UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): October 27, 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 October 27, 2005, announcing our third
quarter revenues and results of operations.
99.2 The script for a conference call held by the registrant on
October 27, 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: October 27, 2005
REHABCARE GROUP, INC.
By: /s/ Mark A. Bogovich
----------------------------------------
Mark A. Bogovich
Vice President,
Interim Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
99.1 Press release dated October 27, 2005, announcing our third
quarter revenues and results of operations.
99.2 The script for a conference call held by the registrant on
October 27, 2005
Exhibit 99.1
CONTACT: RehabCare Group, Inc.
Mark Bogovich
Interim 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/Theresa Kelleher
Press: Sean Leous
(212) 850-5600
FOR IMMEDIATE RELEASE
Thursday, Oct 27, 2005
REHABCARE REPORTS THIRD QUARTER 2005 RESULTS
o RehabCare's core businesses see sequential improvement despite 75% rule and
tight labor market
o InteliStaf Holdings continues to negatively impact earnings with deferred
tax write-off and poor quarterly operating performance
o Hurricanes affect operations in Louisiana, Mississippi and Texas
ST. LOUIS, MO, October 27, 2005--RehabCare Group, Inc. (NYSE:RHB) today reported
financial results for the quarter and nine months ended September 30, 2005.
Comparative results for the quarter and nine months follow.
Quarter Ended Nine Months Ended
Amounts in millions, September 30, September 30,
except per share data 2005 2004 2005 2004
- --------------------------------------------------------------------------------
Consolidated Operating Revenues $120.0 $93.3 | $330.8 $288.7
Consolidated Net Earnings 4.4 6.1 | 14.8 16.9(a)
Consolidated Diluted
Earnings Per Share 0.26 0.36 | 0.86 1.00(a)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contract Therapy Operating Revenues 60.9 42.9 | 171.0 124.7
Contract Therapy Operating Earnings 3.7 2.3 | 9.2 6.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HRS Inpatient Operating Revenues 35.1 37.2 | 106.4 109.7
HRS Outpatient Operating Revenues 12.1 11.2 | 36.7 34.3
- -----------------------------------------------------------------------------
HRS Operating Revenues 47.2 48.4 | 143.1 144.0
HRS Operating Earnings 7.0 8.3 | 20.4 25.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Freestanding Hospitals Operating Revenues 8.8 - | 8.8 -
Freestanding Hospitals Operating Earnings 0.1 - | 0.1 -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Healthcare Management Consulting
Operating Revenues 3.1 2.0 | 8.2(b) 3.4
Healthcare Management Consulting
Operating Earnings 0.1 0.1 | - 0.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Staffing Operating Revenues - - | - 16.7(c)
Staffing Operating Loss - - | - (0.1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Equity in After Tax Loss of Affiliates (2.1)(d)(0.1) | (2.8)(d) (0.6)
- --------------------------------------------------------------------------------
<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, at market rates, of $0.3 million for the nine
months ended September 30, 2005.
(c) Includes intercompany sales, at market rates, of $0.1 million for the nine
months ended September 30, 2004.
(d) Includes a $1.1 million loss representing RehabCare's share of a $4.2
million deferred tax asset valuation allowance recorded by InteliStaf.
</FN>
REHABCARE REPORTS THIRD QUARTER 2005 RESULTS Page 2
John H. Short, Ph.D., president and chief executive officer, commented,
"RehabCare's third quarter results were negatively impacted by the poor
operating performance at InteliStaf Holdings, the challenges of the industry's
continuing adjustment to the 75% rule and the ongoing impact of rising labor
costs, as well as the effect on our operations of hurricanes Katrina and Rita."
Dr. Short added, "The Contract Therapy division experienced strong revenue
growth and has begun to see the effect of its new pricing initiatives, which are
reducing some of the impact of increasing labor costs. The Hospital
Rehabilitation Services division is still contending with the 75% rule in its
acute rehabilitation units (ARU), which are most affected by the shift in
treatment venue away from our client hospitals. Even though we have not seen our
historical same store growth rates, we have been able to mitigate discharge
declines at a rate better than the industry and have seen some stabilization
sequentially. At the same time, we are continuing to adjust our staffing models
to compensate for the lower volumes and labor cost pressures."
