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): March 10, 2005
REHABCARE GROUP, INC.
(Exact name of Company as specified in its charter)
Delaware 0-19294 51-0265872
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
7733 Forsyth Boulevard
Suite 2300
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 863-7422 (Company's telephone number, including area code)
Not applicable
(Former name or former address if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the Company under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition
The information in Exhibit 99.1 is incorporated herein by reference.
Item 7.01 Regulation FD Disclosure
The information in Exhibit 99.2 is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits.
(c) Exhibits
The following exhibits are furnished pursuant to Item 2.02 and 7.01 hereof
and should not be deemed to be "filed" under the Securities Exchange Act of
1934:
99.1 Press release dated March 10, 2005, announcing our fourth
quarter and full year 2004 revenues and results of operations and
guidance for the full year of 2005
99.2 The script for a conference call held by the registrant on
March 10, 2005
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: March 10, 2005
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 March 10, 2005, announcing our fourth quarter and full
year 2004 revenues and results of operations and guidance for the full year
2005.
99.2 The script of a conference call held by the registrant on March 10, 2005
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, March 10, 2005
REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2004 RESULTS
AND PROVIDES GUIDANCE FOR 2005
ST. LOUIS, MO, March 10, 2005--RehabCare Group, Inc. (NYSE:RHB) today reported
financial results for the quarter and year ended December 31, 2004. Comparative
results for the quarter and year follow.
Quarter Ended Full Year Ended
Amounts in millions, Dec 31, Dec 31,
except per share data 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Consolidated Operating Revenues $ 95.1 $129.5 |$383.8 $539.3
- --------------------------------------------------------------------------------
Consolidated Net Earnings (Loss) 6.3 (25.5)(a)| 23.2 (13.7)(a)
Consolidated Diluted
Earnings (Loss)Per Share 0.37 (1.58)(a)| 1.38 (0.86)(a)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HRS Inpatient Operating Revenues 35.9 34.8 | 145.6 136.9
HRS Outpatient Operating Revenues 10.8 12.1 | 45.1 49.0
- --------------------------------------------------------------------------------
HRS Operating Revenues 46.7 46.9 | 190.7 185.9
HRS Operating Earnings 7.9 9.9 | 33.1 33.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contract Therapy Operating Revenues 46.7 33.4 | 171.3 130.8
Contract Therapy Operating Earnings 3.5 1.4 | 10.2 5.9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other Revenues 2.0 (b) - | 5.4 (b) -
Other Operating Earnings - - | 0.2 -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Staffing Operating Revenues - 49.4 (c)| 16.7 223.9 (c)
Staffing Operating Earnings (Loss) - (45.8) | (0.1) (52.5)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Equity in Net Loss of Affiliate (0.2) - | (0.7) -
- --------------------------------------------------------------------------------
(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, at market rates, of $0.2 million for the
three and twelve month periods ended December 31, 2004.
(c) Includes intercompany sales of $0.2 million for the three months ended
December 31, 2003 and $0.1 and $1.3 million for the twelve months ended
December 31, 2004 and 2003, respectively, that Staffing sold to Hospital
Rehabilitation Services and Contract Therapy at market rates.
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REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2004 RESULTS Page 2
John H. Short, Ph.D., president and chief executive officer, commented,
"Both our fourth quarter and 2004 year-end results met our performance
expectations. We saw stabilization in our HRS division, with increased signings
and openings as well as decreased closures, and continued impressive growth in
our Contract Therapy division, both organically and through targeted regional
acquisitions."
Dr. Short continued, "2004 should be viewed as a year in which we began
executing strategies designed to fulfill our vision of a clinically integrated
continuum of post-acute care. These strategies take advantage of markets where
we hold significant presence, allowing us to concentrate both human and capital
resources for maximum effect. We are encouraged that our tactics supporting
these strategies have also begun to gain traction."
Financial Overview of the Fourth Quarter 2004
Net revenues for the 2004 fourth quarter were $95.1 million compared to
$129.5 million from the year ago quarter, a decline of $34.4 million, or 26.5
percent. The decline was primarily due to the sale of the Company's staffing
division to InteliStaf Holdings in February 2004, offset by internal growth in
the Company's Contract Therapy division. The staffing division contributed $49.4
million of net revenues in the fourth quarter of 2003.
Net earnings were $6.3 million compared to a loss of $25.5 million in last
year's fourth quarter. Earnings per share on a fully diluted basis were $0.37
compared to a loss of $1.58 for the same period last year. The net earnings and
earnings per share results for the fourth quarter of 2003 included an after tax
charge of $30.6 million or $1.90 per diluted share. This charge reflected the
write down of the carrying value of the Company's staffing division net assets
to their estimated fair value, less cost to sell.
o The Contract Therapy division's net revenues for the fourth quarter of 2004
increased 39.7 percent to $46.7 million, compared to $33.4 million in the
same quarter a year ago. Operating earnings for the quarter increased 154.4
percent to $3.5 million from $1.4 million in the prior year quarter. At the
end of the quarter, the division had 690 programs compared to 468 programs
at the same time last year.
