UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 29, 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
23rd Floor
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 863-7422
================================================================================
Item 7. Financial Statements and Exhibits.
(c) Exhibits
The following exhibits are furnished pursuant to Item 9 and Item 12 hereof
and should not be deemed to be "filed" under the Securities Exchange Act of
1934:
99.1 Press release dated July 29, 2004, announcing our
second quarter 2004 revenues and results of operations and
guidance for the full year of 2004
99.2 The script for a conference call held by the registrant on
July 29, 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: July 29, 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 July 29, 2004, announcing our second quarter 2004
revenues and results of operations and guidance for the full year 2004.
99.2 The script for a conference call held by the registrant on July 29, 2004
Exhibit 99.1
CONTACT: RehabCare Group, Inc.
Vincent L. Germanese
Chief Financial Officer
Betty Cammarata, Dir-Investor Relations
Press: David Totaro, Senior Vice
President, Corporate Marketing &
Communications
(314) 863-7422 or
Financial Dynamics
Gordon McCoun/Lanie Marcus
Press: Sean Leous
(212) 850-5600
FOR IMMEDIATE RELEASE
Thursday, July 29, 2004
REHABCARE REPORTS SECOND QUARTER 2004 DILUTED EPS OF $0.34, OPERATING
REVENUES OF $90.9 MILLION
ST. LOUIS, MO, July 29, 2004--RehabCare Group, Inc. (NYSE:RHB) today reported
financial results for the quarter and six months ended June 30, 2004.
Comparative results for the quarter and six months follow.
Quarter Ended Six Months Ended
Amounts in millions, June 30, June 30,
except per share data 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Consolidated Operating Revenues $90.9 $136.0 | $195.4 $274.9
Consolidated Net Earnings 5.7 4.5 | 10.8(a) 8.5
Consolidated Diluted
Earnings Per Share 0.34 0.27 | 0.64(a) 0.52
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HRS Inpatient Operating Revenues 37.1 33.8 | 72.5 67.9
HRS Outpatient Operating Revenues 11.4 12.5 | 23.1 24.6
---------------------------------------------------------------------------
HRS Operating Revenues 48.5 46.3 | 95.6 92.5
HRS Operating Earnings 8.1 7.9 | 16.9 15.0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contract Therapy Operating Revenues 41.0 32.9 | 81.8 63.8
Contract Therapy Operating Earnings 2.0 1.8 | 4.4 3.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other Revenues 1.4 - | 1.4 -
Other Operating Earnings 0.1 - | 0.1 -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Staffing Operating Revenues - 57.2(b)| 16.7(b) 119.3(b)
Staffing Operating Loss - (2.1) | (0.1) (4.1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Equity in Net Loss of Affiliate (0.1) - (0.5) -
- --------------------------------------------------------------------------------
<FN>
(a) Includes an after tax restructuring charge of $0.9 million, or $0.06 per
diluted share and an after tax gain on sale of business of $0.3 million, or
$0.02 per diluted share.
(b) Includes intercompany sales of $0.4 million for the three months ended June
30, 2003 and $0.1 million and $0.7 million for the six months ended June
30, 2004 and June 30, 2003, respectively, that Staffing sold to Hospital
Rehabilitation Services and Contract Therapy at market rates.
</FN>
-MORE-
John H. Short, Ph.D., president and chief executive officer, commented, "We
had solid results in our second quarter 2004. We continue to see positive
contributions from our new sales initiatives in both divisions; from the focus
of our management team on our target markets; as well as the benefit from the
sale of our staffing division. Additionally, our human resource initiatives are
progressing quite well and our client retention is ahead of our expectations
year-to-date."