Financial Overview of Third Quarter
Net revenues for the third quarter 2005 were $120.0 million compared to
$93.3 million from the year ago quarter, an increase of 28.7 percent. The
increase reflects the growth in the number of locations in the Contract Therapy
division through normal sales activity and the Company's acquisitions of
Cornerstone Rehabilitation in late 2004 and MeadowBrook Healthcare in August
2005.
Consolidated net earnings were $4.4 million in the third quarter 2005
compared to $6.1 million in the prior year period. Consolidated net earnings for
the quarter include an after-tax loss from equity in affiliates of $2.1 million,
or $0.12 per diluted share, of which $1.1 million was due to deferred tax
valuation allowances recorded in the financial statements of the Company's
unconsolidated affiliate, InteliStaf Holdings, Inc. This compares to a prior
year same quarter after-tax loss from equity in affiliates of $0.1 million. The
Company expected its share of InteliStaf's third quarter 2005 after-tax loss to
be $0.02 per fully diluted share. The Company's operating earnings were also
adversely affected by costs and lost revenues resulting from hurricanes Katrina
and Rita in the amount of $0.4 million after tax, equal to $0.02 per diluted
share.
-MORE-
REHABCARE REPORTS THIRD QUARTER 2005 RESULTS Page 3
Earnings per share for the third quarter 2005 on a fully diluted basis were
$0.26 compared to $0.36 for the same period last year.
o The Contract Therapy (CT) division's net revenues for the third quarter of
2005 increased 42.0 percent to $60.9 million, compared to $42.9 million in
the year ago quarter. Operating earnings for the quarter were $3.7 million
compared to the prior year quarter of $2.3 million. As of September 30,
2005, the division operated in 744 locations.
The year-over-year third quarter increase in revenue was driven by the
average revenue per location increasing by 9.1 percent and the average
number of locations increasing by 179, including the acquisition of
Cornerstone Rehabilitation in December 2004. This business unit continued
to focus on signing larger facilities during the past year, and benefited
from the 75% rule which has shifted certain types of patients from
hospitals to the skilled nursing facility setting.
The growth in operating earnings reflected the significant increase in
revenues that the division experienced as well as the benefit of lower bad
debt expense during the quarter. However, like other providers of therapy,
the division continues to be challenged by increases in labor expenses.
Also, during the quarter, hurricanes Katrina and Rita interrupted
operations at twenty-two of this division's locations impacting pre-tax
operating earnings for this division by approximately $0.3 million.
o The Hospital Rehabilitation Services (HRS) division's third quarter net
revenues decreased 2.5 percent to $47.2 million compared to $48.4 million
in last year's third quarter. Operating earnings for the quarter were $7.0
million compared to $8.3 million in the prior year quarter. As of September
30, 2005, HRS operated 185 programs.
Operating revenues decreased as a result of the 75% rule impact on same
store ARU discharges, which were 2.1 percent lower than the prior year. The
impact of newly opened programs that have not yet reached the operating
levels of the more mature programs that closed during the year have also
negatively impacted HRS revenues.
Operating earnings were negatively impacted by the revenue decline and the
division's inability to fully absorb increases in labor expenses that
occurred in certain markets. We continued initiatives to update the
division's staffing model with the objective of increasing the utilization
of variable versus fixed labor, but it will take additional time for those
initiatives to be fully implemented. The pre-tax operating earnings impact
of hurricanes Katrina and Rita for this division was approximately $0.3
million for the quarter.
o The Company acquired MeadowBrook Healthcare in August 2005 and will report
these newly acquired facilities as well as any future freestanding
facilities as a separate industry segment called Freestanding Hospitals.
The new division reported third quarter net revenues of $8.8 million for
the quarter and operating earnings of $0.1 million.