The year-over-year fourth quarter revenue and operating earnings
performance reflects continued same-store growth, a significant addition of
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REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2004 RESULTS Page 3
programs through internal sales initiatives as well as the acquisition of
CPR Therapies in February 2004 and the recent acquisition of Cornerstone
Rehabilitation in December 2004. The increase in operating earnings for the
current quarter is the result of increased productivity over the prior year
quarter, additional leverage of selling, general and administrative
expenses, and an improved reimbursement environment, as the prior year
quarter was impacted by the Part B caps for two months.
o The Hospital Rehabilitation Services division's (HRS) fourth quarter net
revenues remained relatively flat at $46.7 million compared to $46.9
million in last year's fourth quarter. Operating earnings for the quarter
were $7.9 million compared to $9.9 million in the prior year quarter. At
the end of the quarter, HRS had 181 programs compared to 166 programs at
the same time last year.
HRS operating revenues declined only slightly from the prior year quarter,
with operating revenues from VitalCare offsetting declines in operating
revenue from unit closures in the fourth quarter of 2003.
The year-over-year decline in operating earnings is the result of lower
contribution from the outpatient business unit in the 2004 period compared
to 2003 and from the change in the mix of business due to the substitution
of the VitalCare subacute units in this year's fourth quarter for the acute
rehabilitation programs closed since last year.
o Our investment in InteliStaf Holdings for the quarter generated a loss of
$0.2 million compared to our expectation of break even as InteliStaf
continued to experience soft demand for its services.
The Company's balance sheet at year-end remains strong with $53.5 million
in cash, cash equivalents and restricted cash, minimal long-term debt and an
unused credit facility in excess of $115 million to support strategic
initiatives. Day's sales outstanding at year-end decreased to 66.5 days from
72.0 days at the prior year-end (adjusted for receivables related to the
staffing division). This improvement was an important factor in the Company
generating cash flow from operations of $14.6 million in the fourth quarter. For
the quarter, the Company spent $3.1 million on capital expenditures and an
aggregate of $4.9 million in cash on acquisitions.
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REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2004 RESULTS Page 4
Dr. Short concluded, "2004 was a year of transition. Our results show that
we are making real progress with our strategic plans. Our achievements this past
year lead us to believe that our product and service offerings are aligned with
the needs of our customers, and that we are well-positioned for sustainable
growth in the years ahead."
2005 Guidance
In 2005, management expects revenues from operations, exclusive of any
unannounced acquisitions or joint ventures, to be between $418 million and $438
million for the year and earnings before interest, depreciation and amortization
(EBITDA) of $51.3 million to $55.6 million. Expectations are for diluted
earnings per share in the range of $1.43 to $1.58. The EBITDA and earnings per
share ranges include an impact of $4.2 million pretax effect, or $0.15 per
diluted share after tax, as the result of adopting FAS 123R for the entire year.
Guidance relating to earnings per share assumes a 40.5 percent effective
tax rate and an estimated 17.1 million diluted shares. Capital requirements are
estimated at $15.2 million composed of $8.6 million for routine capital
expenditures and $6.6 million for previously announced joint ventures.
Included in the Company's guidance are the following assumptions:
o For the Contract Therapy division, revenues are expected to increase
between 22 percent and 26 percent over 2004 levels due to continued growth
in contracts, same store operating revenues and the addition of the
Cornerstone Rehabilitation business for the full year. Higher labor costs
associated with the therapist shortages offset by reductions in division
selling, general and administrative expenses are expected to keep pretax
operating earnings as a percent of operating revenues in the 5 percent to 7
percent range in 2005.
o For the Hospital Rehabilitation Services division, operating revenues are
expected to increase between 5 percent and 9 percent from 2004 levels as
the effects of the 75% Rule transition reduce our historical same store
growth rates, partially offset by expected reductions in closures and
increased openings in 2005. Pretax operating earnings for the division are
expected to be between 15 percent to 18 percent also due to short-term
declines in same store growth in discharges resulting from the 75% Rule
transition.
- MORE -
REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2004 RESULTS Page 5
o Overall selling, general and administrative expenses are expected to
decline to approximately 14.0 percent of operating revenue in 2005 from
about 14.9 percent of operating revenue in 2004 and 17 percent in 2003.
o The results of InteliStaf Holdings are expected to be breakeven in 2005.
