================================================================================
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): October 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
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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 October 30, 2003, announcing our earnings
for the 3rd quarter 2003
99.2 The script for a conference call held by the registrant on
October 30, 2003
Item 9. Regulation FD Disclosure.
The information in Exhibit 99.2 is incorporated herein by reference.
Item 12. Results of Operations and Financial Condition.
The information in Exhibit 99.1 is incorporated herein by reference.
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: October 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 October 30, 2003, announcing our earnings for the 3rd
quarter 2003
99.2 The script for a conference call held by the registrant on October 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
Financial Dynamics:
Gordon McCoun/Lanie Fladell
Press: Sean Leous
(212) 850-5600
FOR IMMEDIATE RELEASE
Thursday, October 30, 2003
REHABCARE GROUP, INC. REPORTS THIRD QUARTER 2003 OPERATING REVENUES OF
$135 MILLION AND DILUTED EPS OF $0.20
- After Restructuring Charge -
- Updates Guidance for 2003 -
ST. LOUIS, MO, October 30, 2003--RehabCare Group, Inc. (NYSE:RHB) today reported
financial results for the third quarter and nine months ended September 30,
2003. Results for the quarter and nine months are summarized below.
Quarter Ended Nine Months Ended
Sept.30, June 30, Sept.30, Sept.30,
2003 2003 2002 2003 2002
---- ---- ---- ---- ----
Consolidated Operating Revenues $135.0 $136.0 $142.7 | $409.8 $421.8
Consolidated Net Earnings 3.3* 4.5 7.1 | 11.8* 17.0
Consolidated Diluted
Earnings Per Share 0.20* 0.27 0.41 | 0.72* 0.95
HRS Inpatient Operating Revenues 34.2 33.8 33.1 | 102.1 96.9
HRS Outpatient Operating Revenues 12.3 12.5 12.1 | 36.9 36.8
- --------------------------------------------------------------------------------
HRS Operating Revenues 46.5 46.3 45.2 | 139.0 133.7
HRS Operating Earnings 8.6** 7.9 8.8 | 23.7** 23.2
- --------------------------------------------------------------------------------
Contract Therapy Operating Revenues 33.6 32.9 27.2 | 97.4 76.2
Contract Therapy Operating Earnings 0.9** 1.8 2.6 | 4.5** 6.2
- --------------------------------------------------------------------------------
Supplemental Operating Revenues 29.6 32.5 42.8 | 97.5 133.2
Travel Operating Revenues 25.6 24.7 27.4 | 77.0 78.5
- --------------------------------------------------------------------------------
Staffing Operating Revenues $55.2 $57.2 $70.3 | $174.5 $211.7
Supplemental Gross Profit Margin 18.5% 20.4% 23.9% | 19.8% 23.4%
Travel Gross Profit Margin 16.0 19.0 21.9 | 18.3 21.6
- ------------------------------------------------------------------------------
Staffing Gross Profit Margin 17.3% 19.8% 23.1% | 19.1% 22.7%
Staffing Operating Earnings (Loss) $(2.6)** $(2.1) $ 0.2 | $(6.7)** $(1.8)
- --------------------------------------------------------------------------------
Amounts are in millions, except per share data.
*Includes restructuring charge of $0.8, or $0.05 per diluted share, after tax.
**Excludes restructuring charge.
-MORE-
Highlights of the third quarter results are:
o The Hospital Rehabilitation Services division (HRS) achieved modest
year-over-year and sequential growth in operating revenues due to higher
revenue from the inpatient segment. Inpatient operating revenues increased
by 3.2 percent from the year-ago quarter and 1.1 percent from the second
quarter of this year as a result of improved revenues per program. Average
number of programs in the inpatient segment declined from 137 to 133
year-over-year and from 134 to 133 sequentially. Outpatient operating
revenues were up 2.0 percent year-over-year, but down 1.5 percent
sequentially. Improved operating revenues per program were offset by a
decline in average programs from 55 to 48 year-over-year and from 49 to 48
sequentially.
Operating earnings for the division declined 2.2 percent compared to the
year-ago quarter, but improved 8.7 percent sequentially as selling, general
and administrative expenses and corporate allocations declined
significantly due to the Company's restructuring.
