================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 30, 2003
REHABCARE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-19294 51-0265872
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification
incorporation) Number)
7733 Forsyth Boulevard
17th Floor
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 863-7422
================================================================================
Item 7. Financial Statements and Exhibits.
(c) Exhibits
The following exhibits are furnished pursuant to Item 9 and Item 12 hereof
and should not be deemed to be "filed" under the Securities Exchange Act of
1934:
99.1 Press release dated July 30, 2003, announcing our earnings for
the 2nd quarter 2003
99.2 The script for a conference call held by the registrant on
July 30, 2003
Item 9. Regulation FD Disclosure.
The information in Exhibits 99.1 and 99.2 is incorporated herein by
reference.
The following information required to be reported under Item 12 of this
Current Report on Form 8-K (the "Report") pursuant to Securities and Exchange
Commission (the "Commission") Release No. 33-8176 is disclosed herein under
Item 9 of this Report in accordance with Commission Release No. 33-8216.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: July 30, 2003
REHABCARE GROUP, INC.
By:/s/Vincent L. Germanese
-----------------------------------------------
Vincent L. Germanese
Senior Vice President, Chief Financial Officer
and Secretary
EXHIBIT INDEX
Exhibit No. Description
99.1 Press release dated July 30, 2003, announcing our earnings for the 2nd
quarter 2003
99.2 The script for a conference call held by the registrant on July 30, 2003
Exhibit 99.1
CONTACT: RehabCare Group, Inc.
John H. Short, Ph.D.
Interim Chief Executive Officer
Vincent L. Germanese
Chief Financial Officer
Betty Cammarata, Director-Investor
Relations
(314) 863-7422
or
FD Morgen Walke:
Gordon McCoun/Lanie Fladell
Press: Sean Leous
(212) 850-5600
FOR IMMEDIATE RELEASE
Wednesday, July 30, 2003
REHABCARE REPORTS SECOND QUARTER 2003 DILUTED EPS OF $0.27,
OPERATING REVENUES OF $136 MILLION
- Announces Restructuring Plan -
- Updates Guidance for 2003 -
ST. LOUIS, MO, July 30, 2003--RehabCare Group, Inc. (NYSE:RHB) today reported
financial results for the second quarter and six months ended June 30, 2003.
Comparison results for the quarter and six months follow. Numbers are in
millions, except per share data.
Quarter Ended Six Months Ended
June 30, March 31, June 30, June 30,
2003 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Consolidated Net Earnings $ 4.5 $ 4.0 $ 5.9 | $ 8.5 $ 9.9
Consolidated Operating Revenues 136.0 138.8 140.8 | 274.9 279.1
Consolidated Earnings Per Share 0.27 0.25 0.32 | 0.52 0.54
- --------------------------------------------------------------------------------
HRS Inpatient Operating Revenues 33.8 34.1 32.1 | 67.9 63.8
HRS Outpatient Operating Revenues 12.5 12.0 12.6 | 24.6 24.8
- --------------------------------------------------------------------------------
HRS Operating Revenues 46.3 46.1 44.7 | 92.5 88.6
HRS Operating Earnings 7.9 7.1 7.8 | 15.0 14.4
- --------------------------------------------------------------------------------
Contract Therapy Operating Revenues 32.9 30.9 25.6 | 63.8 49.0
Contract Therapy Operating Earnings 1.8 1.7 2.1 | 3.6 3.7
- --------------------------------------------------------------------------------
Supplemental Operating Revenues 32.5 35.4 44.3 | 67.9 90.4
Travel Operating Revenues 24.7 26.7 26.2 | 51.4 51.1
- --------------------------------------------------------------------------------
Staffing Operating Revenues $57.2 $62.1 $70.5 | $119.3 $141.5
Supplemental Gross Profit Margin 20.4% 20.3% 23.9% | 20.4% 23.2%
Travel Gross Profit Margin 19.0 19.8 21.5 | 19.4 21.4
- --------------------------------------------------------------------------------
Staffing Gross Profit Margin 19.8% 20.1% 23.0% | 20.0% 22.5%
Staffing Operating (Loss) $(2.1) $(2.0) $(.3) | $(4.1) $(2.0)
- --------------------------------------------------------------------------------
-MORE-
Highlights of the second quarter results are:
o The Hospital Rehabilitation Services division achieved continued growth in
operating revenues in the inpatient segment year-over-year as a result of
improved revenues per unit. Sequentially, revenues were flat despite a
reduction of 4 average units. Outpatient operating revenues were flat
year-over-year and up in the sequential quarter demonstrating improved
revenues per facility despite one fewer program.