However, the Company expects to recognize a $0.4 million equity share loss
during the first quarter due to InteliStaf's completion of a debt
re-financing and operational restructuring. Our equity share of earnings
during the remaining three quarters should offset this first quarter loss.
The Company's guidance may be updated during 2005 as it announces
additional acquisitions and joint ownership transactions.
RehabCare Group, Inc., headquartered in St. Louis, MO, is a leading
provider of program management services for hospital inpatient rehabilitation
and skilled nursing units, outpatient therapy programs and contract therapy
services in conjunction with more than 800 hospitals and skilled nursing
facilities in 37 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 fourth quarter and year end
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 1:00 P.M. Eastern
time today and ending at midnight on April 1, 2005. The dial-in number for the
replay is (630) 652-3041 and the access code is 10858899.
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; changes in and
- MORE -
REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2004 RESULTS Page 6
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 financial results of InteliStaf Holdings, Inc.,
RehabCare's unconsolidated affiliate, and the effect of those results on the
financial condition and results of operations of RehabCare; the adequacy and
effectiveness of RehabCare's operating and administrative systems; RehabCare's
ability to attract and the additional costs of 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.
- -------------------------
- MORE -
REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2004 RESULTS Page 7
I. Condensed Consolidated Statements of Earnings
------------------------------------------------
(Amounts in thousands, except per share data)
Three Months Ended Full Year Ended
Dec 31, Dec 31,
------- -------
2004 2003 % Change 2004 2003 % Change
---- ---- -------- ---- ---- --------
Operating revenues $95,128 $129,475 (26.5) $383,846 $539,322 (28.8)
Costs & expenses
Operating 67,894 98,073 (30.8) 275,242 408,559 (32.6)
Selling, general
& administrative
Divisions 7,367 13,842 (46.8) 32,499 65,055 (50.0)
Corporate 5,829 6,392 ( 8.8) 24,615 26,680 (7.7)
Restructuring
charge - - N/M 1,615 1,286 25.6
Gain on sale
of business - - N/M (485) - N/M
Loss on assets held
for sale - 43,579 N/M - 43,579 N/M
Depreciation
& amortization 2,653 2,130 24.6 8,556 8,559 -
------ ------- ------- -------
Total costs
& expenses 83,743 164,016 (48.9) 342,042 553,718 (38.2)
------ ------- ------- -------
Operating earnings,
(loss) net 11,385 (34,541) 133.0 41,804 (14,396) 390.4
Other expense, net (1) (275) (99.6) (55) (338) (83.7)
Interest expense, net (244) (125) 95.2 (788) (574) 37.3
------ ------- ------- -------
Earnings (loss) before income
taxes and equity in net loss
of affiliate 11,140 (34,941) 131.9 40,961 (15,308) 367.6
Income taxes 4,671 (9,418) 149.6 17,049 (1,609) 1,159.6
Equity in net loss
of affiliate (172) - N/M (731) - N/M
------ ------- ------- -------
Net earnings (loss) $ 6,297 $(25,523) 124.7 $ 23,181 $(13,699) 269.2
======= ======== ======== ======== =====
Diluted earnings
(loss) per share $ 0.37 $ (1.58) 123.4 $ 1.38 $ (0.86) 260.5
Weighted average
shares outstanding 17,004 16,124 5.5 16,835 16,000 5.2
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REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2004 RESULTS Page 8
II. Condensed Consolidated Balance Sheets
-----------------------------------------
(Amounts in thousands)
December 31, December 31,
2004 2003
---- ----
Assets
Cash and restricted cash $ 53,478 $ 38,385
Accounts receivable, net 69,565 62,744
Deferred tax assets 10,252 14,706
Other current assets 1,690 1,912
-------- --------
Total current assets 134,985 117,747
Equipment, net 15,149 14,063
Excess cost of net assets acquired, net 68,340 48,729
Intangible assets 11,884 48
Investment in unconsolidated affiliate 39,269 -
Assets held for sale - 46,171
Other assets 8,039 6,868
-------- --------
$277,666 $233,626
======== ========
Liabilities & Stockholders' Equity
Current portion of long-term debt $ 4,731 $ -
Payables & accruals 53,803 40,795
-------- --------
Total current liabilities 58,534 $ 40,795
Liabilities held for sale - 9,771
Long-term debt, less current portion 2,142 -
Other non-current liabilities 9,962 5,105
Stockholders' equity 207,028 177,955
-------- --------
$277,666 $233,626
======== ========
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REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2004 RESULTS Page 9
III. Operating Statistics
-------------------------
(Revenues and Operating Earnings in 000's)
Three Months Ended Full Year
Dec 31, Dec 31, Dec 31, Dec 31,
2004 2003 2004 2003
---- ---- ---- ----
Contract Therapy
- ----------------
Operating Revenues $ 46,662 $33,401 $171,339 $130,847
Division Operating Earnings(a)(b) $ 3,490 $ 1,372 $ 10,208 $ 5,836
Average Number of Locations 651 480 588 460
End of Period Number of Programs 690 468 690 468
Hospital Rehabilitation Services
- --------------------------------
Revenues
Inpatient $ 35,876 $34,776 $145,593 $136,852
Outpatient 10,823 12,081 45,138 48,979
-------- ------- -------- --------
Total $ 46,699 $46,857 $190,731 $185,831
Division Operating Earnings(a)(b) $ 7,864 $ 9,906 $ 33,065 $ 33,557
Average Number of Programs
Inpatient 146 128 142 133
Outpatient 40 46 42 48
--- --- --- ---
Total 186 174 184 181
End of Period Number of Programs 181 166 181 166
Other
- -----
Revenues (c) $ 2,014 - $ 5,367 -
Operating Earnings (a)(b) 31 - 224 -
<FN>
(a) Division Operating Earnings are earnings attributable to the division
before interest, income taxes and other income (expense).
