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): February 5, 2004
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 February 5, 2004, announcing our fourth
quarter and year end 2003 revenues and EPS and guidance for 2004.
99.2 The script for a conference call held by the registrant on
February 5, 2004
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: February 5, 2004
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 February 5, 2004, announcing our fourth quarter and
year end 2003 revenues and EPS and guidance for 2004.
99.2 The script for a conference call held by the registrant on February 5, 2004
Exhibit 99.1
CONTACT: RehabCare Group, Inc.
John H. Short, Ph.D.
Interim Chief Executive Officer
Vincent L. Germanese
Chief Financial Officer
Betty Cammarata, Dir.- Investor Relations
(314) 863-7422
or
Financial Dynamics
Gordon McCoun
Press: Sean Leous
(212) 850-5600
FOR IMMEDIATE RELEASE
Thursday, February 5, 2004
REHABCARE GROUP, INC. REPORTS FOURTH QUARTER AND YEAR END 2003 REVENUES AND EPS
AND GIVES GUIDANCE FOR 2004
ST. LOUIS, MO, February 5, 2004--RehabCare Group, Inc. (NYSE:RHB) today reported
financial results for the fourth quarter and year ended December 31, 2003.
Results for the quarter and full year are summarized below including the after
tax loss of $30.6 million on the StarMed net assets held for sale.
Quarter Ended Full Year Ended
Dec.31, Sept 30, Dec.31, Dec.31,
2003 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Consolidated Operating Revenues $129.5 $135.0 $140.8 |$539.3 $562.6
Consolidated Net Earnings (Loss) (25.5)(a) 3.3(d) 7.4 | (13.7)(a) 24.4
Consolidated Diluted
Earnings (Loss) Per Share (1.58)(a) 0.20(d) 0.45 | (0.86)(a) 1.38
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HRS Inpatient Operating Revenues 34.8 34.2 33.8 | 136.9 130.7
HRS Outpatient Operating Revenues 12.1 12.3 12.2 | 49.0 49.0
- --------------------------------------------------------------------------------
HRS Operating Revenues 46.9 46.5 46.0 | 185.9 179.7
HRS Operating Earnings 9.9 8.6(e) 9.0 | 33.6 32.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contract Therapy Operating Revenues 33.4 33.6 29.0 | 130.8 105.3
Contract Therapy Operating Earnings 1.4 0.9(e) 2.9 | 5.9 9.1
- --------------------------------------------------------------------------------
Supplemental Operating Revenues 28.4 29.6 38.9 | 125.9 172.0
- --------------------------------------------------------------------------------
Travel Operating Revenues 21.0 25.6 26.9 | 98.0 105.5
- --------------------------------------------------------------------------------
Staffing Operating Revenues $ 49.4(b) $ 55.2(b) $65.8 |$223.9(b) $277.5
Supplemental Gross Profit Margin 16.9% 18.5% 24.0%| 19.1% 23.5%
Travel Gross Profit Margin 18.7% 16.0% 22.0%| 18.3% 21.7%
- ------------------------------------------------------------------------------
Staffing Gross Profit Margin 17.6% 17.3% 23.2%| 18.8% 22.8%
Staffing Operating Earnings (Loss) $(45.8)(c)$ (2.6)(e) $ 0.1 |$(52.5)(c)$ (1.7)
- --------------------------------------------------------------------------------
Amounts are in millions, except per share data.
(a) Includes a loss on net assets held for sale of $30.6 million, or $1.90 per
diluted share, after tax
(b) Includes intercompany sales of $0.2 million, $0.3 million and $1.3 million
for the three months ended December 31, 2003, September 30, 2003, and
twelve months ended December 31, 2003, respectively that Staffing has sold
to Hospital Rehabilitation Services and Contract Therapy at market rates
(c) Includes a pretax loss on net assets held for sale of $43.6 million
(d) Includes restructuring charge of $0.8 million, or $0.05 per diluted share,
after tax
(e) The third quarter restructuring charge was included in consolidated
operating earnings, but not allocated to the individual operating divisions
John H. Short, Ph.D., interim president and chief executive officer,
commented, "We are making tangible progress on the execution of the strategy
that we announced several months ago. A key event for us in the fourth quarter
was the agreement to sell the StarMed Staffing Group business to InteliStaf
Healthcare. In addition to immediately helping our earnings, we believe our
equity ownership in InteliStaf will be a very valuable asset for the Company
over time. Further, the agreement we signed with Signature Health Care
Foundation on December 31, 2003 has the potential to be the largest outpatient
management contract in the Company's history, and is an example of how we will
look to create closer partnerships with our clients and extend the continuum of
care from the acute care setting to the home. Finally, our announcement this
week of the development of an acute freestanding rehabilitation hospital in
conjunction with UCLA and a capital partner as well as our acquisition of CPR
Therapies, LLC. demonstrates our focus on target markets and concentration of
programs within a target market."
