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): May 5, 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 May 5, 2005, announcing our first
quarter revenues and results of operations.
99.2 The script for a conference call held by the registrant on
May 5, 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, May 5, 2005
REHABCARE GROUP, INC. REPORTS FIRST QUARTER 2005 RESULTS
ST. LOUIS, MO, May 5, 2005--RehabCare Group, Inc. (NYSE:RHB) today reported
financial results for the first quarter ended March 31, 2005. Comparative
results for the quarter follow.
Quarter Ended
Amounts in millions, Mar.31, Mar.31,
except per share data 2005 2004
- --------------------------------------------------------------------------------
Consolidated Operating Revenues $102.4 $104.5
Consolidated Net Earnings 4.9 5.1(a)
Consolidated Diluted
Earnings Per Share 0.29 0.31(a)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contract Therapy Operating Revenues 52.5 40.8
Contract Therapy Operating Earnings 2.4 2.4(b)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HRS Inpatient Operating Revenues 35.6 35.4
HRS Outpatient Operating Revenues 12.2 11.7
- --------------------------------------------------------------------------------
HRS Operating Revenues 47.8 47.1
HRS Operating Earnings 6.7 8.8(b)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Healthcare Management Consulting
Operating Revenues 2.3(c) -
Healthcare Management Consulting Operating Loss (0.1) -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Staffing Operating Revenues - 16.7(d)
Staffing Operating Loss - (0.1)(b)(e)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Equity in After Tax Loss of Affiliates (0.4) (0.4)
- --------------------------------------------------------------------------------
<FN>
(a) Includes an after tax restructuring charge of $1.0 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) The first quarter 2004 restructuring charge was included in consolidated
operating earnings, but not allocated to the individual operating
divisions.
(c) Includes intercompany sales, at market rates, of $0.2 million.
(d) Includes intercompany sales, at market rates, of $0.1 million.
(e) Includes a pretax gain on sale of business of $0.5 million.
</FN>
REHABCARE REPORTS FIRST QUARTER 2005 RESULTS Page 2
John H. Short, Ph.D., president and chief executive officer, commented,
"RehabCare's performance in the 2005 first quarter was as expected. We had good
execution by our business development teams that generated an increase in
signings of new clients and our operations teams continue to manage through the
implementation of the 75% rule, capacity issues caused by the increase in length
of stay and the shortage of therapists. We took a conservative approach in our
response to recent CMS transmittals, which impacted our inpatient census and
discharges in January and February. We are implementing our mitigation
strategies and are seeing improvements, which we expect to continue into the
second quarter."
Dr. Short continued, "We were also impacted by the 75% rule in our Contract
Therapy division, which drove significant growth in the number of higher acuity
Part A patients, and unfavorably affected our operating margins during the
quarter. We are addressing the therapist availability and cost pressures with
more flexible staffing across our patient care settings."
Financial Overview of the First Quarter 2005
Net revenues for the first quarter of 2005 were $102.4 million compared to
$104.5 million in the year ago quarter, a decline of 2.0 percent. The decline
was due to the sale of the Company's staffing division to InteliStaf Holdings in
February 2004, offset mainly by growth in the Company's Contract Therapy
division. The staffing division contributed $16.7 million of net revenues in the
first quarter of 2004.
Consolidated net earnings were $4.9 million in the first quarter of 2005
compared to $5.1 million in the prior year period. Earnings per share on a fully
diluted basis were $0.29 compared to $0.31 for the same period last year. The
net earnings and earnings per share results for the first quarter of 2004
included a pretax restructuring charge of $1.7 million related to the StarMed
sale ($1.0 million after tax or $0.06 per diluted share) and a $0.5 million gain
on the completion of the StarMed sale ($0.3 million after tax or $0.02 per
diluted share). The after-tax effect of these non-recurring items was to reduce
earnings by $0.04 per diluted share in the prior year quarter.
o The Contract Therapy division's net revenues for the first quarter of 2005
increased 28.7 percent to $52.5 million, compared to $40.8 million in the
year ago quarter. Operating earnings for the quarter remained flat compared
to the prior year quarter at $2.4 million. As of March 31, 2005, the
division had 716 programs.