(b) The third quarter 2003 and first quarter 2004 restructuring charges were
not allocated to the operating segments.
(c) Includes intercompany revenues, at market rates, of $0.2 million for the
three and twelve month periods ended December 31, 2004.
</FN>
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
March 10, 2005
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; 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 financial results of InteliStaf Holdings, Inc.,
RehabCare's unconsolidated affiliate, and the effect of those results on the
financial condition and results of operations of RehabCare; the adequacy and
effectiveness of RehabCare's operating and administrative systems; RehabCare's
ability to attract and the additional costs of 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 fourth quarter and year-end 2004 earnings. With me from management are: Tom
Davis, Executive Vice President and Chief Development Officer; Pat Henry,
Executive Vice President, Traditional Business; Vince Germanese, Chief Financial
Officer; Mark Bogovich, Chief Accounting Officer; Mary Pat Welc, Senior Vice
President, Operations; Don Adam, Senior Vice President, Acquisitions; and Betty
Cammarata, Director of Investor Relations. And, I would like to welcome for the
first time the more than 165 people and 50 locations of Cornerstone
Rehabilitation which joined the RehabCare family on December 2, 2004.
Cornerstone serves long-term care and outpatient clients in northern Louisiana
and eastern Texas.
We are reporting our 2004 fourth quarter and annual results a month later than
normal. The delay was caused by late notice that we received from the auditors
for InteliStaf, our 25% owned unconsolidated affiliate, that our auditors, KPMG,
could not rely on their audit work on InteliStaf. This required KPMG to apply
their own audit procedures to the financial statements of InteliStaf in order
for them to finish our audit. Their work is substantially complete and we expect
no impact on our financial statements.
We will be available during the question and answer period following our formal
remarks.
OPENING Remarks
2004 was truly a year of strategic success for RehabCare Group. During these
twelve months, we:
o Delivered more than $383 million in operating revenues and $1.38 of diluted
earnings per share.
o Sold our StarMed staffing division to InteliStaf Holdings in February,
enabling us to focus on rehabilitation, our core business. While this
transaction significantly reduced our operating revenues when compared to
recent annual results, earnings per share was not affected as we achieved
the same earnings per share this year, $1.38, as we did in 2002, the year
before the impact of the sale.
o Deployed more than $30 million in capital to acquire four businesses which
are expected to generate more than $45 million in annual operating revenues
in 2005.
o Announced our first two joint ventures, committing more than $6.6 million
in capital for operations which, except for the associated program
management contracts, will be accounted for under the equity method.
o Began to change the strategic direction of the Company away from a product
orientation to an integrated rehabilitation company with a continuum of
care foundation and a target market delivery concept working in partnership
with our clients, sharing in financial risk and rewards.
o Implemented a new management structure: to support our ambitious growth
goals, focusing key executive talent on business development, acquisitions
and sales; to accelerate development of the target market/continuum of care
strategy; to support our renewed emphasis on our people through improved
benefit programs, clinical training, clinical research and program
development; and to build depth in our management team.
o Completed and began implementing an information system strategic plan to
significantly improve our technology infrastructure and embrace wireless
technology.
o And, finally, restructured and renewed our credit facility to reduce its
cost and make covenants more flexible to support our business model and
strategies.
These accomplishments lay the foundation for the work we have ahead of us in
2005 and beyond. Let me turn my attention for a few minutes to the quarterly
performance of our business units.
Contract Therapy continues to deliver positive results for the Company. Coupled
with the acquisition of CPR Therapies in the first quarter and Cornerstone
Rehabilitation in the fourth quarter and continued strong sales from our
business development team, Contract Therapy generated sequential and
year-over-year operating revenue and earnings growth that were well ahead of
expectations. Revenue in the quarter rose approximately 40 percent
year-over-year, and operating earnings increased over 150 percent.
