recent trends.

The Hospice industry continues to be hammered by regulatory pressures and negative publicity, making growth in this segment extremely difficult. In particular, the elimination of the adult failure to thrive and general debility admission quotes has created uncertainty and clearly has impacted the physician referral patterns compared to recent years.

The one thing that will set Gentiva apart from our industry is our people. Our Hospice employees provide great care to these 12,900 families, in the most compassionate manner one could ever imagine. It is this compassionate care along with our strategic initiatives that will ultimately stabilize our census. This coupled with the cost reduction we believe that we should see improved margins in Hospice in 2014.

Turning to Home Health, revenues for the quarter were $260 million and adjusted EBITDA was $28 million or 11%, excluding the two previously discussed adjustments. Medicare admission growth was 12% year-over-year, including Harden and the same-store Medicare admission growth was approximately 2%, excluding the impact of closed or sold locations, which is consistent with that of previous quarters.

All in all, this division continues to perform well despite a very difficult reimbursement environment and the overall softness in healthcare utilization. I’d like to say a special thank you to these employees for their continued success.

And finally, Community Care services posted revenues of $46 million and adjusted EBITDA of $6 million or 14%, which is in line with our expectations. This team is doing a very good job in managing this business and providing great service to our clients.

Overtime, we believe that the Community Care division will play a major role in Gentiva success story by expanding the referral base for Home Health and Hospice to the dual eligible population.

In summary, there are a lot of moving parts in the quarter and while I'm not satisfied with the overall results, I believe that we've taken the right steps to position the business for longer term success.

Our number one priority is stabilizing our ADC within Hospice and returning to a position of growth. We believe successfully executing on our One Gentiva strategy is the first step in achieving this outcome.

On our last call, we outlined the new operational reorganization called One Gentiva. During the quarter we made significant progress in rolling out this important initiative across all of our divisional and field operations.

To give you a sense of the magnitude of this effort prior to Harden, nearly 90% of Gentiva employees were impacted by the One Gentiva rollout in one way or another. As a result of these efforts, the company is now comprised of five regions, each led by a Regional President who has general management responsibility over all three business lines with a single sales organization focused on the delivery of a unified comprehensive service offering to our referral sources.

Importantly, the new structure provides our customers one point of contact for Gentiva to meet all the needs of their patients. As a part of this organizational restructuring effort, we closed 46 locations during the quarter after evaluating the effects of the rebasing related rate reductions, the impact of the revised admission criteria for Hospice, as well as our ability to create market density in any given market.

As an organization, we are moving to a market cluster approach to capitalize on our overlapping referral sources and breathe of services in order to focus our efforts on growing our most profitable markets.

These latest branch closings move a significantly further along this path. While the elimination of jobs and the abandoning of underserved markets has always painful for organization. We enter 2014 much better aligned across our platform with the added value of an improved cost structure to help offset some of the impact of the rate cuts.

Let's move on to the Harden transaction. Since closing the Harden acquisition on October the 18th, our field teams have been focused on ensuring a continued high level of patient care and customer service, while integrating overlapping operations.

They have followed the first do no harm approach that I’ve discussed previously to ensure that we retain key referral sources and employees. In some cases we’ve maintained higher clinical and sales staffing levels that maybe necessary to ensure that we had extra coverage to this critical transition period.

In short, we've been very careful in taking synergies during the fourth quarter but we are confident that we will realize our projected synergies without doing any harm to the business.

I'm proud of how our local market teams have worked together to identify the best approach for servicing our patients in each overlapping Home Health and Hospice market.

Based on these detailed reviews we ultimately consolidated 31 overlapping locations during the fourth quarter, which will improve profitability, while providing the best coverage options to our referral sources. We are also making good progress with our back office integration. Eric will provide some further detail around this effort in -- during his remarks.

Although still much work to be done in 2014 related to transitioning operating systems in standardizing incentive plans, I'm pleased with the overall progress that we've made with integrating Harden thus far. And I feel that we are well positioned to make Harden an important piece of the Gentiva’s success story in 2014.

In preparing for 2014, I'd like to share some thoughts and assumptions as it relates to our regulatory and legislative environments. Last November, CMS released the final home health rule that move forward with the maximum amount of rebasing cut at 3.5% each for the next four years. In the final rule, CMS acknowledged that approximately 40% of all home health agencies will be operating at a loss on or by 2017 as a result of its regulation but did not provide any full analysis of the potential access to care impact of this change.

Needless to say, this ruling could have a significant impact on the industry consolidation, a smaller home health agencies may struggle under the pressure of further cuts. The partnership for quality home healthcare along with our national trade associations continue to raise awareness on this issue nationally as the industry continues to seek relief from this rule.

We have made adjustments to our delivery model by eliminating marginal branches, reducing workforce and exiting less profitable businesses in an effort to mitigate the ongoing rate pressure in the home health. On the Hospice side, the 2014 Medicare reimbursement rate increase of approximately 1% went into effect this past October.

The next expected data point from CMS is the proposed rule for 2015 which is expected to be out sometime in late April. In a recent presentation by CMS, they indicated that they were researching Hospice data in an attempt to revise the payment methodology but are not close to recommending a new policy and therefore sweeping payment reform is unlikely in the 2015 proposed rule.

