RHB Rehabcare Grp. Inc.

RehabCare Group, Inc. (NYSE:RHB) today reported financial results for the quarter and six months ended June 30, 2010. Comparative results for the quarter and six months follow.

                Second First Second Six Months Ended Quarter Quarter Quarter June 30, Amounts in millions, except per share data 2010 2010 2009 2010     2009   Consolidated Operating Revenues (a) $ 334.0 $ 327.4 $ 205.2 $ 661.4 $ 406.7 Consolidated Operating Earnings (a) 31.3 32.5 12.8 63.8 27.1 Consolidated Net Earnings from Continuing Operations (a), (b) 15.2 14.8 7.4 30.0 15.8 Loss from Discontinued Operations, Net of Tax (c)   —     —   (0.9 )   —     (0.8 ) Consolidated Net Earnings (a), (b) 15.2 14.8 6.5 30.0 15.0 Net (Earnings) Loss Attributable to Noncontrolling Interests   (0.5 )   0.2   0.4     (0.3 )   0.5   Net Earnings Attributable to RehabCare (a), (b), (c) 14.7 15.0 6.9 29.7 15.5 Diluted Earnings per Share Attributable to RehabCare: Earnings from Continuing Operations, Net of Tax (a), (b) 0.59 0.61 0.43 1.20 0.91 Net Earnings (a), (b), (c) 0.59 0.61 0.38 1.20 0.87   SRS Operating Revenues 130.9 126.4 123.8 257.2 246.9 SRS EBITDA 12.5 11.7 10.7 24.1 22.8 SRS Operating Earnings 11.1 10.3 9.1 21.5 19.6   HRS Inpatient Operating Revenues 31.8 31.1 32.9 62.9 64.7 HRS Outpatient Operating Revenues   13.0     12.1   12.2     25.1     23.5   HRS Operating Revenues 44.8 43.2 45.1 88.0 88.2 HRS EBITDA 8.4 7.5 8.3 15.9 15.2 HRS Operating Earnings 7.9 6.9 7.7 14.8 14.0   Hospital Operating Revenues (a) 158.4 157.8 36.3 316.2 71.6 Hospital EBITDA (a) 18.0 20.6 (2.2 ) 38.7 (3.0 ) Hospital Operating Earnings (Loss) (a) 12.3 15.2 (3.8 ) 27.5 (6.1 )   (a) During the 2010 second quarter, the Company recorded a $1.7 million unfavorable pretax adjustment for estimates of additional amounts due on 2007 and 2008 cost reports for one of its inpatient rehabilitation facilities. The after-tax impact of this adjustment was approximately $1.0 million, or $0.04 per diluted share (see table on page 9).   (b) During the 2010 second quarter, the Company recognized a $0.8 million, or $0.03 per diluted share, income tax benefit for the combined impact of the reversal of a contingency reserve due to a favorable ruling from the Internal Revenue Service and tax credits identified during the quarter (see table on page 9).   (c) The $0.9 million after-tax loss from discontinued operations in the second quarter of 2009 included 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.  

Management Comments

“We continued to see strong year-over-year results in the second quarter. Notwithstanding all of the prospective changes in the regulatory landscape, as well as our integration of Triumph, our divisions are performing well,” said John H. Short, Ph.D., RehabCare President and Chief Executive Officer.

“As expected, our 13 legacy hospitals reached a breakeven operating earnings run rate at the end of the quarter. Our legacy long-term acute care hospitals are experiencing significant improvements under Triumph’s operational model and leadership, including our Dallas hospital, which was accretive in the quarter. Triumph’s quarterly results primarily were impacted by continued soft acute care volumes in key markets; however, we are aggressively working to grow census and expect to achieve historical EBITDA (earnings before interest, taxes, depreciation and amortization) margins by the beginning of 2011 for the Triumph portfolio,” he said.