-MORE-
REHABCARE REPORTS THIRD QUARTER 2005 RESULTS Page 4
InteliStaf Update
InteliStaf Holdings, LLC appointed Mike Wilstead its new CEO and Mark
Thomas its new CFO, effective Tuesday, October 25. Messrs. Wilstead and Thomas
were formerly COO and CFO respectively of QuadraMed Corporation. The Company
expects that their experience in turnarounds and sales will further initiatives
started by InteliStaf's board of directors during the quarter.
As previously reported, an assessment of InteliStaf's business and its
long-term financial projections was expected to be completed by the end of the
third quarter. The assessment has taken longer than planned and will now be
completed during the fourth quarter with additional input from the newly hired
management team. Once this assessment has been completed, InteliStaf will
evaluate whether the value of its long-lived assets may be impaired. Once that
assessment is complete, the Company will evaluate whether any adjustment to the
carrying value of its equity investment is required.
Balance Sheet
The Company's balance sheet at September 30, 2005 remains strong with
approximately $18.2 million in cash and cash equivalents, and $11.9 million in
subordinated long-term debt and an available credit facility capacity of
approximately $75 million expandable to $110 million to support strategic
initiatives. Days sales outstanding at quarter end increased to 68.2 days from
66.5 days at the end of 2004. During the quarter, the Company generated cash
flow from operations of $9.2 million and incurred $6.0 million of capital
expenditures.
Guidance
Given the lack of earnings visibility at InteliStaf and the outcome of its
impairment analysis, the unknown impact of hurricane Wilma on South Florida
operations, and the ongoing challenges of both the 75% rule and the labor market
for qualified therapists, we are withdrawing guidance for the balance of the
year.
Dr. Short concluded, "There remains a substantial amount of uncertainty in
the industry as hospitals and nursing homes adjust to the new compliance
requirements. As we mentioned last quarter, we have implemented a number of
mitigation strategies that, in combination with a successful business model and
a strong financial position, have enabled us to manage through the process at a
rate that appears to be better than the industry. We believe we have positioned
the Company to withstand the pressures in the current environment and seize the
opportunities that will present themselves when the industry stabilizes."
RehabCare Group, Inc. provides physical therapy management services for
hospital inpatient rehabilitation and skilled nursing units, outpatient programs
and contract therapy services in conjunction with more than 930 hospitals and
skilled nursing facilities in 38 states, the District of Columbia and Puerto
Rico. RehabCare also provides rehabilitation services in three freestanding
rehabilitation hospitals and two long-term acute care hospitals, which provide
specialized acute care for medically complex patients. RehabCare is pleased to
be included in the Russell 2000 and Standard and Poor's Small Cap 600 indices.
-MORE-
REHABCARE REPORTS THIRD QUARTER 2005 RESULTS Page 5
A listen-only simulcast of RehabCare's third quarter conference call will
be available on the Company's web site at www.rehabcare.com and online at
www.companyboardroom.com, beginning at 10:00 Eastern time. An online replay will
be available for at least 21 days after the call. A telephonic replay of the
call will be available beginning at 1:00 P.M. Eastern time today and ending at
midnight on November 17, 2005. The dial-in number for the replay is (630)
652-3041 and the access code is 12994552.