o The Contract Therapy division continued strong revenue growth resulting
from a higher number of locations and higher revenues per location
year-over-year and sequentially. Earnings were negatively impacted by
increases in contract labor and salary-related expenses. Although operating
revenues and earnings increased sequentially, both were slowed by greater
than expected closures as the Company manages payment risk.
o The Staffing division experienced continued declines in operating revenues
for both supplemental and travel year-over-year and sequentially. Gross
profit margins in both segments declined year-over-year as a result of
increased salary-related expenses, which could not be passed on to our
customers.
Diluted shares outstanding decreased by 10.1 percent from last year's
second quarter and 9.8 percent from last year's six months, primarily due to the
repurchase of 1.7 million shares under the stock repurchase program, which was
completed during the second half of 2002.
Commenting on the results, John H. Short, Ph.D., Interim Chief Executive
Officer, stated, "Each of our businesses is facing significant regulatory,
resource and industry pressures, which are negatively impacting their operating
performance. While we have been addressing these issues through closing of
unproductive facilities and reducing expenses, the performance of the businesses
is still not satisfactory. Accordingly, we have instituted a comprehensive
multi-faceted program to return our company to growth and improved
profitability."
Key elements of the program are:
1. An examination of the Company's service offerings, emphasizing a continuum
of services approach to redesign the value proposition of our existing
services. A value proposition defines the value received by our clients
from RehabCare's services in profits or quality improvement compared to
cost.
2. Enhancement of client relationships to provide more comprehensive service
offerings creating long-term partnerships;
3. Acquisitions in each division; and
4. Operational restructuring, which will ensure RehabCare's competitiveness in
the marketplace.
Elaborating on the program, Dr. Short stated, "We are retooling our product
offerings in each of our divisions to make them more market responsive. For
example, in our HRS and Contract Therapy divisions, using a model developed with
one of our longest standing clients, we are creating a continuum of
rehabilitative service delivery covering inpatient, outpatient and skilled care,
both inside the hospital and freestanding. Driving this continuum is a value
analysis that helps us identify needed enhancements over the life of our
relationship."
"In our staffing division, we are working on several important projects.
The first is to fully integrate our travel and supplemental operations to enable
us to provide a single point of contact to our clients. This capability will
enable us to implement a market management concept focused on client
relationships, and will allow us to reduce our reliance on costly branch
operations. The second project involves developing the systems and processes
necessary to implement a variable staffing management program that emphasizes
clinical personnel development and the optimization of variable labor usage
through partnership with our clients. Our third initiative is demonstrating
measurable quality through our partnership with Simulis LLC, a global provider
of simulation-based e-learning and training solutions. We believe this will
distinguish us to our clients, allowing us to offer objective and measurable
competency and skill set validation for our professionals on assignment. We
believe that the value proposition of this approach is significant, offering
tangible bottom line improvement to a typical hospital."
Further discussing the second part of the program, Dr. Short stated, "We
are committed to becoming less transaction-oriented in our business and more
focused on comprehensive, long-duration partnerships with our clients. To
accomplish this, we are developing alternatives to our typical relationships.
For example, we are prepared to invest significant capital to develop joint
ventures which allow us to deliver inpatient and outpatient rehabilitation in a
variety of settings in association with major hospitals and health systems.
Another important initiative is the opportunity to deploy capital to develop de
novo programs or expand programs within hospitals to meet patient demand. We
have existing, but preliminary, negotiations underway with a number of hospitals
to more fully develop these types of arrangements. With our strong balance sheet
and operating cash flow, we can easily handle a number of these larger
opportunities annually. These examples could provide us with accelerated growth
potential, longer client relationships, and a base to expand our continuum of
services in partnership with the dominant hospitals and health systems in their
respective marketplace.
"Longer term client relationships are essential to our strategy in StarMed
as deeper relationships allow us to shift our resources from selling and back
office operations to the development and placement of highly qualified nursing,
allied health, and clinical resources within our provider clients. To facilitate
closer customer contact, integration of our information systems with our clients
is required. An initiative with Bond International Software PLC and their Adapt
system, recently announced, provides us the wherewithal to accomplish this early
in the first quarter of 2004.