The so-called 65 Percent Rule is not expected to impact operating results
in 2003, as the final rule is not expected to be released until early
December 2003, with implementation no sooner than early 2004. The Company
typically does not make specific comments on the impact of proposed
rulemaking or legislation prior to final effectiveness as the impact often
changes significantly during the approval process. However, given the
advanced stage of this proposed rule and the evaluation of the potential
impact completed by the Company, the rule's impact is expected to be
manageable in 2004 with an estimated decline in discharges of zero to 3
percent in our HRS division due to differing cost reporting periods.
Mitigation strategies to replace utilization through enhanced internal and
external census development move the impact of the decline in discharges to
the lower end of the range. While the rule primarily affects the Hospital
Rehabilitation Services division, the Company expects that the Contract
Therapy division will potentially benefit, as patients that cannot be
served in the acute rehab setting may receive therapy in the nursing home
setting served by the latter division.
o The Contract Therapy division improved quarterly operating revenues by 23.5
percent year-over-year and 2.1 percent sequentially due to the opening of
new locations. The average revenue per location increased 3.5 percent from
last year's third quarter as a result of the continued focus on opening
larger locations. On a sequential basis, however, the average revenue per
location declined 1.8 percent as a result of the Part B therapy caps that
were implemented on September 1, 2003.
Quarterly operating earnings declined 64.6 percent year-over-year and 49.6
percent sequentially, due to an increase in contract labor and
salary-related expenses, as well as lower productivity as a result of a
complex information system conversion during the quarter.
The information system conversion is now complete and management is taking
action to improve productivity. The division expects improvement in
operating earnings over the next two quarters as a result of these actions.
The Part B therapy caps impact the Company's Contract Therapy division and
provide for a cap of $1,590 on certain Part B therapy services through the
remainder of 2003. The division is able to mitigate some of the impact of
the caps through therapy productivity improvements. However, because the
caps may be short-term in duration, the division has elected not to make
more permanent changes to its operating model.
o The Staffing division experienced declines in operating revenues both
year-over-year and sequentially, primarily as a result of a decline in
weeks worked in the supplemental segment due to a continued softening in
demand. Third quarter operating earnings/loss declined year-over-year and
sequentially. Gross profit margins in both segments also declined
year-over-year and sequentially as a result of increased salary-related
expenses and staff incentives that were not covered by increases in bill
rates. Partially offsetting these factors were reductions in selling,
general and administrative expenses resulting from the Company's
restructuring initiatives.
Operating revenues in the Travel segment declined 6.7 percent
year-over-year but grew 3.4 percent sequentially, primarily as a
result of incentive programs implemented during the third quarter.
Despite the sequential improvement in operating revenues, gross profit
margin decreased 15.8 percent from the second quarter due to an
increase in compensation, meal and housing costs imbedded in incentive
programs implemented to increase volumes. Management has adjusted
these incentives and expects that gross profit margins will improve in
the fourth quarter.
Operating revenues in the Supplemental segment declined 30.9 percent
from the year ago quarter and 8.8 percent from the second quarter of
this year. The decline in operating revenues was driven by an 8.3
percent sequential decrease in weeks worked. Gross profit margins
declined both year-over-year and sequentially due to increases in
professional and general liability and workers' compensation insurance
accruals in the third quarter. Analyses have been completed specific
to each market resulting in specific action plans for each branch.
These plans are expected to assist in achieving fourth quarter targets
and breakeven performance for 2004.
Diluted shares outstanding decreased by 5.2 percent from last year's third
quarter and 8.3 percent from last year's nine 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.
As announced in the second quarter earnings release, the Company
successfully completed its operational restructuring resulting in a charge for
termination benefits and other costs of approximately $772,000 after tax,
equivalent to $0.05 per diluted share. Approximately 85 percent of the charge
relates to severance payments and outplacement costs. This was higher than the
previously announced after-tax charge of $600,000. The difference is due to
costs associated with additional positions eliminated and future lease payments
related to the closing of several supplemental branches. The restructuring
program, which also includes reductions in health insurance program costs,
changes to vendor relationships and reductions in discretionary expenditures
such as travel, is on track to achieve the expected $12 million annualized cost
reduction. We expect to realize a portion of this cost reduction in the fourth
quarter of this year and the full effect in 2004.