Dr. Short continued, "During the quarter we absorbed the acquisitions
completed in the first half of the year. We eliminated a significant portion of
corporate costs previously absorbed by the staffing division. In addition, our
new signings for our Contract Therapy division are in line with our aggressive
expectations and our new signings in our Inpatient business are ahead of
expectations. Also, we have implemented an initiative to cross sell programs
within our existing client relationships to enable us to take advantage of the
many strong relationships within our organization. As these growth plans come to
fruition, we expect to redeploy part of the remaining overhead from the sale of
the staffing division to support these growth plans and we expect to eliminate
the remainder of those costs in early 2005. In the meantime, we are carrying
these costs and they are impacting operating earnings in both of our divisions."
Financial Overview of Second Quarter
- ------------------------------------
Net revenues for the second quarter 2004 were $90.9 million compared to
$136.0 million from the year ago quarter or a decline of 33.2 percent primarily
due to the sale of the Company's staffing division in February 2004. The
staffing division contributed $57.2 million of net revenues in the second
quarter of 2003. Net earnings increased 28.0 percent to $5.7 million in the
second quarter 2004 compared to $4.5 million in the year ago quarter. Earnings
per share on a fully diluted basis were $0.34 compared to $0.27 for the same
period last year.
o The Hospital Rehabilitation Services division (HRS) increased its second
quarter net revenues 4.8 percent to $48.5 million compared to $46.3 million
in last year's second quarter. Operating earnings for the quarter increased
1.5 percent to $8.1 million from $7.9 million in the prior year quarter. At
the end of the quarter, HRS had 189 programs compared to 183 programs at
the same time last year.
The increase in operating revenues is the result of same store growth in
discharges and the first quarter acquisition of VitalCare, partially offset
by net closures in programs. The division's operating earnings remain
strong, but are being negatively impacted by operational issues in both our
outpatient business and VitalCare.
o The Contract Therapy division's net revenues for the second quarter of 2004
increased 24.7 percent to $41.0 million, compared to $32.9 million in the
same quarter a year ago. Operating earnings for the quarter increased 9.2
percent to $2.0 million from $1.8 million in the prior year quarter. At the
end of the quarter, the division had 570 programs compared to 448 programs
at the same time last year.
The year-over-year second quarter revenues and operating earnings
performance reflects the significant growth in the number of programs
through strong sales results and the acquisition of CPR Therapies, LLC in
the first quarter of 2004. The division continues to benefit from its
target market strategy and improved therapist productivity resulting in
year-over-year operating earnings increases. However, the division's
operating earnings were negatively impacted by an increase in bad debt
expense related to closed programs and lower margins experienced by CPR
Therapies during its integration.
o The Company completed the acquisition of Phase 2 Consulting at the
beginning of May 2004. For the last two months of the quarter, Phase 2
Consulting operating revenues and earnings were in line with expectations.
o The sale of the staffing division has improved the Company's operating
earnings and the Company believes that its equity ownership in InteliStaf
will be a valuable asset.
The Company's balance sheet at June 30, 2004 remains strong with almost $39
million in cash, cash equivalents and restricted cash, minimal long-term debt
and an unused credit facility in excess of $110 million to support strategic
initiatives. During the second quarter, the Company used approximately $6.3
million of cash for acquisitions and related costs and an additional $1.0
million for capital expenditures. Days sales outstanding declined to 66 days
from 72 days at December 31, 2003 (adjusted for receivables related to the
staffing division). This improvement, together with cash flow from operating
earnings, resulted in cash flow from operations of $17.2 million during the
quarter.
With regard to the outlook for the remainder of 2004, the Company affirms
the guidance provided during its first quarter conference call. The Company
expects 2004 net revenues to be between $370 million and $390 million and
earnings before interest, taxes, depreciation and amortization (EBITDA) to be in
the range of $46 million to $49 million. Based on the visibility of the second
half of the year, the Company expects full year diluted earnings per share to be
near the midpoint of the $1.34 to $1.44, range previously provided. Diluted
earnings per share expectations include a $0.9 million charge, net of tax ($0.06
per share) and the $0.3 million gain net of tax ($0.02 per share), in the first
quarter from the sale of the staffing division.