"This has been an important period of transition for RehabCare as we work
to return to our historic rates of growth and profitability. We are pleased that
our performance has begun to reflect the actions we have taken since mid-year
2003. Despite a challenging business climate, fourth quarter operating earnings
in the Hospital Rehabilitation Services and Contract Therapy divisions improved
from the prior quarter, as we benefited from improved contribution margins and
the restructuring we put in place earlier in the year. The fourth quarter
operating results of the Staffing division were negatively impacted by the
previously announced charge to write-down the carrying value of StarMed's net
assets."
On February 2, 2004, RehabCare closed the sale of its StarMed Staffing
Group business to InteliStaf Healthcare in exchange for an approximate 25
percent equity share of InteliStaf. Included in the fourth quarter results was a
pretax charge of $43.6 million, $30.6 million after tax, equal to $1.90 per
diluted share, to reflect the write-down of the carrying value of StarMed net
assets to their estimated fair value less costs to sell. The StarMed business
was recorded as assets and liabilities held for sale in the Company's balance
sheet at December 31, 2003.
Prior to its sale, the Staffing division experienced declines in quarterly
operating revenues both year-over-year and sequentially, primarily due to
healthcare clients' efforts to reduce costs during a soft economy. Seasonality
also affected the sequential decline within the Travel division. This external
environment caused a decline in weeks worked both sequentially and
year-over-year and closures of unsustainable branches. On a positive note, gross
profit margins increased by 30 basis points sequentially due to management
efforts in both operating segments, offset by a $0.6 million increase equal to
120 basis points in professional liability insurance.
Operational Overview of Fourth Quarter
- --------------------------------------
o The Hospital Rehabilitation Services division (HRS) achieved year-over-year
and sequential growth in operating revenues due primarily to higher
inpatient revenue. Inpatient operating revenues increased by 2.9 percent
from the year-ago quarter and 1.8 percent from the third quarter of this
year as a result of improved revenues per program. Average number of
inpatient programs declined from 133 to 128 both year-over-year and
sequentially. Outpatient operating revenues were down 0.6 percent
year-over-year and 2.1 percent sequentially. Improved operating revenues
per program were offset by a decline in average programs from 52 to 46
year-over-year and from 48 to 46 sequentially. The declines in the average
number of programs for the division reflect decisions by clients to
self-operate, withdrawal by the Company due to limited opportunity and
hospital unit closures.
Operating earnings for the division increased 10.0 percent compared to the
year-ago quarter, and increased 14.7 percent sequentially as selling,
general and administrative expenses declined significantly due to the
Company's third quarter 2003 restructuring. The division also benefited
from a pretax settlement of approximately $0.6 million in connection with
the closing of two programs.
o The Contract Therapy division improved quarterly operating revenues by 15.1
percent year-over-year while revenue was essentially flat sequentially. The
average revenue per location decreased 3.2 percent from last year's fourth
quarter and 2.2 percent sequentially.
Quarterly operating earnings declined 52.5 percent year-over-year; however,
they grew 50.3 percent over the third quarter. Much of the year-over-year
decline is the result of increased salary and related expenses associated
with difficulties experienced in adjusting staffing levels to the declines
in revenue brought about by the Part B therapy caps and the short-term lack
of location-by-location management information resulting from the
implementation of the Company's proprietary PROMOS system in August. The
sequential growth over the third quarter is directly attributable to the
restoration of the division's management information tools. The division's
operating earnings were also positively impacted by the restructuring
previously mentioned.
The above-mentioned Part B therapy caps were in effect from September 1
until December 8, when a moratorium on the caps was included with the
Medicare Drug Bill. The moratorium extends until December 31, 2005 to allow
time for the development of alternative Part B therapy recommendations that
would replace the therapy caps.
The Company's balance sheet at year-end remains strong with more than $38
million in cash and short-term investments, no long-term debt and an unused
credit facility in excess of $110 million to support our strategic initiatives.
Our cash generation remains strong, with $14.0 million in operating cash flow
for the quarter before capital expenditures of about $1.3 million. Operating
cash flows in the quarter were positively impacted by reductions in accounts
receivable and increases in payables and accruals reflecting increased insurance
reserves.
Diluted shares outstanding decreased by 2.5 percent from last year's fourth
quarter and 9.3 percent from last year's full year, primarily due to the
repurchase of 1.7 million shares under the stock repurchase program, which was
completed during the second half of 2002.
Update on Strategic Initiatives
- -------------------------------
In the HRS division, the Company has taken four steps to improve its
operating performance. First, a new senior business development executive, who
has extensive industry experience, has been appointed to lead the effort in
revitalizing HRS' approach to business development. Second, RehabCare will
invest an additional $600,000 in improving its sales processes, developing new
sales strategies and in strategic sales training for its business development
officers. Third, management will focus its attention on providing "add-on"
products to the Company's 111 single service clients, recognizing that the more
products managed in a relationship, the stronger that relationship becomes,
which improves opportunities for retention. And, fourth, RehabCare will provide
capital opportunities to many of our existing management contract relationships,
creating expanding partnerships with larger programs and longer terms.
