UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): July 28, 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
On July 28, 2005, RehabCare Group, Inc. (the Company) issued a press
release and conducted a conference call with investors reporting results of
operations for the quarter ended June 30, 2005. In addition to widely
disseminating the press release and providing a previously announced internet
simulcast of the conference call, the Company also posted the press release and
provided a retransmission of the conference call on its internet website.
During a routine periodic review of its EDGAR filings, the Company learned
that in its form 8-K filed on July 28, 2005, it had inadvertently furnished a
copy of its quarter ended March 31, 2005 press release and script instead of the
documents pertaining to the results of the quarter ended June 30, 2005. The
Company is hereby amending its previously furnished exhibits to provide the
correct versions of the press release and conference call script of July 28,
2005.
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 July 28, 2005, announcing our second
quarter revenues and results of operations.
99.2 The script for a conference call held by the registrant on
July 28, 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: November 8, 2005
REHABCARE GROUP, INC.
By: /s/ Mark A. Bogovich
----------------------------------------
Mark A. Bogovich
Vice President,
Interim Chief Financial Officer
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/Theresa Kelleher
Press: Sean Leous
(212) 850-5600
FOR IMMEDIATE RELEASE
Thursday, July 28, 2005
REHABCARE REPORTS SECOND QUARTER 2005 RESULTS AND UPDATES 2005 GUIDANCE.
ST. LOUIS, MO, July 28, 2005--RehabCare Group, Inc. (NYSE:RHB) today reported
financial results for the quarter and six months ended June 30, 2005.
Comparative results for the quarter and six months follow.
Quarter Ended Six Months Ended
Amounts in millions, June 30, June 30,
except per share data 2005 2004 2005 2004
- --------------------------------------------------------------------------------
Consolidated Operating Revenues $108.4 $90.9 | $210.8 $195.4
Consolidated Net Earnings 5.5 5.7 | 10.4 10.8 (a)
Consolidated Diluted
Earnings Per Share 0.32 0.34 | 0.60 0.64(a)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contract Therapy Operating Revenues 57.6 41.0 | 110.1 81.8
Contract Therapy Operating Earnings 3.1 2.0 | 5.5 4.4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HRS Inpatient Operating Revenues 35.7 37.1 | 71.3 72.5
HRS Outpatient Operating Revenues 12.4 11.4 | 24.6 23.1
- --------------------------------------------------------------------------------
HRS Operating Revenues 48.1 48.5 | 95.9 95.6
HRS Operating Earnings 6.7 8.1 | 13.4 16.9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Healthcare Management Consulting
Operating Revenues 2.8(b) 1.4 | 5.1(b) 1.4
Healthcare Management Consulting
Operating Earnings (Loss) - 0.1 | (0.1) 0.1
- --------------------------------------------------------------------------------
Staffing Operating Revenues - - | - 16.7(c)
Staffing Operating Loss - - | - (0.1)(d)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Equity in After Tax Loss of Affiliates (0.3) (0.1) | (0.7) (0.5)
- --------------------------------------------------------------------------------
<FN>
(a) Includes an after tax restructuring charge of $0.9 million, or $0.06 per
diluted share and an after tax gain on sale of business of $0.3 million, or
$0.02 per diluted share.
(b) Includes intercompany sales, at market rates, of $0.1 million and $0.3
million for the three months and six months ended June 30, 2005,
respectively.
(c) Includes intercompany sales, at market rates, of $0.1 million for the six
months ended June 30, 2004.
(d) Includes a pretax gain on sale of business of $0.5 million.
</FN>
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 2
John H. Short, Ph.D., president and chief executive officer, commented,
"While we entered the second quarter with optimism that we were making progress
in adjusting to the implementation of the 75% rule, its impact industry-wide
proved to be more severe than we had originally thought, which produced a
disappointing quarter. First, an overly conservative approach to compliance with
the 75% rule has caused us to be well ahead of required thresholds for
compliance which depressed our expected revenue growth and operating earnings
margins in the Hospital Rehabilitation Services division and offset the benefit
of openings of new locations in this division. In addition, HRS was negatively
impacted by higher labor costs. Second, while our Contract Therapy division is
enjoying strong growth in terms of units and revenues, higher labor costs
combined with the 75% rule negatively impacted the patient mix toward lower
margin Part A therapy services, which hurt the division's profitability.
Finally, our unconsolidated staffing company, InteliStaf Holdings, Inc. suffered
a downturn in operations that we had not anticipated."