Dr. Short concluded, "We have a confident outlook for the performance of
our businesses over the balance of 2004. We are encouraged by the signing of
nine new programs in HRS during the first six months of 2004, in addition to the
strong sales efforts in Contract Therapy. We also are encouraged by the progress
that we are making in developing our continuum model in several markets and
structuring a number of joint venture transactions."
RehabCare Group, Inc., headquartered in St. Louis, Missouri, is a leading
provider of program management services for hospital inpatient rehabilitation
units and skilled nursing units, outpatient therapy programs, and contract
therapy services in conjunction with more than 700 hospitals and skilled nursing
facilities in 39 states, the District of Columbia, and Puerto Rico. RehabCare is
pleased to be included in the Russell 2000 and Standard and Poor's Small Cap 600
Indices.
A listen-only simulcast of RehabCare's second quarter conference call will
be available on the Company's web site at www.rehabcare.com and online at
www.companyboardroom.com, beginning at 10:00 Eastern time. An online replay will
be available for at least 21 days after the call. A telephonic replay of the
call will be available beginning at 1:30 P.M. Eastern time today and ending at
midnight on August 19, 2004. The dial-in number for the replay is (320) 365-3844
and the access code is 739623.
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 restructuring efforts with respect to RehabCare's continuing
businesses; changes in and compliance with governmental reimbursement rates and
other regulations or policies affecting RehabCare's continuing businesses;
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 (Unaudited amounts
in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 % Change 2004 2003 % Change
---- ---- -------- ---- ---- --------
Operating revenues $90,944 $136,043 (33.2) $195,441 $274,885 (28.9)
Costs & expenses
Operating 64,643 102,215 (36.8) 140,710 206,905 (32.0)
Selling, general
& administrative
Divisions 7,863 17,137 (54.1) 17,536 35,427 (50.5)
Corporate 6,276 6,939 ( 9.6) 12,593 13,735 (8.3)
Restructuring
charge (51) - N/M 1,615 - N/M
Gain on sale of business - - N/M (485) - N/M
Depreciation
& amortization 2,010 2,106 (4.6) 3,778 4,345 (13.0)
----- ----- ----- -----
Total costs
& expenses 80,741 128,397 (37.1) 175,747 260,412 (32.5)
------ ------- ------- -------
Operating earnings,
net 10,203 7,646 33.4 19,694 14,473 36.1
Other income
(expense), net (43) (53) (18.9) (50) (73) (31.5)
Interest expense, net (211) (154) 37.0 (372) (305) 22.0
---- ---- ---- ----
Earnings before income
taxes and equity in net loss
of affiliate 9,949 7,439 33.7 19,272 14,095 36.7
Income taxes 4,136 2,982 38.7 8,000 5,594 43.0
Equity in net loss
of affiliate (110) - N/M (463) - N/M
------ ------- ------- -------
Net earnings $5,703 $ 4,457 28.0 $10,809 $ 8,501 27.1
====== ======= ======= =======
Diluted earnings
per share $ 0.34 $ 0.27 25.9 $ 0.64 $ 0.52 23.1
Weighted average
shares outstanding 16,794 16,444 2.1 16,769 16,469 1.8
II. Condensed Consolidated Balance Sheets
(Amounts in thousands)
Unaudited
June 30, December 31,
2004 2003
--------- -----------
Assets
Cash and restricted cash $ 38,718 $ 38,385
Accounts receivable, net 65,954 62,744
Deferred tax assets 8,308 14,706
Other current assets 4,177 1,912
-------- -------
Total current assets 117,157 117,747
Equipment, net 13,255 14,063
Excess cost of net assets acquired, net 62,391 48,729
Intangible assets 10,208 48
Investment in unconsolidated affiliate 39,537 -
Assets held for sale - 46,171
Other assets 7,112 6,868
-------- --------
$249,660 $233,626
======== ========
Liabilities & Stockholders' Equity
Current portion of long-term debt $ 720 $ -
Payables & accruals 45,230 40,795
------- -------
Total current liabilities 45,950 $40,795
Liabilities held for sale - 9,771