RehabCare is revising its prior guidance for full-year 2003 results given
the operating results in the third quarter and the outlook for the balance of
the year. Included in expected fourth quarter 2003 performance is a more
significant negative impact of Part B therapy caps on the estimated Contract
Therapy contribution margins, as previously explained, and the impact on fourth
quarter Travel operating profitability and reduced bookings during the month of
August. Management expects operating revenues of $530 million to $545 million
for the year, unchanged from prior guidance. However, due to the factors cited
above, current expectations are for earnings before interest, taxes,
depreciation and amortization (EBITDA) between $35 million and $40 million,
compared to $39 million to $43 million previously, and diluted earnings per
share in the range of $0.95 to $1.10, compared to a previous $1.09 to $1.23,
both of which include the impact of the $0.05 restructuring charge.
On a more positive note, in addition to the cost savings anticipated to
accrue from the operational restructuring, which is the first initiative of our
strategy for return to a profitable growth trend, the Company also reports
progress on its other three initiatives:
o Examination of the Company's Service Offerings - The Company's focus
continues on developing a continuum of rehabilitative service delivery
covering inpatient, outpatient and skilled care, both inside the hospital
and freestanding. The initiative now includes both a long-term acute care
component and a home health component with the Company developing a care
management service to manage the continuum. Importantly, the regulatory
developments in the 65 Percent Rule and the Part B therapy caps support the
development of the continuum concept and have increased the importance of a
closer working relationship between the Hospital Rehabilitation Services
and Contract Therapy divisions. In the Staffing division, the three
initiatives involving Travel and Supplemental integration, implementation
of a variable staffing management program and the Simulis simulation-based
e-learning and training program continue.
o Strategic Partnering - The previously announced broadening of the Company's
business model in HRS, both in terms of the type of relationship (i.e.
joint ownership) and deployment of capital, has resulted in business
opportunities in various stages of development. The interest shown to date
has confirmed our expectations.
o Acquisitions - The Company is considering a number of acquisition
opportunities, which are in various stages of negotiation for both the HRS
and Contract Therapy divisions.
Commenting on progress on the strategic initiatives, Dr. Short stated,
"While I am disappointed with our performance due to system and incentive
issues, I remain confident that the fourth quarter is going to be back on track
and that our cost reduction objectives will be met. Furthermore, our management
team is making good progress in developing new service offerings, which will
enable us to better manage the impact of regulatory changes brought about by the
65 Percent Rule and the Part B therapy caps. We are pleased with the number of
opportunities that have developed as a result of our business development and
acquisition initiatives and look forward to announcing concrete progress in the
near future. We remain committed to the resumption of our Company's profitable
growth, and have a strong financial position and capital resources to execute
our strategy."
RehabCare Group, Inc., headquartered in St. Louis, is a leading provider of
program management of hospital rehabilitation services 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 third 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, November 20. The dial-in number for the replay is (320)
365-3844 and the access code is 702165.
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 and
sustain 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, within the expected
timeframes, 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 and regulatory effects on pricing and
margins; and general economic conditions, including efforts by governmental
reimbursement programs, 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 Nine Months Ended
September 30, September 30,
2003 2002 %Change 2003 2002 %Change
---- ---- ------- ---- ---- -------
Operating revenues $134,962 $142,690 (5.4) $409,847 $421,755 (2.8)
Costs & expenses
Operating 103,581 103,909 (0.3) 310,486 310,358 0.0
Selling, general
& administrative
Divisions 15,786 18,576 (15.0) 51,213 56,396 (9.2)
Corporate 6,553 6,432 1.9 20,288 21,190 (4.3)
Restructuring charge 1,286 - - 1,286 - -
Depreciation
& amortization 2,084 2,178 (4.3) 6,429 6,138 4.7
------- ------- ------ ------
Total costs
& expenses 129,290 131,095 (1.4) 389,702 394,082 (1.1)