Dr. Short continued, "To address these issues, we have implemented
additional tools to better manage compliance in line with unit thresholds which
we expect to improve our host hospitals' admissions; implemented cost reduction
efforts on a unit by unit basis to offset labor increases; and initiated pricing
policy changes that we expect to produce both short and long term benefits."
Dr. Short concluded, "While we are confident we will get traction from
these mitigation strategies, we have revised our full-year guidance as we
continue to manage through the 75% rule transition and bear the impact of the
performance issues at InteliStaf."
Financial Overview of Second Quarter
Net revenues for the second quarter 2005 were $108.4 million compared to
$90.9 million from the year ago quarter, an increase of 19.1 percent, reflecting
increased revenues as a result of 193 net new locations added since the second
quarter of 2004. Of the 193 net new locations, approximately 50 were added
through acquisitions and the remainder through normal sales activity. The
Company experienced strong same store growth in its contract therapy and
outpatient businesses, which was offset partially by the negative impact of the
75% rule in its inpatient business.
Consolidated net earnings were $5.5 million in the second quarter 2005
compared to $5.7 million in the prior year period. The consolidated net earnings
were adversely impacted during this period by the continued effects of managing
through the 75% rule transition; year-over-year facility operating expenses
increasing 25.6 percent while revenues only increased 19.1 percent, mainly due
to higher therapist wages and contract labor in all business units; and
disappointing results of the Company's equity method investment in InteliStaf
Holdings, Inc.
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 3
Earnings per share on a fully diluted basis were $0.32 compared to $0.34
for the same period last year including an increase in fully diluted shares
outstanding of 2.7 percent.
o The Contract Therapy division's net revenues for the second quarter of
2005 increased 40.5 percent to $57.6 million, compared to $41.0
million in the year ago quarter. Operating earnings for the quarter
were $3.1 million compared to the prior year quarter of $2.0 million.
As of June 30, 2005, the division had 764 locations.
The year-over-year second quarter increase in revenue reflects
continued strong same store revenue growth of 12.1 percent which is
higher than historical levels. This business unit has benefited from
the shift of patients from the hospital to the skilled nursing
facility setting in line with our post acute continuum strategy. In
addition, the number of locations has increased both through internal
sales initiatives as well as the acquisition of Cornerstone
Rehabilitation in December 2004.
Operating earnings performance reflects the effect of the significant
revenue growth, partially offset by a shift in patient revenue mix to
lower margin Medicare Part A services primarily as the result of the
75% rule transition. The division continues to experience increases in
labor expenses due to the continued tight therapist labor market.
These costs have not been recovered from clients through price
increases. The division was impacted by 64 new facilities (the largest
number of new openings in a quarter in the Company's history) opened
in the quarter that have not yet reached maturity, which negatively
impacted overall margins.
To address the concern on pricing and the increasing labor rates,
management has completed a facility-by-facility assessment of the
division's 764 sites, addressing operating costs, price and geography
issues. The Company is taking steps today to increase prices in high
cost markets and exit business in unfavorable locations.
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 4
o The Hospital Rehabilitation Services (HRS) division's second quarter
net revenues decreased to $48.1 million compared to $48.5 million in
last year's second quarter. Operating earnings for the quarter were
$6.7 million compared to $8.1 million in the prior year quarter. As of
June 30, 2005, HRS had 188 programs.
The HRS division saw a slight decrease in operating revenues even
though the number of locations and volumes per location were
essentially unchanged compared to the year ago quarter. While the
number of locations in the inpatient business has remained relatively
unchanged, the average revenue per location has declined by 3.2
percent, as new programs replace more mature programs.
Regarding the status of the 75% rule, the Company is averaging 60
percent compliance on June 30, well ahead of the transition
requirements of the rule. The Company has experienced both a reduction
in growth in the number of patients discharged in our inpatient units
and denial of approximately 680 patients that could have been admitted
while maintaining compliance. To address this issue, a real-time tool
is being installed to support operators and clinicians in the
admission evaluation process regarding how many patients are admitted
in the 25% category at any given time.
Another one of the Company's ongoing mitigation strategies includes
identifying new referral sources, which has resulted in a significant
increase in the number of external hospital admissions. Increase in
external hospital admissions for the first six months of 2005 over the
comparable period of 2004, is 12 percent. June yielded the highest
number of admissions from external sources in the Company's history.
In addition, the Company's recently implemented managed care strategy
resulted in an increase in non-Medicare patients of 8 percent in the
second quarter of 2005 compared to first quarter of 2005.