- MORE -
REHABCARE REPORTS FIRST QUARTER 2005 RESULTS Page 3
The year-over-year first quarter increase in revenue reflects continued
same-store growth, the addition of programs through internal sales
initiatives as well as the acquisitions of CPR Therapies in February 2004
and Cornerstone Rehabilitation in December 2004.
Operating earnings remained flat year over year, despite the increase in
revenue. This was primarily due to a shift in our patient mix to lower
margin Part A patients exacerbated by an increasing shortage of therapists
which increased labor cost.
o The Hospital Rehabilitation Services (HRS) division's first quarter net
revenues increased to $47.8 million compared to $47.1 million in last
year's first quarter. Operating earnings for the quarter were $6.7 million
compared to $8.8 million in the prior year quarter. As of March 31, 2005,
HRS had 182 programs.
The increase in HRS operating revenues of 1.5% from the prior year quarter
reflects modest growth in our outpatient business and a small increase in
inpatient revenues driven by a full quarter's revenue from VitalCare
(acquired March 1, 2004), partially offset by the impact of the 75% rule.
The implementation of the 75% rule, as previously discussed, has negatively
impacted our unit level census and subsequently has lowered the number of
discharges for the quarter as these patients are now being treated in other
patient care settings.
The year-over-year decline in operating earnings is largely the result of
lower earnings from the inpatient business unit in 2005 compared to 2004.
The decline is the result of the negative impact on revenues of the 75%
rule, and replacing higher margin acute rehabilitation units that were
closed with lower margin VitalCare subacute units that were acquired.
Because of the 75% rule mitigation strategies, our inpatient units are now
seeing more clinically complex patients that tend to require more therapist
treatment time than patients have historically without an increase in
billings to the host facility.
- MORE -
REHABCARE REPORTS FIRST QUARTER 2005 RESULTS Page 4
o Our investment in InteliStaf Holdings for the quarter resulted in an equity
share loss of $0.4 million as InteliStaf completed a debt re-financing and
operational restructuring.
The Company's balance sheet at March 31, 2005 remains strong with $42.4
million in cash, cash equivalents and restricted cash, minimal long-term debt
and a credit facility with an available balance of approximately $115 million to
support strategic initiatives. Days sales outstanding at quarter end decreased
to 65.6 days from 66.5 days at the end of 2004. Cash flow used in operations was
$6.2 million during the first quarter 2005 as compared with $8.9 million
provided from operations in the same period of 2004. The change in operating
cash flow from the prior year quarter is the result of the lower operating
margins, first quarter 2005 income tax payments and growth in accounts
receivable brought about by the significant growth in our contract therapy
division. For the quarter, the Company spent $1.7 million on capital
expenditures, principally information technology, and $3.6 million on its
investment in the Kokomo, IN joint venture with Howard Regional Health System.
The Company filed an 8-K on April 18, 2005, indicating its decision to not
adopt FAS 123R until January 1, 2006 based on the SEC's announcement to delay
the required implementation timeframe.
Dr. Short concluded, "Looking beyond the current challenges, we remain
optimistic about the trends affecting our business and the model for care that
we are bringing to the market. We completed the first quarter with solid
backlogs of new openings in the inpatient, outpatient and contract therapy
business units. We have greater clarity on how to contend with the 75% rule;
only 2 of our units are currently out of compliance, and both will be in
compliance by the end of their cost reporting periods. Despite our case mix
index increasing from 1.07 to 1.09, our length of stay has been care managed
down by over 1 day and our discharges have increased 10% since January 2005. We
are responding to the Part A/Part B mix shift and cost pressures in Contract
Therapy and expect to see improved profitability over the course of 2005.
Finally, we are not changing our previously provided guidance of revenues
between $418 million and $438 million, and earnings per diluted share of $1.58
to $1.73."
RehabCare Group, Inc., headquartered in St. Louis, MO, is a leading
provider of contract therapy and program management services for hospital
inpatient rehabilitation, skilled nursing units, and outpatient therapy programs
in conjunction with more than 890 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.
- MORE -
REHABCARE REPORTS FIRST QUARTER 2005 RESULTS Page 5
A listen-only simulcast of RehabCare's first 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 1:00 P.M. Eastern time today and ending at
midnight on May 27, 2005. The dial-in number for the replay is (630) 652-3041
and the access code is 11563417.