The Hospital Rehabilitation Services division generated slightly higher
operating revenue for the full-year 2004. As we said in previous quarters, the
Inpatient business has performed well, but overall HRS results have been
impacted by challenges in our Outpatient division. I can report that the
initiatives that we implemented earlier in 2004 to turn around the Outpatient
business are beginning to show results. You may recall that the Outpatient
business had:
o Declining revenues as a result of both reduced number of locations and
lower same store volumes; and
o Increases in labor costs at the unit level.
During the fourth quarter we saw lower program costs due to better matching of
volumes and resources. In addition, we achieved increased signings of outpatient
programs for the second quarter in a row. As a result, profitability of the
Outpatient segment has begun to improve and is on track with our expectations.
This is encouraging short term progress and I acknowledge the hard work of our
colleagues in this part of our business.
During my remarks on the last two quarterly conference calls, I stated that
VitalCare had not met our performance expectations principally because units
were cancelled unexpectedly due to market conditions in California and costs had
risen ahead of revenues. During the fourth quarter we completed a resizing of
the business to reflect its reduced number of units. As a result, SG&A costs are
more in line with current operating revenues. The effect of these changes had
little positive impact on 2004 results, but should be fully realized in 2005. We
are further insulated against the impact of VitalCare's lost programs because
the transaction structure with the seller reduced the purchase price for
terminations within a predetermined period. During the quarter, we further
reviewed the VitalCare business environment in California and believe that this
business is more efficiently delivered in skilled nursing facilities than in
hospitals because of the clinical condition of the patients and long lengths of
stay. Therefore, we are directing our sales emphasis for this type of program to
skilled nursing facilities.
Turning to the status of our joint venture initiatives, we have announced a
number of them in the past twelve months. Two of these joint ventures, Howard
Regional in Kokomo, Indiana and Valley Baptist in Harlingen/Brownsville, Texas
form the nucleus of two of our announced five target markets. The third, UCLA,
could also become the nucleus for one of our future target markets.
Our Howard Hospital / RehabCare Joint Venture began operation in February 2005.
RehabCare owns 40% of the 30 bed rehab hospital and manages the day-to-day
operations of the facility for the joint venture. The management contract fees
for Inpatient and Outpatient generated in 2005 are estimated at $2.7 million and
our 2005 share of the joint venture's profit is estimated to be $.5 million
(after tax). A third party Long Term Acute Care company will develop a 30 bed
LTAC in the unused portion of the facility later in the fiscal year.
The first phase of our Valley Baptist / RehabCare Joint Venture is composed of
contracts to manage Valley Baptist's existing 18 bed rehab unit in Harlingen,
two existing Outpatient therapy programs and to provide other therapy staffing
for the system. These contracts were started in January 2005 and are estimated
to generate $5.2 million in management fee revenue in this fiscal year. Phase
two is the development of a free-standing facility in Brownsville which will
contain a 25 bed rehab hospital and a 40 bed LTAC hospital. RehabCare will own
49% of the rehab hospital and 24.5% of the LTAC facility. Valley Baptist and a
third party LTAC company will comprise the remaining ownership. The Brownsville
facility will open in late 2005 and is not expected to contribute to 2005
earnings.
In regards to our UCLA project, finding a real estate solution for our proposed
facility has continued to be challenging. The combination of the desire for a
narrow radius of distance from UCLA's existing facilities, restrictive zoning
regulations within this specific area and hospital seismic retrofitting
requirements in California narrows the building options available for our
purposes. We continue to evaluate options and remain optimistic we will find a
solution this year.
We currently have eight non-binding joint venture letters of intent in some
stage of development and negotiation. Although we do not expect each of these
projects to result in a completed joint venture, we feel this business model has
good growth potential.
We also identified 3 target markets; Norfolk, VA; St. Louis, MO; and
Philadelphia, PA; which contain most or all of the elements of the continuum of
care delivery sites. As we gain operational and developmental traction in these
five markets, we will designate additional target markets based on our capacity
to move them ahead.
Our Phase 2 Consulting business continues to deliver steady results with
operating revenues and earnings on plan. The consulting business has a strong
backlog of work going into 2005. Another important development for Phase 2
Consulting is the signing of one contract and the negotiation of another
contract for providing care management services within acute care hospitals.
These contracts individually are small, but will allow us to develop the
capability needed to manage care delivery in our target markets.
Our investment in InteliStaf Holdings continues to represent challenges for us.
In the fourth quarter, we recognized an additional $172,000 loss from our equity
share due to continued softness in the temporary staffing market. InteliStaf's
management has set in motion a series of steps to refinance its outstanding debt
and execute an operational restructuring during the first quarter of 2005. We
continue to believe that our equity ownership in InteliStaf will be a valuable
asset for the Company over time as that business matures and the industry turns
around.