"The third part of the program re-invigorates the use of strategic
acquisitions as a tool to develop critical mass and market relationships in
priority locations for StarMed, further accelerates growth and therapy resource
availability for Contract Therapy and identifies program continuum opportunities
in larger markets with key hospitals in HRS. We have assigned experienced senior
executives to focus a significant part of their time on developing a pipeline of
opportunities for us to consider."
Describing the fourth part of the program, Dr. Short stated, "We are currently
executing a restructuring of our operations that includes a cost reduction
target of some $12 million annually across all aspects of our operations. This
restructuring eliminates management redundancies in Hospital Rehabilitation
Services and reduces operating overhead in Contract Therapy, StarMed, and our
corporate support services. Approximately 75 positions are affected, saving $5.7
million, or 47.5 percent of the target. Other components include restructuring
our health insurance programs (25 percent) and vendor relationships and reducing
our discretionary expenditures makes up the balance. We intend to complete this
restructuring in the third quarter."
Dr. Short continued, "Given our operating results through the first six
months and our outlook for the balance of the year, we are updating our guidance
for 2003. We now expect operating revenues of $530 million to $545 million,
earnings before interest, taxes, depreciation and amortization (EBITDA) between
$39 million and $43 million and diluted earnings per share in the range of $1.09
to $1.23. Our guidance incorporates a one-time termination benefits charge
estimated at $.6 million after-tax we expect to take in the third quarter (about
$.036 per diluted share), the estimated impact of the therapy caps effective
September 1 and minimal impact of the 75 percent rule, if implemented, this
year, as well as a 40 percent effective tax rate for the remainder of the year.
In addition, our guidance assumes a continued decline in supplemental segment
operating revenues in the third quarter consistent with that in the preceding
two quarters with no further decline in the fourth quarter due to seasonal
effects."
Dr. Short concluded, "Despite these challenges, we have a strong balance
sheet and continue to generate sufficient cash flow to fund our operations and
provide capital for the growth and profitability initiatives mentioned above. We
are determined to execute our plan to return our company to our historical
growth rates and look forward to reporting our progress in future quarters."
RehabCare Group, Inc., headquartered in St. Louis, is a leading provider of
program management of inpatient rehabilitation and skilled nursing units,
outpatient therapy programs, contract therapy services and temporary healthcare
staffing services in conjunction with over 7,000 hospitals, nursing homes and
other long-term care facilities throughout the United States. RehabCare is
pleased to be included in the Russell 2000 and Standard and Poor's Small Cap 600
Indices.
A listen-only simulcast of RehabCare's second quarter conference call will
be available on the Company's web site at www.rehabcare.com and online at
www.companyboardroom.com, beginning at 10:00 Eastern time. An online replay will
be available for at least 21 days after the call. A telephonic replay of the
call will be available beginning at 1:30 P.M. Eastern time today and ending at
midnight on Tuesday, August 13. The dial-in number for the replay is (320)
365-3844 and the access code is 691427.
This release contains forward-looking statements that are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
differ materially from forecasted results. These risks and uncertainties may
include, but are not limited to, the cost, effect and timing of restructuring
activities that have been commenced, including our ability to achieve the annual
expense reductions anticipated; the timing and rate of the resumed growth in the
staffing division; changes in and compliance with governmental reimbursement
rates; regulations or policies affecting the hospital rehabilitation services
and contract therapy divisions, including our estimates with respect to the
effect of newly promulgated regulations on the Company's business; our ability
to attract new client relationships or to retain and grow existing client
relationships through the integration of our new information system with those
of our clients and the development of alternative product offerings; our ability
to identify and consummate strategic acquisitions to accelerate growth in our
divisions; our ability, and the additional costs, to attract operational and
professional employees; significant increases in health, worker's compensation
and professional and general liability insurance premiums; the adequacy and
effectiveness of operating and administrative systems; litigation risks,
including our ability to predict the ultimate costs and liabilities or the
disruption of RehabCare Group's operations; competitive effects on pricing and
margins; and general economic conditions, including efforts by insurers,
healthcare providers and others to contain healthcare costs.
NOTE: More information on RehabCare can be found on the World Wide Web at
http://www.rehabcare.com.