Long-term debt 3,540 -
Other non-current liabilities 9,486 5,105
Stockholders' equity 190,684 177,955
-------- --------
$249,660 $233,626
======== ========
III. Operating Statistics (Revenues and Operating
Earnings in 000's)
Three Months Ended
June 30, June 30,
2004 2003
------- -------
Hospital Rehabilitation Services
- --------------------------------
Revenues
Inpatient $37,121 $33,778
Outpatient 11,397 12,535
------ ------
Total $48,518 $46,313
Division Operating Earnings(a)(b) $ 8,064 $ 7,943
Average Number of Programs
Inpatient 145 134
Outpatient 42 49
--- ---
Total 187 183
Contract Therapy
- ----------------
Operating Revenues $41,028 $32,914
Division Operating Earnings(a)(b) $ 1,979 $ 1,812
Average Number of Locations 572 455
Other
- -----
Revenues $ 1,398 -
Operating Earnings(a)(b) 109 -
<FN>
(a) Division Operating Earnings are earnings attributable to the division
before interest, income taxes and other income (expense).
(b) The restructuring charge was not allocated to the operating segments.
</FN>
WE INVITE YOU TO VISIT OUR WEB SITE AFTER NOON TODAY TO VIEW KEY STATISTICS IN
GREATER DETAIL @ www.rehabcare.com.
-END-
Exhibit 99.2
REHABCARE CONFERENCE CALL SCRIPT
July 29, 2004
INTRODUCTION BY CONFERENCE OPERATOR
INTRODUCTION OF MANAGEMENT BY FINANCIAL DYNAMICS
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 restructuring efforts with
respect to RehabCare's continuing businesses; changes in and compliance
with governmental reimbursement rates and other regulations or policies
affecting RehabCare's continuing businesses; 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
Good morning and thank you for joining us today. I'm John Short, president and
CEO of the Company. We're pleased that you could join us for the discussion of
our second quarter 2004 earnings. 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.
Update on Corporate Results and Initiatives
Our second quarter was a solid one for RehabCare. The quarterly results showed
sequential and year-over-year improvements in our ongoing businesses and both
our top and bottom line financial results were in line with our expectations.
Net revenues for the second quarter 2004 were $90.9 million compared to $104.5
million from the sequential quarter or a decline of 13.0 percent primarily due
to the sale of the Company's staffing division in February 2004. The divested
staffing business contributed $16.7 million of net revenues in the first quarter
of 2004. Our earnings per diluted share of $0.34 exceeded the first quarter's
earnings per diluted share by $0.03.
As you can see from our earnings release, operating earnings increased from $7.7
million last year to $10.2 million in the quarter just ended. The majority of
the $2.5 million improvement was the result of our sale of the staffing division
earlier this year. At the same time, contribution margins at the division level
improved both in absolute dollars as well as margin percentage.
As we said on our last call, of the total of $11.6 million in corporate costs
primarily absorbed by the staffing division, we had targeted $7.6 million in
costs for reduction. I am pleased to say that we have eliminated the first $6.0
million in costs as part of the transition services agreement with InteliStaf
and have successfully identified and are harvesting the $1.6 million in
remaining cost reductions. Our intention is to grow our company to a
substantially larger size, and some of this infrastructure will be needed to
manage the growth. As these growth plans come to fruition, we expect to redeploy
part of the remaining overhead from the sale of the staffing division to support
these growth plans. And, we expect to eliminate the remainder of the costs in
early 2005. We will, of course, continue to manage non-essential expenses
judiciously to realize appropriate profitability. These costs are impacting
operating earnings for both divisions.