In our Contract Therapy division, the Company will support its already
strong sales development program with a more aggressive, and targeted, marketing
and advertising campaign designed to create awareness of its full continuum of
care product offerings and to further reinforce its industry-wide reputation as
a leading expert in managing the post-acute continuum. Second, management has
implemented a more targeted approach to the sales development process,
concentrating the Company's resources on selected primary and secondary markets
where management's analysis indicates RehabCare has ample opportunities to grow
its business more profitably. Third, with the conversion to PROMOS fully
executed, management now has the requisite tools to focus on the key business
indicators to monitor and improve profit margins. And, fourth, management has
implemented a more disciplined methodology to the Company's pricing policies,
ensuring that each contract is profitable, minimizing opportunities for
unacceptable payment risks.
2004 Guidance
- -------------
In 2004, management expects operating revenues from ongoing operations of
between $335 million to $357 million for the year and earnings before interest,
depreciation and amortization (EBITDA) of between $40.7 million and $43.5
million. Expectations are for diluted earnings per share in the range of $1.22
to $1.32, which includes a $1.2 million charge, net of tax ($.07 per share), in
the first quarter from the sale of StarMed to InteliStaf. The charge relates to
final determination of the loss on the sale of StarMed, principally in working
capital adjustments, severance provisions and leasehold consolidation costs.
Guidance relating to earnings per share assumes a 39 percent effective tax
rate and an estimated 16.8 million diluted shares. Capital requirements are
estimated at $10.5 million composed of $4.9 million for routine capital
expenditures, $3.9 million for acquisitions and approximately $1.7 million
remaining to be drawn on a line of credit extended to Signature Healthcare
Foundation, which the Company expects to be fully drawn on during 2004.
The following are highlights, which are included in the Company's guidance:
o For the Hospital Rehabilitation Services division, operating revenues are
expected to decline between 1 percent and 7 percent from 2003 levels due to
the effects of the 65 Percent Rule and net reductions in inpatient and
outpatient programs as more clients attempt to self operate programs. These
reductions and related resource changes net of selling, general and
administrative reductions are estimated to reduce operating earnings from
18 percent of operating revenues in 2003 to 15 percent in 2004.
o For the Contract Therapy division, revenues are expected to increase
between 13 percent and 20 percent from 2003 levels due to continued growth
in contracts, same store operating revenues and the addition of the CPR
Therapies business. Improvements in contribution margins and reductions in
selling, general and administrative expenses are expected to increase
operating earnings as a percent of operating revenues to 7 percent in 2004
from 5 percent in 2003.
o Operating revenues associated with the CPR Therapies and Signature
Healthcare Foundation transactions are expected to range between $7.7 and
$8.5 million in the aggregate with operating earnings approximately 10
percent of operating revenue. These amounts have been included in our 2004
guidance. Because we have additional requirements to initiate operations
for the UCLA transaction, the Company's guidance does not include UCLA
operations at this time.
o Overall selling, general and administrative expenses are expected to
decline to about 15 percent of operating revenue in 2004 from about 17
percent of operating revenue in 2003. Factors affecting this decline are
the effect of the 2003 restructuring offset by 2004 budgeted compensation
increases, budgeted initiatives and corporate general and administrative
expenses, formerly absorbed by StarMed in 2003 to be retained by the
Company in 2004 to support acquisition and joint ownership transactions.
o Going forward, the Staffing division's financial condition and results of
operations will not be consolidated with the Company's continuing business
and the Company's investment in InteliStaf will be accounted for under the
equity method in 2004. Accordingly, the Company expects to record an
estimated $0.5 million to $0.7 million (after tax) as its equity share of
InteliStaf results of operations in 2004. Overall, InteliStaf expects
operating revenue in the range of $425 million to $465 million and net
income of about 0.5 percent of operating revenue. InteliStaf's results are
expected to be negatively impacted by integration costs in 2004.
The Company's guidance will be updated on a quarterly basis or as necessary
as it announces additional acquisitions and joint ownership transactions.
Dr. Short added, "Our pipeline of acquisition opportunities remains robust,
and we are seeing substantial interest from potential partners who support our
business model involving true partnerships serving the full post acute continuum
of care. The combination of cash on hand, access to capital through our credit
agreements and internal cash flows should allow us to take advantage of these
opportunities."
Dr. Short concluded, "While we continue to experience challenges, we expect
that 2004 will be a much improved year, from a financial perspective, when
compared to 2003. In order to improve the sales and margin performance of each
of our divisions, we are implementing a number of initiatives that we believe
will maximize their full potential. Ultimately, our objective is to better
integrate the way rehabilitation services are delivered across the post acute
care continuum so that we, and our clients, are in the best position to care for
patients needing rehab services in the right setting, at the right cost, and
with the right outcomes."