- ------------------------
-MORE-
I. Condensed Consolidated Statements of Earnings
------------------------------------------------
(Amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2003 2002 %Change 2003 2002 %Change
---- ---- ------- ---- ---- -------
Operating revenues $136,043 $140,836 (3.4) $274,885 $279,065 (1.5)
Costs & expenses
Operating 102,215 103,623 (1.4) 206,905 206,449 0.2
Selling, general
& administrative
Divisions 17,137 18,839 (9.0) 35,427 37,819 (6.3)
Corporate 6,939 6,813 1.8 13,735 14,759 (6.9)
Depreciation
& amortization 2,106 2,035 3.5 4,345 3,960 9.7
------- ------- ------- -------
Total costs
& expenses 128,397 131,310 (2.2) 260,412 262,987 (1.0)
------- ------- ------- -------
Operating earnings,
net 7,646 9,526 (19.7) 14,473 16,078 (10.0)
Other income
(loss), net (53) 1 N/M (73) 4 N/M
Interest expense, net (154) (55) 180.0 (305) (114) 167.5
------- ------- ------- -------
Earnings before
income taxes 7,439 9,472 (21.5) 14,095 15,968 (11.7)
Income taxes 2,982 3,600 (17.2) 5,594 6,068 (7.8)
------- ------- ------- -------
Net earnings $ 4,457 $ 5,872 (24.1) $8,501 $ 9,900 (14.1)
======= ======= ======= =======
Diluted earnings
per share $ 0.27 $ 0.32 (15.5) $ 0.52 $ 0.54 (4.6)
Weighted average
shares outstanding 16,444 18,298 (10.1) 16,469 18,267 (9.8)
II. Condensed Consolidated Balance Sheets
-----------------------------------------
(Amounts in thousands)
June 30, December 31,
2003 2002
-------- -----------
Assets
Cash & short-term investments $23,527 $ 9,584
Accounts receivable, net 86,304 87,221
Deferred tax assets 4,292 2,529
Other current assets 5,340 6,122
-------- --------
Total current assets 119,463 105,456
Equipment, net 18,547 19,844
Excess cost of net assets acquired, net 101,685 101,685
Other assets 6,904 8,545
-------- --------
$246,599 $235,530
======== ========
Liabilities & Stockholders' Equity
Payables & accruals $ 37,725 $37,610
Other non-current liabilities 9,722 9,306
Stockholders' equity 199,152 188,614
-------- --------
$246,599 $235,530
======== ========
-MORE-
III. Operating Statistics
-------------------------
(Revenues and Operating Earnings in 000's)
Three Months Ended
June 30, March 31, June 30,
2003 2003 2002
------- -------- --------
Hospital Rehabilitation Services
- --------------------------------
Revenues
Inpatient $33,778 $34,137 $32,057
Outpatient 12,535 12,022 12,612
------- ------- -------
Total $46,313 $46,159 $44,669
Division Operating Earnings* $ 7,943 $ 7,074 $ 7,757
Average Number of Programs
Inpatient 134 138 134
Outpatient 49 50 55
--- ---- ---
Total 183 188 189
Contract Therapy
Revenues $32,914 $30,926 $25,607
Division Operating Earnings* $ 1,812 $ 1,739 $ 2,095
Average Number of Locations 455 431 374
Staffing
Revenues
Supplemental $32,459 $35,436 $44,320
Travel 24,735 26,680 26,240
------- ------- --------
Total $57,194** $62,116** $70,560
Gross Profit Margin
Supplemental 20.4% 20.3% 23.9%
Travel 19.0% 19.8% 21.5%
Total 19.8% 20.1% 23.0%
Division Operating
Earnings (Loss)* $(2,109) $ (1,986) $ (326)
Weeks Worked
Supplemental 23,386 25,134 33,789
Travel 12,589 13,607 13,314
------ ------ ------
Total 35,975 38,741 47,103
Average Number of
Supplemental Branches 76 82 111
*Division Operating Earnings (Loss) are earnings before interest and income
taxes
**Includes intercompany sales of $0.4 million that staffing has sold to hospital
rehabilitation services and contract therapy at market rates
WE INVITE YOU TO VISIT OUR WEB SITE AFTER NOON TODAY TO VIEW KEY STATISTICS IN
GREATER DETAIL @ www.rehabcare.com.
