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.
“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”
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.
Unclear responsibilities hinder oral health care in nursing homes