Dr. Short continued, “Our Skilled Nursing Rehabilitation Services (SRS) division delivered another strong quarterly earnings performance, while preparing for a host of regulatory changes. In addition to restrictions on concurrent therapy and new RUG IV payments that go into effect October 1, we also are facing a proposed 50% Multiple Procedure Payment Reduction (MPPR) for Part B therapy rates beginning in 2011. We are working with other patient advocates in encouraging the Centers for Medicare and Medicaid Services (CMS) to rescind their proposal due to its adverse impact on patient access to essential therapy services. At the same time, we are developing mitigation strategies should it be implemented. Our concerns with MPPR are outlined in our position paper, which we have posted on our website at http://www.rehabcare.com/about/news/index.html. Maintaining our SRS operating earnings margin outlook of 7% to 8% for the full year 2010, we are expecting a margin in the range of 5.5% to 6.5% in the fourth quarter.

“Finally, our Hospital Rehabilitation Services division is achieving high levels of profitability and gaining traction with business development strategies that were put in place earlier this year, signing four new contracts in the second quarter.”

Financial Overview of Second Quarter

Consolidated operating revenues for the second quarter of 2010 were $334.0 million, which included $110.8 million generated by Triumph, a 62.8% increase compared to $205.2 million in the 2009 second quarter.

Consolidated net earnings from continuing operations attributable to RehabCare were $14.7 million, or $0.59 per diluted share, in the second quarter of 2010 compared to $7.8 million, or $0.43 per diluted share, in the prior year quarter. The second quarter of 2010 was impacted by a $1.7 million unfavorable pretax adjustment for estimated prior year cost report settlements at one inpatient rehabilitation facility (IRF) and a $0.8 million income tax benefit, which resulted in a net negative after-tax impact on diluted earnings per share of $0.01 (see table on page 9).

Operating revenues in the Skilled Nursing Rehabilitation Services (SRS) division increased 5.7% from $123.8 million in the second quarter of 2009 to $130.9 million in the second quarter of 2010, driven by a 5.5% increase in the average number of contract therapy programs operated. Contract therapy same store revenues increased 3.4%.

On June 30, 2010, SRS operated in 1,115 locations compared to 1,125 locations at the end of the first quarter of 2010 and 1,065 locations at the end of the second quarter of 2009. With a backlog of 44 signed but unopened contracts at the end of the second quarter, the Company expects to resume net unit growth in the third quarter.

The SRS division’s operating earnings were $11.1 million, or 8.5% of revenue, compared to $9.1 million, or 7.4% of revenue, in the second quarter of 2009.

On July 16, CMS released an update to the skilled nursing facility (SNF) prospective payment system, which provides for a net increase of 1.7% in Rate Year (RY) 2011. The Company does not expect this update to alter its outlook. The SNF rule also contains the new RUG IV payment rates, which the Company does not believe will significantly impact its patient volumes.

The Hospital Rehabilitation Services (HRS) division’s 2010 second quarter operating revenues decreased 0.8% to $44.7 million from $45.1 million in the second quarter of 2009. Inpatient operating revenues declined 3.6% as a result of a 6.1% decline in the average number of inpatient programs. IRF same store revenues and discharges increased 2.3% and 0.7%, respectively, over the prior year quarter. Outpatient operating revenues increased 6.7% in the 2010 second quarter despite a 12.1% decline in the average number of outpatient programs. This was driven by a 21.4% improvement in average revenue per program inclusive of 7.0% same store growth in outpatient revenues.

At June 30, 2010, the division operated 106 IRF programs compared to 103 at the end of the first quarter and 111 a year ago. The division had four IRF openings, one IRF closing, one outpatient unit opening and signed contracts for three IRFs during the second quarter. At quarter end, the number of signed but unopened IRF contracts was two, compared to three at the end of the first quarter. A net one to two new IRF programs are expected for the second half of 2010.

HRS 2010 second quarter operating earnings were $7.9 million, or 17.6% of revenue, compared to operating earnings of $7.7 million, or 17.0% of revenue, for the 2009 second quarter. For the full year 2010, the Company is raising its outlook for operating earnings margins from a range of 15% to 17% to a range of 16% to 18%.