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 our actual results in future periods to differ
materially from forecasted results. These risks and uncertainties may include
but are not limited to, our ability to consummate acquisitions and other
partnering relationships; our ability to integrate recent and pending
acquisitions and 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 governmental reimbursement rates
and other regulations or policies affecting the services provided by us to
clients and/or patients; the operational, administrative and financial effect of
our compliance with other governmental regulations and applicable licensing and
certification requirements; our ability to attract new client relationships or
to retain and grow existing client relationships through expansion of our
hospital rehabilitation and contract therapy service offerings and the
development of alternative product offerings; the ability of new management of
InteliStaf Holdings, Inc., our unconsolidated affiliate, to complete its
business assessment of InteliStaf on a timely basis and to institute a business
restructuring to improve revenues and earnings; the results of our impairment
analysis to be conducted with respect to the carrying value of our investment in
InteliStaf; the future financial results of our other unconsolidated affiliates;
the adequacy and effectiveness of our operating and administrative systems; our
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
our past and future business, including our ability to predict the ultimate
costs and liabilities or the disruption of our operations; competitive and
regulatory effects on pricing and margins; and general 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 THIRD QUARTER 2005 RESULTS Page 6
I. Condensed Consolidated Statements of Earnings
(Unaudited, amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
Operating revenues $120,044 $ 93,277 $330,828 $288,718
Costs & expenses
Operating 91,034 66,638 248,738 207,348
Selling, general
& administrative:
Divisions 8,987 7,596 26,450 25,132
Corporate 6,211 6,193 18,314 18,786
Restructuring charge - - - 1,615
Gain on sale of business - - - (485)
Depreciation & amortization 2,894 2,125 7,595 5,903
-------- -------- -------- --------
Total costs & expenses 109,126 82,552 301,097 258,299
-------- -------- -------- --------
Operating earnings, net 10,918 10,725 29,731 30,419
Other income (expense), net (6) (4) 32 (54)
Interest expense, net 106 172 252 544
-------- -------- -------- --------
Earnings before income taxes
and equity in net loss
of affiliates 10,806 10,549 29,511 29,821
Income taxes 4,376 4,378 11,951 12,378
Equity in net loss
of affiliates (2,023) (96) (2,762) (559)
-------- -------- -------- --------
Net earnings $ 4,407 $ 6,075 $ 14,798 $ 16,884
======== ======== ======== ========
Diluted earnings per share $ 0.26 $ 0.36 $ 0.86 $ 1.00
Weighted average diluted
shares outstanding 17,136 16,867 17,175 16,819
II. Condensed Consolidated Balance Sheets
(Amounts in thousands)
Unaudited
Sept 30, December 31,
2005 2004
--------- ------------
ASSETS
Cash & restricted cash $ 18,152 $ 53,478
Accounts receivable, net 92,233 69,565
Deferred tax assets 10,474 10,252
Other current assets 4,178 1,690
-------- --------
Total current assets 125,037 134,985
Equipment, net 26,338 15,149
Excess of cost over net assets
acquired, net 95,174 68,340
Intangible assets 12,327 11,884
Investment in unconsolidated affiliates 40,150 39,269
Other assets 8,322 8,039
-------- --------
$307,348 $277,666
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 6,650 $ 4,731
Payables & accruals 58,678 53,803
-------- --------
Total current liabilities 65,328 58,534
Long-term debt, less current portion 5,290 2,142
Other non-current liabilities 10,575 9,962
Stockholders' equity 226,155 207,028
-------- --------
$307,348 $277,666
======== ========
-MORE-
REHABCARE REPORTS THIRD QUARTER 2005 RESULTS Page 7
III. Operating Statistics
(Unaudited, Revenues and Operating Earnings in 000's)
Three Months Ended
Sept 30, Sept 30,
2005 2004
------- --------
Contract Therapy
- ----------------
Operating Revenues $60,896 $42,895
Division Operating Earnings(a) $ 3,659 $ 2,301
Average Number of Locations 771 592
End of Quarter Number of Locations 744 600
Hospital Rehabilitation Services
- --------------------------------
Operating Revenues
Inpatient $35,083 $37,253
Outpatient 12,150 11,174
------- -------
Total $47,233 $48,427
Division Operating Earnings(a) $ 7,010 $ 8,340
Average Number of Programs
Inpatient 146 147
Outpatient 42 41
--- ---
Total 188 188
End of Quarter Number of Programs
Inpatient 144 145
Outpatient 41 41
--- ---
Total 185 186
Freestanding Hospitals
- ----------------------
Operating Revenues $ 8,846 $ -
Division Operating Earnings (a) 95 -
Healthcare Management Consulting
- --------------------------------
Operating Revenues $ 3,078 $ 1,955
Division Operating Earnings (a) 154 84
<FN>
(a) Division Operating Earnings are earnings attributable to the division
before interest, income taxes and other income (expense).