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
compliance with governmental reimbursement rates and other regulations or
policies affecting RehabCare's businesses; RehabCare's ability to attract new
client relationships or to retain and grow existing client relationships through
expansion of RehabCare's contract therapy and hospital rehabilitation service
offerings and the development of alternative product offerings; the future
financial results of InteliStaf Holdings, Inc., and RehabCare's other
unconsolidated affiliates, 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 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 and 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 FIRST QUARTER 2005 RESULTS Page 6
I. Condensed Consolidated Statements of Earnings
------------------------------------------------
(Unaudited, Amounts in thousands, except per share data)
Three Months Ended
March 31,
--------------------------------------
2005 2004 % Change
---- ---- --------
Operating revenues $102,431 $104,497 (2.0)
Costs & expenses
Operating 76,498 76,067 0.6
Selling, general
& administrative
Divisions 8,635 9,673 (10.7)
Corporate 5,999 6,317 (5.0)
Restructuring charge - 1,666 N/M
Gain on sale of business - (485) N/M
Depreciation
& amortization 2,293 1,768 29.7
------- -------
Total costs & expenses 93,425 95,006 (1.7)
------- -------
Operating earnings, net 9,006 9,491 (5.1)
Other income (expense), net 14 (7) (300.0)
Interest expense, net (42) (161) (73.9)
------- -------
Earnings before income
taxes and equity in net loss
of affiliates 8,978 9,323 (3.7)
Income taxes 3,635 3,864 (5.9)
Equity in net loss
of affiliates (441) (353) 24.9
------- -------
Net earnings $ 4,902 $ 5,106 (4.0)
======= =======
Diluted earnings per share $ 0.29 $ 0.31 (6.5)
Weighted average diluted
shares outstanding 17,145 16,728 2.5
II. Condensed Consolidated Balance Sheets
-----------------------------------------
(Amounts in thousands)
Unaudited
March 31, December 31,
2005 2004
----------- ------------
Assets
Cash & restricted cash $ 42,444 $ 53,478
Accounts receivable, net 76,450 69,565
Deferred tax assets 10,816 10,252
Other current assets 2,383 1,690
-------- --------
Total current assets 132,093 134,985
Equipment, net 15,206 15,149
Excess of cost over net assets
acquired, net 68,681 68,340
Intangible assets 11,638 11,884
Investment in unconsolidated affiliates 42,465 39,269
Other assets 8,175 8,039
-------- --------
$278,258 $277,666
======== ========
Liabilities & Stockholders' Equity
Current portion of long-term debt $ 5,003 $ 4,731
Payables & accruals 46,581 53,803
-------- --------
Total current liabilities 51,584 58,534
Long-term debt, less current portion 1,941 2,142
Other non-current liabilities 9,741 9,962
Stockholders' equity 214,992 207,028
-------- --------
$278,258 $277,666
======== ========
- MORE -
REHABCARE REPORTS FIRST QUARTER 2005 RESULTS Page 7
III. Operating Statistics
-------------------------
(Unaudited, Revenues and Operating Earnings in 000's)
Three Months Ended
Mar 31, Mar 31,
2005 2004
----- ----
Contract Therapy
- ----------------
Operating Revenues $52,459 $40,754
Division Operating Earnings(a)(b) $ 2,393 $ 2,438
Average Number of Locations 715 536
End of Quarter Number of Locations 716 564
Hospital Rehabilitation Services
- --------------------------------
Operating Revenues
Inpatient $35,632 $35,343
Outpatient 12,181 11,744
------ ------
Total $47,813 $47,087
Division Operating Earnings(a)(b) $ 6,676 $ 8,797
Average Number of Programs
Inpatient 143 130
Outpatient 41 43
--- ---
Total 184 173
End of Quarter Number of Programs
Inpatient 141 146
Outpatient 41 42
--- ---
Total 182 188
Healthcare Management Consulting
- --------------------------------
Operating Revenues (c) $ 2,310 -
Division Operating Earnings (Loss)(a) $ (63) -
<FN>
(a) Division Operating Earnings are earnings attributable to the division
before interest, income taxes and other income (expense).