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 5
The division's operating earnings were also negatively impacted by the
division's inability to absorb the increases in labor and benefits
expenses that are occurring similar to the Contract Therapy division
in certain markets.
The division is currently working on an initiative to review and
update the staffing model in all locations to increase the utilization
of variable versus fixed labor. This will allow the Company to better
manage labor cost with fluctuating census levels.
InteliStaf Update
The Company's second quarter results include its $0.3 million equity share
of the net loss of InteliStaf Holdings, Inc. which is an increase in the loss
from the $0.1 million equity in net loss of the affiliate in the year ago
quarter. InteliStaf's second quarter results reflect a slight increase in
revenue sequentially as it appears that the business has stabilized from the
revenue standpoint. The major problem is primarily due to gross profit margin
contraction in the travel business that has been brought about by increased
housing costs, among other issues.
In response to InteliStaf's deteriorating performance over the last several
months, InteliStaf's board completed a thorough review of the business and
concluded that changes in management were necessary. Accordingly, in mid July,
the CEO was replaced by AlixPartners, LLC (AP), an experienced restructuring
firm, with the objective of significantly improving InteliStaf's top and bottom
line performance.
AP is performing its assessment which is expected to be completed by
mid-August with recommendations to InteliStaf's board shortly after that time.
Once this assessment has been completed, InteliStaf will evaluate whether the
value of its long-lived assets may be impaired. This assessment is not expected
to be completed until the end of the third quarter. 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 June 30, 2005 remains strong with
approximately $45 million in cash, cash equivalents and restricted cash, minimal
long-term debt and an unused credit facility of approximately $80 million
expandable to $115 million to support strategic initiatives. Days sales
outstanding at quarter end increased slightly to 67.1 days from 66.5 days at the
end of 2004. During the quarter, the Company generated cash flow from operations
of $4.8 million and spent $2.2 million on capital expenditures.
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 6
Acquisition and Joint Ventures Update
On June 9, the Company announced the signing of a definitive agreement to
purchase the operating assets of MeadowBrook Healthcare, Inc. for approximately
$35 million composed of $26 million in cash and a draw on the Company's credit
facility and $9 million in subordinated notes. This acquisition continues to
move the Company forward in executing its strategy to deliver the post acute
continuum of rehabilitation care. Upon the closing of this transaction, the
Company anticipates that each of the four MeadowBrook markets will become a
target market by combining the newly acquired facilities with our existing
locations.
The Company expects to close the MeadowBrook transaction on August 1 and
take over operations at that time. For the remainder of the year, MeadowBrook is
expected to generate $21 to $25 million in net revenue and contribute diluted
earnings per share of one to three cents. Furthermore, this acquisition has
provided the Company the back office and information systems to support its
ongoing growth initiatives in the freestanding rehabilitation market.
The Company expects to lease the properties from SunTrust Bank which will
acquire the properties from MeadowBrook and affiliates in a separate transaction
that is scheduled concurrently with the Company's acquisition of Meadowbrook.
The Company is developing two freestanding acute rehabilitation facilities
in Texas. First, together with Northwest Texas Health System (NWTHS), the
Company will be developing a 40-bed freestanding rehabilitation hospital in
Amarillo, TX. Scheduled to open in the spring of 2006, it will serve 25 counties
in northwest Texas and, with the Company's two existing skilled nursing facility
clients, will provide the opportunity to develop an additional target market and
further enhance the post acute continuum of NWTHS. The total capital investment
for this project is estimated at $5.5 million.
Second, the Company is developing a 24-bed freestanding acute
rehabilitation facility in Arlington, TX. This will allow the Company to benefit
from its twelve years of experience from operating a rehab program in the
Arlington market. The new facility will be owned and operated solely by
RehabCare. Projected to open in December 2005, it will serve the Dallas/Ft.
Worth/Arlington region where the Company also manages therapy programs at 15
skilled nursing facilities. The total capital investment for this project is
estimated at $5.6 million.
With the acquisition of MeadowBrook, the opening of the Amarillo and
Arlington projects and the Company's existing joint venture in Kokomo, the
Company would be operating seven freestanding rehab and LTACH hospitals in early
2006.
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 7
2005 Guidance Update
Based on the pending acquisition of MeadowBrook and the result of the
Company's operating performance and its equity investment in InteliStaf for the
first six months of 2005, the Company is providing updated guidance for 2005.
