RehabCare Reports Second Quarter 2009 Results

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

"We were pleased to again deliver a solid quarter of top and bottom line improvement over the prior year. Our Skilled Nursing Rehabilitation Services (SRS) and Hospital Rehabilitation Services (HRS) divisions continued to generate healthy revenue growth and operating cash flow and achieved profit margins in line with our 2009 outlook,” said John H. Short, Ph.D., RehabCare President and Chief Executive Officer.

"The momentum of our Hospital operations was disrupted in the second quarter by softer performance at certain hospitals. However, we remain focused on implementing strategies for success in each of our hospital markets and anticipate the division will continue to respond with improved results in areas not meeting our expectations,” said Dr. Short. "At the same time, we continue to evaluate opportunities to grow the division. On June 30, we announced our joint venture ownership of Dallas LTAC Hospital, which moves us one step closer to achieving greater efficiencies and economies of scale within our hospital operations.”

Financial Overview of Second Quarter

Consolidated operating revenues for the second quarter of 2009 were $205.2 million, a 12.8% increase compared to $181.9 million in the 2008 second quarter.

Net earnings from continuing operations for the second quarter of 2009 were $7.4 million compared to $4.0 million in the 2008 second quarter. Diluted earnings per share attributable to RehabCare from continuing operations for the second quarter of 2009 were $0.43 compared to $0.26 in the second quarter of 2008.

Consolidated net earnings attributable to RehabCare were $6.9 million, or $0.38 per diluted share, in the second quarter of 2009 compared to $4.5 million, or $0.25 per diluted share, in the prior year quarter. 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.

Operating revenues in the Skilled Nursing Rehabilitation Services division increased 8.1% from $114.5 million in the second quarter of 2008 to $123.8 million in the second quarter of 2009, primarily the result of a contract therapy same store revenue increase of 9.1%. On June 30, 2009, SRS operated in 1,065 contract therapy locations compared to 1,053 locations at the end of the second quarter of 2008 and 1,063 locations at the end of the first quarter of 2009. The Company signed 44 new contracts in the second quarter of 2009 compared to 46 in the second quarter of 2008.

The SRS division’s operating earnings were $9.1 million, or 7.4% of revenue, compared to $6.2 million, or 5.4% of revenue, in the second quarter of 2008. The 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 second quarter 2009 operating revenues increased 12.1% to $45.1 million, compared to $40.2 million in the second quarter of 2008. Inpatient operating revenues improved 10.2% and inpatient rehabilitation facility (IRF) same store discharges increased 5.9% compared to second quarter 2008. The average number of inpatient programs increased by 1.3% and the average revenue per program increased 8.8% due to an improvement in IRF-subacute contract mix. Outpatient operating revenues increased 17.7% as the average number of programs increased by 9.1% and same store revenues increased 12.4%.

At June 30, 2009, HRS operated 156 programs compared to 154 at the end of the second quarter of 2008 and 158 programs at the end of the first quarter of 2009. The division operated 111 IRF programs at the end of the 2009 second quarter compared to 113 at the beginning of the quarter and 107 a year ago. The division had two IRF openings and four closings during the second quarter and two signed but unopened IRF contracts at June 30.

HRS operating earnings increased by $2.3 million to $7.7 million, or 17.0% of revenue, in the second quarter of 2009 compared to $5.3 million, or 13.2% of revenue, in the 2008 second quarter. The higher average number of IRF programs, increased revenue per program and strong same store growth contributed to year-over-year revenue and earnings improvement in the second quarter of 2009.

Operating revenues in the Hospital division for the second quarter of 2009 increased 2.7% sequentially to $36.3 million and same store discharges increased 10.3%. The division incurred an operating loss of $3.8 million in the second quarter of 2009 compared to an operating loss of $2.3 million in the first quarter of 2009. The $1.5 million sequential increase in operating losses was primarily due to lower revenue per patient day, a result of decreased case-mix index and higher unfunded days at certain hospitals and limiting admissions to achieve compliance with the 60% Rule in two of the Company’s IRFs.

With the acquisition of Dallas LTAC Hospital on June 30 and the opening of Greater Peoria Specialty Hospital on August 4, the division currently operates a total of 13 hospitals, including six IRFs and seven long-term acute care hospitals (LTACHs).

Balance Sheet and Liquidity

At June 30, 2009, the Company had approximately $23.6 million in cash and cash equivalents and $32.7 million in outstanding debt. Net debt (outstanding debt less cash and cash equivalents) stood at $9.1 million at June 30, 2009 compared to $18.8 million at the end of the first quarter of 2009. Days sales outstanding decreased to 60.9 days at June 30, 2009 from 63.9 days at March 31, 2009.

For the six months ended June 30, 2009, the Company generated cash from operations of $27.1 million and expended approximately $5.9 million for capital expenditures, principally related to information systems and equipment for the start-up of Greater Peoria Specialty Hospital.

Legislative Update

While post-acute bundling generated considerable debate during the first quarter, the focus today is on whether Congress will reach agreement on a health reform package. The Company remains actively engaged in the healthcare debate and cautiously optimistic that a bill will surface before year end that would include both a physician fee schedule fix and an extension of the Part B Therapy Cap exception process, which expires December 31.

On July 31, the Centers for Medicare and Medicaid Services released final rules for FY2010 Medicare reimbursement. The Company estimates a net 2.8% rate increase for its freestanding IRFs and a 1.4% net increase for its LTACHs. The net 1.1% decrease for Skilled Nursing Facilities (SNFs) will likely result in some downward pricing pressure in the Company’s SRS division.

Outlook

The Company will not be providing revenue and earnings per share guidance for 2009, but provides the following outlook, which takes into consideration the July 31 final Medicare rules:

• The Company anticipates strong consolidated revenue and net earnings growth for the full year 2009.
• The Skilled Nursing Rehabilitation Services division expects 6.5% - 7.5% operating earnings margins for the remainder of 2009, driven by 6% - 8% year-over-year same store revenue growth. The division also expects flat to modest unit growth in 2009.
• The Hospital Rehabilitation Services division expects 15% - 17% operating earnings margin and flat unit growth for the remainder of 2009. The division also anticipates 3% - 5% year-over-year growth in IRF same store discharges in 2009.
• The Hospital division expects total year operating losses of $12.5 - $14.0 million, which includes approximately $3.0 million in merger and acquisition related costs. For full year 2009, revenue is expected to be $155 - $165 million, driven by strong growth in mature and de novo hospitals, including the new LTACH in Dallas. The Company continues to expect breakeven operating earnings run rate by the end of the first half of 2010.
• The effective tax rate is anticipated to approximate 39% for 2009 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 $6.0 million for the remainder of 2009, principally related to information systems investments.

Conclusion

"Our SRS and HRS colleagues are to be commended for an exceptional first half of the year. We are well positioned to deliver on our revenue and earnings outlook for 2009 in both divisions. I also want to recognize our Hospital division colleagues for their efforts to improve performance and for the progress we have made so far,” said Dr. Short.

"We are focused on providing greater value to each of our stakeholders during tough economic times and uncertainty surrounding healthcare reform.”

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 1,200 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 August 6, 2009, beginning at 10:00 AM Eastern time. Listeners may access the call by dialing (800) 640-9765, confirmation number 24844748, 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 noon Eastern Time tomorrow by dialing (877) 213-9653, confirmation number 24844748. An online archive of the conference call will remain on the Company’s website for at least 21 days after the call.

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.