------- ------- ------- -------
Operating earnings,
net 5,672 11,595 (51.1) 20,145 27,673 (27.2)
Other income
(loss), net 10 11 (9.1) (63) 15 N/M
Interest expense, net 144 95 51.6 449 209 114.8
------- ------- ------- -------
Earnings before
income taxes 5,538 11,511 (51.9) 19,633 27,479 (28.6)
Income taxes 2,215 4,374 (49.4) 7,809 10,442 (25.2)
------- ------- ------- -------
Net earnings $ 3,323 $ 7,137 (53.4) $ 11,824 $ 17,037 (30.6)
======= ======= ======= =======
Diluted earnings
per share $ 0.20 $ 0.41 (50.9) $ 0.72 $ 0.95 (24.3)
Weighted average
shares outstanding 16,540 17,455 (5.2) 16,507 18,002 (8.3)
II. Condensed Consolidated Balance Sheets
(Amounts in thousands)
September 30, December 31,
2003 2002
------------ -----------
Assets
Cash & short-term investments $ 27,428 $ 9,584
Accounts receivable, net 90,550 87,221
Deferred tax assets 5,274 2,529
Other current assets 5,614 6,122
------- -------
Total current assets 128,866 105,456
Equipment, net 18,403 19,844
Excess cost of net assets acquired, net 101,685 101,685
Other assets 6,996 8,545
------- -------
$ 255,950 $ 235,530
======= =======
Liabilities & Stockholders' Equity
Payables & accruals $ 42,111 $ 37,610
Other non-current liabilities 10,637 9,306
Stockholders' equity 203,202 188,614
------- -------
$ 255,950 $ 235,530
======= =======
III. Operating Statistics
(Revenues and Operating Earnings in 000's)
Three Months Ended
September 30, June 30, September 30,
2003 2003 2002
------- ------- -------
Hospital Rehabilitation Services
- --------------------------------
Operating Revenues
Inpatient $34,161 $33,778 $33,114
Outpatient 12,342 12,535 12,097
------- ------- -------
Total $46,503 $46,313 $45,211
Division Operating Earnings* $ 8,634 $ 7,943 $ 8,829
Average Number of Programs
Inpatient 133 134 137
Outpatient 48 49 55
--- --- ---
Total 181 183 192
Contract Therapy
- ----------------
Operating Revenues $33,607 $32,914 $27,223
Division Operating Earnings* $ 913 $ 1,812 $ 2,581
Average Number of Locations 473 455 396
Staffing
- --------
Operating Revenues
Supplemental $29,605 $32,459 $42,827
Travel 25,586 24,735 27,430
------- ------- -------
Total $55,191** $57,194** $70,257
Gross Profit Margin
Supplemental 18.5% 20.4% 23.9%
Travel 16.0% 19.0% 21.9%
Total 17.3% 19.8% 23.1%
Division Operating
Earnings (Loss)* $(2,589) $(2,109) $ 185
Weeks Worked
Supplemental 21,434 23,386 31,315
Travel 13,140 12,589 13,941
------ ------ ------
Total 34,574 35,975 45,256
Average Number of
Supplemental Branches 70 76 106
*Division Operating Earnings (Loss) are earnings attributable to the division
before interest, income taxes, other income (loss) and restructuring charge.
**Includes intercompany sales of $0.3 million and $0.4 million (for the three
months ended September 30, 2003 and June 30, 2003, respectively) 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
October 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 and
sustain 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 within the expected timeframes
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 and regulatory effects on pricing and margins; and general economic
conditions, including efforts by governmental reimbursement programs, 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 third quarter's performance. Before I do so, I will give you a
good news/bad news comment and then update you on the progress we are making in
our search for a permanent CEO of the Company.
Briefly, the bad news is that the implementation of our plans to improve
our growth and profitability are taking longer to implement than originally
expected. The good news is that our level of confidence in the success of these
activities is even higher now than originally assumed.
At our August board meeting, we heard presentations from two excellent
search firms. After considerable deliberation, we have selected a firm to assist
us in the selection of a permanent CEO. However, as you can see from our third
quarter results in our earnings release, we have a considerable amount of work
to do with each division's performance. Consequently, we are deliberately
slowing the selection process so that John and our executive management team can
make the necessary short-term changes in our operations to get us back on track.
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 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; Hickley Waguespack, Executive Vice President;
Vince Germanese, Chief Financial Officer; and Betty Cammarata, Director of
Investor Relations. I would also like to introduce Mark Bogovich as our new
Chief Accounting Officer. Mark was promoted in August and was formerly the Vice
President of Finance for the Contract Therapy division. He has been with the
Company for more than four years. Welcome, Mark.
We will 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.