-END-
Exhibit 99.2
REHABCARE CONFERENCE CALL SCRIPT
July 30, 2003
INTRODUCTION BY CONFERENCE OPERATOR
INTRODUCTION OF MANAGEMENT BY MORGEN-WALKE
This conference call contains forward-looking statements that are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve known and unknown
risks and uncertainties that may cause the Company's actual results in
future periods to differ materially from forecasted results. These risks
and uncertainties may include, but are not limited to, the cost, effect and
timing of restructuring activities that have been commenced, including our
ability to achieve the annual expense reductions anticipated; the timing
and rate of the resumed growth in the staffing division; changes in and
compliance with governmental reimbursement rates; regulations or policies
affecting the hospital rehabilitation services and contract therapy
divisions, including our estimates with respect to the effect of newly
promulgated regulations on the Company's business; our ability to attract
new client relationships or to retain and grow existing client
relationships through the integration of our new information system with
those of our clients and the development of alternative product offerings;
our ability to identify and consummate strategic acquisitions to accelerate
growth in our divisions; our ability, and the additional costs, to attract
operational and professional employees; significant increases in health,
worker's compensation and professional and general liability insurance
premiums; the adequacy and effectiveness of operating and administrative
systems; litigation risks, including our ability to predict the ultimate
costs and liabilities or the disruption of our operations; competitive
effects on pricing and margins; and general economic conditions, including
efforts by insurers, healthcare providers and others to contain healthcare
costs.
INTRODUCTION AND WELCOME BY ED TRUSHEIM
- ---------------------------------------
Good morning and thank you for joining us today. I'm Ed Trusheim, Chairman of
the Board of Directors of the Company. In a few moments, I will turn the
conference call over to John Short, our Interim Chief Executive Officer, for his
remarks on the second quarter's performance and, more importantly, his plan to
return the Company to its former growth and profitability. Before I do so, I
will update you on the progress we are making in our search for a permanent CEO
of the Company. In our last conference call on June 4, I stated that the Board
would be very deliberate in our search timeframe, taking up to nine months in
order to provide sufficient time for Dr. Short to initiate the changes we
believe are necessary to enhance the success of the Company. We intend to stick
by this approach and if necessary take a little longer to find the right
candidate. To date, we have formed the search committee made up of myself and
one other independent board member, Mr. Ted Wight. We have asked our senior vice
president of human resources, Patty Fish, to serve in a support role for the
committee. We have received proposals from six nationally recognized search
firms and have reduced the number to two, either of which could do the job. We
will make a selection between the two firms by the end of August and then we
will develop our leadership characteristics and selection criteria before we
proceed to identify candidates. While we are not yet in a position to discuss
with you specifics of the characteristics and criteria, a proven track record in
leading growth, deep knowledge of the healthcare industry and demonstrated
ability to lead large complex organizations such as ours will be important
characteristics. And now, Dr Short.
REMARKS BY JOHN SHORT
- ---------------------
Good morning and thank you, Ed, for the update on the search process. And, thank
you to those of you listening in for joining us today. With me from management
today are: Tom Davis, President of our Hospital Rehabilitation Services
Division; Pat Henry, President of our Contract Therapy Division; Todd Cook,
President of our Travel Staffing segment; Laurie Schadegg, President of our
Supplemental Staffing segment; Vince Germanese, Chief Financial Officer; Hickley
Waguespack, Executive Vice President; Jim Douthitt, Chief Accounting Officer;
and Betty Cammarata, Director of Investor Relations.
We will all be available during the question and answer period following my
formal remarks.
During this call, I will review our plans for improving growth and profitability
in our Company as was laid out in our press release issued earlier this morning
and provide additional explanation for the quarterly results. Vince Germanese
will begin by providing additional information about our financial results.
Thank you, John,
In the Hospital Rehabilitation Services division, we saw modest growth in both
operating revenues and operating earnings and we continued our progress to
integrate the inpatient and outpatient segments. We are cross-training our teams
in the various offerings and are reassigning management based on customer
relationships instead of product. We are moving rapidly to reduce costs through
elimination of redundant positions, and we have begun to experience cost savings
as we take advantage of the synergies in the integrated business unit.
The inpatient segment experienced good unit financial performance for the second
quarter compared to the first quarter driven by higher revenue per location,
increased discharges per location, and improved margins. Our total number of
units at the end of the quarter was 134, one fewer than the end of the previous
quarter (4 openings and 5 closures and of the 5 closures, 3 were subacute). Our
backlog stood at 7, 4 of which require certificates of need to open. Our
challenge remains growing the number and size of our units.