Otherwise we continue to engage with congressional offices related to the ongoing SGR position fix. Congress currently has until March 31 to resolve the SGR issue but they may also take the approach to delay this to the end of 2014.

We will continue our efforts to find some relief from this rule but our message in Washington is fairly simple, further rate cuts are unsustainable. As for community care, these services are governed on a state-by-state basis and we’re expecting rates in the four states that we service to remain substantially unchanged.

While we’ve not included expansion plans in our 2004 outlook, we are evaluating the regulatory environment in the states where we have significant density for expansion opportunities for this business, which brings me to our outlook for 2014. As disclosed in the press release, we issued this morning, we expect 2014 revenues of $1.9 billion to $2.1 billion, an adjusted income attributable to Gentiva shareholders to be in the range of $0.85 to $1.50 per diluted share.

Eric will provide additional details on our outlook in just a moment but for now I wanted to share some of my overall thoughts on how we get there. From a revenue perspective, we’re assuming that we’ll see similar volume trends across our business in 2014 led by modest growth in our home health and community care businesses while our Hospice census remains flat, which is an improvement from where the industry has seen recent trends.

We expect our new One Gentiva structure to help us achieve these goals as we increasingly capitalize on the organizations combined resources and benefit from increased referral opportunities throughout the community care division. From a cost perspective, we expect home health and Hospice to benefit from the cost savings associated with One Gentiva, Harden integration and closed or sold locations.

Hospice should additionally benefit from the direct expense reductions made late in the fourth quarter and into January. We’re expecting community care margins to remain fairly constant and as stated earlier have not included expansion plans into our outlook.

We also expect to continue to gain leverage from the benefits of the Harden synergies throughout the remainder of 2014, all of which positions the company to achieve its goals for next year. In conjunction with this outlook, our top priority is to stabilize our Hospice census and position the business for growth in 2014 while continuing to provide excellent care to our patients.

We must also execute on our One Gentiva strategy and finalize the integration of Harden. And finally, we must continue to invest in our clinical delivery system by supporting our caregivers through standardization and the better use of technology.

In conclusion, these continue to be challenging times for healthcare service providers, given the muted levels of hospital and physician volumes, as well as the negative headwinds created by regulatory pressures. Longer term home health, Hospice and community care continue to be exceptionally well positioned given the aging population and the need to take care of patients in the most appropriate and the lowest cost setting.

Today Gentiva is better positioned to provide comprehensive home care to all seniors, including the dual eligible population. We are increasingly focused on building market density through our organic as well as acquisitive growth. We're gaining efficiencies through the refinement of our operating model and the better use of technology. And we’re aligning our sales organization to meet the needs of our customers.

In closing, I want to thank all of our employees for the compassion that you bring to our patient's home each and every day. And with that, I'd like to turn the call over to Eric for some further insights into our results. Eric?

Eric Slusser

Thanks, Tony and good morning. As Tony discussed, there were a lot of moving parts in our results this quarter given the Harden acquisition, the branch closures and consolidations and our One Gentiva initiative.

Before I discuss our results further, I would like to cover a few other matters to facilitate your review. First of all, all results for the quarter include the Harden acquisition operating results from the October 18th acquisition date through year end, so there will be a lot of with and without Harden results in my comments.

The One Gentiva corporate restructuring resulted in the closure of 46 branches during the fourth quarter of 2013. Additionally, the company consolidated 31 overlapping branches as part of the integration of the Harden acquisition. Based on the net impact of acquiring Harden offset by the revenue from closed locations, net revenue comparisons for the fourth quarter and full year 2013 were positively impacted year-over-year by approximately $91 million.

During the quarter, we recorded Hospice revenue billing adjustments of approximately $6.9 million and increased our self-insurance reserves by $7.6 million to reflect adverse historical loss development trends and claims settlements. Note that unless indicated, the results and metrics I discussed will not exclude the impact of these two adjustments which impact comparability between periods.

Also note, we recorded a non-cash impairment charge related to our Hospice segment of approximately $386.1 million during the quarter, based on our year-end impairment test of the company's goodwill and other long life assets. This -- excuse me, impairment is reflective of the continued decline in the Hospice business coupled with an expected challenging growth environment given the negative press and regulatory pressures in the industry.

Finally I want to remind everyone that similar to our previous quarters, we will be highlighting results from continuing operations during our discussion. Now onto the results, for the full year 2013, net revenues from continuing operations were $1.73 billion, which was up from $1.71 billion in 2012.

For the fourth quarter of 2013, net revenues were $486.1 million compared to $425 million in the prior year. Home health episodic revenues increased 8% in the fourth quarter to $225.9 million. Hospice revenues were $180.8 million in the fourth quarter, down 3% compared to $187.3 million in the fourth quarter of 2012 based on continued lower admission and ADC trends. Community care revenues were $45.6 million from the Harden acquisition date through year end.

Turning to our home health revenue metrics during the fourth quarter of 2013, there were approximately 52,300 total admissions on an episodic basis and approximately 79,300 total episodes. On a year-over-year basis including Harden but excluding the impact of branches sold or closed, Medicare admissions grew approximately 12% and episodes grew approximately 16%.

On a comparable basis excluding Harden, Medicare admissions grew approximately 2% and episodes grew approximately 1%. The number of episodes per admission was 1.52 for the 2013 fourth quarter slightly higher than previous quarters due to the addition of Harden.

