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GTIV posted their 2011 Q2 result and hosted conference call on 04 Aug 2011. The PR release can be found at:
Since posting their results and hosting the conference call, shares of GTIV have fallen like a meteor (that is faster than a rock, by the way) to the point that no future growth is apparently expected. In fact, FY2012 earnings are expected to fall 16%. Share price has fallen from $27 at the start of the year to just $6.65 presently. Holy crap. How did I end up with this stock, and what didn’t I see?

To just cover a few key numbers.
1. 2011 Q2 Revenue was $457M
2. 2011 Q1 Revenue was $459M
3. 2010 Q2 Revenue is not really meaningful due the acquisition of Odyssey in 2010 Q2

Overall Gross Margins:
1. 2011 Q2 GM: 47.7%
2. 2011 Q1 GM: 48.7%
3. 2010 Q2 GM: 54.5%
The decrease in GM from 2011 Q1 to Q2 was caused by gas/mileage reimbursement and the increased cost of clinician hires in preparation of increased sales (which did not materialize)
The decrease in GM from 2010 Q2 to 2011 Q2 was mainly due to the 5% reimbursement cut in Home Health Care by Medicare and the addition to the Odyssey Hospice Care unit (Hospice traditionally has a lower margin than Home Health Care).

Department Gross Margins:
Home Health Care (HHC) GM declined 470 basis points from 2010 Q2 (55.2% to 50.5%) due to:
1. Medicare reimbursement rate cut (5%)
2. Increased cost for newly hired clinicians
3. Softer volumes
Hospice GM declined from 45.6% to 43.9% y-o-y (it was flat sequentially) due to:
1. face to face requirements for Hospice referrals
2. lower than expected revenue

I also need to point out that GTV $21.2M in special costs this quarter:
1. $18.5M in Odyssey legal costs incurred prior to the buyout
2. $2.2M in Odyssey acquisition costs
3. $0.5M in restructuring costs

So what drove the price drop? First GTIV lowered their 2011 revenue guidance from $1.90B - $1.95B to $1.8B - $1.85B. Frankly, I don’t think this is main driver for the price drop. The decline in 2011 revenue is due to poor performance in getting more Home Health Care and Hospice patients, but is NOT due to CMS cuts because those were known at the end of the first quarter. Yes, it is bad news, but it is only one quarter. One quarter does not a trend make (just like 2011 Q1 12% increase in Home Health Care admissions did not foretell a trend there).

The main drivers for the price drop were:
1. The debt deal cutting money or potentially cutting money from Medicare (which will likely lead to future reimbursement rate cuts)
2. The 2012 HHC reimbursement rates (presented PRIOR to the debt deal are not favorable (3.35% cut although one analyst had it at 5%)
3. The 2013 HHC reimbursement rates of -2% (-5% in 2011, -3.35% in 2012 and -2% in 2013—this is going in the wrong direction for GTIV)
4. The possibility that GTIV will NOT be able to meet their debt covenant requirement to have leverage down to 4.5x EBITDA by end of 2011 and further reduced to 3x EBITDA by the end of 2013.
5. Analysts have slashed 2012 revenue estimates by 41% over the past three months.

Frankly, I think all these concerns are valid. GTIV has a huge mountain of debt ($1.028 Billion at the end of Q2), which they are slowly paying down ($20M paid down during 2011 Q2). Second, GTIV is not executing as expected although they think that they will see better results in the future. The continued cuts by CMS (Centers for Medicare and Medicaid Services) in reimbursement rates are likely to continue.

I am holding my position in GTIV at the moment. I think there is some upside from Friday’s close of $6.65 because I think the selloff was overdone. CMS has raised 2012 outlays for Hospice care by 2.5%, so that is a positive. One initiative I am watching closely is their BRIDGE program which should lead to an increase in Hospice admissions directly from their Home Health Care unit. If this is successful, the future looks brighter, but GTIV is only starting on this initiative so it will be a couple of quarters before we know.
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