Performance improved in the outpatient segment in the second quarter compared to
the first quarter, driven by increased visits per location and improved
productivity despite a closure during the quarter. Again, our challenge is
increasing growth in the number of sites in our outpatient segment.
On the topic of changing regulations, we have spent considerable time and effort
responding to the Centers for Medicare and Medicaid Services proposed 75 percent
rule this quarter. We have recently learned that CMS plans to issue a new
proposed rule on August 1 together with a final rule on payment rates. The new
proposed 75 percent rule will have an additional 60-day comment period. In our
response to CMS, we made two key points as follows:
o The Rule was developed in 1984 and should be updated to current practice of
rehabilitative medicine; other CMS criteria for admission to a rehab unit
such as required hours of therapy per day need to be given due weight
o Strict enforcement of the Rule will conflict with access to care in rehab
units
As soon as we learn of the final rule and can assess its impact on our business,
we will have more to say on the subject.
Our contract therapy division continues to have success increasing its average
quarterly revenue per location year-over-year to over $72,000, or 5.7 percent.
The division added 9 net facilities during the quarter, ending with 448
facilities under contract, compared to 382 at the end of the 2002 second
quarter. The number of openings dropped to 41 consistent with our historical
average following the strong first quarter openings of 58. Closures increased by
one to 32 with 24 of those closures resulting from action we initiated due to
unacceptable payment risk or profitability concerns. Our backlog remains strong
at 31.
The therapist shortage continues to present staffing challenges for the division
forcing the use of high priced contract labor to support our operations. We have
added resources to the recruiting team and have focused efforts on reducing the
"time to fill" our open positions.
With regard to the therapy caps, we continue to anticipate a September 1, 2003
implementation and to work with industry groups toward a better solution for
this regulation. Our revised guidance contains our estimated impact on operating
revenues, costs and operating earnings for the remainder of the year after
September 1.
Our staffing division continues to be negatively impacted by a general softness
in demand, driven primarily by lagging vacancy rates, improvement in healthcare
clients hiring, cost reduction efforts and a soft economy. On a long-term basis,
we continue to believe that the demand for nurses and other healthcare
professionals will outpace the growth in supply.
In supplemental staffing, total weeks worked declined 7 percent to 23,386 from
the prior quarter resulting from a decrease in all nursing skill mixes and
offset by a 6 percent increase in weeks worked within allied health. Same store
revenue decreased 17.6 percent year-over-year and 7.2 percent sequentially.
Gross profit margins remained relatively flat sequentially with slight increases
in average pay rates relative to average bill rates offset by a shift in skill
mix. We continue to reduce branch personnel and consolidate branch back office
operations to partially offset the declines in volumes.
In travel staffing, total weeks worked declined 7.5 percent sequentially to
12,589 with all categories of personnel declining. Gross profit margins
decreased sequentially due to increases in pay rates and compensation allowances
not covered by increases in bill rates. On a positive note, gross weeks booked
in June were the highest since October of 2002. This statistic is a key leading
indicator for the future of the segment.
Our balance sheet remains strong with more than $23 million in cash at June 30,
$10 million in operating cash flow for the quarter and capital expenditures of
about $1.5 million. Day's sales outstanding were 58 days, up .4 of a day from
last quarter and 3.5 days from the year ago quarter. We continue to have a
debt-free balance sheet with a credit facility in excess of $110 million
available for our strategic initiatives.
Finally, Jim Douthitt, our Chief Accounting Officer, has accepted a CFO position
with a private company in Florida, working for a former RehabCare executive. Jim
is a dedicated executive and contributed significantly to RehabCare's past
success. We will miss him and wish him success in his new career. We have
several candidates we are looking at to replace him during the third quarter.
Now I will turn the call back over to John -
Thanks, Vince,
As you know, I have been at the helm of our Company now for almost 8 weeks and
have had the opportunity to review each of our three divisions and all of our
support departments.
Each of our businesses is facing significant regulatory, resource and industry
pressures, which are negatively impacting their operating performance. While we
have been addressing these issues through closing of unproductive facilities and
reducing expenses, the performance of the businesses is still not satisfactory.