(b) The first quarter 2004 restructuring charge was not allocated to the
operating segments.
(c) Includes intercompany revenues, at market rates, of $0.2 million for the
quarter ended March 31, 2005.
</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
May 5, 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 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., and RehabCare's other
unconsolidated affiliates, 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 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 and 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 first quarter. 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; 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.
OPENING Remarks
In our year-end conference call on March 10, we discussed the challenges we were
facing in our inpatient division in the first quarter as a result of
transmittals issued by CMS interpreting how certain case types were to be
treated in the 75% rule compliance process. The quarter was every bit as
challenging as we indicated it would be. That said, we finished the quarter
where we expected.
The General Accounting Office report on the 75% rule was made available at the
end of April. Although the report states that a need for additional research is
evident, there is no indication of any significant change to the planned
phase-in of the rule. We support the GAO report in terms of the need for
additional clinical data. We continue to disagree with the CMS 75% rule
currently in place that does not consider the functional level of patients as it
applies to diagnostic restrictions. We support the industry position of a
"freeze" of the compliance level at 50%, as additional research is conducted by
us and others.
We have focused efforts on research and development to support clinical decision
matrices and will utilize our extensive database of 14,000 patients per day to
support the appropriate utilization of resources across the post-acute continuum
of services we provide.
All of our acute units are in compliance with the 50% transition based on their
cost report year with the exception of 2 units which will be in compliance by
the end of their cost report year.
60.6% of all patients admitted to our acute units met the thirteen qualifying
conditions comprising the 75% rule in the first quarter. Forty-three, or 37%, of
all of our acute units will enter the 60% compliance transition beginning July
1, 2005. Of the 43, 17 units already meet the 60% transition and the remaining
26 are averaging 55%, so we are confident we will meet this year's challenge.
To do this requires continued focus on our mitigation strategies referenced in
our March 10th conference call. These include:
1. Clinical education and training
Nursing skills assessment and training have been developed and are in the
process of implementation at all acute rehab units. We currently are
training 46 skilled nursing facility clients to accept orthopedic patients
which have been affected by the 75% rule.
2. Development of new referral sources
We are targeting managed care and commercial payers through a re-designed
managed care program. Using our field-based referral development employees,
we are increasing our focus on neurology, neuro-surgery and trauma
patients.
3. Further implementation of a continuum of care model which will facilitate
movement of patients to the most clinically appropriate and cost effective
setting.
As expected, we saw an increase in length of stay as units admitted more complex
patients as a result of the mitigation strategy to change referral patterns.
This caused initial capacity issues but much of the length of stay increase has
now been mitigated due to effective management of clinical treatment plans and a
change to a more effective care management model. Length of stay has declined by
over one day from January 2005 and discharges have increased by 10% for the same
time period. This despite an increase in case mix index from 1.07 to 1.09 within
the quarter.
It is important to note that while last week's call from AMPRA, our industry
trade group, indicated an industry decline of 7% of rehab admissions, we have
only experienced a 2.4% decline since the July 2004 implementation of the
transition.
We had anticipated during the implementation of the 75% rule that we would see a
migration of certain types of patients from acute rehabilitation units to
skilled nursing facilities. In fact, this became a significant factor during the
first quarter in the operating results of our Contract Therapy division.
As patients typically seen in acute rehab settings shifted to skilled nursing
facilities, the 11% same store average daily census increase in therapy services
under Medicare Part A reimbursement began to outweigh our ability to provide
Medicare Part B therapy services. Since the per minute revenue difference
between providing Part A versus Part B services is over 30%, this had a
significant impact on Contract Therapy's contribution margin. Typically growth
in Part A and Part B track together. In this case, the spike in Part A patients
maxed out therapists' time. Staff capacity issues are being addressed through
both improvements in productivity and utilization efforts.
Additionally, the target market operating principles have demonstrated the
ability to improve both therapist retention and efficiency. Recruitment efforts
are underway to address therapy shortages through additional allocation of
resources directed at visibility campaigns, and on campus recruiting activities
as well as internet advertising as part of regional and national initiatives. We
are also launching a campaign to incent our 8,500 clinical colleagues to refer
friends and associates to our openings.