Revenues for the third quarter were $135.0 million, down 5.4 percent from
$142.7 million a year ago. We reported net earnings of $3.3 million, or $0.20
per diluted share, after a $772,000 non-recurring after-tax charge, equal to
$0.05 per share. Excluding the charge, net income would have been $4.1 million,
or $0.25 per diluted share, compared to $7.1 million, or $0.41 per diluted share
in the year-ago quarter and $4.5 million, or $0.27 per diluted share in the
prior quarter.
As you can see from the results we are disappointed with the performance of
the business during the third quarter. While we began in the third quarter to
realize the cost savings generated by the operational restructuring previously
announced, our progress was impeded by a number of factors. Some of these were
environmental, like the affect of the economy on our clients and the imposition
of Part B therapy caps, while others were situations where we, frankly, could
have done a better job of managing through some of the challenges.
I will now let Vince take you through the financial discussion of the
Company during the quarter. After he's finished, I will give you an update on
where we are with regard to our initiatives to get the Company back to
acceptable levels of performance.
Vince -
In the Hospital Rehabilitation Services division, we saw modest growth in
operating revenues year-over-year and sequentially. Operating earnings also
improved sequentially, but declined slightly year-over-year. Operating revenues
and operating earnings both improved for the nine months ended September 30. We
have just about completed the integration of the inpatient and outpatient
segments with the final incorporation of our program services department into
the division.
The inpatient segment experienced improved financial performance for the
third quarter compared to the second quarter, driven by higher revenue per
program, which, in turn, is driven by increased discharges per program, and
reduced selling, general and administrative expense. Our average number of
programs at the end of the quarter was 133 and we finished the quarter with 129
programs, five fewer than the end of the previous quarter (1 which was an acute
opening and 6 closures and of the 6 closures, 1 was subacute and the others were
small acute rehab programs). Of the closures, 5 were lost to self-operation, and
1 was a bankruptcy. Our backlog stood at 10, 5 of which require certificates of
need to open.
The outpatient segment experienced a slight decline in operating revenues
sequentially as a result of the closure of two very small programs, offset by
improvement in average revenue per program. We finished the quarter with 47
programs.
We have spent considerable time during this quarter responding to the
revised proposed 65 Percent Rule (formerly the 75 Percent Rule). The 65 Percent
Rule is a condition of participation for Medicare reimbursement of acute
rehabilitation programs. The rule will mandate that each program achieve a
certain percentage of admissions in selected clinical types. We were pleased to
note that CMS incorporated clinical considerations into the new proposed rule
and provided a transition period for up to three years during which a
research-based rule can be considered for implementation. We continue to believe
that CMS should update the proposed rule comprehensively for current practice of
rehabilitative medicine, address access issues and the arbitrariness of the 65
Percent Rule.
The Company typically does not make specific comments on the impact of
proposed regulatory rulemaking or legislation as the impact often changes
significantly during the approval process. However, the evolution of this rule
is sufficiently far along and our analysis is substantially complete so that we
believe we will be able to manage the impact without major effects on our
business.
In assessing the impact of the Rule, we performed an evaluation that
included a program-by-program review of the case types served by each program
(using a relevant historical period) and the underlying clinical programs in the
hospitals' acute setting to determine the likely changes to the discharges for
that program as a result of compliance with the proposed rule. We then conducted
an analysis of the market that the unit serves to determine whether there is
potentially unmet need for services of the type fitting the required profile of
discharges for the program.
Using these data as an indicator of the impact on 2004 (assumed first
effective year), we are estimating, in the aggregate, a decline in discharges in
the range of 0 to 3 percent in HRS, depending upon the success of our mitigation
strategy of identifying and providing rehabilitative services to the underserved
patients in each of our markets and giving consideration to the effect of
varying cost reporting periods.
As we conducted our program-by-program analysis, we became even more
convinced of the validity of our post acute continuum strategy, which seeks to
provide multiple service settings within a market, anchored by a strong host
hospital client, in order to service a broad spectrum of patients with
rehabilitation needs. We also note that the Contract Therapy division
potentially will benefit from the 65 Percent Rule implementation, as it will be
in the position of receiving patients not able to be served by acute
rehabilitation programs. When the final rule is issued, we will update our
impact analysis and provide information to you if significantly different than
discussed on this call.
