RHB Rehabcare Grp. Inc.

RehabCare Group, Inc. (NYSE:RHB) today reported financial results for the quarter and nine months ended September 30, 2009. Comparative results for the quarter and nine months follow.

        Third Second Third Nine Months Ended Quarter Quarter Quarter September 30,

Amounts in millions, except per share data

2009 2009 2008 2009   2008   Consolidated Operating Revenues $ 208.0 $ 205.2 $ 181.4 $ 614.7 $ 543.4 Consolidated Operating Earnings 10.5 12.8 7.1 37.6 23.4 Consolidated Net Earnings from Continuing Operations 5.7 7.4 3.7 21.5 12.2 Loss from Discontinued Operations, Net of Tax (a) — (0.9 ) (0.3 ) (0.8 ) (0.5 ) Consolidated Net Earnings 5.7 6.5 3.4 20.7 11.7 Net Losses Attributable to Noncontrolling Interests 1.1 0.4 0.6 1.6 1.3 Net Earnings Attributable to RehabCare 6.8 6.9 4.0 22.3 13.0 Diluted Earnings per Share Attributable to RehabCare: Earnings from Continuing Operations, Net of Tax 0.37 0.43 0.24 1.28 0.76 Net Earnings 0.37 0.38 0.22 1.24 0.73   SRS Operating Revenues 123.4 123.8 112.2 370.3 339.2 SRS Operating Earnings 9.8 9.1 6.7 29.4 16.9   HRS Inpatient Operating Revenues 32.9 32.9 30.8 97.6 90.4 HRS Outpatient Operating Revenues 12.1 12.2 10.8 35.6 31.6 HRS Operating Revenues 45.0 45.1 41.6 133.2 122.0 HRS Operating Earnings 8.2 7.7 6.2 22.2 16.2   Hospital Operating Revenues 39.7 36.3 27.5 111.2 82.2 Hospital Operating Loss (7.6 ) (3.8 ) (5.5 ) (13.7 ) (9.1 )  

(a)

The $0.9 million after-tax loss from discontinued operations in the second quarter of 2009 includes a $0.7 million loss on the sale of the Company’s Phase 2 Consulting business on June 1, 2009 and a $0.2 million after-tax loss from Phase 2’s discontinued operating activities.

 

“Our Skilled Nursing Rehabilitation Services (SRS) and Hospital Rehabilitation Services (HRS) divisions surpassed our margin expectations in the third quarter and are on pace for a full year of strong earnings growth,” said John H. Short, Ph.D, RehabCare President and Chief Executive Officer. “Year-over-year operating revenues also continue to grow at a healthy rate across all divisions. Furthermore, our SRS and HRS divisions had great success with contract signings in the quarter, despite a period of economic instability and legislative uncertainty for healthcare administrators.

“Our Hospital division improved same store operating performance sequentially, but incurred incremental expenses related to merger and acquisition activities, as well as start-up losses for Greater Peoria Specialty Hospital, our new long-term acute care hospital (LTACH) in Peoria, IL. The division also was impacted by an operating loss at Dallas LTAC Hospital, which we acquired on June 30 and where the operational turnaround has been slower than expected. We continue to address transitory issues within the division to reach breakeven operating earnings run rate by the end of the 2010 second quarter.”

Financial Overview of Third Quarter

Consolidated operating revenues for the third quarter of 2009 were $208.0 million, a 14.7% increase compared to $181.4 million in the 2008 third quarter.

Consolidated net earnings attributable to RehabCare were $6.8 million, a 69.0% increase, in the third quarter of 2009 compared to $4.0 million in the prior year quarter. Diluted earnings per share attributable to RehabCare for the third quarter of 2009 was $0.37, which includes $2.2 million pre-tax external merger and acquisition related expenses, or $.07 per diluted share after tax, compared to $0.22 in the third quarter of 2008.

Operating revenues in the Skilled Nursing Rehabilitation Services division increased 9.9% from $112.2 million in the third quarter of 2008 to $123.4 million in the third quarter of 2009, driven by a contract therapy same store revenue increase of 10.0%. The division had a net gain of 23 units over the third quarter of 2008 and a net gain of 33 from the second quarter of 2009. On September 30, 2009, SRS operated in 1,098 contract therapy locations compared to 1,075 locations at the end of the third quarter of 2008 and 1,065 locations at the end of the second quarter of 2009. The Company signed 65 new contracts in the third quarter of 2009 compared to 53 in the third quarter of 2008 and 44 in the second quarter of 2009.