At this point, there are no updates on the therapy caps since our March 10th
call. We are 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.
Outpatient therapy continues to perform as projected, with modest growth over
last year.
Turning to the status of our new business development initiatives, in Q4 2004 we
consolidated business development strategies, building upon best practices as
well as cross market and cross continuum opportunities. In Q1 2005 these
initiatives have borne fruit resulting in 12 new HRS signings of which 6 were
ARU's, 4 were subacute units, and two were outpatient programs. This compares to
5 new signings in Q1/04, an improvement of 140%. It also reflects the third
straight quarter of new Outpatient Service signings.
Our strategy for implementing VitalCare subacute services in skilled nursing
facility settings is also beginning to take shape with two new signings in the
first quarter and a strong pipeline of potential opportunities.
In Contract Therapy, there were 64 new client signings this quarter. The
pipeline of new opportunities within Contract Therapy remains strong in this
market segment.
Turning to the status of our acquisition and joint venture initiatives, we
continue to be encouraged by the number of opportunities that meet our
investment and strategic criteria. Our backlog of nine non-binding joint venture
letters of intent plus several complimentary acquisition targets comprise our
pool of opportunities.
Our two previously announced joint ventures, Howard Regional in Kokomo, Indiana
and Valley Baptist in Harlingen/Brownsville, Texas became operational in the
first quarter and are meeting expectations. I also have an update for you on
UCLA.
As we have mentioned in our last several calls, finding a real estate solution
for our proposed facility has proven 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. During this quarter we presented the only real estate solution
to UCLA that we believed met these requirements. UCLA, however, declined to
accept the solution. This has led UCLA to decide it no longer is interested in
selling the assets of its neuro-rehabilitation unit to us. While we are
disappointed with this outcome regarding UCLA, we will continue to develop our
existing southern California continuum of thirty-seven clients.
We now have five target markets: Norfolk, VA; St. Louis, MO; Philadelphia, PA;
Harlingen/Brownsville, TX; and Kokomo, IN, all markets where we have sizeable
market share and most or all of the elements of the continuum of care delivery
system. In four of these five markets, we have appointed a senior manager as its
market leader, responsible for all its operations, across all the practice
settings, throughout the continuum. And, we are beginning to see positive
results in these markets. For example, in the Norfolk market, in the first
quarter, annualized staff retention was greater than 95%, almost one-third of
our clinical staff worked in multiple practice settings, and more than 200
patients were treated in more than one RehabCare managed venue. We believe these
results show that we can manage staff and patients across the continuum more
effectively with our target market strategy. As we gain further traction in
these five markets, we will replicate our model in additional markets throughout
the country.
Our Phase 2 Consulting business continues to deliver steady results. During the
first quarter, we began making investments in product development and human
capital. We further developed the infrastructure to support CareNexus, our
proprietary care management product, and added two high profile healthcare
executives to our consulting team, Mickey Bilbrey, former president and CEO of
the University of Tennessee Medical Center, and Preston Gee, a widely known
writer and lecturer and former executive at St. David's Healthcare Partnership
in Austin, Texas. Our consulting business continues to have a strong backlog of
work carried over from 2004 and from the first quarter.
With regard to our investment in InteliStaf Holdings in the first quarter, we
recognized a $400,000 loss from our equity share due to a debt and operational
restructuring which we expected. 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.
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 first quarter 2005 were $102.4 million compared to $104.5
million in the same quarter last year, or a decline of $2.1 million, primarily
due to the first quarter 2004 inclusion of revenues from the Company's former
staffing division. The staffing division contributed $16.7 million to last
year's first quarter revenue. Revenues were up sequentially 7.7 percent from
$95.1 million in the preceding quarter. Net earnings decreased to $4.9 million
in the first quarter 2005 compared to $5.1 million a year ago and declined from
$6.3 million in the fourth quarter of 2004. Earnings per share on a fully
diluted basis were $0.29 compared to $0.31 last year and $0.37 in the previous
quarter. First quarter 2004 EPS and net earnings results included a
restructuring charge of $1.0 million after tax (or $0.06 per diluted share) and
a gain on the sale of the staffing division of $0.3 million after tax (or $0.02
per diluted share).