In the Hospital Rehabilitation Services division, the number of programs appears
to be stabilizing. The division finished the quarter with 189 programs, which is
an increase of one over the end of the first quarter and an increase from the
June 30, 2003 total of 183 programs. The division opened four programs and
closed three programs in the second quarter. Of the three closures, 1 was for
credit reasons (sub-acute), 1 was for self-operation (OP) and 1 chose not to
renew their contract (ARU). The division's backlog remains at 11 comparable to
the end of the first quarter.
Importantly, our revitalized sales initiatives announced last quarter are taking
hold as we signed 4 new inpatient programs in the quarter and received
certificate of need approval for an additional inpatient program. That brings
our total signings year to date to 9, or 90 percent of our annual target. Four
of them are now opened and the remainder will open within 12 months. This
compares to six contracts during the first six months of 2003.
While the inpatient business continues to perform well, we have not been
satisfied with the execution of the outpatient business. We have reconfigured
the operating management of outpatient and expect to see improvement by the
fourth quarter of 2004.
Contract Therapy's target market strategy continues to deliver positive results
for the division. This, coupled with the acquisition of CPR Therapies in the
first quarter, has helped deliver sequential and year-over-year operating
revenue growth. Our Contract Therapy division finished the second quarter with
570 locations compared to the year ago total of 448. The division added 6 net
new locations versus the first quarter's addition of 36 net new locations
excluding the acquisition of CPR Therapies. Of the 30 locations opened in the
second quarter, 20 were in primary target markets and 10 were in secondary
target markets. Our openings in the second quarter were impacted by
opportunities we chose not to pursue because of resource constraints despite a
Company record in recruiting therapists for the quarter. Such constraints, as we
understand them today, are included in our previous guidance. Of the 24 closures
in the second quarter, 10 were for credit reasons, 5 closed their operations, 4
changed ownership, 3 chose not to renew their contracts and we exited 2
unprofitable locations. The division's backlog remains strong at 43 compared to
39 at the end of the first quarter.
Update on InteliStaf and Acquisitions of CPR Therapies, VitalCare and
Phase 2 Consulting
InteliStaf's results, particularly operating revenues, have been adversely
impacted by the continuing slump in the healthcare staffing industry. Still, the
company is managing within its operating revenues and continues to generate
operating earnings near expectations which is quite an accomplishment given the
difficulty integrating two complex businesses (theirs and StarMed's) and the
current operating environment. An encouraging note is the growing acceptance of
the staffing partner model within InteliStaf's client base. InteliStaf expects
this model to become a much larger share of its operations in the future. We
continue to believe our equity ownership in InteliStaf will be a valuable asset
for the Company over time as that business matures and the industry turns
around.
While CPR Therapies is well ahead of our expectations for operating revenues, we
still have work to do to bring its margins in line with the rest of Contract
Therapy's business. The focus of these efforts will be on adjusting staffing
patterns, improving therapist productivity and implementing our clinical
programs. We are anticipating CPR Therapies' margins to be in line by the end of
the year.
The strategy of cross selling subacute services to inpatient clients and
inpatient/outpatient services to VitalCare clients is gaining traction with one
letter of intent signed for cross-sold services. A joint target marketing
approach has been established within California to best capture the
opportunities this comprehensive continuum of care model presents. Despite these
positive activities, we still have work to do to more fully integrate VitalCare
and to bring its operating performance more in line with our expectations. We
are targeting the end of the third quarter as a realistic time frame to
accomplish the needed changes.
As we reported last quarter, we are operating Phase 2 Consulting as a
freestanding subsidiary of RehabCare. Its operating revenues and earnings are in
line with our expectations for the two months ended June 30.
Update on Joint Venture and Enhancements to Business Relationships
We continue to build our pipeline of joint venture and other relationship
enhancing opportunities and we are confident that we will sign several by
year-end. We now have letters of intent from four potential healthcare partners
for joint ventures to develop acute rehabilitation facilities. Two of these
opportunities involve leasing existing facilities, which are currently under
negotiation. These facilities will be in operation more quickly than the other
two, which will require new construction. As these deals come closer to
fruition, I will update you on their probable impact on our operating revenues
and earnings and capital requirements.