In the information technology department, we are expanding PROMOS, our patient
information system, to our Outpatient sites. We have selected a new budgeting
and reporting tool to handle our growing organization and a home health system
to handle that part of the business as new operations come on stream. We are
completing the installation of high speed access to all of our sites to better
track patients. The implementation of an on-line learning management system and
recruiting system is complete and we now are focused on wireless technology for
our point of care devices and patient outcome measurement and tracking. An
employee portal has been completed to further increase communication with our
colleagues.
Turning to human resources, the constrained and competitive market for
therapists continues to impact our growth. In spite of successfully hiring over
2800 therapists in 2004, we are entering 2005 with over 500 openings and
increasing upward pressure on the time it takes to fill these openings. Building
on the positive effects we have seen from improvements in our benefits programs,
we are redoubling our efforts on recruitment and retention through targeted
investments in technology and human resources management expertise.
Clinical Research and Development efforts have set an aggressive agenda of
research and partnering with a number of allied therapy academic programs. We
have also initiated research programs that are designed to mitigate the 75% Rule
such as CORE which addresses the movement of non qualifying ARU total joint
replacement patients to an alternative rehabilitation setting.
The combination of traditional HRS and CT under Pat Henry is proceeding well.
Enthusiasm is growing among the operators in both businesses to seek new ways to
work together to improve clinical care and operating efficiency. This is a great
prequel to additional target markets and critical to our managing through the
challenges of the 75% Rule.
Turning to the regulatory update, the modified 75% Rule went into effect for
acute rehab on July 1, 2004. Our original estimate of a 0%-3% impact held true
for the first two quarters of implementation. Consequently, for the fourth
quarter, we estimate a negative impact of $600,000, which is in the 0%-3% range.
During that time, we were operating under the misconception that no further
modifications to the 75% Rule were forthcoming. Since that time, however, CMS
issued two additional transmittals, Numbers. 347 (10.29.04) and 478 (02.16.05).
These transmittals further clarified both excluded diagnostic categories and the
process for fiscal intermediary verification.
Transmittal #347 shifted selected high volume ICD-9 codes from being qualifying
conditions (or 75% patients), as they had been according to the original July
1st implementation instructions from CMS, to non qualifying conditions (or 25%
patients). This shift in definitions caused a significant number of our units to
be potentially out of compliance unless we restricted the admission of non
qualifying patients. Since we only learned about this change in definition in
November and did not complete the quantification of the impact on a unit
specific basis until December, we believed we had only a limited time to cure
our compliance within the look back periods specified in the July regulation.
Our reaction to #347 was to sharply limit admissions in some locations to
maintain compliance with the 50% threshold, and based on our previous
interpretation of the look backs described in the final rule, many locations
further restricted admissions in anticipation of having to move to a 60%
threshold by March 1st, 2005. This resulted in a sharp reduction in admissions
growth during the first two months of 2005. Given that the penalty for
non-compliance is loss of Medicare certification, we have embraced a very
conservative approach to the interpretation and implementation of these
transmittals.
Luckily, Transmittal #478, issued in mid-February, clarified that there will be
a blended compliance threshold for year two, ensuring that each facility has the
benefit of a full 12 months of experience for review. This in effect has
expanded the period our units have to comply with the Rule and we have begun to
admit additional non qualifying patients who still need intensive therapy.
Unfortunately, the damage had already been done for the first two months of this
quarter.
We are continuing to implement a number of mitigation strategies. These include:
1. Clinical education and training to enhance capability of staff to provide
care for patients with more complex medical conditions.
2. Development of new referral sources to drive change to a more neurological
case mix.
3. Our previously announced strategy to develop a continuum of care model in
the markets that we serve, which will facilitate movement of patients to
the most clinically appropriate and cost effective setting.
A significant increase in length of stay has also been noted in a number of
locations due to the shift in case mix resulting in capacity issues in these
units. We have a two fold strategy to address this issue:
1. Transition from a discharge planning to a case management model.
2. Potential bed expansion in units where appropriate.
On balance, our mitigation strategies are working, although more slowly than
anticipated. We are still awaiting the GAO report that was mandated by the
Appropriations Bill signed in December. That Bill suggested, and we and the
industry believed, that a moratorium would be put in place staying the
implementation of the 75% Rule. It was not until mid-February that it became
clear there was no moratorium and no change to the Rule unless the GAO report
called for change. We believe that this report may be available by the end of
March with an implementation after a 60 day period. We cannot determine whether
CMS will provide additional interpretive guidelines at this time. We are
continuing our mitigation strategies into 2005 assuming the rule continues as
directed by the recent transmittals. We believe that for a period of time, this
will result in same store growth declines over historical rates which have been
in the range of 6% to 7%. Our current estimate of the impact is 3-5% of acute
rehab revenues in 2005.