</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
October 27, 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 our actual results in future periods
to differ materially from forecasted results. These risks and uncertainties
may include but are not limited to, our ability to consummate acquisitions
and other partnering relationships; our ability to integrate recent and
pending acquisitions and 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
governmental reimbursement rates and other regulations or policies
affecting the services provided by us to clients and/or patients; the
operational, administrative and financial effect of our compliance with
other governmental regulations and applicable licensing and certification
requirements; our ability to attract new client relationships or to retain
and grow existing client relationships through expansion of our hospital
rehabilitation and contract therapy service offerings and the development
of alternative product offerings; the ability of new management of
InteliStaf Holdings, Inc., our unconsolidated affiliate, to complete its
business assessment of InteliStaf on a timely basis and to institute a
business restructuring to improve revenues and earnings; the results of our
impairment analysis to be conducted with respect to the carrying value of
our investment in InteliStaf; the future financial results of our other
unconsolidated affiliates; the adequacy and effectiveness of our operating
and administrative systems; our 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 our past and future business,
including our ability to predict the ultimate costs and liabilities or the
disruption of our operations; competitive and regulatory effects on pricing
and margins; and general 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. With me from management are: Tom Davis, Executive Vice
President and Chief Development Officer; Pat Henry, Executive Vice President,
Traditional Business; Mark Bogovich, Interim Chief Financial Officer; Don Adam,
Senior Vice President, Acquisitions; Jeff Zadoks, Vice President and Controller;
Betty Cammarata, Director of Investor Relations; John McWilliams, Sr. VP and
Chief Human Resources Officer.
We will be available during the question and answer period following our formal
remarks.
Opening Remarks
First of all I wanted to let you know that I am very proud of our people and how
they responded to the devastation brought about by hurricanes Katrina and Rita
during the past two and half months. Thirty-three of our contract therapy,
inpatient and outpatient and freestanding sites were impacted, (three twice) in
Louisiana, Mississippi, and Texas. We support our employees, clients and
patients with salary and benefit continuation, food, shelter and other
essentials. In addition, our colleagues from around the country have established
a relief fund for donations to help those with greater needs, which we are
matching up to $100,000. We also have been affected in our south Florida
locations by hurricane Wilma, all of which will negatively impact our fourth
quarter results.
Performance of our core business during the quarter was solid, driven by the
actions we outlined in our second quarter conference call. Unfortunately,
unanticipated events had a significant negative impact on our results. The most
notable of which, in addition to the hurricanes, was disappointing results at
InteliStaf. However, we remain confident in our long-term strategy for growth,
as evidenced by the number of joint venture opportunities in the pipeline.
Previously, we identified that many of our units had over- reacted to the
phase-in of the 75% rule, and were maintaining compliance levels greater than
those required for their specific cost report year. To address this, we
implemented tools to give field operators real-time information on their
compliance levels and additional resources to support admission decision making.
As a result, we have seen a decrease in both the number of facilities and the
total number of patients which have been denied admissions due to no 25% bed
being available for two consecutive quarters. We continue to focus our efforts
on the identification of new sources of admissions for our host facilities
through the efforts of our on-site managers and community relations personnel.
Despite the fact that 45, or 38% of our units entered the 60% compliance period
during the quarter, we have seen a slight improvement in same store discharges
compared to the second quarter. As of September 30, the average compliance of
all our units remained at 60%.
The year over year third quarter impact of the 75% rule implementation on both
our same store ARU discharges and revenue was a negative 2.1%. This compares
favorably with the estimated industry impact of a negative 7.7% in Medicare
discharges as reported by The Moran Company Report. The declines reported by the
publicly traded competitors vary between a negative 12.1% of Medicare discharges
to a negative 10.8% of revenue. More impressive is our performance over the
first 3 quarters of 2005 where our same store ARU discharges remained constant
while others declined. According to The Moran Company Report the industry is
experiencing an annualized 2005 decline of 15.3% or an estimated 40,000
discharges that are being prevented from receiving acute rehab care due to the
rule.
To further enhance our facilities' ability to manage patients with more complex
medical and rehabilitation needs, our Clinical Research and Development group
has developed and begun implementation of a variety of evidence based practice
protocols designed to provide our clinicians access to the most current and
efficacious treatment models.