RehabCare Group, Inc., headquartered in St. Louis, Missouri, is a leading
provider of rehabilitation program and management services in over 700
hospitals, nursing homes and other long-term care facilities throughout the
United States. It provides services in acute care, skilled nursing, outpatient
and home health settings to fit the clinical needs of patients in a
cost-effective manner. 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 fourth quarter and full year
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 Sunday, February 29. The dial-in number for
the replay is (320) 365-3844 and the access code is 718315.
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 RehabCare's actual results in future periods to
differ materially from forecasted results. These risks and uncertainties may
include, but are not limited to, the ability of RehabCare to integrate
acquisitions and to implement client partnering relationships within the
expected timeframes and to achieve the revenue and earnings levels from such
acquisitions and relationships at or above the levels projected; the timing and
financial effect of the Company's continuing restructuring efforts with respect
to the Company's current businesses; changes in and compliance with governmental
reimbursement rates and other regulations or policies affecting RehabCare's
hospital rehabilitation and contract therapy lines of business; RehabCare's
ability to attract new client relationships or to retain and grow existing
client relationships through expansion of RehabCare's hospital rehabilitation
and contract therapy service offerings and the development of alternative
product offerings; the future operating performance of InteliStaf Holdings,
Inc., and the rate of return that RehabCare will be able to achieve from its
equity interest in InteliStaf; the adequacy and effectiveness of RehabCare's
operating and administrative systems; RehabCare's ability and the additional
costs of attracting administrative, operational and professional employees;
significant increases in health, workers' compensation and professional and
general liability costs; litigation risks of RehabCare's past and future
business, including RehabCare's ability to predict the ultimate costs and
liabilities or the disruption of its 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
I. Condensed Consolidated Statements of Earnings
------------------------------------------------
(Amounts in thousands, except per share data)
Three Months Ended Year Ended
December 31, December 31,
------------------------ ------------------------
% %
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
Operating revenues $129,475 $140,810 (8.0) $539,322 $562,565 (4.1)
Costs & expenses
Operating 98,073 102,723 (4.5) 408,559 413,081 (1.1)
Selling, general
& administrative
Divisions 13,842 18,225 (24.0) 65,055 74,621 (12.8)
Corporate 6,392 5,642 13.3 26,680 26,832 (0.6)
Restructuring charge - - - 1,286 - N/M
Loss on assets
held for sale 43,579 - N/M 43,579 - N/M
Depreciation
& amortization 2,130 2,196 (3.0) 8,559 8,334 2.7
------- ------- ------- -------
Total costs
& expenses 164,016 128,786 27.4 553,718 522,868 5.9
------- ------- ------- -------
Operating earnings
(loss), net (34,541) 12,024 N/M (14,396) 39,697 N/M
Other income
(loss), net (275) (6) N/M (338) 9 N/M
Interest expense, net (125) (148) (15.5) (574) (357) 60.8
-------- ------- ------- -------
Earnings (loss)
before income taxes (34,941) 11,870 N/M (15,308) 39,349 N/M
Income taxes (benefit) (9,418) 4,512 N/M (1,609) 14,954 N/M
-------- ------- -------- -------
Net earnings (loss) $(25,523) $ 7,358 N/M $(13,699) $24,395 N/M
======== ======= ======== =======
Diluted earnings
(loss) per share $ (1.58) $ 0.45 N/M $ (0.86) $ 1.38 N/M
Weighted average
dilutive shares
outstanding 16,124 16,529 (2.5) 16,000 17,642 (9.3)
II. Condensed Consolidated Balance Sheets
(Amounts in thousands)
December 31, December 31,
2003 2002
----------- ------------
Assets
Cash & short-term investments $38,385 $ 9,584
Accounts receivable, net 62,444 87,221
Deferred tax assets 14,706 2,529
Assets held for sale 46,171 -
Other current assets 1,912 6,122
-------- --------
Total current assets 163,618 105,456
Equipment, net 14,063 19,844
Excess cost of net assets acquired, net 48,729 101,685
Other assets 6,916 8,545
-------- --------
$233,326 $235,530
======== ========
Liabilities & Stockholders' Equity
Payables & accruals $ 40,495 $37,610
Liabilities held for sale 9,771 -
Other non-current liabilities 5,105 9,306
Stockholders' equity 177,955 188,614
-------- --------
$233,326 $235,530
======== ========
III. Operating Statistics
-------------------------
(Revenues and Operating Earnings in 000's)
Three Months Ended Full Year
Dec 31, Sept 30, Dec 31, Dec 31, Dec 31,
2003 2003 2002 2003 2002
----- ---- ---- ---- ----
Hospital Rehabilitation Services
Operating Revenues
Inpatient $34,776 $34,161 $33,793 $136,852 $130,743
Outpatient 12,081 12,342 12,154 48,979 49,003
-------- ------- ------- -------- --------
Total $46,857 $46,503 $45,947 $185,831 $179,746
Division Operating Earnings(a)$9,906 $ 8,634(d) $9,007 $ 33,557 $ 32,256
Average Number of Programs
Inpatient 128 133 133 133 135
Outpatient 46 48 52 48 55
--- ---- --- --- ---
Total 174 181 185 181 190
Contract Therapy
- ----------------
Operating Revenues $33,401 $33,607 $29,031 $130,847 $105,276
Division Operating Earnings(a)$1,372 $913(d) $2,888 $5,836 $9,124
Average Number of Locations 480 473 404 460 378
Staffing
- --------
Operating Revenues
Supplemental $28,416 $29,605 $38,876 $125,916 $172,071
Travel 21,035 25,586 26,945 98,036 105,472
------- ------- -------- -------- --------
Total $49,451(b) $55,191(b) $65,821 $223,952(b)$277,543
Gross Profit Margin
Supplemental 16.9% 18.5% 24.0% 19.1% 23.5%
Travel 18.7% 16.0% 22.0% 18.3% 21.7%
Total 17.6% 17.3% 23.2% 18.8% 22.8%
Division Operating
Earnings (Loss)(a) $(45,819)(c)$(2,589)(d) $129 $(52,503)(c)$(1,683)
Weeks Worked
Supplemental 20,932 21,434 27,889 90,886 128,396
Travel 10,892 13,140 13,912 50,228 54,156
------ ------ ------ ------ -------
Total 31,824 34,574 41,801 141,114 182,552
Average Number of
Supplemental Branches 63 70 102 73 108
(a) Division Operating Earnings (Loss) are earnings attributable to the
division before interest, income taxes and other income (loss).