The SRS division’s operating earnings were $9.8 million, or 8.0% of revenue, compared to $6.7 million, or 5.9% of revenue, in the third quarter of 2008. The 47.6% year-over-year gain is a result of improved operating performance and better leveraging of selling, general and administrative costs.

The Hospital Rehabilitation Services division’s third quarter 2009 operating revenues increased 8.3% to $45.0 million, compared to $41.6 million in the third quarter of 2008. Inpatient operating revenues improved 6.9% and inpatient rehabilitation facility (IRF) same store discharges increased 0.5% compared to third quarter 2008. The average revenue per inpatient program increased 9.1% due to an improvement in contract mix. Outpatient operating revenues increased 12.3% as the average number of programs increased by 9.0% and same store revenues increased 7.8%.

At September 30, 2009, HRS operated 154 programs compared to 156 both at the end of the third quarter of 2008 and the end of the second quarter of 2009. The division operated 110 IRF programs at the end of the 2009 third quarter compared to 111 at the beginning of the quarter and 110 a year ago. The division had no IRF openings and one IRF closing during the third quarter. There were six HRS contract signings in the third quarter, three IRFs and three subacute units. At quarter end, the number of signed but unopened contracts was eight, five of which were IRFs, compared to a backlog of two at the end of the second quarter.

HRS operating earnings increased 31.6% to $8.2 million, or 18.2% of revenue, in the third quarter of 2009 compared to $6.2 million, or 15.0% of revenue, in the 2008 third quarter. The year-over-year gain is a result of improved contract terms and corporate and division realignment of selling, general and administrative costs.

Operating revenues in the Hospital division for the third quarter of 2009 increased $3.4 million, or 9.3%, sequentially to $39.7 million. Same store discharges decreased 3.5% sequentially as two of the division’s IRFs limited admissions in July and August to achieve compliance with the 60% Rule. The division incurred an operating loss of $7.6 million in the third quarter of 2009 compared to an operating loss of $3.8 million in the second quarter of 2009. The $3.8 million sequential increase in operating losses was due to a $1.6 million increase in total merger and acquisition related expenses, a $1.2 million increase in start-up losses for Greater Peoria Specialty Hospital and a $1.8 million operating loss at Dallas LTAC Hospital. The division’s same store operating performance improved sequentially by $0.5 million. The division currently operates a total of 13 hospitals, including six IRFs and seven LTACHs.

Balance Sheet and Liquidity

At September 30, 2009, the Company had $34.5 million in cash and cash equivalents and $26.7 million in outstanding debt. Net debt (outstanding debt less cash and cash equivalents) has been reduced by $37.5 million since the beginning of the year. Days sales outstanding decreased to 61.1 days at September 30, 2009 from 70.1 days at September 30, 2008.

For the nine months ended September 30, 2009, the Company generated cash from operations of $46.6 million and expended $8.9 million for capital expenditures, principally related to companywide information systems, equipment for the start-up of Greater Peoria Specialty Hospital and hospital facility maintenance capital.

Legislative Update

Congress continues healthcare reform efforts, with both chambers working to reconcile their respective bills, and may vote later this year. Current legislation favorably addresses the Company’s key regulatory objectives, including providing an extension of the Part B Therapy Caps exceptions process through 2011, replacing a scheduled 21% reduction in Medicare payments to physicians with a 0.5% increase for one year and extending LTACH reimbursement clarity until 2013. The Company remains engaged in the legislative process through its affiliated trade groups and independent efforts.

On October 1, final rules for FY2010 Medicare reimbursement were implemented, providing a net 2.8% rate increase for RehabCare’s freestanding IRFs and a net 1.4% increase for its LTACHs. The net 1.1% rate decrease for skilled nursing facilities will likely result in flat pricing in the Company’s SRS division through 2010.

Outlook

The Company does not provide revenue and earnings per share guidance, but provides the following outlook for the remainder of 2009 and for 2010:

• The Company anticipates strong consolidated revenue and net earnings growth for the full year 2009 and 2010.
• The Skilled Nursing Rehabilitation Services division expects 6.5% - 7.5% operating earnings margins for the remainder of 2009 and in 2010, driven by mid-single digit year-over-year same store revenue growth. The division expects modest unit growth in the 2009 fourth quarter and in 2010.
• The Hospital Rehabilitation Services division expects 15% - 17% operating earnings margins, 2% - 4% year-over-year growth in IRF same store discharges and flat unit growth in the 2009 fourth quarter and in 2010.
• The Hospital division expects total year operating losses of $16.0 - $17.0 million, which includes approximately $3.5 million in external merger and acquisition related expenses incurred through September 30, 2009. For full year 2009, revenue is expected to be $154 - $156 million. The Company expects a breakeven operating earnings run rate by the end of the second quarter of 2010 and to achieve breakeven operating earnings for the full year 2010.
• The effective tax rate is anticipated to approximate 39% for 2009 and 2010 after consideration of noncontrolling interests and equity income.
• The Company expects continued strong operating cash flow with DSO in the range of 60 to 65 days.
• Capital expenditures are anticipated to be approximately $3.0 million for the remainder of 2009, principally related to information systems investments, and $13.0 million in 2010.

