RehabCare third quarter operating revenue increases 64.7% to $342.7 million

Nov 3 2010

RehabCare Group, Inc. (NYSE:RHB) today reported the following financial results.

“Our contract services divisions had a repeat performance of solid earnings”

(a) During the 2010 second quarter, the Company recorded a $1.7 million unfavorable pretax revenue 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 $0.8 million after-tax loss from discontinued operations in the first nine months of 2009 included a $0.7 million loss on the sale of the Company's Phase 2 Consulting business on June 1, 2009.

Management Comments

John H. Short, Ph.D, RehabCare President and Chief Executive Officer, commented, "While we are pleased that our legacy RehabCare hospitals exceeded expectations in the third quarter, we are focused on improving operations in underperforming Triumph hospitals. Key performance indicators of our combined operations are trending up, and we continue to expand our post-acute continuum of care through growth opportunities in select markets, two of which we are announcing today."

"Our contract services divisions had a repeat performance of solid earnings," Dr. Short said. "In our Skilled Nursing Rehabilitation Services division, we successfully reduced our percentage of patients being treated concurrently to 5% by the end of the third quarter, in advance of new concurrent therapy rules that went into effect October 1. Similar to the transition to PPS, the complex changes associated with MDS 3.0 and RUGs IV have caused some chaos in the skilled nursing facility market which will negatively impact margins in the fourth quarter."

Financial Overview of Third Quarter

Consolidated operating revenues for the third quarter of 2010 were $342.7 million, which included $111.5 million generated by Triumph, a 64.7% increase compared to $208.0 million in the 2009 third quarter. Excluding Triumph, revenues increased $23.2 million, or 11.1%.

Consolidated net earnings from continuing operations attributable to RehabCare were $15.7 million, or $0.64 per diluted share, in the third quarter of 2010 compared to $6.8 million, or $0.37 per diluted share, in the prior year quarter. Earnings in the third quarter of 2009 included $2.2 million of pretax external merger and acquisition-related expenses, or $0.07 per diluted share after tax.

Operating revenues in the Skilled Nursing Rehabilitation Services (SRS) division increased 6.2% from $123.4 million in the third quarter of 2009 to $130.9 million in the third quarter of 2010, driven by a 4.3% increase in the average number of contract therapy programs operated. Contract therapy same store revenues increased 3.4%. Operating earnings were $10.4 million, or 7.9% of revenue, compared to $9.8 million, or 8.0% of revenue, in the third quarter of 2009.

On September 30, 2010, SRS operated in 1,131 locations compared to 1,115 locations at the end of the second quarter of 2010 and 1,098 locations at the end of the third quarter of 2009. SRS had 20 signed but unopened contracts at the end of the third quarter. Openings and closings in the quarter totaled 67 and 51, respectively, resulting in a net 16 additional units. Accordingly, the Company is revising its outlook for the full year 2010 from a net 50 to 75 new units to a net 10 to 20 new units.

The physician fee schedule and Medicare Part B therapy cap exceptions process are scheduled to expire on November 30 and December 31, 2010, respectively. Congress may extend both provisions, but due to the uncertainty of the mid-term elections, it is unclear as to whether this will occur before their deadlines. A decision on implementation of the Multiple Procedure Payment Reduction rule should be forthcoming soon.

The Hospital Rehabilitation Services (HRS) division's 2010 third quarter operating revenues increased 1.2% to $45.6 million from $45.0 million in the third quarter of 2009. Inpatient operating revenues declined 1.0% as a result of a 2.6% decline in the average number of inpatient programs. Inpatient rehabilitation facility (IRF) same store revenues and discharges increased 3.3% and 4.7%, respectively, over the prior year quarter. Outpatient operating revenues increased 7.3% in the 2010 third quarter despite a 12.1% decline in the average number of outpatient programs. This was driven by a 22.2% improvement in average revenue per program including 8.0% same store growth in outpatient revenues. Operating earnings were $8.5 million, or 18.7% of revenue, compared to operating earnings of $8.2 million, or 18.2% of revenue, for the 2009 third quarter.