Operating revenues in the Hospital division for the second quarter of 2010 increased $0.7 million, or 0.4%, sequentially to $158.4 million. Same store revenues decreased 3.4% on a sequential basis, impacted by soft acute care volumes in key markets and an unfavorable $1.7 million adjustment for estimated prior year cost report settlements at one IRF.

The legacy hospitals generated an operating loss of $2.4 million in the 2010 second quarter compared to an operating loss of $1.0 million in the 2010 first quarter. The second quarter operating loss reflected the $1.7 million estimated adjustment referenced above and included $0.4 million in start-up losses for Greater Peoria Specialty Hospital.

Triumph HealthCare generated revenues of $110.8 million, operating earnings of $14.6 million and EBITDA of $18.5 million, or 16.7% of revenue, during the second quarter of 2010. For the full year, the Company expects Triumph to achieve an EBITDA margin of around 17%, with a return to historical EBITDA margins beginning in 2011. Expecting continued soft census in the second half of the year, compounded by long-term acute care hospital (LTACH) Medicare rate reductions, the Company is adjusting its 2010 Hospital outlook to a revenue range of $640 to $665 million, down from $650 to $675 million, and an EBITDA range of $85 to $95 million, down from $90 to $100 million.

At the end of the quarter, the Hospital division operated a total of 35 hospitals, including 29 LTACHs and six IRFs.

The final RY 2011 rule for LTACHs, published on July 30, will result in an estimated negative 1.0% adjustment for the Company’s LTACHs. The CMS self-executing rule for IRFs, released on July 16, will increase payments by an estimated net 2.4% for the Company’s owned IRFs. These adjustments are included in the Company’s revised 2010 outlook.

Balance Sheet and Liquidity

At June 30, 2010, the Company had $18.0 million in cash and cash equivalents and $452.3 million in outstanding debt excluding unamortized original issue discounts. Days sales outstanding (DSO) increased to 62.1 days from 61.8 days at March 31, 2010.

For the six months ended June 30, 2010, the Company generated cash from operations of $25.8 million and expended $15.7 million for capital expenditures, principally related to the start-up of Triumph Hospital-The Heights, companywide information systems and hospital facility maintenance capital.

Outlook

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

• The Skilled Nursing Rehabilitation Services division expects 7% to 8% operating earnings margins for the full year 2010, which will be driven by low to mid-single digit year-over-year same store revenue growth and net unit growth of 50 to 75 units. This reflects the estimated impact of new concurrent therapy rules, the rollout of new technologies, pricing pressures and wage rate increases during the year. Given these pressures, the division anticipates an operating earnings margin of 5.5% to 6.5% in the fourth quarter.
• The Hospital Rehabilitation Services division expects 16% to 18% operating earnings margins and 2% to 4% year-over-year growth in IRF same store discharges for the full year 2010. A net one to two new IRF programs are expected for the second half of 2010.
• The Hospital division expects total year revenue of $640 to $665 million and EBITDA of $85 to $95 million. As previously stated, the Company expects to achieve breakeven operating earnings in its 13 legacy hospitals for the full year 2010.
• The effective tax rate, after consideration of noncontrolling interests, is anticipated to be 38.25% for the remainder of the year.
• Net income attributable to noncontrolling interests is expected to approximate $2.5 million for the total year 2010.
• The Company expects strong operating cash flow with DSO between 60 and 63 days.
• Capital expenditures are anticipated to be $32 million in 2010, consisting of $12.5 million of information systems investments and $19.5 million in expansion projects and maintenance.

Conference Call Information

RehabCare will host a conference call on August 4, 2010, beginning at 10:00 AM Eastern time. Listeners may access the call by dialing (800) 640-9765, confirmation number 27202042, or in a listen-only mode through the Company’s website at http://www.rehabcare.com/about/investors/webcast.html. A replay of the call will be available beginning at approximately 3:00 PM Eastern Time on August 4 by dialing (877) 213-9653, confirmation number 27202042. An online archive of the conference call will remain on the Company’s website through September 3, 2010.