Management expects revenues from operations, exclusive of any unannounced
acquisitions or joint ventures, to be between $453 million and $467 million for
the year and earnings before interest, income taxes, depreciation and
amortization (EBITDA) of $52.2 million to $55.2 million. Expectations are for
diluted earnings per share to be in the range of $1.35 to $1.45. The earnings
per share range does not include the impact of FAS 123R, which the Company
expects to adopt effective January 1, 2006 and does not include the impact, if
any, of the impairment assessment to be conducted by management and the board of
InteliStaf.
Guidance relating to earnings per share assumes a 40.5 percent effective
tax rate, depreciation and amortization expense of 2.3 percent of net revenues
and an estimated 17.3 million diluted shares. Capital requirements are estimated
at $45.0 million composed of $8.3 million for routine capital expenditures,
$10.7 million for joint ventures development and $26.0 million for the
MeadowBrook acquisition.
Included in the Company's guidance are the following assumptions:
o For the Contract Therapy division, annual operating revenues are
expected to increase between 30 percent and 35 percent over 2004
levels due to significant growth in contracts during the first half of
2005, higher than previously anticipated same store operating revenues
and the addition of the Cornerstone Rehabilitation business for the
full year. Higher labor costs associated with the therapist shortage
offset by the leveraging of division selling, general and
administrative expenses are expected to have pretax operating earnings
as a percent of operating revenues in the 6 percent to 7 percent range
for 2005.
o For the Hospital Rehabilitation Services division, operating revenues
are expected to increase between 1 percent and 3 percent from 2004
levels as the effects of the 75% rule transition have reduced the
Company's historical same store growth rates larger than originally
anticipated. Pretax operating earnings for the division are expected
to be in the 14 percent to 16 percent range for the year due to
declines in same store growth in discharges resulting from the 75%
rule transition as well as the increases in labor cost mentioned
previously.
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 8
o Selling, general and administrative expenses are expected to decline
to approximately 13.8 percent of operating revenue in 2005 from about
14.9 percent of operating revenue in 2004.
o The Company's investment in InteliStaf Holdings which is included in
the equity in net loss of affiliates line, will range from an after
tax loss of $1.0 to $1.5 million related to the operating challenges
that InteliStaf is experiencing during 2005.
The Company's guidance may be updated during the remainder of 2005 as it
announces additional acquisitions and joint ownership transactions or has more
updated information related to the restructuring efforts being conducted at
InteliStaf.
Dr. Short concluded, "Summarizing the components of our change in outlook
for the year which supports our revised guidance regarding earnings per share,
approximately two thirds of the change results from the effects of slower than
expected growth in the Hospital Rehabilitation Services division operating
revenues resulting from the 75% rule transition issues and slower than expected
net additions of larger new units and approximately one-third results from
operating performance issues at our affiliate, InteliStaf. While we are
disappointed with the second quarter results, the underlying reasons for the
results only serve to reinforce the importance of implementing our strategies of
target markets, continuums of care, joint venture development and acquisitions.
These strategies in the longer term address the key operating, regulatory and
financial issues facing the Company and provide the proper framework for our
growth and profitability in the future."
RehabCare Group, Inc., headquartered in St. Louis, MO, is a leading
provider of physical therapy program management services for hospital inpatient
rehabilitation, skilled nursing units, and outpatient therapy programs and
contract therapy services 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.
A listen-only simulcast of RehabCare's second quarter conference call will
be available on the Company's web site at www.rehabcare.com and online at
www.companyboardroom.com, beginning at 10:00 Eastern time. An online replay will
be available for at least 21 days after the call. A telephonic replay of the
call will be available beginning at 1:00 P.M. Eastern time today and ending at
midnight on August 18, 2005. The dial-in number for the replay is (630) 652-3041
and the access code is 12128731.