As we deal with the 75% Rule, we are also making plans to deal with the
reinstatement of the Part B therapy caps on January 1, 2006. We are not certain
what form, if any, these caps will take and there are multiple proposals on the
table at this time. Handling the caps will benefit from the 75% Rule by moving
more Part A orthopedic patients into skilled nursing facilities and increasing
the length of stay. In addition, it would positively impact the supply of
therapists resulting in reduced labor costs.
We are also expecting a GAO report to Congress on the Medicare Part B Therapy
Caps. Once that report is available, we will have a better idea of the likely
direction of these caps. We continue to be involved and represented in the
planning process to develop and recommend an alternative to CMS regarding the
Part B caps.
Vince will now review our financial results of the Company for the quarter and
year-end.
Update on Financial Results
Thank you, John.
Net revenues for the fourth quarter 2004 were $95.1 million compared to $129.5
million in the same quarter last year, or a decline of $34.4 million, due to the
sale of the Company's staffing division in February 2004. The staffing division
contributed $49.4 million to last year's fourth quarter revenue. Revenue was up
sequentially 2.0 percent to $95.1 million from $93.3 million in the preceding
quarter. Net earnings increased to $6.3 million in the fourth quarter 2004
compared to a loss of $25.5 million a year ago and increased slightly from $6.1
million in the third quarter of 2004. Earnings per share on a fully diluted
basis were $0.37 compared to a loss of $1.58 last year and $0.36 in the previous
quarter. Net earnings and EPS for the fourth quarter 2003 included a pretax
charge of $43.6 million, $30.6 million after tax, equal to $1.90 per diluted
share, which reflects the write-down of the carrying value of StarMed net assets
to their estimated fair value less costs to sell.
Net revenues for the twelve months ended December 31, 2004 were $383.8 million;
a decline of $155.5 million from $539.3 million in the prior year period, due to
the sale of the Company's staffing division. The staffing division contributed
$223.9 million of revenue in the full year 2003. Net earnings increased to $23.2
million for the full year compared to a loss of $13.7 million in the year ago
period. Net earnings per share on a fully diluted basis were $1.38 compared to a
loss of $0.86 for 2003. The 2004 EPS and net earnings results 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. In addition, earnings for the fourth
quarter 2004 included the following infrequently occurring items: the
disposition of certain software systems that will not be usable by the Company
going forward, the acceleration of fees related to the Company's prior credit
facility as a new facility was put in place in October, a worker's compensation
settlement for prior years, and a larger than normal use of paid days off. The
combination of these items had a relatively neutral impact on the quarter.
Net earnings and earnings per share for the year ended December 31, 2003 include
a loss on net assets held for sale of $30.6 million, or $1.90 per diluted share,
after tax and an $0.8 million after tax restructuring charge or $0.05 per
diluted share.
Net revenues for the Contract Therapy division were $46.7 million, an increase
of 39.7 percent from $33.4 million in the 2003 fourth quarter and were up 8.8
percent on a sequential basis. Operating earnings for the division more than
doubled to $3.5 million from $1.4 million in the prior year quarter and
increased from $2.3 million in the third quarter 2004. The increases in revenue
and operating earnings performance reflect continued same-store growth, a
significant addition of programs through internal sales initiatives as well as
the acquisition of CPR Therapies in February of 2004 and the recent acquisition
of Cornerstone Rehabilitation in December 2004. The increase in operating
earnings for the current quarter was driven by improvements in productivity and
additional leverage of the selling, general and administrative expenses. The
prior year quarter was impacted by the Medicare Part B Caps for the majority of
the quarter.
The division finished the fourth quarter with 690 locations compared to the year
ago total of 468 and it added 40 net new locations, exclusive of the addition of
50 Cornerstone locations, versus the third quarter's addition of 30 net new
locations. Thirty-seven of the 51 new openings in the quarter were in Contract
Therapy's primary markets. Of the 11 closures in the fourth quarter, one was due
to pricing, four facilities closed, and six took their therapy in-house. The
division's backlog remains strong at 31 compared to 49 at the end of the third
quarter.
Net revenues in the fourth quarter for our Hospital Rehabilitation Services
division decreased slightly year-over-year to $46.7 million and declined 3.6
percent on a sequential basis. The decrease year-over-year is the result of the
75% Rule impact, a $600,000 positive settlement received in 2003 related to two
hospital closures, as well as losing fifteen mature contracts. The decrease in
revenues sequentially is the result of lower volumes during the quarter due to
seasonality around the holidays that occurs in our Inpatient and Outpatient
units as well as the impact of approximately $600,000 from the 75% Rule.