About RehabCare Group

Established in 1982 and headquartered in St. Louis, MO, RehabCare (www.rehabcare.com) is a leading provider of post-acute care, owning and operating 35 long-term acute care and rehabilitation hospitals and providing program management services in partnership with over 1,260 hospitals and skilled nursing facilities in 42 states. RehabCare is included in the Russell 2000 and Standard and Poor’s Small Cap 600 Indices.

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 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 because of changes in underlying factors, new information, future events or otherwise.

This press release contains non-GAAP financial measures as such term is defined in Regulation G under the rules of the Securities and Exchange Commission. While the Company believes these non-GAAP financial measures are useful in evaluating the Company, this information should be considered as supplemental in nature and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. Further, these non-GAAP financial measures may differ from similarly titled measures presented by other companies. The Company has included reconciliations of these non-GAAP measures to the most directly comparable GAAP measure in the tables of this release.

 

I. Condensed Consolidated Statements of Earnings

(Unaudited; amounts in thousands, except per share data)                     Three Months Ended Six Months Ended June 30, Mar. 31, June 30, June 30, June 30, 2010 2010 2009 2010 2009   Operating revenues $ 334,033 $ 327,361 $ 205,164 661,394 406,695 Costs and expenses: Operating 267,299 261,070 163,562 528,369 322,853 Selling, general and administrative 27,814 26,535 24,987 54,349 49,068 Depreciation and amortization   7,642     7,280     3,783   14,922   7,652   Total costs and expenses   302,755     294,885     192,332   597,640   379,573     Operating earnings 31,278 32,476 12,832 63,754 27,122   Interest income 28 18 4 46 19 Interest expense (8,551 ) (8,500 ) (549 ) (17,051 ) (1,121 ) Other income (expense), net (5 ) 7 — 2 1 Equity in net income of affiliates   211     116     108   327   274     Earnings from continuing operations before income taxes 22,961 24,117 12,395 47,078 26,295 Income tax expense   7,744     9,288     4,965   17,032   10,468   Earnings from continuing operations 15,217 14,829 7,430 30,046 15,827 Loss from discontinued operations   —     —     (882 ) —   (831 ) Net earnings 15,217 14,829 6,548 30,046 14,996 Net (earnings) loss attributable to noncontrolling interests   (512 )   164     335   (348 ) 547   Net earnings attributable to RehabCare $ 14,705   $ 14,993   $ 6,883   29,698   15,543     Amounts attributable to RehabCare: Earnings from continuing operations $ 14,705 $ 14,993 $ 7,765 29,698 16,374 Loss from discontinued operations   —     —     (882 ) —   (831 ) Net earnings $ 14,705   $ 14,993   $ 6,883   29,698   15,543     Diluted EPS attributable to RehabCare: Earnings from continuing operations $ 0.59 $ 0.61 $ 0.43 1.20 0.91 Loss from discontinued operations   —     —     (0.05 ) —   (0.04 ) Net earnings $ 0.59   $ 0.61   $ 0.38   1.20   0.87     Weighted average diluted shares 24,766 24,655 18,097 24,696 17,955  

II. Condensed Consolidated Balance Sheets

(Amounts in thousands)         Unaudited June 30, December 31, 2010 2009 Assets Cash and cash equivalents $ 18,041 $ 24,690 Accounts receivable, net 218,084 199,447 Deferred tax assets 20,092 21,249 Other current assets   25,592   19,530 Total current assets 281,809 264,916   Property and equipment, net 117,155 111,814 Goodwill 566,078 566,078 Intangible assets 131,151 135,406 Investment in unconsolidated affiliate 4,829 4,761 Other assets   25,765   27,005 $ 1,126,787 $ 1,109,980 Liabilities & Equity Current portion of long-term debt $ 13,565 $ 7,507 Payables & accruals   142,826   144,113 Total current liabilities 156,391 151,620   Long-term debt, less current portion 430,479 447,760 Other non-current liabilities 52,826 50,980 Stockholders’ equity 467,995 437,338 Noncontrolling interests   19,096   22,282 $ 1,126,787 $ 1,109,980  