Revenue per episode for the fourth quarter was approximately $2850, which was down approximately 2% year-over-year, due largely to the reduction in Medicare reimbursement rates and the impacts from the Harden acquisition…

On the Hospice side, our consolidated average daily census for the fourth quarter of 2013 was 13,500, up approximately 5% from the fourth quarter 2012, including Harden and excluding the impact of closed and sold locations. Excluding Harden and the impact of closed and sold locations, ADC declined 6% from the fourth quarter of 2012.

Our consolidated admissions for the quarter were approximately 13,000, which was up 7% compared to the prior year fourth quarter, including Harden and excluding the impact of closed and sold locations. On a comparable basis excluding Harden, admissions declined 3% from the fourth quarter of 2012.

Our consolidated average discharge length of stay for the fourth quarter of 2013 was 107 days compared to 105 days in the fourth quarter of 2012. Our net patient service revenue per day in the fourth quarter of 2013 was $145, down from $155 due primarily to the billing adjustments discussed previously. The mix and our levels of care for our billable days for the fourth quarter of 2013 continued to be approximately 98% for routine care and 2% for all other levels.

Our Medicare cap was $0.2 million in the fourth quarter 2013, compared to $1.7 million in the comparable quarter last year. On the community care side, we had approximately 3.6 million billed hours, and we had an average revenue of approximately $13 per hour for the period that we own the business in the fourth quarter of 2013.

Total company gross profit as a percent of net revenues was 42.2% in the fourth quarter of 2013, down from 46.1% in the fourth quarter 2012. Gross margin for home health were 47.4% this quarter, down slightly from 47.8% in the fourth quarter of 2012.

Hospice gross margins were 38.3% this quarter, down from 43.8% in the fourth quarter of 2012, as our direct expenses exceeded the level required for our ADC levels and as a result of the billing audit adjustments discussed previously. Community care gross margins were 27.8%, for the period we own the business in the fourth quarter of 2013.

Turning to our selling, general and administrative expenses, excluding charges related to cost savings initiatives, restructuring, merger and acquisition activities and legal settlements. SG&A expenses in the fourth quarter of 2013 were $194.1 million, up from $156.7 million in the fourth quarter of 2012.

SG&A as a percent of net revenues was 39.9% for the fourth quarter of 2013, compared to 36.9% in the prior year period due to the Harden acquisition increases and the related synergies not coming out until late in the quarter.

From an adjusted EBITDA perspective, earnings before interest, taxes, depreciation and amortization, excluding charges related to restructuring, merger and acquisition activities, legal settlements and losses from closed locations were $21.6 million in the 2013 fourth quarter. Excluding the impact of the two adjustments discussed previously, adjusted EBITDA was $36.1 million, or 7.3% of net revenues in the 2013 fourth quarter compared to $44.2 million, or 10.4% in the prior quarter.

Full year 2013 adjusted EBITDA was $149.5 million, or 8.6% of net revenues, excluding the adjustments discussed previously, compared to $180.5 million or 10.5% of net revenues in 2012, with margins reflecting the impact of home health Medicare reimbursement rate reduction, sequestration and lower Hospice volumes.

Our effective tax rate was 41.3% in the fourth quarter of ’13, compared to a tax rate of 38.4% in the fourth quarter of 2012. Fourth quarter 2013 adjusted loss on a diluted basis was $0.14. Excluding the impact of the two adjustments discussed previously, adjusted income on a diluted basis was $0.08 for the fourth quarter of 2013. On a full year basis for 2013, adjusted income on a diluted basis was $0.66 after excluding the adjustments discussed previously.

Switching to the balance sheet, cash and cash equivalents closed the quarter at $87 million, down from $183.3 million at the end of the third quarter as we used available cash to fund part of the Harden acquisition. DSOs were 49 days for the quarter, down from 50 days at the end of the third quarter. Capital expenditures for the fourth quarter of 2013 were $4.9 million, bringing the full year total to $19.1 million.

Fourth quarter net cash from operations was $18.5 million and free cash flow was $13.7 million. From a debt perspective, we had debt outstanding on our term loans revolver and senior notes of approximately $1.2 billion at the end of the fourth quarter of 2013. Our consolidated leverage ratio for the quarter was approximately 5.4. This represents a 24% cushion to our maximum allowed leverage ratio of 6.75%, which is in place through March of 2015 before dropping to 6.5%.

The new agreement allows us to net up to $35 million of excess cash and provide significant pro forma add backs for Harden and One Gentiva savings over the first 12 to 18 months after close. With the new credit agreement, we also no longer have any interest coverage requirements. For 2014, we were required to make approximately $18 million in mandatory principal payments, spread out quarterly throughout the year.

Turning to our Harden integration activities, I'm pleased with the overall progress our teams have continued to make in the four months since we close the transaction in mid-October. From a back-office support perspective, we integrated many of the corporate organizations late in the fourth quarter of 2013. We are on track to have the rest of Harden’s back-office functions integrated by the end of the third quarter of 2014, which relate primarily to systems convergence.