Our Contract Therapy division continues to have success increasing its
number of locations with the addition of 25 net facilities during the quarter,
ending with 473 facilities under contract, and compared to 394 at the end of the
2002 third quarter. The number of openings for the quarter was 50, which is up
from the 41 in the second quarter. Closures decreased by 7 to 25 of which 8
resulted from action on our part because of unacceptable payment risk. Our
backlog remains strong at 31. The increased number of locations was the primary
driver of the 23.5 percent increase in contract revenues compared to last year
and a slight increase over the second quarter.
The Part B therapy caps were implemented on September 1, 2003 and will
remain in effect until at least December 31, 2003. In our first month of
operation under the caps, we correctly estimated the impact of the caps on
operating revenues, but under-estimated the impact on operating earnings as a
result of the computer conversion described below. Our revised guidance contains
our estimated impact on operating revenues, costs and operating earnings of the
Part B caps for the remainder of the year after September 1. There is
legislation currently pending in Congress for a one-year moratorium for the Part
B caps beginning January 1, 2004.
Operating profits of the division declined 49.6 percent from second quarter
levels and 64.6 percent from the same period last year. The therapist shortage
continues to present staffing challenges for the division creating higher wage
requirements and forcing continued use of 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.
In addition to the foregoing, the division experienced difficulty adjusting
staffing levels to declines in operating revenue brought about by implementation
of the Part B therapy caps and as a result of a short-term lack of
location-by-location management information resulting from the implementation of
our proprietary PROMOS system in August. PROMOS has been successfully used in
our HRS inpatient segment for a number of years. We implemented PROMOS because
the prior legacy system in Contract Therapy needed to be replaced. PROMOS
provides a common platform for both HRS and Contract Therapy program management
divisions and PROMOS gives us enhanced clinical compliance capabilities. We
experienced greater than expected difficulties in the conversion, which reduced
our ability to react appropriately to daily fluctuations in patient therapy
needs from a staffing perspective. This conversion also required a significant
amount of effort on the part of our people to insure that billing and payroll
information were being accurately produced. These conversion difficulties
impacted August and September operations and are behind us now. Contract therapy
management has completed a program-by-program review and action plan to insure
appropriate use of the new system and a return to a flex staffing approach. We
expect this division to show operating earnings levels over the next two
quarters more consistent with the first half of the year.
Our staffing division continues to be negatively impacted by a general
softness in demand, driven primarily by lagging vacancy rates, increases in
hiring by our healthcare clients, cost reduction efforts and a soft economy. On
a long-term basis, we believe that the demand for nurses and other healthcare
professionals will outpace the growth in supply.
In supplemental staffing, total weeks worked declined 8.3 percent from the
prior quarter resulting from a decrease in all nursing skill mixes. This was
consistent with the consolidation of seven branches during the quarter, ending
the quarter with a total of 65. Same store revenue decreased 17 percent
year-over-year and 4.8 percent sequentially. Gross profit margins declined from
20.4 percent to 18.5 percent sequentially, principally because of increases in
workers' compensation and professional and general liability claims costs. These
were partially offset by average pay rates declining faster than average bill
rates. We have shown a consistent 1,600 weeks worked since the second week in
July through the end of the third quarter, which is a positive trend.
We will continue to evaluate branch operations and consolidate branch and
back office operations to partially offset the declines in volumes where we deem
the supporting markets unable to sustain profitable operations.
In travel staffing, total weeks worked increased 4 percent sequentially to
13,140 as a result of implementing several incentive programs. Unfortunately,
gross profit margins decreased sequentially 3 percentage points as these
incentive programs proved more costly than originally anticipated due to
increases in bonuses and meal and housing allowances. Management of Travel has
since adjusted these incentive programs to balance revenues and gross profit
margins. We expect improvement in gross profit margins over the next two
quarters. Additionally, gross weeks booked in August were the lowest since
February 2003, which will contribute to a greater than expected decline in
operating revenues during the fourth quarter. Gross weeks booked in September
returned to pre-August levels and, therefore, we consider August performance a
one-time event.
From a financial perspective, the Company's balance sheet remains strong
with more than $27 million in cash at September 30, no long-term debt and a
credit facility in excess of $110 million available to support our strategic
initiatives. Our cash generation remains strong, with $5 million in operating
cash flow for the quarter before capital expenditures of about $1.7 million.