(b) Includes intercompany sales of $0.2 million, $0.3 million and $1.3 million
for the three months ended December 31, 2003, September 30, 2003 and twelve
months ended December 31, 2003 respectively that Staffing has sold to
Hospital Rehabilitation Services and Contract Therapy at market rates.
(c) Includes a pretax loss on net assets held for sale of $43.6 million
(d) The third quarter 2003 restructuring charge was not allocated to the
operating segments
WE INVITE YOU TO VISIT OUR WEB SITE AFTER NOON TODAY TO VIEW KEY STATISTICS IN
GREATER DETAIL @ www.rehabcare.com.
Exhibit 99.2
REHABCARE CONFERENCE CALL SCRIPT
February 5, 2004
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 RehabCare's actual results in future periods to
differ materially from forecasted results. These risks and uncertainties may
include, but are not limited to, the ability of RehabCare to integrate
acquisitions and to implement client partnering relationships within the
expected timeframes and to achieve the revenue and earnings levels from such
acquisitions and relationships at or above the levels projected; the timing and
financial effect of the Company's continuing restructuring efforts with respect
to the Company's current businesses; changes in and compliance with governmental
reimbursement rates and other regulations or policies affecting RehabCare's
hospital rehabilitation and contract therapy lines of business; RehabCare's
ability to attract new client relationships or to retain and grow existing
client relationships through expansion of RehabCare's hospital rehabilitation
and contract therapy service offerings and the development of alternative
product offerings; the future operating performance of InteliStaf Holdings,
Inc., and the rate of return that RehabCare will be able to achieve from its
equity interest in InteliStaf; the adequacy and effectiveness of RehabCare's
operating and administrative systems; RehabCare's ability and the additional
costs of attracting administrative, operational and professional employees;
significant increases in health, workers' compensation and professional and
general liability costs; litigation risks of RehabCare's past and future
business, including RehabCare's ability to predict the ultimate costs and
liabilities or the disruption of its 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 fourth quarter and full year's performance.
As you can see from this morning's and other recent press releases, the Company
is showing improved performance in its hospital rehabilitation services and
contract therapy divisions and has been active in both acquisitions and other
transactions implementing our continuum strategies designed by Dr. Short. The
Board is pleased with the progress made in this regard and so has continued to
suspend its CEO search for the time being, in order to give Dr. Short and the
management team the ability to focus on these important developments and bring
them to fruition.
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; Vince Germanese, Chief
Financial Officer; Mark Bogovich, Chief Accounting Officer; Don Adam, Senior
Vice President, Acquisitions and Betty Cammarata, Director of Investor
Relations.
We will be available during the question and answer period following our formal
remarks.
The last eight months have passed very quickly for our management team, the
Company and me. June, July and August were dedicated to planning and
implementing our successful restructuring and management reorganization and
laying the foundation for our continuum, relationship and acquisition strategic
initiatives. During September and October, we focused on regulatory matters,
Part B therapy caps and the 65 Percent Rule, which would significantly (and in
the case of the therapy caps, did significantly for a short time) impact our
business. In this period, the Contract Therapy division completed an assessment
of a target market strategy designed to improve efficiency and profitability and
began the implementation of that initiative. We also resolved issues with the
implementation of the Promos system in contract therapy. We endured short-term
disruption in that business for the long-term benefit of having all of our
businesses on the same patient information platform.