Turning to our outlook for 2014, we expect net revenues to be in the range of $1.9 billion to $2.1 billion and adjusted income attributable to Gentiva shareholders to be in the range of $0.85 to $1.15 on a diluted per share basis. This outlook includes the full year impact of the Harden acquisition and the final 2014 Medicare home health and Hospice reimbursement rates issued by CMS, but excludes any ongoing losses from closed or sold locations as they are wound down.

When trending 2014, keep in mind that we anticipate more normalized earnings per share and adjusted EBITDA run rates. Starting in the second quarter, when we were able to more fully benefit from synergies associated with the Harden integration and the recent Hospice cost reductions.

Additionally, similar to many other type -- service type businesses, our businesses was negatively impacted by the widespread severe weather conditions in January and February. As a result of these factors, we estimate our first quarter results to be approximately $0.15 lower than our average quarterly results for the remainder of the year.

For 2014, we estimate capital expenditure be in the $15 million to $20 million range. We also estimate free cash flow to be in the range of $40 million to $50 million with much stronger contributions in the second and fourth quarters of the year based on the timing of interest payments and other cash items.

In summary, our home health division continues to perform well despite a tough environment and our community care division is off to a good start. We continue to believe that organizational changes associated with One Gentiva, will enable us to grow the Hospice business over time as our combined company resources are much better aligned at a local market level.

On the reimbursement side, we continue to do everything we can to educate the legislators about the benefits of home care. In the meantime, we have adjusted our strategy through efforts such as One Gentiva and the Harden acquisition to ensure we can continue to drive shareholder value despite the tough environment.

That concludes my comments. Operator, let's open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Darren Lehrich of Deutsche Bank.

Josh Kalenderian - Deutsche Bank

Good morning. This is Josh Kalenderian in for Darren. Quick question on the Hospice admissions, what do you think is mainly driving lower admissions year-over-year? I know we’ve seen a trend this year but have you guys looked at adult failures thrive, debility diagnosis, is that impacting your admissions at all and what steps you guys are taking to kind of boost admissions going forward?

Tony Strange

Well, Josh, I think that's the question of the hour and I think all of the things you just talked about are impacting admissions. But I think it's bigger than that. The elimination of the diagnosis code associated with adult failure to thrive and general debility, I think that's symptomatic. I think CMS, whether intentionally or unintentionally sent signals out to physicians to say we're watching about the kind of patients that are being admitted to Hospice and I think the physicians are somewhat gunshot today about being able to predict end-of-life.

And so I think, all of those things are causing the industry to pause and step back a little bit. I mean, I can give you anecdotal stories of where physicians have been reticent to put patients on Hospice because they couldn't identify the exact terminal diagnosis related to the patient's decline in an example of 102-year-old patient that is losing weight. So any way I think all of those things, and you couple that with the negative publicity that's been out there related to scrutiny from the OIG or from the DOJ, all of those things are weighing heavily on the Hospice industry.

I think the second half of your question, I think, is the most important piece and what you’re going to do about it. I think over time no different than I'll remind you where home health was in 2011 that over time the pendulum will balance itself, and people will come back and understand the value of in the life care and the role that it can play in the health continuum.

And I think in the mean time, what we have to do is that we have to build an organization that goes out to meet the needs of our customers and referral sources. And I think we've talked a lot about One Gentiva and about positioning the company as a post-acute care provider of services. And in doing so, I think ultimately we’ll see that turnaround in the Hospice centers.

I made a comment in my prepared remarks that typically in the first quarter of the year, we see a pretty rapid decline in census. While we did see decline in the fourth quarter, I'm pleased with thus far in 2014. We've seen that census somewhat stabilize. So I think eventually the pendulum will come back and Gentiva will be in the right place at the right to capitalize on the growth in the Hospice industry.

Josh Kalenderian - Deutsche Bank

Okay. And then, do you have a pro forma year-over-year growth rate for Harden on the community care?

Tony Strange

We've not put out any specific. We’ve not disclosed any specific growth plans for ’14 for Harden, but I’ll frame the overall growth plan, that’s in our assumptions. We assume modest growth in home health and community care and call that low-single digit that will be consistent with what we've seen in the past. And in our 2014 outlook, we have assumed a flat census for the entire -- for the year of 2014. So we’re not making big assumptions about growth in home health or Hospice other than what we had seen in recent trends. And we’re making the assumption that the ADC and Hospice stabilizes and we maintain that census throughout ’14. Is that unhelpful?

Josh Kalenderian - Deutsche Bank

Yes.

Tony Strange

Operator, next question?

Operator

Your next question comes from Ralph Giacobbe of Credit Suisse.

Ralph Giacobbe - Credit Suisse

Thanks. Good morning. So can I go back to third quarter with the guidance and sort of the implied 4Q EPS of kind of $0.30 to $0.40. I guess still struggle a little bit with what’s changed that dramatically I guess from an operational standpoint. Is Hospice sort of has been struggling? And is there other one-time elements that maybe you haven't called, haven’t mentioned or called out that we need to consider in terms of bridging sort of one you gave guidance to what the actual results for in the fourth quarter? And then just a piece of that is -- another piece of that is, what is the normalized EBITDA run rate in the fourth quarter as you see it, as you exited ones, those Hospice direct expenses were taken out?