With regard to our UCLA project, we have nothing new to report other than we
continue to look at 2005 as the first year that this venture will impact the
Company's results.
The Signature Healthcare Foundation relationship is also progressing. We have
signed leases for the anticipated two additional locations opening in the third
quarter.
We initiated an exciting new relationship this quarter with the National
Arthritis Foundation and renewed another with VHA. We believe that both of these
relationships will better position us to become the rehabilitation provider of
choice in our target markets.
We continue to explore opportunities for acquisitions to complement our
businesses and our target markets. While we are looking at several promising
combinations, we have nothing specific to report to you at this time. As these
opportunities mature, we will provide updates.
Also, while we are optimistic about closing one or more joint ventures or
acquisitions before the end of the year, I want to reiterate that these are
complex deals requiring multidisciplinary teams to complete. Estimating the
timing of closure and impact on our operating results is difficult.
Regulatory Update
The modified 75% Rule went into effect for acute rehab programs on July 1, 2004.
This is a key rehab regulation and we have initiated, where needed, our
mitigation strategies as part of our continuum of care strategy. In addition we
have been providing education and training to our acute rehab employees, clients
and referral sources regarding the application of the modified rule.
Recently the House Appropriations Committee passed a spending bill that includes
an amendment to delay the 75% Rule for one year while the Institute of Medicine
studies the potential impact to beneficiaries and providers. Despite the
proposed legislation, we are continuing to work within the confines of the
regulation and are taking a "wait and see" approach for this legislative
proposal.
This modified rule contains very few solutions to the problems that have been
stated on many occasions by the industry. We continue to believe CMS has failed
to address the fundamental flaws in this outdated and arbitrary regulation.
In regard to the Part B therapy caps, we do not have an additional update from
the information we provided in our first quarter 2004 earnings call.
Vince will now review our financial results of the Company for the quarter and
six-month period.
Update on Financial Results
Thank you, John.
Net revenues for the second quarter 2004 were $90.9 million compared to $136.0
million in the same quarter last year, or a decline of $45.1 million, primarily
due to the sale of the Company's staffing division in February 2004. The
staffing business contributed $57.2 million to last year's Q2 revenue. Revenue
in the first quarter was $104.5 million, of which the staffing business
contributed $16.7 million, so, on a sequential basis, revenue from our ongoing
businesses was up by 3.5 percent. Net earnings increased to $5.7 million in the
second quarter 2004 compared to $4.5 million a year ago and $5.1 million in the
first quarter. Earnings per share on a fully diluted basis were $0.34 compared
to $0.27 last year and $0.31 in the previous quarter.
Net revenues for the six months ended 2004 were $195.4 million, a decline of
$79.5 million from $274.9 million in the prior year period, primarily due to the
sale of the Company's staffing division. The staffing business contributed
$119.3 million of net revenue in the first half of 2003. Net earnings increased
27.1 percent to $10.8 million for the six months compared to $8.5 million in the
year ago period. Earnings per share on a fully diluted basis were $0.64 compared
to $0.52 for the 2003 six month period.
Earnings per share for the three months ended March 31, 2004 and six months
ended June 30, 2004 include restructuring charges of $0.9 million after tax (or
$0.06 per diluted share) and gain on the sale of the staffing division of $0.3
million after tax (or $0.02 per diluted share). The net after-tax effect of
these charges was to reduce earnings by $0.04 per diluted share.
Net revenues for our Hospital Rehabilitation Services division increased 4.8
percent year-over-year and 3.0 percent sequentially to $48.5 million. The
increase in revenues for the division was primarily the result of the
acquisition of VitalCare and increased same store discharges, partially offset
by a net closure in programs. Operating earnings of $8.1 million for the
division increased slightly from $7.9 million a year ago, but decreased from
$8.8 million sequentially. The decrease in earnings for the quarter compared to
the previous one was attributable to the operating challenges in our outpatient
division, among other factors.