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 9
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 consummate
acquisitions, including the pending acquisition of MeadowBrook Healthcare and
the lease transactions with respect to the current MeadowBrook properties;
RehabCare's ability to integrate acquisitions and 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 governmental reimbursement rates and other regulations or
policies affecting governmental and third party reimbursement for services
provided by RehabCare; the operational, administrative and financial effect of
RehabCare's compliance with other governmental regulations and applicable
licensing and certification requirements; 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 services
offerings and the development of alternative product offerings; the ability of
new management of InteliStaf Holdings, Inc., an unconsolidated affiliate of
RehabCare, 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 RehabCare's impairment analysis to be conducted with respect to the
carrying value of its investment in InteliStaf; the future financial results of
RehabCare's other unconsolidated affiliates; 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
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 10
I. Condensed Consolidated Statements of Earnings
------------------------------------------------
(Unaudited, amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
Operating revenues $108,353 $ 90,944 $210,784 $195,441
Costs & expenses
Operating 81,206 64,643 157,704 140,710
Selling, general
& administrative:
Divisions 8,828 7,863 17,463 17,536
Corporate 6,104 6,276 12,103 12,593
Restructuring charge - (51) - 1,615
Gain on sale of business - - - (485)
Depreciation & amortization 2,408 2,010 4,701 3,778
-------- -------- -------- --------
Total costs & expenses 98,546 80,741 191,971 175,747
-------- -------- -------- --------
Operating earnings, net 9,807 10,203 18,813 19,694
Other income (expense), net 24 (43) 38 (50)
Interest expense, net (104) (211) (146) (372)
-------- -------- -------- --------
Earnings before income taxes
and equity in net loss
of affiliates 9,727 9,949 18,705 19,272
Income taxes 3,940 4,136 7,575 8,000
Equity in net loss
of affiliates (298) (110) (739) (463)
-------- -------- -------- --------
Net earnings $ 5,489 $ 5,703 $ 10,391 $ 10,809
======== ======== ======== ========
Diluted earnings per share $ 0.32 $ 0.34 $ 0.60 $ 0.64
Weighted average diluted
shares outstanding 17,245 16,794 17,195 16,769
II. Condensed Consolidated Balance Sheets
-----------------------------------------
(Amounts in thousands)
Unaudited
June 30, December 31,
2005 2004
--------- ------------
Assets
Cash & restricted cash $ 44,765 $ 53,478
Accounts receivable, net 80,368 69,565
Deferred tax assets 10,360 10,252
Other current assets 4,009 1,690
-------- --------
Total current assets 139,502 134,985
Equipment, net 15,795 15,149
Excess of cost over net assets
acquired, net 65,631 68,340
Intangible assets 11,114 11,884
Investment in unconsolidated affiliates 42,174 39,269
Other assets 8,138 8,039
-------- --------
$282,354 $277,666
======== ========
Liabilities & Stockholders' Equity
Current portion of long-term debt $ 1,830 $ 4,731
Payables & accruals 47,105 53,803
-------- --------
Total current liabilities 48,935 58,534
Long-term debt, less current portion 1,612 2,142
Other non-current liabilities 10,382 9,962
Stockholders' equity 221,425 207,028
-------- --------
$282,354 $277,666
======== ========
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REHABCARE REPORTS SECOND QUARTER 2005 RESULTS Page 11
III. Operating Statistics
-------------------------
(Unaudited, Revenues and Operating Earnings in 000's)
Three Months Ended
June 30, June 30,
2005 2004
------- --------
Contract Therapy
- ----------------
Operating Revenues $57,629 $41,028
Division Operating Earnings(a) $ 3,165 $ 1,979
Average Number of Locations 745 572
End of Quarter Number of Locations 764 570
Hospital Rehabilitation Services
- --------------------------------
Operating Revenues
Inpatient $35,631 $37,121
Outpatient 12,415 11,397
------- -------
Total $48,046 $48,518
Division Operating Earnings(a) $ 6,696 $ 8,064
Average Number of Programs
Inpatient 144 145
Outpatient 42 42
--- ---
Total 186 187
End of Quarter Number of Programs
Inpatient 146 148
Outpatient 42 41
--- ---
Total 188 189
Healthcare Management Consulting
- --------------------------------
Operating Revenues $ 2,811 $ 1,398
Division Operating Earnings (a) (54) 109
(a) Division Operating Earnings are earnings attributable to the division
before interest, income taxes and other income (expense).
WE INVITE YOU TO VISIT OUR WEB SITE AFTER NOON TODAY TO VIEW KEY STATISTICS IN
GREATER DETAIL @ www.rehabcare.com.
-END-
Exhibit 99.2
REHABCARE CONFERENCE CALL SCRIPT
July 28, 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 consummate acquisitions, including the pending acquisition of
MeadowBrook Healthcare and the lease transactions with respect to the
current MeadowBrook properties; RehabCare's ability to integrate
acquisitions and 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
governmental reimbursement rates and other regulations or policies
affecting governmental and third party reimbursement for services provided
by RehabCare; the operational, administrative and financial effect of
RehabCare's compliance with other governmental regulations and applicable
licensing and certification requirements; 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 services offerings and the development of
alternative product offerings; the ability of new management of InteliStaf
Holdings, Inc., an unconsolidated affiliate of RehabCare, 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
RehabCare's impairment analysis to be conducted with respect to the
carrying value of its investment in InteliStaf; the future financial
results of RehabCare's other unconsolidated affiliates, 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. 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; Betty Cammarata, Director of Investor
Relations; Mary Pat Welc, Sr. VP of Operations; Colleen Jones, VP of Operations;
Sharon Noe, Sr. VP of Operations; 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
As you will recall, in our first quarter conference call, because of the strong
financial performance we had experienced in March, we were optimistic about the
second quarter. Further, while April was below expectations, May was strong and
we were confident that we were on track for a strong quarter. However, June was
a significant disappointment and so was the quarter.