Eric Slusser

Ralph, this is Eric. Let me about a few of the items that were in my script. So we had the one-time billing adjustments and the self-insurance reserve adjustments that those two together equate to about $0.22. Both of those came out subsequent to that announcement, subsequent to closing the deal and were a late fourth quarter items. That is part of it.

Another piece of the bridge is just the continued Hospice decline in the quarter from a revenue perspective from where we estimate it would be when we announced the deal and then the final piece. I think that Tony and I both talked about is as the revenue declined, the ADC declined. We just didn't get the direct cost of operating the Hospice business and get the cost structure rightsized with the level of ADC until the end of the December, early January. Those are really the big drivers that get you back to where our original guidance was.

Tony Strange

And then Ralph to quantify what Eric just said, if you think about in his remarks he pointed out that our average daily census in Q4 was 13,500 or thereabout, and I made the comment that our current census today was 12,900. So we saw that decline throughout early, I mean late in the quarter. And to Eric’s point, that has a significant amount of cost. Most of our caregivers in Hospice are paid on a salary basis. And so when census changes, you have to adjust your cost structure.

And I think in retrospect, we probably could've gotten after that, three or four weeks earlier than we did. We’re all fairly focused on the implementation of One Gentiva and integration of Harden. So to Eric’s point, we got that cost out late in the fourth quarter related to the decline. And I think all those things had an impact.

Ralph Giacobbe - Credit Suisse

And then just in terms of how you guys view a normalized kind of EBITDA run rate exiting the year?

Tony Strange

Well, the way you look at it in ’14, we don’t really given EBITDA guidance, but you can kind of back into it. When you look at ’14, that really has kind of that run rate, I mean. Eric?

Eric Slusser

Yeah. I think, let me -- just keep in mind that the rate that’s there, the rates I talked about in my script, when you back out the two adjustments, I think I indicated we’re at a $150 million adjusted basis for the year. Keep in mind that only includes one quarter of the Harden acquisition. So you’ve got another three quarters of that acquisition, plus all the synergies associated with that. And that's how you bridge to the current year number because that obviously would include all of that in our current year guidance.

Ralph Giacobbe - Credit Suisse

Okay.

Tony Strange

And when you think about margins on the business lines, while we haven’t guided to that aspect on an normalized basis, we kind of look at all of these businesses having very similar contribution margins.

Ralph Giacobbe - Credit Suisse

Okay, great. And then just my quick follow-up here. For the closed agencies, can you give us a sense at all of the EBITDA drag in 2013, I assume it was a drag?

Tony Strange

Yes. Give me a second, we will get that and I will answer Ralph before the call is over.

Ralph Giacobbe - Credit Suisse

Okay, great. Thank you very much.

Tony Strange

Operator, next question?

Operator

Thank you. Your next question comes from Sheryl Skolnick of CRT Capital.

Sheryl Skolnick - CRT Capital

Good morning, everyone. Thank you for taking my question. And if you could just help me to understand sort of basis of where the adjusted EPS comes from. First of all, you mentioned loss of $0.14 in the quarter. Did you then say that would adjust out to a loss of $0.08 or income of $0.08?

Eric Slusser

Sheryl, this is Eric. That was income. That’s kind of the $0.22 added back for those two big items in the fourth quarter. So, it’s a positive $0.08.

Sheryl Skolnick - CRT Capital

Okay. So that was a positive $0.08. All right. That’s what I thought you said. And so -- and I apologize for asking these little details, but I just want to make sure I get the math right here because I am trying to get to a run rate of what we can look for, for 2014 off the fourth quarter. So then if that was sort of the $0.08 here and the net income associated with that, which is [completely] the $0.08 times per share count, correct. And then I could figure that out by backing out the after-tax, what tax rate did you use to get to that positive $0.08?

Eric Slusser

Typically right around 41% was our effectively rate for the quarter.

Sheryl Skolnick - CRT Capital

So you use the effective rate. Okay. I got that. All right. So if we look at that $0.08, clearly that doesn’t reflect full quarter’s worth of synergies. It doesn’t reflect all of the puts and takes with respect to the weather in the first quarter, etcetera, etcetera. So if I just look at that $0.08 though and I say okay there is going to be, by time that we get to the back end of the year, you’re going to get the synergies, presumably you’re going to get some cost savings from the other initiatives.

And if I take your guidance about the $0.15 of pressure on the first quarter from all of the weather and look at it dollar as being kind of a nice round number in between $0.85 and the $1.15 and happens to the midpoint. Should I be thinking about the first quarter in the neighborhood of $0.10 and the rest of the quarter splitting up $0.90? Is that the right way to think about this and then you’d be looking at an $0.08 growing to $0.10 growing too significantly larger amount in the back end is all the positive?

Eric Slusser

Yes. I think, Sheryl, directionally with the comment I gave, that's somewhat directionally correct, clearly the weather, the week of January, and then more so the week of February that we got hit hard impacted as we looked at it 70% of our locations. And then here we are again this week the North, Northeast, Midwest and everything about Georgia getting hammered again. So directionally with the number I gave of about $0.15 below, the average of the other quarters should get you directionally in that ballpark.