Our cost initiatives have started to gain traction as operating margins improved
sequentially in HRS from 13.9% to 14.8% in the third quarter. We continue to
focus our attention on adjustments to our staffing model with the objective of
being more flexible with changes in volume. This initiative will take additional
time to be fully implemented.
In our contract therapy division, we continued to see strong revenue growth and
margins are slowly improving. As we had expected, the implementation of our new
pricing initiative in the third quarter has caused some backlash. We have
experienced a higher than normal number of cancellations of 55 versus 16. This
will have some short term effect on the revenues until we are able to replace
those clients. Pricing for new clients signed in the third quarter has been
increased to more accurately reflect current cost structures (including contract
labor), and value added.
We completed the acquisition of MeadowBrook on August 1 which added two
freestanding rehab hospitals and two freestanding LTACHs. This provides us the
back office services and information systems for future freestanding hospitals,
including our Arlington facility that is slated to open in late December and
Amarillo which is scheduled for a late spring of 2006 opening. It is important
to note during the start up of these new facilities, the Company will be
incurring costs with minimal revenues. We expect to have approximately $225,000
to $300,000 of start-up costs related to our Arlington project in the fourth
quarter.
With the Meadowbrook acquisition, the addition of Amarillo and Arlington and our
existing Kokomo facility, RehabCare plans to operate seven freestanding
hospitals in early 2006.
In all seven of these markets we are pursuing joint venture continuums of care
with local hospital system providers and physician groups.
Target Markets
- --------------
Our Target Market approach is yielding positive lessons. In three of our
markets, turnover remains well below Company averages with both Norfolk and St.
Louis running between 1-2% for the quarter. While the target markets continue to
struggle with the same operating challenges faced by our traditional business,
each of them has major development projects underway. We have also shown that
many therapists are willing to rotate among multiple care venues in each of our
target markets. These positive developments led us to begin to implement these
lessons into the remainder of our business.
Phase 2
- -------
Our healthcare management consulting business, Phase 2 Consulting, grew
operating revenues by 57% for the third quarter 2005 versus prior year. This is
due to increased staff productivity, which has improved from 73% to 79%, the
receipt of performance based bonuses and 32 new projects added during the
quarter. The project backlog remains solid.
InteliStaf
- ----------
As part of the continued efforts to turn around its operating performance,
InteliStaf appointed Mike Wilstead its new CEO and Mark Thomas its new CFO
effective October 25, 2005. Messrs. Wilstead and Thomas were formerly COO and
CFO respectively of QuadraMed Corporation, a provider of IT solutions to the
health care industry. The Company expects that their experience in turnarounds
and sales will further the initiatives started by the InteliStaf Board during
the quarter.
Recruiting
- ----------
While we have seen no evidence of loosening in the tight supply of therapists,
we did continue to see positive results from our recruiting efforts.
Quarter-over-quarter, we saw a 19% reduction in the time it takes to fill an
opening. Additionally, for the third straight quarter, at least half of our
openings came about as a result of new business growth. Our retention of
therapists continues to track near 85%.
Our search to fill our Chief Financial Officer vacancy continues to be very
active. While we have seen considerable interest and enthusiasm in the
opportunity, we have not yet identified a candidate who fully meets our
requirements and standards. As expected, the interim leadership structure
previously announced with Mark Bogovich serving as Interim Chief Financial
Officer and Jeff Zadoks taking on additional responsibilities in his role as
Corporate Controller is operating well and providing us the flexibility to
remain highly selective in our evaluation of candidates. We will continue to
actively source and evaluate additional candidates until a permanent replacement
is found.
New Business Development
- ------------------------
Our HRS business development activities generated third quarter contract
signings in every product line: four acute rehab units, three outpatient units,
and one subacute unit.
Contract Therapy signed 65 agreements during the third quarter and the pipeline
of sales remains strong.
We signed one additional letter of intent for Joint Ventures during the quarter.
We currently have 12 LOI's that remain active and we are also pursuing several
additional pre-LOI opportunities. We anticipate announcing several new joint
ventures/acquisitions in the next few months.