At September 30, 2010, the division operated 106 IRF programs, flat sequentially and down four from a year ago. The division had one IRF opening and one IRF closing, one subacute opening and two outpatient unit closings during the third quarter. At quarter end, the number of signed but unopened contracts was six, including three IRFs. The Company anticipates a net one to two new IRF programs for the fourth quarter.

Operating revenues in the Hospital division for the third quarter of 2010 increased $7.7 million, or 4.9%, sequentially to $166.2 million. Same store revenues increased $6.1 million, or 3.9% on a sequential basis, which included a second quarter unfavorable $1.7 million adjustment for estimated prior year cost report settlements at one IRF. Including this adjustment, the legacy RehabCare hospitals improved operating earnings by $5.2 million sequentially, a net improvement of $3.5 million.

Triumph generated revenues of $111.5 million, operating earnings of $12.9 million and EBITDA (earnings before interest, taxes, depreciation and amortization) of $16.9 million, or 15.2% of revenue, a sequential 1.5 percentage point decline, during the third quarter of 2010. The sequential decline primarily was related to operational issues at four hospitals. In addition, the progress of start-ups in Philadelphia and Houston Heights has been markedly slower than anticipated. Volumes increased, supported by the introduction of new clinical programs at several hospitals, and costs per patient day were reduced during the quarter.

At the end of the quarter, the Hospital division operated a total of 35 hospitals, including 29 long-term acute care hospitals (LTACHs) and six IRFs.

New Hospital Projects

Mishawaka, IN: RehabCare has signed a letter of intent with Saint Joseph Regional Medical Center in Mishawaka, IN, to form a joint venture that will own and operate Saint Joseph Rehabilitation Institute, with RehabCare acquiring a majority interest. The 40-bed IRF, now managed under an interim agreement by RehabCare, opened in December 2009 as an off-campus, distinct part unit of the acute care hospital. The joint venture partnership will seek to license and certify the facility as a freestanding IRF. RehabCare's market presence also includes Triumph Hospital Our Lady of Peace, a 32-bed LTACH located on an additional campus of Saint Joseph's. The Company expects to close on the agreement in the first quarter of 2011.

Houston, TX: RehabCare is developing a 46-bed IRF in northeast Houston. Scheduled for completion by the beginning of 2012, RehabCare will lease the approximately 56,000 square foot facility, which will feature all private patient rooms and state-of-the art therapy technologies. The RehabCare Houston market currently consists of 10 LTACHs, one owned IRF, one managed IRF and 27 skilled nursing facility programs.

Balance Sheet and Liquidity

At September 30, 2010, the Company had $22.5 million in cash and cash equivalents and $421.1 million in outstanding debt excluding unamortized original issue discounts. The Company has paid down debt by $43.0 million since the beginning of the year. Days sales outstanding (DSO) decreased sequentially to 61.9 days from 62.1 days.

For the nine months ended September 30, 2010, the Company generated cash from operations of $68.7 million and expended $23.5 million for capital expenditures, principally related to the start-up of Triumph hospitals in Philadelphia and Houston, upgraded services at several hospitals, 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 fourth quarter of 2010:

• The Skilled Nursing Rehabilitation Services division expects 5.5% to 6.5% operating earnings margins and relatively flat unit growth in the fourth quarter. This outlook reflects the estimated impact of regulatory changes and the rollout of new information system technologies.
• The Hospital Rehabilitation Services division expects 16% to 18% operating earnings margins, 2% to 4% year-over-year growth in IRF same store discharges and a net one to two new IRF programs for the fourth quarter.
• The Hospital division, which includes both the legacy RehabCare and Triumph hospitals, expects combined fourth quarter revenue of $163 to $168 million and an EBITDA margin of approximately 14%.
• The effective tax rate, after consideration of noncontrolling interests, is anticipated to be 38.25% for the remainder of the year.
• The Company continues to expect DSO between 60 and 63 days.
• Capital expenditures in the fourth quarter are anticipated to be $9 million, consisting of information systems investments, expansion projects and maintenance.