Sheryl Skolnick - CRT Capital

Okay. So as you move through the year and you begin -- and you’re integrating, you’re getting these synergies and presumably you get the stability in the Hospice business, which I’m still not sure how you get there, but just, I guess, for the cross-selling and everything. As you move through the year and you think about then in the fall having to do the ICD-10, what kind of impact are you assuming in all of this for potential disruption as you convert not only the systems conversion at the same time and achieve cost savings and stabilize the Hospice business but also implement the conversion to ICD-10?

Tony Strange

That’s a really good question, Sheryl. You’re right ICD-10 is going to have an impact on the business. Matter of fact in our 2014 guidance, we have included additional cost of about $5 million that it’s going to take us to comply with the ICD-10. And that’s not necessarily like that a one-time type number. We expect there’s going to be ongoing cost associated with managing ICD-10. The good news is that its biggest impact will be on our home health business. It will have some impact but not a tremendous impact in Hospice and they will have virtually no impact on community care.

So you have to kind of think through the different business lines and how that affected. But your first communist is spot on. Our number one priority is to get that ADC in our Hospice business stabilized. And when we can find, when I can be on this call and declare that our Hospice census is at the lowest point or has been at the lowest point that it’s going to be at, then that’s one will be able to begin the growth. But you’re right to have that somewhat that skepticism until I'm able to make that as a definitive statement.

Sheryl Skolnick - CRT Capital

Yeah. I guess what I’m concerned about and I don’t mean to monopolize this. But what I’m concerned about is how much you have on your plate? I mean, the life is not for the fear fall and you need to be little fearless when you see the opportunities and I get that. But there’s an awful lot coming down the pike on in this year, there's a lot riding on this year. I hate to ask it, but I’m going to ask it. Are you sure you can handle all of this? What you have and what protections do you have in place? Which structure do you have in place to make sure that there is consistency of results and accountability and progress and success?

Tony Strange

Well, Sheryl, the thing that you’re highlighting is that this industry right now is in turmoil. The post-acute care space, the services healthcare, services industry is going through a pretty difficult time. I think the thing that gives me the greatest confidence that we can handle this is that at Gentiva, it’s not Tony or just Eric, I mean we’ve got a team of seasoned folks around this table that have been together for the better part of sometimes as much as two decades, but clearly at least in 10 years. And I’ll put this group of people I don’t feel on any given day.

And when changes are given to us, we will find ways to adapt to those changes and we will come out the other side. What our industry needs right now more than anything is a year or two of stability. What we need is just a little bit of a window where we’re not having to digest massive change after change, but eventually we will come through this. And you’ve been in this business for a long, long time ourselves, and you've seen this pendulum swinging and we’ll go through this dark period and eventually the sun will come up again. And those that perseverance and as a good friend of my mine says always stat at the table, those companies will be successful in the long run.

So in short, the answer what gives me the confidence is the team of people that we have sitting around the table at Gentiva.

Sheryl Skolnick - CRT Capital

Fair enough. Thank you very much for your patience and answering my question.

Tony Strange

Thank you.

Operator

Thank you. Our next question comes from Shubhomoy Mukherjee of Barclays.

Shubhomoy Mukherjee - Barclays

Hi, quick question on your guidance. So I do understand that you don’t give out explicit EBITDA guidance. But if we back off from the $1 per share EPS number, take a 41% tax rate, about $90 million of interest cost and $25 million of depreciation. You get to an EBITDA run rate of about 175, which will one seems to be very short of 210 to 220 that you had guided to when you did the bank deal? And secondly, if you can just tell us how much of synergy that baked into this number, because it’s based on the 175 run rate, it seems that it would be pretty close to the 6.7 times total leverage covenant? Thanks.

Eric Slusser

Yeah, let me address that first analysis, while we don't guide the EBITDA. I think you throughout a $90 million interest number and I believe that’s the cash number. I always remind you that you incur cost issue debt that get differed and amortized over the life of the debt. So you have to include all of that non-cash debt amortization in your calculation. So that maybe a number that you’re little low on because the $90 million is the cash-only interest rate and this -- what was the second part of the question?

Shubhomoy Mukherjee - Barclays

Yeah. The -- we wanted to understand that how you would stack up from the covenant perspective. And first of all, how much of synergies is baked into the estimate and how do you think you would compare stack up from the covenant compliance perspective?

Eric Slusser

And baked into, synergies baked into what estimate?

Shubhomoy Mukherjee - Barclays

Into your guidance for next year?

Eric Slusser

Well, we have estimated synergy similar to what we had disclosed. When we did the transaction we expected to get a lot of the corporate synergies early on and on a run rate basis we've got a good amount of those. The rest of them will come in the next three months as we integrate the rest of the IT back office systems and also our two billing systems, their Hospice system and there are home health system will get converted to ours in the first nine months of the year.

The other synergies are ongoing in processes. As I think, I said, when we did the deal, the estimate was on our run rate basis. We would have them all in by the fourth quarter of 2014 and that’s still our expectation.

Shubhomoy Mukherjee - Barclays

And the covenant issue?

Eric Slusser

I think, I talked about that, we have significant add backs in the transaction for our deal, as I said, our cap is at 6.75. So you can take that number and backing off of our total debt, what the kind of the full years of EBITDA. We are well and excess of that. I said we’re at 24% cushion and really had a leverage ratio. We’re right where we were when we closed the deal.