Legislative Update
- ------------------
Update to 75% Rule & Therapy Cap
The Senate Finance Committee, which oversees Medicare legislation, has agreed to
a reconciliation package which included several Medicare items. Of particular
importance to RehabCare, the bill calls for a two year freeze of the 75% rule at
the 50% threshold and a study to determine subsequent action. In addition, any
IRF or acute rehab unit that was decertified at the 50% threshold would be given
more time to reach this level. The bill also calls for a one year extension of
the therapy cap moratorium, through December 31, 2006. RehabCare vigorously
supports these measures. Despite these positive developments, we continue to
operate as if both the 75% rule and therapy caps remain in their current state.
RUG Refinement
This rule takes effect on January 1, 2006 and involves the addition of 9 new
RUG's, all in the rehabilitation area. While some of our clients may experience
declines in reimbursement, the rule is not likely to alter the way RehabCare
prices or delivers service.
IRF PPS Update
During the third quarter CMS released the FY 2006 IRF Final Rule for discharges
occurring on or after 10/1/2005. Although the changes from the rule are broad in
scope the impact to the Company is projected to be less significant. Preliminary
analysis shows that the annualized decrease in our projected net revenue to be
approximately $300,000 which is tied directly to a small number of HRS programs
with case weighted pricing along with the new freestanding hospitals.
Mark Bogovich will now review our financial results for the quarter.
Thank you, John,
Net revenues for the third quarter 2005 increased 28.7 percent to $120.0 million
compared to $93.3 million in the same quarter last year and also increased by
10.8 percent from the second quarter 2005. The increases in revenue resulted
primarily from the growth in the average number of locations in the Contract
Therapy division through normal sales activity and the Company's acquisitions of
Cornerstone Rehabilitation in late 2004 and our August 2005 acquisition of
Meadowbrook Healthcare's four freestanding hospitals.
Net earnings declined to $4.4 million in the third quarter 2005 compared to $6.1
million a year ago and from $5.5 million in the second quarter of 2005. Both
variances were principally driven by the after-tax loss from equity in
affiliates of $2.1 million, or $0.12 per diluted share, which resulted from the
operating losses and deferred tax valuation allowances recorded in the financial
statements of InteliStaf. This loss from InteliStaf compares to a third quarter
2004 after-tax loss of $0.1 million and a $0.3 million after tax loss in the
second quarter of 2005. The Company expected its share of InteliStaf's after-tax
loss to be $0.02 per fully diluted share for the third quarter 2005. RehabCare's
operating earnings were also adversely affected by costs and lost revenues
resulting from hurricanes Katrina and Rita in the amount of $0.6 million, or
$0.4 million after tax.
Earnings per share on a fully diluted basis for the quarter were $0.26 compared
to $0.36 last year and $0.32 in the previous quarter.
Net revenues for the Contract Therapy division were $60.9 million, an increase
of 42 percent from $42.9 million in the third quarter 2004 and up 5.7 percent on
a sequential basis. Operating earnings for the division increased to $3.7
million compared to $2.3 million in the prior year third quarter and $3.2
million in the second quarter 2005.
The third quarter revenue increase is the result of the higher average number of
locations operated during the quarter, the increase in the average revenue per
location which reflected strong same store revenue growth of 10.7%, and the
focus of our business development team on signing larger facilities. Revenues
for this division continued to benefit by the shift of patients from the
hospital to the skilled nursing facility setting due to the 75% rule.
The division was able to improve operating earnings through significant revenue
growth as well as the benefit of lower bad debt expense for the quarter. Like
other providers of therapy, the division continues to be challenged by the
increases in labor expenses. Hurricanes Katrina and Rita interrupted operations
at twenty-two of our contract therapy locations impacting operating earnings by
approximately $0.3 million for the quarter.
The division finished the third quarter with 744 locations compared to the year
ago quarter of 600. We added 35 new locations during the quarter and closed 55.
Of the closures in the third quarter, 6 were for payment problems; 22 were
RehabCare initiated for various reasons, 14 programs took their therapy in-house
and 10 clients chose to work with another vendor. Three others closed their
doors or changed owners resulting in contract termination. The division's
backlog remains strong at 54 compared to 36 at the end of the second quarter.