Since the trends have diverged from our expectations, we have completed an
exhaustive review of our operations and have concluded the following four
factors were the contributing reasons to our earnings shortfall:
First, in an effort to comply with the infamous 75% rule, our facilities
over-reacted. We are well ahead of the required thresholds for compliance which
is negatively impacting our revenue growth and operating earnings margins in the
Hospital Rehabilitation Services division. We estimate that there were
approximately 680 patients in the first six months who could have been admitted
but were not as a result of our overreaction to the rule. As of June 30, our
units, on average, were at the 60% level of compliance, when the target was 50%.
Second, our operating expenses increased 25.6% while revenues only increased
19.1%, mainly due to higher therapist wages and contract labor in all of our
business units. Third, while we are experiencing very strong growth in our
Contract Therapy division, with a record 64 openings in the quarter, this rapid
expansion has eroded margins. And, fourth, InteliStaf Holdings, our affiliated
staffing company, had an unexpected downturn in its operations.
These factors quickly turned what was a promising outlook in late May into a
disappointing quarter at the end of June. Management has taken the following
immediate steps to correct the situation:
First, we have implemented additional tools to better manage 75% rule compliance
to unit specific thresholds, making certain that our field operators are better
supported in the admission evaluation process. We expect this to quickly improve
our admissions. Second, as a result of our review of all 952 sites, we have
implemented cost reduction efforts to offset labor increases. Third, we have
initiated pricing policy changes that we expect to produce both short and
long-term benefits and fourth, with respect to InteliStaf, its board has made a
management change and has hired AlixPartners, LLC an experienced turnaround firm
to improve its performance. In addition, the board has retained Russell Reynolds
to conduct a national search for a replacement CEO.
While we are not satisfied with our performance, we are satisfied that the
relevancy of our strategic plan that we implemented in January 2004 continues to
be reinforced. As our traditional businesses are becoming increasingly exposed
to the very tight labor market and regulatory pressures; developing target
markets, increasing the number of products that RehabCare manages within the
post-acute continuum and deploying capital to enhance longer-term relationships
will provide growth and operating environments more conducive to margin
protection and enhanced clinical outcomes. We believe taking these steps will
result in significantly improved financial performance in the balance of 2005.
Target Markets
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Early observations of our Target Markets show promise in four of the five
locations with our ability to care manage patients and rotate therapists across
service venues while improving retention above the company average. We talked
last time about our success in Norfolk, our most mature target market, relating
to these measurements. I am pleased to report similar results in Q2 with
retention rates near the 95% level, over 35% of staff rotating between service
venues and more than 13%, or 1,029 patients, receiving services in one or more
RehabCare care service settings. We are experiencing more modest, but favorable
results in three of the four remaining Target Markets. Philadelphia has been
slower to start and has been more challenging.
Phase 2
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Our Phase 2 Consulting business grew by 22% sequentially and slightly improved
operating earnings. The firm added 25 new projects during the quarter, with more
than 32% from new clients. The business continues to have a strong backlog.
Recruiting
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In our last conference call, we discussed some of the challenges associated with
the tight supply of therapists and our plans to add resources to recruitment and
retention efforts. We have seen positive results in the second quarter, compared
to the first. Average hires per month have increased 18%, and average time to
fill open positions has held relatively flat, up only 1.3 days. Additionally,
our overall retention of therapists is holding at approximately 85%. Lastly, we
have made good progress working down the overall number of openings, and are
encouraged by three straight quarters of growth in the percent of openings
attributed to new positions as opposed to replacements. In fact, for the second
quarter in a row, more than 50% of our openings are associated with growth in
our business.
New Business Development
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Our new business development activities generated second quarter contract
signings in every product line: two Acute Rehab Units, two Outpatient Units, and
one VitalCare subacute unit. For the first six months, the three VitalCare
signings are confirmation of our strategy to focus this product in Skilled
Nursing Facilities rather than hospitals in California.