Conclusion

“Another quarter of double-digit revenue and earnings growth over 2008 reflects the continual efforts of our contract management divisions to grow the business, improve operational performance and deliver enhanced value to our customers. With our continued technology investments and broad array of services across the post-acute continuum, we remain in a great position to compete in an ever-evolving post-acute marketplace,” said Dr. Short.

About RehabCare Group

Established in 1982 and headquartered in St. Louis, MO, RehabCare (www.rehabcare.com) is a leading provider of rehabilitation program management services in partnership with over 1,250 hospitals and skilled nursing facilities in 41 states. The Company also operates freestanding rehabilitation hospitals and long-term acute care hospitals across the country. RehabCare is included in the Russell 2000 and Standard and Poor’s Small Cap 600 Indices.

RehabCare will host a conference call on November 3, 2009, beginning at 5:00 PM Eastern time. Listeners may access the call by dialing (800) 640-9765, confirmation number 25516586, or in a listen-only mode through the Company’s website at http://www.rehabcare.com/investors/webcasts.htm. A replay of the call will be available beginning at approximately 7:00 PM Eastern Time today by dialing (877) 213-9653, confirmation number 25516586. An online archive of the conference call will remain on the Company’s website through January 4, 2010.

This press release contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the Company’s current expectations and could be affected by numerous factors, risks and uncertainties discussed in the Company’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Do not rely on forward-looking statements as the Company cannot predict or control many factors that affect its ability to achieve the results estimated. The Company makes no promise to update any forward- looking statements as a result of changes in underlying factors, new information, future events or otherwise.

 

I. Condensed Consolidated Statements of Earnings

(Unaudited; amounts in thousands, except per share data)           Three Months Ended Nine Months Ended Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30, 2009 2009 2008 2009 2008   Operating revenues $ 208,040 $ 205,164 $ 181,350 $ 614,735 $ 543,353 Costs and expenses: Operating 170,020 164,290 148,955 494,832 442,325 Selling, general and administrative 23,813 24,259 21,735 70,922 66,772 Depreciation and amortization 3,727 3,783 3,580 11,379 10,860 Total costs and expenses 197,560 192,332 174,270 577,133 519,957   Operating earnings 10,480 12,832 7,080 37,602 23,396   Interest income — 4 29 19 104 Interest expense (498 ) (549 ) (847 ) (1,619 ) (3,152 ) Other income (expense), net 3 — (4 ) 4 24 Equity in net income of affiliates 52 108 143 326 441   Earnings from continuing operations before income taxes 10,037 12,395 6,401 36,332 20,813 Income tax expense 4,331 4,965 2,735 14,799 8,639 Earnings from continuing operations 5,706 7,430 3,666 21,533 12,174 Loss from discontinued operations (16 ) (882 ) (280 ) (847 ) (511 ) Net earnings 5,690 6,548 3,386 20,686 11,663 Net loss attributable to noncontrolling interests 1,067 335 612 1,614 1,339 Net earnings attributable to RehabCare $ 6,757 $ 6,883 $ 3,998 $ 22,300 $ 13,002   Amounts attributable to RehabCare: Earnings from continuing operations $ 6,773 $ 7,765 $ 4,278 $ 23,147 $ 13,513 Loss from discontinued operations (16 ) (882 ) (280 ) (847 ) (511 ) Net earnings $ 6,757 $ 6,883 $ 3,998 $ 22,300 $ 13,002   Diluted EPS attributable to RehabCare: Earnings from continuing operations $ 0.37 $ 0.43 $ 0.24 $ 1.28 $ 0.76 Loss from discontinued operations — (0.05 ) (0.02 ) (0.04 ) (0.03 ) Net earnings $ 0.37 $ 0.38 $ 0.22 $ 1.24 $ 0.73   Weighted average diluted shares 18,282 18,097 17,824 18,050 17,773  