While we were gratified with having met these challenges, as shown in our
improving results, we are most pleased with the traction we are getting with our
strategic initiatives. In November and December, we successfully negotiated the
sale of our StarMed Staffing division to InteliStaf Healthcare. This transaction
eliminated the financial losses of staffing ahead of schedule, gives us an
investment in one of the largest combined supplemental/travel healthcare
staffing companies in the United States and allows us to focus on our core
program management services businesses, Hospital Rehabilitation Services ("HRS")
and Contract Therapy.
In January and early February, as you can tell by our announcements of the
Signature, CPR Therapies and UCLA transactions, we are gaining momentum in
implementing our strategic initiatives. Signature adds to our patient care
delivery network in St. Louis, one of our target markets, by giving us the
ability to implement outpatient clinics and a therapy home health agency. CPR
Therapies marks our entrance into the Colorado market in a significant way and
adds to our critical mass in California. Finally, UCLA marks an important step
for our company in developing a freestanding, yet campus-based, acute
rehabilitation hospital with one of the most prestigious academic medical
centers in the country.
With these and future transactions come new challenges for our company in terms
of integration, support services and cost management. I will address each of
these later in this call.
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.
Thank you, John.
Revenues for the fourth quarter were $129.5 million, down 8 percent from $140.8
million a year ago. Net loss was $(25.5) million, or $(1.58) per diluted share
including the StarMed writedown of $30.6 million, or $1.90 per diluted share,
compared to income of $7.4 million, or $0.45 per diluted share in the year-ago
quarter and $3.3 million, or $0.20 per diluted share in the prior quarter, which
included a restructuring charge of $800,000 or $.05 per share. Fourth quarter
2003 results include a pretax charge of $43.6 million, equal to $1.90 per
diluted share after tax, to reflect the write-down of the StarMed net assets
held for sale.
Revenues for the full year 2003 were $539.3 million down 4.1 percent from $562.6
million in 2002. Like the fourth quarter, the decline in revenues was due
primarily to revenue declines in our StarMed Staffing division. Net loss for
2003 was ($13.7) million, including the loss net of taxes on disposal of StarMed
of $30.6 million, as compared to net income of $24.4 million in 2002.
In the Hospital Rehabilitation Services division, the inpatient business unit
again experienced slightly improved operating revenue and earnings performance
for the fourth quarter compared to the third quarter, driven by higher revenue
per program, which, in turn, was driven by increased discharges per program, and
reduced selling, general and administrative expense. Our average number of
programs for the quarter was 128 and we finished the quarter with 123 programs,
6 fewer than the end of the previous quarter. There were 4 acute openings in the
quarter and 10 closures, 7 of which were acute and 3 subacute. Of the closures,
5 acute units were lost to self-operation and 2 were our choice due to limited
opportunity. 1 subacute unit decided to self-operate and 2 other locations
closed their units. Our backlog stood at 7; 5 of which require certificates of
need to open.
The outpatient business unit experienced a net 4 closures for the quarter and
increased revenue per location. We had average programs of 46 and finished the
quarter with 43 programs. Of the 5 closures for the quarter in inpatient, 3
decided to self-operate and we closed 2 due to limited opportunity.
We expect to see some continued attrition in 2004 as some clients seek to
operate on their own. John will describe later in this call steps that we are
taking to turn the tide in HRS.
With regard to the 65 Percent Rule and as previously reported to you, we have
completed a unit-by-unit review of its likely impact. We looked at the market,
the programs and services of the hospital and our ability to access additional
patients. Based on this review, we have significant initiatives underway in
about 15 units to add programs and services to mitigate the impact of the Rule.
The remainder of the units is well within our ability to absorb the impact. In
addition, the Contract Therapy division has the potential to benefit from the
Rule, as these high-acuity rehab patients, who cannot be served in the acute
rehab setting, may receive treatment in the skilled care setting served by the
latter division.
In the fourth quarter, our Contract Therapy division commenced the task of
assessing the profitability levels and growth potential of each geographic
market it serves. The result of this work was the establishment of selected
primary and secondary markets where the division felt there are ample
opportunities to grow the business profitably. Consequently, this target market
strategy identified various markets in which the division has not been able to
operate profitably; and therefore, the division began exiting some of those
markets. The implementation of this target market strategy in the fourth quarter
produced a net loss of five contracts for the quarter, ending with 468
facilities, compared to 473 at the end of the third quarter. The number of
openings for the quarter was 25, in line with our historical and seasonal
experience and down from the 50 openings in the third quarter. Closures
increased by 5 to 30, of which 18 were closures resulting from our target market
strategy and 2 were closed due to unacceptable payment risk. The backlog remains
very strong at 49 located in our target markets.
Operating earnings of the division increased 50.3 percent from the third quarter
due primarily to productivity improvements the division was able to achieve with
the restoration of its management information systems that I will discuss
shortly. There was, however, a 52.5 percent decline from the same period last
year. We believe the majority of this year-over-year decline is attributable to
the revenue and cost impact of the Part B therapy caps that were implemented on
September 1, 2003. The division received relief when a moratorium was placed on
the caps as part of the Medicare Drug Bill that was signed on December 8, 2003.