Contract Therapy signed 55 agreements during the second quarter and the pipeline
of sales remains strong.
We signed three additional letters of intent for Joint Ventures during the
quarter. We currently have 12 letters of intent that remain active and we are
also pursuing several additional pre-LOI opportunities.
The MeadowBrook acquisition, which will add two freestanding rehab hospitals and
two freestanding LTACH's, is expected to close August 1. This transaction will
provide back office services and information systems for future freestanding
rehab hospitals and LTACH projects, including our new Arlington and Amarillo
facilities that I'll discuss in a second. Additionally, we get the benefit of
talented and experienced individuals as part of this transaction. I would like
to take this opportunity to welcome MeadowBrook to the RehabCare family.
The forty bed Amarillo freestanding rehab facility will be developed in
conjunction with Northwest Texas Health System, a 489 bed facility, serving 25
counties in northwest Texas. We anticipate a Spring 2006 opening.
The Arlington Texas project was conceived and developed as a result of the
termination of a 12 year management contract relationship we had with a hospital
in this market. Rather than leave the market, we looked for alternative sites to
take advantage of significant referral relationships developed by RehabCare. We
also maintained an experienced management team in Arlington. Perhaps most
importantly, this project is a clear indication of our willingness to operate
autonomously and continue to leverage our investment in the RehabCare programs
we have spent years developing and make us more independent of the decisions of
our host hospitals.
With the Meadowbrook acquisition, the addition of Amarillo and Arlington and our
existing Kokomo facility, RehabCare plans to operate seven freestanding Rehab or
LTACH hospitals in early 2006.
In all seven of these markets we have pursued, or intend to pursue, joint
venture continuums of care with local hospital system providers.
Legislative Update
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Part B Caps
The moratorium for Part B therapy caps ends December 31, 2005. Currently there
are 2 bills, one each in the Senate and the House, both calling for full repeal.
While we support these bills, several House and Senate members have voiced
frustration about the lack of alternative payment methodology in lieu of full
repeal. The current industry proposal involves two years of one blended cap that
would cover at least 90-95% of all beneficiaries.
75% Rule
CMS has publicly announced its intent to enforce the 75% rule as previously
outlined in April. In response, Senate Bill (S1405) was introduced, with a
similar bill announced in the House, calling for a freeze at the 50% threshold
and the establishment of a National Advisory council to oversee future federal
policies that could deny necessary patient care. RehabCare supports this
legislative effort.
RUG Refinement
The therapy industry has submitted comments on Rule 70: which is the Prospective
Payment System and Consolidated Billing for Skilled Nursing Facilities for FY
2006. The comments challenge four main areas: refinements to case-mix
classifications, minimum data set concerns, clarification of clinical issues and
consolidated billing. RehabCare continues to lobby in support of these
initiatives.
Vince will now review our financial results of the Company for the quarter.
Vince,
Thank you, John.
Net revenues for the second quarter 2005 were $108.4 million compared to $90.9
million in the same quarter last year, or an increase of 19.1 percent,
reflecting increased revenues as a result of 193 net new openings added since
the second quarter of 2004. Revenues were up 5.8 percent from $102.4 million in
the preceding quarter. Net earnings declined to $5.5 million in the second
quarter 2005 compared to $5.7 million a year ago and increased from $4.9 million
in the first quarter of 2005. Earnings per share on a fully diluted basis were
$0.32 compared to $0.34 last year and $0.29 in the previous quarter.
Net revenues for the Contract Therapy division were $57.6 million, an increase
of 40.5 percent from $41.0 million in the 2004 second quarter and were up 9.9
percent on a sequential basis. Operating earnings for the division increased to
$3.1 million compared to $2.0 million in the prior year second quarter and $2.4
million in the first quarter 2005.
The second quarter increases in revenue demonstrates continued strong same store
revenue growth. This business unit has benefited by the shift of patients from
the hospital to the skilled nursing facility setting. In addition the number of
locations has increased both through internal sales initiatives as well as the
acquisition of Cornerstone Rehabilitation in December 2004.
Operating earnings performance reflects the effect of the significant revenue
growth offset by the shift in patient revenue mix to lower margin Medicare Part
A services, as the result of the 75% rule transition. The division also
continues to experience increases in contract labor and therapist labor expenses
due to the continued tight therapy labor market.