Third quarter 2005 HRS revenues decreased to $47.2 million, or 2.5% compared to
$48.4 million for last year's third quarter and from $48.0 million on a
sequential basis. Operating earnings for the division declined to $7.0 million
from $8.3 million in the prior year quarter, but increased from $6.7 million
sequentially.
Operating revenues decreased as a result of the 75% rule impact on same store
ARU discharges, which were 2.1 percent lower than the prior year. The impact of
newly opened programs that have not yet reached the operating levels of the more
mature programs that closed during the year also negatively affected HRS
revenues.
Operating earnings were negatively impacted by the revenue decline and the
division's inability to fully absorb increases in labor expenses that occurred
in certain markets. The pre-tax operating earnings impact of hurricanes Katrina
and Rita for this division was approximately $0.3 million for the quarter.
The division finished the quarter with 185 programs, a net decline of 3
sequentially, which is comprised of three openings and six closures. Of the
three new openings, one was an acute rehab unit, one was a subacute unit and one
was an outpatient unit. Of the six closures, one was an acute rehab unit, three
were subacute units, and two were outpatient units. Of these six closures, five
chose to self operate and one unit has closed. The division's backlog was 16 at
the end of the quarter, which included nine ARUs, four outpatient units, and
three subacute units. This is an increase of five over the second quarter
backlog of eleven.
The Company acquired MeadowBrook Healthcare in August 2005 and we will report
these newly acquired facilities as well as any future freestanding facilities as
a separate industry segment called Freestanding Hospitals. The new division
reported net revenues of $8.8 million and operating earnings of $0.1 million for
the quarter.
The Company's third quarter 2005 equity share of InteliStaf's losses, reflected
a loss of $1.0 million related to normal operations and a $1.1 million loss
related to a valuation allowances recorded against InteliStaf's deferred tax
assets.
Regarding the valuation allowance, InteliStaf management concluded that they
would not fully realize the benefits of their deferred tax assets. InteliStaf
management reached this conclusion primarily as a result of accumulated losses
incurred over the latest three year period, combined with the expectation of
continued near term difficult operating conditions.
As we previously reported, an assessment of the InteliStaf business and its
long-term financial projections was expected to be completed by the end of the
third quarter. The assessment has taken longer than planned and will now be
completed during the fourth quarter with additional input from the newly hired
management team. Once this assessment has been completed, InteliStaf will
evaluate whether the value of its long-lived assets may be impaired. Once that
assessment is complete, we will evaluate whether any adjustment to the carrying
value of our equity investment is required.
Our balance sheet remains strong with $18.2 million in cash and cash equivalents
at September 30, and $11.9 million in subordinated long-term debt related to
acquisitions. Days sales outstanding increased sequentially by one day to 68.2
days. Cash flow from operations was $9.2 million for the third quarter 2005
while capital expenditures were $6.0 million, with $2.2 million related to
construction of our soon to be opened Arlington facility and the remainder
related to IT initiatives and routine capital expenditures.
Guidance
Given the lack of earnings visibility at InteliStaf and the outcome of its
impairment analysis, the unknown impact of hurricane Wilma on South Florida
therapy operations, and the ongoing challenges of both the 75% rule and the
labor market for qualified therapists, we are withdrawing guidance for the
balance of the year.
Now I will turn the call back over to John.
Thank you. Before we take your questions, I am pleased to announce the election
to our board of Mr. Anthony Piszel and Mr. Larry Warren. Mr. Piszel is Executive
Vice President and Chief Financial Officer of Health Net, Inc. and is a former
Fellow of the Financial Accounting Standards Board and Mr. Warren is recently
retired as the Chief Executive Officer of University of Michigan Hospitals and
Health Centers where he served twenty years. With the healthcare experience they
bring, these two new board members will be invaluable assets to our board and
management team.
Closing Remarks
Before closing, I want to express my appreciation to all the men and women of
RehabCare, who have shown me and our Board that, despite operating in a
challenging environment, facing many issues beyond our immediate control, they
remain committed to the hard work that is necessary to achieve superior results.
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.