On the inpatient side of HRS, patient days were up 16.7 percent sequentially and
discharges per average unit decreased 9.1 percent. These statistics reflect the
impact of VitalCare subacute units which have patients with longer lengths of
stay and fewer discharges. In the outpatient business, both units of service and
patient visits declined approximately 1.0 percent over the sequential quarter.
Net revenues for Contract Therapy of $41 million increased 24.7 percent from
$32.9 million in the 2003 second quarter and were up slightly on a sequential
basis. Operating earnings for the division increased 9.2 percent from a year ago
to $2.0 million, but decreased from $2.4 million in the first quarter. The
decrease in earnings from the previous quarter was attributable to the loss
during the second quarter of several mature contracts that we elected to cancel,
the decision to increase the division's bad debt reserve to reflect the
collection risk associated with these contracts, and other factors. For the
year-over-year comparison, the increase in net revenues and operating earnings
is the result of having a larger number of contracts, increasing therapist
productivity and adopting the target market strategy in late 2003.
The Company's balance sheet remains strong with almost $39 million in cash,
restricted cash and short-term investments at June 30, long-term debt of only
$4.3 million related to acquisitions and an unused credit facility in excess of
$110 million to support our strategic initiatives.
Days sales outstanding (adjusted to exclude receivables related to the staffing
division) declined 3 days to 66 sequentially, and 6 days from the end of 2003 as
a result of efforts from our collections and finance teams. We will continue to
aggressively manage our accounts receivable given the difficult payment
environment. As a result of cash generated from operating earnings plus the
reduction in accounts receivable, our operating cash flow was $17.2 million.
Capital expenditures for the Company were approximately $7.3 million, of which
$6.3 million related to an acquisition and $1.0 million to equipment and
leaseholds.
With regard to our outlook for the remainder of 2004 - the Company affirms the
guidance that we provided during our first quarter conference call. We expect
2004 net revenues to be between $370 million and $390 million and earnings
before interest, taxes, depreciation and amortization (EBITDA) to be in the
range of $46 million to $49 million. Based on visibility of the second half of
the year, the Company expects full year diluted earnings per share to be near
the midpoint of the $1.34 to $1.44 range, previously provided. Diluted earnings
per share expectations include a $0.9 million charge, net of tax ($0.06 per
share) and the $0.3 million gain net of tax ($0.02 per share), in the first
quarter from the sale of the staffing division.
We are progressing on a timeline to complete our Sarbanes-Oxley Section 404
internal control documentation and testing project by September 30. At that time
we expect our independent auditors to commence their audit work. Currently, we
are estimating that the project will take approximately 4,000 hours of company
and outside resources to complete and will cost an estimated $700,000, which
includes the cost of internal and external resources, our newly initiated
internal audit department and the audit by our independent auditors. Of this
amount we estimate that 35-40 percent will become a recurring annual cost.
Finally, to insure that we have sufficient capital to finance our acquisitions
and fund our larger joint ownership transactions, we will be renewing our
revolving line of credit in conjunction with a new credit facility during the
third quarter of this year.
Now I will turn the call back over to John -
Thanks, Vince,
Before we take your questions, I'm pleased to announce that Joe Swedish has been
elected to our Board of Directors, effective June 1. Joe is president and chief
executive officer of Centura Health, the largest healthcare provider in
Colorado, a system which includes 12 hospitals, 8 senior housing facilities,
home care and hospice operations, and a variety of services promoting faith
based community health initiatives. Joe's extensive career has focused on
turnaround situations and enterprise creation and he has unmatched experience in
the cultural, financial and strategic restructuring of healthcare delivery
systems. We all believe he will be a valuable addition to the Board.
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 new 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 past few 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 people of RehabCare for their dedication to our clients and
patients who make our success possible. Thank you. This concludes the conference
call.