The division finished the second quarter with 764 locations compared to the year
ago total of 570. We added 48 net new locations during the quarter on 64
openings and 16 closures. Of the 16 closures in the second quarter, one was for
non-payment; two clients cancelled, one facility took its therapy program
in-house; one facility changed owners, and eleven were closed at our election
due to unacceptable profitability or other reasons. The division's backlog
remains strong at 36 compared to 46 at the end of the first quarter.
Net revenues in the second quarter for our Hospital Rehabilitation Services
division decreased marginally to $48.1 million versus $48.5 for last year's
second quarter and increased from $47.8 million on a sequential basis. Operating
earnings for the division declined to $6.7 million from $8.1 million in the
prior year quarter, and were flat sequentially. The year-over-year revenue
decrease reflects strong same store growth of 5.8% in our outpatient division,
offset by the impact of the 75% rule. The year-over-year division operating
earnings were also negatively impacted by the division's inability to absorb
increases in labor and benefits expenses that are occurring similar to the
Contract Therapy division in certain markets.
The division finished the quarter with 188 programs, an increase of net six
openings sequentially, which is comprised of 10 openings and four closures. Of
the 10 new openings, eight were acute rehab units, one subacute unit and one
outpatient unit. Of the four closures, three were acute rehab units, and one was
a VitalCare subacute unit. The reasons for the closures were, one went to a
competitor, and three elected to self-operate. The division's backlog was eleven
(including two outpatient, six inpatient ARU and three subacute), a decrease of
five over the end of the first quarter.
VitalCare operations have continued to be challenged by the California hospital
situation. Our plan to establish subacute units in skilled nursing facilities is
progressing well and we currently have three in the backlog. To further enhance
the synergies between VitalCare and SNFs, earlier this week we placed our
Contract Therapy and VitalCare operations in the Southern California markets
under the direction of one of our seasoned Contract Therapy executives, freeing
up an existing Senior VitalCare executive to focus exclusively on business
retention and new business development.
One additional item for VitalCare relates to the claw back provision in the
purchase agreement. In the second quarter of 2005, we adjusted the purchase
price of VitalCare downward by $3 million, related to the retention and/or
termination of customer contracts for a period of time after the purchase date.
This reduction of the purchase price resulted in the elimination of the $3
million promissory note and a corresponding decrease in the excess of cost over
net assets acquired reported in the balance sheet.
The Company's balance sheet remains strong with $45 million in cash, cash
equivalents and restricted cash at June 30, and long-term debt of $3.4 million
related to acquisitions. Days sales outstanding in accounts receivable increased
sequentially by approximately 1.5 days to 67.1, and increased 1.3 days from 65.8
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
from operations was $4.8 million dollars for the second quarter of 2005. Capital
expenditures for the second quarter were approximately $2.2 million, principally
related to information technology and therapy equipment expenditures.
Regarding the second quarter results compared to consensus estimates, our
analysis shows the 8 cents per diluted share difference to be attributed to:
HRS operating earnings, attributable principally
to the effects of the 75% rule = 5 cents
CT operating earnings margin = 1 cent
InteliStaf = 2 cents
For a total of 8 cents
As you saw in our earnings release earlier this morning, we have updated our
annual guidance to reflect the acquisition of MeadowBrook and our internal
operating challenges as well as issues at InteliStaf. We expect our 2005
revenues will be in the range of $453 million to $467 million, and we look for
diluted earnings per share to be between $1.35 and $1.45 for the year. Further
details of this guidance are contained in our earnings press release. We will
update our guidance as necessary, as we add and finalize acquisitions and
significant joint ownership transactions during the year and have updated
information related to restructuring efforts at InteliStaf.
Now I will turn the call back over to John.
Thanks Vince, before we take your questions, I am pleased to announce the
election to our Board Dr. Suzan Rayner. Dr. Rayner is Executive Vice President,
Medical Affairs and Medical Director for Schwab Rehabilitation Hospital, a part
of the Sinai Health System, based in Chicago. Dr. Rayner's specialty in Physical
Medicine and Rehabilitation and her clinical interest in Geriatric
Rehabilitation, specialties which supplement our core business, are invaluable
assets to our board and management team.
With that I would like to have our operator open the call for questions.
Closing Remarks
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I am confident that our long term strategy is sound. I am also confident that we
fully understand the short term challenges and have the right team taking
appropriate actions which will result in significantly improved financial
performance in the balance of 2005.
I want to thank all who participated in this call. We appreciate the opportunity
to tell the story of RehabCare. We are operating in a challenging environment.
Our continued success will be a result of our outstanding therapists and
management team who remain committed and dedicated to our patients, their
families and our clients.
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.