Shubhomoy Mukherjee - Barclays

No. I mean, the question I have is you have a 24% cushion-based on LTM basis. But I mean, if you’re looking at forward EBITDA, when you start analyzing the full benefit, the full impact of sequestration and the rate cuts and all the weakness in the Hospice business. You’re looking at your EBITDA run rate on a pro forma including Harden call it between 175 and maybe 180 -- maybe 185.

That gets you pretty close to the cushion relative to the 6.75 times drops quite dramatically. So could you give us some color on what the if -- it will really help if you can give us some insight of what the implied EBITDA range for next year would be? Well it helps us understand what the cushion versus the covenant would look like next year?

Eric Slusser

Yeah. Well, you got to remember that credit agreement has significant pro forma add backs for the next 18 months. That are over and above what your pro forma is for synergies, for One Gentiva savings that were designed to provide significant cushion and they will continue to do that.

I think if you go back to the transaction. Again, we are not guiding the EBITDA but you are guessing that numbers when you start talking about 175 and I gave you one of the items that on the interest amortization that significantly impacts that.

But if you go back to the guidance we gave, when we did the deal, we didn't give guidance other than an EBITDA range that was pre-equity comp. And I think if you take that number and dial back the ICD-10 costs that are new that Tony talked about. You’ve clearly got first quarter weather issues that I've talked about, Tony’s talked about.

And then the ongoing Hospice reductions that kind of bridges here from what we previously guided and the events that have come-up subsequent to that and where we are today.

But we are very comfortable where it’s at and our cushioning going forward. We’ve look at this and looked at a 12 months out and our agreement was designed to give us the cushion and its there are, there are no concerns about our covenant cushion going forward.

Shubhomoy Mukherjee - Barclays

Thanks for that.

Operator

Thank you. Your next question comes from Whit Mayo of Robert Baird.

Whit Mayo - Robert Baird

Hey. Thanks. Good morning. Tony, there’s been some discussion of about Hospice and Part D drugs and what’s billable and what’s not. Do you just have any color on what that means for you and broadly for the industry?

Tony Strange

Yes. And thank you for phrasing the question in that way because I do think that that what it means for us might be a little bit different than what it means for the whole industry.

You are correct, CMS has put out some guidelines that are very specific as to what drugs are going to be included in the Hospice benefit and what drugs are not. Gentiva has always -- Gentiva and legacy Odyssey, and then even the Harden business have always been relatively conservative about covering drugs.

And so, when you -- if you had, if you were to look at industry averages, Gentiva’s drug expense historically has been a little bit higher, has run higher than what we might see in the industry related to the kinds of drugs that we’re covering.

With all that said, in our 2014 guidance we have made an assumption that we are going to see drug costs go up in 2014 as we begin implementing this throughout all of our offices. With that said, I think you have -- you probably read some things where people are expecting, I have seen some reports as high as 30% increase in drug cost, numbers typically being between 15% and 30% in estimation. We will see a number significantly less than that primarily because we have already been covering those drugs. Does that help?

Whit Mayo - Robert Baird

Yes. I know it does and may be you don’t really want to disclose the numbers but is there a way to sort of frame up what the potential exposure could be?

Eric Slusser

Well, I don’t want to try to give line item guidance for ‘14 but we have baked -- we baked into our 2014 outlook, call it a 10% to 15% increase in drug cost.

Whit Mayo - Robert Baird

Drug cost represents how much of your cost structure? Or percent of revenue, is there any way to frame that up?

Eric Slusser

Yeah, we just never -- we've never given guidance on line item cost in the Hospice but you know you are...

Whit Mayo - Robert Baird

That's okay. Yeah, I think I have got an idea.

Eric Slusser

Its labor -- it really a PPD, it’s PPD labor expense, PPD for drugs and PPD for DME that represents the bulk of the direct cost in the Hospice P&L.

Whit Mayo - Robert Baird

Yeah, got it. And I know there are a lot of moving pieces with the One Gentiva initiative. Is there a anticipated cost savings figure that’s associated with that initiative and I guess the corollary to that question is I am trying to get a sense of the progression of the anticipated savings from this program and presumably it will be more back half loaded than the front -- than the first half. So I don’t know Eric if you can kind of speak to that?

Tony Strange

Yeah, we haven’t given that out. I mean a lot of -- as oppose to the savings, the savings were mostly generated around infrastructure. Headcount cuts across all of our regions as we collapse home health and Hospice together. The benefit come as you indicated as we get into ‘14 when we start seeing the realization from One Gentiva in the market place but I have to take to put a number on the actual savings achieved.

Whit Mayo - Robert Baird

Got it. I know that’s fine. And may be just one last one, the 46 locations that you are closing, one, how much of that is -- first actually is there a corresponding revenue number associated with those agencies as for modeling purposes and then two…

Eric Slusser

Yes. And let me just route that and I have those numbers. Let me just give them to you. For the year, it was about $41 million of revenue and about $7 million of EBITDA loss, a lot though that comes remember when we done this before, once you close the site down, the losses deteriorate pretty rapidly because you have no further revenue and you have ongoing cost to serve the patients. So a good chunk of that EBITDA loss comes in the fourth quarter versus the ongoing losses we were incurring on those sites in quarters one, two, three.

Whit Mayo - Robert Baird

That's helpful. And how much of that is Hospice versus home health.

Eric Slusser

We didn’t give that breakdown.