Operating earnings for the division declined to $7.9 million from $9.9 million
in the prior year quarter, and decreased from $8.3 million sequentially. The
year-over-year decline in operating earnings is the result of lower contribution
from the Outpatient business unit in 2004 compared to 2003 as volumes have
declined and from the change in the mix of business due to the substitution of
the VitalCare subacute units for the acute rehabilitation programs closed at the
end of 2004. The sequential decline was primarily attributable to the lower
revenues and some seasonal margin deterioration.
For 2004 the HRS division had 15 net openings compared to a net closure of 21
for 2003. The net openings were comprised of 15 unit openings from normal sales
activity, a net 18 openings for VitalCare, and 18 closures in the normal course
of business. The division finished the year with 181 programs, up from 166
programs at the end of 2003.
We signed 17 new contracts of which 13 were acute rehab units and 4 were
outpatient programs. These signings include 1 acute rehab unit and 2 outpatient
programs that will be part of the Valley Baptist joint venture previously
announced. These numbers do not include 1 acute rehab unit and 1 outpatient
program that will be part of the Howard Community joint venture which we just
recently signed at the end of January. Of the 18 closures, 9 were acute rehab
units, 7 were outpatient programs and 2 were subacute units. Reasons for
closures were 10 self operation, 3 program abandonments by the host hospitals, 3
exited due to continuing profitability or payment concerns on our part and 2
were lost to a competitor. We appear to be stabilizing erosion in HRS units and
the traditional and joint venture sales results are encouraging for future
growth in net units. The division's backlog was 12 (including three new
outpatient and one new inpatient ARU) down from 14 at the end of the third
quarter. We expect all of these units to open within 12 months.
For the quarter, Phase 2 Consulting generated operating revenues and earnings in
line with expectations.
The Company's balance sheet remains strong with almost $53.5 million in cash,
cash equivalents and restricted cash at December 31, and long-term debt of $6.9
million related to acquisitions. Day's sales outstanding (adjusted to exclude
receivables related to the staffing division) decreased sequentially 1.2 days to
66.5, and decreased 5.5 days from 72.0 days at the end of 2003. We will continue
to aggressively manage our accounts receivable given the difficult payment
environment. Cash flow from operations was $50.1 million for the year. Capital
expenditures for the year were approximately $7.1 million related to equipment
and leaseholds and we invested an aggregate of $24.4 million in cash on
acquisitions.
Finally, with regard to our outlook for 2005 -
As we said in our press release, we expect operating revenues, excluding 2004
staffing revenues to increase between 14 percent and 19 percent to a range of
$418 to $438 million, with both HRS and Contract Therapy generating higher
profits as well as revenue. We expect to leverage our SG&A expenses, which
should decline from 14.9 percent of revenue to 14.0 percent. As a result, we
look for an EPS increase of 14.7 to 25.6 percent to between $1.58 and $1.73 for
the year, excluding the impact of FAS 123R, which we will adopt in full year
2005 and which we estimate to be $0.15 per share in 2005.
Our press release provides insight into the factors impacting our expected
results of operations. To what we said in the release, I would add the
following:
o Revenues for the acquisition of Cornerstone Rehabilitation are expected to
range between $11 and $11.5 million for 2005 with operating margins at
about 8 percent, slightly ahead of Contract Therapy's average. However, the
size of this transaction will only have a small impact on the division's
overall margin. EPS impact is expected to be approximately three cents.
o I anticipate our day's sales outstanding to range in the mid to upper 60's
depending on the quarters throughout the year as we have historically seen
some fluctuations due to seasonality.
o We expect a slight decline in our overall effective tax rate to 40.5
percent as the final tax effects of the sale of StarMed are left with the
2004 tax year.
o As a result of the impact of the 75% Rule, the InteliStaf loss mentioned in
our press release, the start-up of our Kokomo joint venture, and additional
staff in target markets, we expect first quarter earnings per share between
$0.28 and $0.30, before consideration of the effect of FAS 123R, the impact
of which was taken into account.
We will update our guidance 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,
To sum up,
o We achieved solid results on both our top and bottom lines for the quarter
and for the year.
o Our backlog of joint ventures and acquisitions continues to grow and I will
keep you informed of progress in these endeavors throughout the year.
o We announced an important acquisition of Cornerstone Rehabilitation which
is very much in line with our acquisition strategy and expect to announce
one or more acquisitions or joint ventures during the next few quarters.
o Our trends in openings and closures demonstrate that we are stabilizing
HRS.
o Our growth in Contract Therapy continues to be strong both in revenues and
operating earnings.
o We are taking steps to mitigate the impact of the 75% Rule, which will
affect our same store growth as previously discussed for the first six
months of this year.
o And we have the greatest therapists providing the best care in
rehabilitation services in the country.
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 1:00 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 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.