Net revenues for the Contract Therapy division were $52.5 million, an increase
of 28.7 percent from $40.8 million in the 2004 first quarter and were up 12.4
percent on a sequential basis. Operating earnings for the division were flat at
$2.4 million compared to the prior year first quarter and declined from $3.5
million in the fourth quarter 2004. The increase in revenues reflects 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 acquisition of Cornerstone Rehabilitation in December 2004. The flat
year-over-year and sequential decline in operating earnings for the current
quarter resulted from increased therapist labor costs due to the use of higher
cost contract labor, pay rate increases and higher overtime usage. Operating
earnings were also adversely affected by increases in host facilities' Part A
therapy patient census, which has caused a shift in patient mix to lower margin
Part A therapy services.
The division finished the first quarter with 716 locations compared to the year
ago total of 564 and added 26 net new locations during the quarter on 43
openings and 17 closures. Of the 17 closures in the first quarter, seven were
for non-payment; a small chain of six facilities took their therapy programs
in-house, two clients cancelled, one client sold their facility and one facility
closed. The division's backlog remains strong at 46 compared to 31 at the end of
the fourth quarter.
Net revenues in the first quarter for our Hospital Rehabilitation Services
division increased 1.5 percent at $47.8 million versus $47.1 for last year's
first quarter and increased 2.4 percent on a sequential basis. Operating
earnings for the division declined to $6.7 million from $8.8 million in the
prior year quarter, and decreased from $7.9 million sequentially. The
year-over-year revenue increase reflects modest growth in our outpatient
division, a full quarter's revenue from VitalCare, partially offset by the
impact of the 75% rule. The increase in revenues sequentially is the result of
the opening of four new outpatient locations and same store growth in outpatient
units. The year-over-year decline in operating earnings is the result of lower
earnings in the inpatient business due to the impact of the 75% rule and the
change in mix of business due to increases of VitalCare subacute units and
decreases in acute rehabilitation units. In addition, as I discussed earlier
about Contract Therapy, higher therapist labor costs from increased use of
outside contract labor also negatively impacted our HRS division's operating
earnings. The sequential decline was primarily attributable to the 75% rule.
The division finished the quarter with 182 programs, an increase of net one
opening sequentially, which is comprised of 8 openings and 7 closures. Of the 8
new openings, 3 were acute rehab units, 1 subacute unit and 4 outpatient units.
Of the 7 closures, 1 was an acute rehab unit, 2 were outpatient programs and 4
were subacute (VitalCare) units. Reasons for closures were 3 for self operation,
3 program abandonments by the host hospitals and 1 was lost to a competitor. The
division's backlog was 16 (including one outpatient, 12 inpatient ARU and 3
subacute), an increase of four over the end of the fourth quarter.
The Company's balance sheet remains strong with $42.4 million in cash, cash
equivalents and restricted cash at March 31, and long-term debt of $6.9 million
related to acquisitions. Days sales outstanding in accounts receivable decreased
sequentially by approximately 1 day to 65.6, and decreased 3.4 days from 69.0
days in the year-ago quarter. We will continue to aggressively manage our
accounts receivable as the mix of our receivables is shifting more towards the
contract therapy division since we have seen more growth in that unit. Cash flow
used in operations was $6.2 million for the first quarter of 2005. The change in
operating cash flow from the previous quarter is the result of the lower
operating margins, first quarter 2005 income tax payments and growth in accounts
receivable brought about by significant growth in our contract therapy division
for the year. Capital expenditures for the first quarter were approximately $1.7
million, principally related to information technology expenditures, and we
invested $3.6 million in our Kokomo, IN joint venture.
Finally, as we stated in our April 18th 8-K, we have elected not to implement
FAS123R until January 2006 based on the SEC's announcement to delay their
required implementation timeframe. That being said, our previous guidance
remains unchanged with revenues between $418 to $438 million, and we look for
diluted EPS to be between $1.58 and $1.73 for the year.
We will update our guidance as necessary as we add and finalize acquisitions and
significant joint ownership transactions during the year.
Now I will turn the call back over to John -
Thanks, Vince,
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.