The moratorium is effective until December 31, 2005. Since this issue is only in
moratorium, we continue to be involved in the development of alternative
approaches if and when they are reinstituted and to work with other industry
leaders to propose and develop other more effective solutions.
Last quarter, we informed you that the division had experienced difficulties
adjusting staffing levels to the declines in operating revenues brought about by
a short-term lack of location-by-location management information resulting from
the implementation of our proprietary PROMOS system, which occurred in August.
As an update, the major issues surrounding the conversion that adversely
affected the third quarter's operations continued to impact the division until
they were resolved in late October. With the superior management information
available to them, management had quick access to, and was able to focus on, the
key business indicators of the division and return operations closer to levels
that the division had become accustomed to achieving, and we expect continued
improvement in the first quarter of 2004.
As John said a few minutes ago, we completed the sale of the StarMed Staffing
business to InteliStaf on February 2. For informational purposes, I will discuss
briefly the operating performance of the business in the fourth quarter. The
Staffing division continued to be negatively impacted by a general softness in
demand, driven primarily by increases in client 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 2.3 percent from the prior
quarter resulting from a decrease in RN and LPN placements. This slowed from the
previous quarter's decline of 8.3 percent. Same store revenue decreased 14.4
percent year-over-year and 2.5 percent sequentially. Gross profit margins
decreased from 18.5 percent to16.9 percent sequentially, primarily due to the
impact of a $0.6 million professional liability insurance adjustment.
In travel staffing, total weeks worked decreased 17.1 percent sequentially to
10,892 as a result of softening demand during the holiday months. Partially
offsetting this decline, gross profit margins increased sequentially 270 basis
points due to the elimination and run-off of prior quarters' incentive programs
and adjustments to compensation and meal and housing allowances.
From a financial perspective, the Company's balance sheet remains strong with
more than $38 million in cash and short-term investments at December 31, no
long-term debt and an unused credit facility in excess of $110 million to
support our strategic initiatives. Our cash generation remains strong, with
$14.0 million in operating cash flow for the quarter before capital expenditures
of about $1.3 million. Operating cash flows in the quarter were positively
impacted by reductions in accounts receivable and increases in payables and
accruals reflecting increased insurance reserves.
Total day's sales outstanding in the fourth quarter, which included the
receivables of StarMed, were 63.7 days, up 1.9 days from last quarter and 6 days
from the year ago quarter. The factors contributing to the increase in DSO's are
slow payments from state public aid systems that fund nursing homes, a large
government contract in StarMed, the timing of payments due to the holidays and
the shift in receivable mix from the HRS and Staffing divisions to the Contract
Therapy division. We received several large payments in early January from
several of these clients and are continuing to develop payment plans on other
issues impacting the payment terms. We continue to be aggressive managing our
accounts receivable given the difficult payment environment.
Finally, with regard to our outlook for 2004 -
Our press release provides details on our full-year guidance for 2004 and a
number of the factors impacting our expected results of operations. To what we
said in the release, I would add the following:
o Our Contract Therapy division has completed its target market review in the
fourth quarter and will continue to see improvement in margins as a result
compared to 2003. The division expects to continue aggressive sales efforts
in our target markets and maintain historical growth levels in terms of net
contracts added.
o I anticipate our day's sales outstanding to recalibrate to the mid 70's as
we lose the effect of relatively low day's sales outstanding in StarMed and
see the higher proportionate impact of the higher day's sales outstanding
of contract therapy.
o We do not expect a significant impact on earnings from equity-based
compensation as we expect to delay adoption of related FASB pronouncements
until 2005 or later, if permitted.
o We expect a slight decline in our overall effective tax rates (to 39
percent) due to the elimination of certain permanent differences in StarMed
relating to meal allowances.
Finally, we will update our guidance on a quarterly basis and as necessary as we
add acquisitions and significant joint ownership transactions during the year.
Now I will turn the call back over to John -
Thanks, Vince,
Update on business improvement program
In July, the Company set out a four-point program to return to historical levels
of revenue growth and profitability. Included in the program was a restructuring
of the Company's operations to realize approximately $12 million in annual cost
savings; developing a continuum of rehabilitative service capability covering
inpatient, outpatient and skilled care; enhancement of client relationships; and
acquisitions, joint ventures and mergers. Substantive progress has been achieved
on all these initiatives.
The impact of the restructuring program is evident in comparing the fourth
quarter selling, general and administrative costs of $20.2 million to the
selling, general and administrative costs in the second quarter of 2003 of $24.1
million. We will not experience the full effect of the restructuring in 2004 as
a portion of the cost savings will go with the StarMed transaction.
We expect that the first part of 2004 will see continued restructuring as we
transition support services to InteliStaf. This transition could take up to five
months for selected services such as billing, accounting and so on. Our
agreement with InteliStaf calls for us to be reimbursed for the cost of the
transition services we provide. Once InteliStaf no longer needs these services,
we will assist those individuals involved in finding alternative employment
inside or outside of our Company. We feel confident that we can effectively
manage these costs estimated at about $6 million out of the Company.