Accordingly, we have instituted a comprehensive multi-faceted program to return
our company to growth and improved profitability. Key elements of the program
are:
1. An examination of our service offerings, emphasizing a continuum of
services approach to redesign the value proposition of our existing
services. As you are aware, a value proposition defines the value received
by our clients from RehabCare's services in profits or quality improvement
compared to the cost of those services.
2. Enhancement of client relationships to provide more comprehensive service
offerings creating long-term partnerships;
3. Acquisitions in each of our divisions; and
4. Operational restructuring, which will ensure RehabCare's competitiveness in
the marketplace.
First, we are retooling our product offerings, as we indicated, in each of our
divisions to make them more market responsive. For example, in our HRS and
Contract Therapy divisions, using a model developed with one of our longest and
largest standing clients, we are creating a continuum of rehabilitative service
delivery covering inpatient, outpatient and skilled care, both inside the
hospital and freestanding.
In our staffing division, we are working to fully integrate our travel and
supplemental operations to enable us to provide a single point of contact to our
clients. This single point of contact is something our clients have been
demanding. This capability will enable us to implement a market management
concept focused on client relationships, and will allow us to reduce our
reliance on costly branch operations. We are developing the systems and
processes necessary to implement a variable staffing management program that
emphasizes clinical personnel development and the optimization of variable labor
usage through partnership with our clients. Finally, we are demonstrating
measurable quality through our partnership with Simulis LLC, a global provider
of simulation-based e-learning and training solutions. We believe this will
distinguish us to our clients, allowing us to offer objective and measurable
competency and skill set validation for our professionals on assignment.
The second component of our plan is that we are committed to becoming less
transaction-oriented in our business and more focused on comprehensive,
long-term partnerships with our clients. For example, we have the opportunity to
deploy capital to develop de novo programs or expand programs within hospitals
to meet patient demand. We have existing, but preliminary, negotiations underway
with a number of hospitals to more fully develop these types of arrangements.
With our strong balance sheet and operating cash flow, we can easily handle a
number of these larger opportunities annually. Opportunities such as these can
provide us with accelerated growth potential, longer client relationships, and a
base to expand our continuum of services in partnership with the dominant
hospitals and health systems in their respective markets.
Third, we intend to make strategic acquisitions to develop critical mass and
market relationships in priority locations for StarMed, further accelerate
growth and therapy resource availability for Contract Therapy and identify
program continuum opportunities in larger markets with key hospitals in HRS. We
have assigned experienced senior executives in our organization to focus a
significant part of their time on developing a pipeline of opportunities for us
to consider.
The fourth component involves a restructuring of our operations that includes a
cost reduction target of some $12 million annually across all aspects of our
operations. This restructuring eliminates management redundancies in Hospital
Rehabilitation Services and reduces operating overhead in Contract Therapy and
StarMed, as well as our corporate support services. Approximately 75 positions
are affected, saving $5.7 million, or 47.5 percent of our target. Other
components include restructuring our health insurance programs, which would
result in 25 percent of the savings and restructuring our vendor relationships
and reducing our discretionary expenditures, which make up the balance. We
intend to complete this restructuring in the third quarter.
As to the outlook for the remainder of the year. Our efforts to reduce our cost
of operations and selling, general and administrative costs will result in a
one-time termination benefits charge of about $ .6 million after taxes in the
third quarter. This charge reflects primarily severance and related benefit
continuance costs together with legal and outplacement fees. Overall, our
efforts to reduce our costs in the restructuring and other initiatives
undertaken since the first quarter with a target reduction of $12.0 million, as
previously mentioned, should result in a reduction of our quarterly selling,
general and administrative costs in excess of $4.0 million in the fourth quarter
when compared to the second quarter of 2003. We believe these initiatives will
greatly improve our prospects for a successful 2004.
With that I would like to have our operator open the call for questions.
Following Questions and Answers -
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As a reminder, this conference call is being webcast live on our web site,
www.rehabcare.com and will be available for replay beginning at 1:30 Eastern
time today. For your reference, we continue to provide the statistics section on
our web site offering quarterly historical statistics for each of our operating
divisions for the last five years. We invite you to view this information and
hope it will be useful to you.
I want to thank all that participated in this call. We appreciate the
opportunity to tell the story of the new RehabCare. I also want to express my
appreciation to the management team for the good spirit in which they have made
difficult decisions and to John Short for his dynamic and positive leadership.
Thank you. This concludes the conference call.