Whit Mayo - Robert Baird

Okay.

Eric Slusser

I think of the locations, I can give you the locations here of the 40, 46, excuse me -- 49, 28 were Hospice.

Whit Mayo - Robert Baird

I am sorry, how many were Hospice?

Eric Slusser

28 of the 49.

Tony Strange

46.

Eric Slusser

46, I am sorry.

Whit Mayo - Robert Baird

And I guess one last one and I will hop off but is there a good tax rate number to think about for 2014 that you used to construct your guidance?

Eric Slusser

Yes, we just use 41%.

Whit Mayo - Robert Baird

Okay. Thanks Eric.

Tony Strange

Operator, I think we have time for one more question.

Operator

Thank you. Your next question comes from Omar Vaishnavi of BlueMountain Capital.

Omar Vaishnavi - BlueMountain Capital

Hey, guys. Thanks for taking the question. I did want to ask a little bit more for some of the details behind the billing and insurance reserve issues like how did you guys find that about that. Is that going to be a problem at all in the future, what led to the problem, just some background?

Tony Strange

Well, Eric, one I take the billing adjustment and I will let you talk about worker’s comp. Omar we have a very rigid internal audit process that we go through and are looking at all of our branches and given the scrutiny specifically with Hospice and making sure the appropriate level of care, we go through in our audit process and look for places where we may not have the appropriate documentation to back up a certain level of care and we typically make those adjustments and we refund those dollars.

In the fourth quarter, we took an additional reserve for claims that we think that we might need to repay and also we took a reserve. We increased that reserve on a go-forward basis for 2014 to make sure that we were adequately prepared for any adjustments that come up. So it really came through an internal audit process from our prospective. Eric, why don’t you touch on the workers comp reserve.

Eric Slusser

Yeah, the workers’ comp is really made up of two items. Part of it is claims, settlements on claims, some of which are 15-years old, that a dispute arose late in the fourth quarter from one of our third-party insurance administrators that was a settlement process. The other comes out of our annual actuarial review where the actuaries did a more of a deep dive actual claim audit of all of our workers’ comp claims over $10,000, and as a result of that determined that from an actuarial basis, the reserves needed to be increased on a one-time basis.

Omar Vaishnavi - BlueMountain Capital

Got it. That's very helpful. So it sounds like both of the issues at least partially related to prior periods and not just Q4, not even just 2013. So, I know you had included in your EBITDA results for the fourth quarter, but from a run rate prospective you don’t think those things we should focus on going forward?

Eric Slusser

Yes, that’s why I gave you the adjusted out versions of those numbers in my previous comments.

Omar Vaishnavi - BlueMountain Capital

Okay. That's helpful. And the other question I had is sort of just the general matter. Can you guys think, tell us how you are thinking about the capital structure? I know your bonds become callable later this year, what kind of opportunities are you guys are seeing there and if you’ve had any early conversations with banks about what kind of options you have there?

Eric Slusser

Well, we are always looking at the capital structure and clearly with the Harden acquisition and all of the focus on that, really this year that is our focus, the first six months of the year. As you indicated, it’s not until August when those bonds become callable and that will be a function of where the markets pricing the debt add at that time, but clearly our eyes are on that because that's the key next thing we want to focus on. As to the question about the banks, same thing, I mean, constant communication, discussion with them, discussing ideas that we might look at. But as we sit here today that’s still ways off, we will start to talk about that as probably as we get through the second quarter and get closer to that August date.

Omar Vaishnavi - BlueMountain Capital

Got it. Two more quick questions, one, did you guys -- can you guys tell us what your share count assumption was for your 2014 guidance, was it 36 million or?

Eric Slusser

Yes. It will be almost 37 million with the full shares in from what was issued as part of Harden, we are using right at 37 million.

Omar Vaishnavi - BlueMountain Capital

Okay. Got it. The last question is, you guys mentioned some of the costs you are going to incur for ICD-10. I imagine a lot of smaller agencies will be even more impacted than you given a lot of them don’t even have the technology infrastructure. But in terms of the actual coding related changes from ICD-10 from ICD-9, what kind of impact do you think that will be on the business, or do you think that won’t be much at all?

Tony Strange

Yeah. I think if there is going to be ongoing cost associated with having to code for ICD-10, I mean, if you think about, I mean it’s basically taking from 15,000 to 85,000 different scenarios from a coding prospective. So, I think all companies are going to have to make investments in their coding, not just technology but in their coding intellectual property if you will. And that's in our assumption. We are assuming that we are going to have to make more investments into people who do that kind of coding.

Omar Vaishnavi - BlueMountain Capital

Got it. But you think your blended average revenue per visit or whatever won’t change at all from the codes itself, it’s just the cost structure that changes?

Tony Strange

No, I wouldn’t anticipate revenue changing from a coding prospective. But that's why we have to invest in. If you didn’t make those investments then you might make the assumption that revenues could be impacted.

Omar Vaishnavi - BlueMountain Capital

Got it. Thank you. That answers my questions.

Eric Slusser

Sure. Okay. Operator, I think that we are out of time. I’d like to again say thank you to all of the Gentiva employees for what you do everyday. And I would like to thank everybody on the call for joining us and I look forward to talking to you in a couple of months. Thank you.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

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