More challenging to manage will be the remaining indirect costs of almost $5.6
million, which were formerly absorbed by StarMed. Properly handling these costs
will require a combination of redesign of support services to eliminate
unnecessary costs coupled with deliberate reassignment of certain of these
services to support acquisitions like CPR Therapies and joint ownership
transactions such as UCLA. We anticipate an additional reduction of some $1.6
million of these costs during the second half of the year with final disposition
by the first quarter of 2005.
We are making progress in implementing our continuum of care approach as
indicated by our announcement on December 31, 2003, of an agreement with
Signature Health Care Foundation to provide staffing and other services to the
Foundation's full service rehabilitation programs in outpatient and home health
settings. This represents the construction of a comprehensive delivery system
for rehabilitative services in a target market.
As I step back and look at our penetration into the St. Louis market, I see that
we now manage a 49-bed acute rehabilitation unit at a major medical center, 26
rehabilitation programs in skilled nursing facilities and, through Signature,
plan to develop up to 16 outpatient clinics and a therapy home health
capability. We are very close, in St. Louis, to creating the model for
integrated delivery of rehab care across the post acute continuum, where we are
able to care for patients needing rehabilitation services in the right setting,
at the right cost with the right outcome all under our clinical management.
Remaining to be accomplished is completion of a common information systems
platform to enable coordination of the appropriate site of service for our
patients among the participants in the delivery network.
The Company completed the first in what I expect to be a series of acquisitions
when we purchased the client contracts and certain other assets of CPR Therapies
on February 2, 2004. CPR is a leading provider of contract rehabilitation
services in skilled nursing and assisted living facilities in Colorado,
California and Florida. The acquisition provides RehabCare with a significant
entry into the Colorado market and increases its critical mass in California.
In addition, these contracts and their related client relationships provide a
foundation for us to build continuums of care in several key markets in
Colorado, Florida and California. I will keep you posted as we make progress in
these markets and demonstrate that we have the capability of building a
continuum of care from a skilled nursing, outpatient or inpatient foundation.
Finally, on February 4, 2004, RehabCare announced that it had signed an
agreement to purchase the assets of the Neurological Rehabilitation and Research
Unit of the University of California at Los Angeles Medical Center. The Company
will partner with UCLA on the development of a freestanding acute care
rehabilitation hospital in the Los Angeles area, and the two parties will work
together to develop a clinical research network to involve many of RehabCare's
inpatient and outpatient rehabilitation programs.
This transaction, while not expected to be fully implemented until 2005, is a
very good example of the Company's changing views on relationships. In
conjunction with a capital partner and UCLA, this project will entail a 56-bed
rehabilitation hospital, leased and operated by a joint venture of RehabCare and
the capital partner, in close proximity to UCLA Medical Center. At maturity, we
expect this project to yield an estimated $19 million in revenues and 22 percent
EBITDA and a total capital requirement of approximately $12.0 million. What
remains is finalizing plans for the specific location of the facility,
completing needed renovations and obtaining the various licenses needed to
commence operations. I look forward to updating you in succeeding quarters on
our progress on this most important project.
I am pleased with the momentum that I see developing in our acquisitions, joint
ownership transactions and the pipeline of larger opportunities presenting
themselves to us. I do not underestimate the challenges we need to meet with the
management of our support services costs. And, I am working with the Company's
management team on a number of infrastructure initiatives, which, I believe,
will be essential to continuing our momentum.
o First, we must insure that our HRS division stabilizes the erosion of
programs experienced over the last eighteen months. While I am concerned by
this erosion, I believe we have a product that is in demand in the
marketplace that requires additional sales resources. Therefore, we have
taken four steps to improve our operating performance in our HRS division.
First, I am pleased to announce that we have named a new senior business
development executive, who has extensive industry experience, to lead the
effort in revitalizing our approach to business development. Second, we are
investing more than $600,000 in improving our sales processes, developing
new sales strategies and in strategic sales training for our business
development officers. Third, we are focusing our attention on providing
"add-on" products to our 111 single service clients, recognizing that the
more products we manage in a relationship, the stronger that relationship
becomes while improving opportunities for retention. And, fourth, we will
provide capital opportunities to many of our existing relationships,
creating expanding partnerships with larger programs and longer terms.
o Second, we are completing a three-year horizon information technology
strategic plan, which will enable our continuum strategy, simplify
integration of businesses that we acquire, make better use of the internet
for both internal process improvement and external touch to our clients and
patients. This plan will be completed by the end of February and I will
report to you its initiatives in our first quarter conference call.
o Finally, to insure that we have sufficient capital to finance our
acquisitions and fund our larger joint ownership transactions, our finance
group has begun development in conjunction with our bankers of a new credit
facility, which we anticipate being completed by mid-second quarter.
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 six 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.