II. Condensed Consolidated Balance Sheets

(Amounts in thousands)     Unaudited September 30, December 31, 2009 2008 Assets Cash and cash equivalents $ 34,541 $ 27,373 Accounts receivable, net 137,681 139,197 Deferred tax assets 14,750 14,876 Other current assets 8,016 7,165 Total current assets 194,988 188,611   Property and equipment, net 42,141 37,851 Goodwill 173,462 171,365 Intangible assets 25,571 28,944 Investment in unconsolidated affiliate 4,725 4,772 Other assets 6,132 6,863 $ 447,019 $ 438,406 Liabilities & Equity Current portion of long-term debt $ 444 $ — Payables & accruals 98,572 91,327 Total current liabilities 99,016 91,327   Long-term debt, less current portion 26,273 57,000 Other non-current liabilities 14,137 12,279 Stockholders’ equity 294,369 267,772 Noncontrolling interests 13,224 10,028 $ 447,019 $ 438,406  

III. Condensed Consolidated Statements of Cash Flows

(Unaudited; amounts in thousands)   Nine Months Ended September 30, 2009   2008   Net cash provided by operating activities $ 46,623 $ 32,000 Net cash used in investing activities (9,918 ) (12,528 ) Net cash used in financing activities (29,537 ) (17,332 )   Net increase in cash and cash equivalents 7,168 2,140 Cash and cash equivalents at beginning of period 27,373 10,265 Cash and cash equivalents at end of period $ 34,541 $ 12,405    

Supplemental information:

Additions to property and equipment $ (8,932 ) $ (12,689 )  

IV. Operating Statistics (Unaudited; dollars in thousands)

            Third Second Third Nine Months Ended Quarter Quarter Quarter September 30, 2009 2009 2008 2009 2008

Skilled Nursing Rehabilitation Services

Operating revenues $ 123,350 $ 123,787 $ 112,246 $ 370,285 $ 339,174 Operating expenses 99,631 100,134 91,558 298,763 278,496 Selling, general and administrative 12,321 12,967 12,376 37,305 38,589 Depreciation and amortization 1,564 1,578 1,651 4,820 5,158 Operating earnings $ 9,834 $ 9,108 $ 6,661 $ 29,397 $ 16,931 Operating earnings margin 8.0 % 7.4 % 5.9 % 7.9 % 5.0 %   Average number of contract therapy locations 1,089 1,068 1,071 1,077 1,062 End of period number of contract therapy locations 1,098 1,065 1,075 1,098 1,075   Patient visits (in thousands) 2,011 2,017 1,879 6,033 5,687  

Hospital Rehabilitation Services

Operating revenues Inpatient Rehabilitation Facility (IRF) $ 31,092 $ 31,257 $ 28,405 $ 92,367 $ 83,207 Subacute 1,834 1,662 2,395 5,221 7,232 Total Inpatient $ 32,926 $ 32,919 $ 30,800 $ 97,588 $ 90,439 Outpatient 12,113 12,178 10,791 35,614 31,557 Total HRS $ 45,039 $ 45,097 $ 41,591 $ 133,202 $ 121,996 Operating expenses 31,451 31,007 29,302 93,092 86,797 Selling, general and administrative 4,831 5,806 5,448 16,127 17,013 Depreciation and amortization 561 624 612 1,831 2,008 Operating earnings $ 8,196 $ 7,660 $ 6,229 $ 22,152 $ 16,178 Operating earnings margin 18.2 % 17.0 % 15.0 % 16.6 % 13.3 %   Average number of programs IRF 111 113 109 112 107 Subacute 9 9 14 9 14 Total Inpatient 120 122 123 121 121 Outpatient 36 36 33 36 33 Total HRS 156 158 156 157 154   End of period number of programs IRF 110 111 110 110 110 Subacute 9 9 13 9 13 Total Inpatient 119 120 123 119 123 Outpatient 35 36 33 35 33 Total HRS 154 156 156 154 156   IRF discharges 10,858 11,359 10,569 33,216 31,154 Subacute discharges 798 792 870 2,447 2,399 Total Inpatient discharges 11,656 12,151 11,439 35,663 33,553   Outpatient visits (in thousands) 320 328 239 959 720  

Hospitals

Operating revenues $ 39,651 $ 36,280 $ 27,513 $ 111,248 $ 82,183 Operating expenses 38,938 33,149 28,095 102,977 77,032 Selling, general and administrative 6,661 5,351 3,618 17,236 10,587 Depreciation and amortization 1,602 1,581 1,317 4,728 3,694 Operating earnings (loss) $ (7,550 ) $ (3,801 ) $ (5,517 ) $ (13,693 ) $ (9,130 ) Operating earnings margin -19.0 % -10.5 % -20.1 % -12.3 % -11.1 %   End of period number of facilities 13 12 10 13 10 Patient days 33,579 30,233 24,393 92,603 71,790 Discharges 1,887 1,817 1,492 5,351 4,451