Day's sales outstanding were 62 days, up 4 days from last quarter and 5
days from the year ago quarter. There has been a trend over the past several
years in certain of our divisions to see increases in accounts receivable
between the second quarter and third quarter. A factor contributing to this
trend is slow payments from state government public aid systems resulting in
several clients slowing payments. In addition, we are starting to see pressure
from large hospital clients to have 45-day terms in new contracts instead of 30
days, generally, as previously experienced. We received several large payments
in early October from several of these clients and are working with the small
remaining number to develop payment plans or resolve other issues impacting
payment terms. We continue to be aggressive managing our accounts receivable
given the difficult payment environment.
Now I will turn the call back over to John -
Thanks, Vince,
As we discussed last time, there are four elements to our program for
getting RehabCare back to acceptable levels of performance.
1. Restructuring
2. Reevaluation of our service offerings
3. Enhancement of client relationships
4. Acquisitions
The restructuring component of the program is essentially complete, and the
financial impacts have already begun to show up in the third quarter. We should
see continued improvement in our costs through 2004 when we expect to realize
the full $12 million in annualized savings.
On the remaining three initiatives, I must tell you that I spent a
considerable amount of time this quarter dealing with the margin issues in
Travel staffing and Contract Therapy as well as reviewing the impact of the 65
Percent Rule on our HRS division and the Part B caps on our Contract Therapy
division. We must accelerate our post acute continuum of care development and
further a closer market driven working relationship between our HRS and Contract
Therapy divisions. As the prospective payment system for acute rehabilitation
programs matures, we expect to see the same trends in our business as hospitals
saw in the implementation of diagnosis-related groups. The incentives will
support treatment of patients in less costly settings like home health,
outpatient and skilled nursing with the patients remaining in the acute
rehabilitation setting requiring even more intense service.
I am more convinced than ever that we must better differentiate our
staffing product in the marketplace to effectively compete and grow gross profit
margins. We are developing differentiators for our staffing business dealing
with a one StarMed approach, training through the Simulis partnership, and a
target market framework for customer service. I have also given our staffing
executives the task to break even financially for the full-year fiscal 2004. I
will be in a position to report further on the results of this initiative when
we discuss our fourth quarter results.
From a product and service standpoint, we are developing a continuum of
care with seamless integration of our inpatient, outpatient and contract therapy
divisions in all of our markets. We are adding a care management component,
long-term acute care and home health offerings to extend across that continuum.
We have just about completed the integration of the inpatient and outpatient
segments downsizing certain support positions, which were included in our
restructuring and inserting several key business activities directly into that
business unit.
Our efforts to form joint ventures and create closer working relationships
with clients are making progress. It is premature to talk about any specific
developments in this area, but we believe we will be able to make announcements
to this effect in the fourth quarter. I am pleased at the rate that our
strategic acquisitions initiative has gained momentum since its inception last
quarter, as it has in each division created a pipeline of opportunities for
consideration. The stated goal of this initiative, and the charge of the
executives driving it, is to identify program continuum opportunities that
complement the enterprise, and accelerate divisional growth in key geographic
markets through strategic combinations. We look forward to also making an
announcement in the fourth quarter concerning results on this initiative.
Finally, with regard to our revised outlook. With the challenges we faced
in the third quarter and the initial effects of the regulatory changes, we had
to revise our expectations for 2003 earnings. While we are keeping to our full
year revenue target, we are bringing down our guidance for EBITDA by $3 to $4
million to reflect the cost issues that Vince discussed in his presentation.
This brings expected EBITDA to $35 to $40 million, resulting in EPS for the year
of between $0.95 and $1.10, down from a previous $1.09 to $1.23.
You will note that the bulk of the reduction in full year 2003 guidance
comes from the shortfall in our third quarter performance. While there will be
some residual lag early in the fourth quarter as our corrective actions gain
traction, we expect our operating performance to be back on track by the end of
the year. We thus expect to enter 2004 at the same level of performance as we
expected in July when we last spoke to you. We intend to provide our initial
guidance for 2004 when we report fourth quarter 2003 results in early February.
With that I would like to have our operator open the call for questions.
To be read following Questions and Answers -
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.