III. Condensed Consolidated Statements of Cash Flows

(Unaudited; amounts in thousands)     Six Months Ended June 30, 2010     2009   Net cash provided by operating activities $ 25,793 $ 27,077 Net cash used in investing activities (15,690 ) (6,866 ) Net cash used in financing activities   (16,752 )   (23,999 )   Net decrease in cash and cash equivalents (6,649 ) (3,788 ) Cash and cash equivalents at beginning of period   24,690     27,373   Cash and cash equivalents at end of period $ 18,041   $ 23,585      

Supplemental information:

Additions to property and equipment $ (15,658 ) $ (5,881 )  

IV. Operating Statistics (Unaudited; dollars in thousands)

                    Second First Second Six Months Ended Quarter Quarter Quarter June 30, 2010 2010 2009 2010 2009

Skilled Nursing Rehabilitation Services

Operating revenues $ 130,851 $ 126,352 $ 123,787 $ 257,203 $ 246,935 Operating expenses 105,655 103,333 100,134 208,988 199,132 Selling, general and administrative 12,717 11,367 12,967 24,084 24,984 Depreciation and amortization   1,365     1,307     1,578     2,672     3,256   Operating earnings $ 11,114 $ 10,345 $ 9,108 $ 21,459 $ 19,563 Operating earnings margin 8.5 % 8.2 % 7.4 % 8.3 % 7.9 %   EBITDA $ 12,479 $ 11,652 $ 10,686 $ 24,131 $ 22,819   Average number of contract therapy locations 1,127 1,131 1,068 1,129 1,071 End of period number of contract therapy locations 1,115 1,125 1,065 1,115 1,065   Patient visits (in thousands) 2,080 2,020 2,017 4,100 4,022    

Hospital Rehabilitation Services

Operating revenues Inpatient Rehabilitation Facility (IRF) $ 29,609 $ 29,016 $ 31,257 $ 58,625 $ 61,275 Subacute   2,125     2,094     1,662     4,219     3,387   Total Inpatient $ 31,734 $ 31,110 $ 32,919 $ 62,844 $ 64,662 Outpatient   13,000     12,130     12,178     25,130     23,501   Total HRS $ 44,734 $ 43,240 $ 45,097 $ 87,974 $ 88,163 Operating expenses 31,856 31,155 31,007 63,011 61,641 Selling, general and administrative 4,445 4,627 5,806 9,072 11,296 Depreciation and amortization   556     537     624     1,093     1,270   Operating earnings $ 7,877 $ 6,921 $ 7,660 $ 14,798 $ 13,956 Operating earnings margin 17.6 % 16.0 % 17.0 % 16.8 % 15.8 %   EBITDA $ 8,433 $ 7,458 $ 8,284 $ 15,891 $ 15,226   Average number of programs IRF 104 104 113 104 113 Subacute   10     10     9     10     9   Total Inpatient 114 114 122 114 122 Outpatient   32     31     36     31     36   Total HRS 146 145 158 145 158   End of period number of programs IRF 106 103 111 106 111 Subacute   10     10     9     10     9   Total Inpatient 116 113 120 116 120 Outpatient   32     31     36     32     36   Total HRS 148 144 156 148 156   IRF discharges 10,376 10,007 11,359 20,383 22,358 Outpatient visits (in thousands) 279 262 328 541 639  

IV. Operating Statistics Continued (Unaudited; dollars in thousands)

                    Second First Second Six Months Ended Quarter Quarter Quarter June 30, 2010 2010 2009 2010 2009

Hospitals

Operating revenues $ 158,448 $ 157,769 $ 36,280 $ 316,217 $ 71,597 Operating expenses 129,788 126,582 32,421 256,370 62,080 Selling, general and administrative 10,652 10,541 6,079 21,193 12,534 Depreciation and amortization   5,721     5,436     1,581     11,157     3,126   Operating earnings (loss) $ 12,287 $ 15,210 $ (3,801 ) $ 27,497 $ (6,143 ) Operating earnings margin 7.8 % 9.6 % -10.5 % 8.7 % -8.6 %   EBITDA $ 18,008 $ 20,646 $ (2,220 ) $ 38,654 $ (3,017 )  

LTACHs

Number of hospitals – end of period 29 28 6 29 6 Available licensed beds – end of period 1,605 1,593 303 1,605 303 Admissions 3,522 3,563 521 7,085 1,037 Patient days 92,857 90,455 14,586 183,312 28,430 Average length of stay (Medicare days only) 26 27 28 26 27 Net inpatient revenue per patient day $ 1,514 $ 1,518 $ 1,181 $ 1,516 $ 1,214 Occupancy rate 64 % 63 % 66 % 63 % 65 % Percent patient days - Medicare 72 % 73 % 76 % 73 % 75 %  

IRFs

Number of hospitals – end of period 6 6 6 6 6 Available licensed beds – end of period 243 243 243 243 243 Admissions 1,157 1,232 1,238 2,389 2,448 Discharges 1,197 1,188 1,252 2,385 2,400 Average length of stay (Medicare days only) 12 13 12 13 12 Net inpatient revenue per discharge (a) $ 12,718 $ 14,845 $ 13,687 $ 13,777 $ 13,926 Occupancy rate 69 % 73 % 71 % 71 % 70 % Percent patient days - Medicare 62 % 66 % 67 % 64 % 65 %   (a) Excluding a $1.7 million unfavorable prior year cost report adjustment recorded during the second quarter of 2010 for one of the Company’s IRFs, net inpatient revenue per discharge for IRFs would have been $14,134 and $14,488 for the second quarter and first six months of 2010, respectively.  

V. Charges/Credits Included in Statement of Earnings

(Amounts in thousands, except per share data)             Second Quarter 2010  

Pre-Tax

Impact

After-Tax

Impact

Diluted

EPS

Unfavorable cost report adjustment $ 1,696 $ 1,047 $ 0.04 Favorable income tax adjustments   —   (842 )   (0.03 ) $ 1,696 $ 205   $ 0.01    

VI. Operating Earnings and EBITDA Reconciliation

                    Second First Second Six Months Ended Quarter Quarter Quarter June 30, 2010 2010 2009 2010 2009   Net earnings $ 15,217 $ 14,829 $ 6,548 $ 30,046 $ 14,996 Income tax expense 7,744 9,288 4,965 17,032 10,468 Interest income (28 ) (18 ) (4 ) (46 ) (19 ) Interest expense 8,551 8,500 549 17,051 1,121 Other (income) expense, net 5 (7 ) — (2 ) (1 ) Equity in net income of affiliates (211 ) (116 ) (108 ) (327 ) (274 ) Loss from discontinued operations   —     —     882     —     831   Operating earnings 31,278 32,476 12,832 63,754 27,122 Depreciation and amortization   7,642     7,280     3,783     14,922     7,652   Consolidated EBITDA $ 38,920 $ 39,756 $ 16,615 $ 78,676 $ 34,774       SRS operating earnings $ 11,114 $ 10,345 $ 9,108 $ 21,459 $ 19,563 SRS depreciation and amortization   1,365     1,307     1,578     2,672     3,256   SRS EBITDA $ 12,479 $ 11,652 $ 10,686 $ 24,131 $ 22,819     HRS operating earnings $ 7,877 $ 6,921 $ 7,660 $ 14,798 $ 13,956 HRS depreciation and amortization   556     537     624     1,093     1,270   HRS EBITDA $ 8,433 $ 7,458 $ 8,284 $ 15,891 $ 15,226     Hospital operating earnings (loss) $ 12,287 $ 15,210 $ (3,801 ) $ 27,497 $ (6,143 ) Hospital depreciation and amortization   5,721     5,436     1,581     11,157     3,126   Hospital EBITDA $ 18,008 $ 20,646 $ (2,220 ) $ 38,654 $ (3,017 )