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Rehabcare Group 10-Q 2010 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
OR
Commission file number 001-14655
RehabCare Group, Inc.
7733 Forsyth Boulevard, 23rd Floor, St. Louis, Missouri 63105
(Address of principal executive offices and zip code)
(800) 677-1238
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of October 31, 2010, there were 24,935,730 outstanding shares of the registrant’s common stock.
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REHABCARE GROUP, INC.
Index
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PART 1. – FINANCIAL INFORMATION
Item 1. – Condensed Consolidated Financial Statements
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Earnings
(Unaudited; amounts in thousands, except per share data)
See accompanying notes to condensed consolidated financial statements.
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Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data)
See accompanying notes to condensed consolidated financial statements.
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Condensed Consolidated Statements of Comprehensive Income
(Unaudited; amounts in thousands)
See accompanying notes to condensed consolidated financial statements.
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REHABCARE GROUP, INC.
Condensed Consolidated Statement of Changes in Equity
(Unaudited; amounts in thousands)
See accompanying notes to condensed consolidated financial statements.
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REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited; amounts in thousands)
See accompanying notes to condensed consolidated financial statements.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements
Nine Month Periods Ended September 30, 2010 and 2009
(Unaudited)
The condensed consolidated financial statements contained in this Form 10-Q, which are unaudited, include the accounts of RehabCare Group, Inc. (“RehabCare” or “the Company”) and its wholly and majority owned affiliates. The Company accounts for its investments in less than 50% owned affiliates using the equity method. All significant intercompany accounts and activity have been eliminated in consolidation. The results of operations for the three months and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the fiscal year.
Certain prior year amounts have been reclassified to conform to current year presentation. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. In the opinion of management, all entries necessary for a fair presentation have been included. Reference is made to the Company’s audited consolidated financial statements and the related notes as of December 31, 2009 and 2008 and for each of the years in the three-year period ended December 31, 2009, included in the Annual Report on Form 10-K on file with the Securities and Exchange Commission, which provide additional disclosures and a further description of the Company’s accounting policies.
The preparation of the consolidated financial statements in conformity with GAAP requires management to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the Company’s 2009 Annual Report on Form 10-K, filed on March 8, 2010.
GAAP requires the recognition of compensation expense for all share-based compensation awarded to employees, net of estimated forfeitures, using a fair-value-based method. Under GAAP, the grant-date fair value of each award is amortized to expense over the award’s vesting period. Compensation expense associated with share-based awards is included in selling, general and administrative expense in the accompanying consolidated statements of earnings. Total pre-tax compensation expense and its related income tax benefit were as follows (in thousands of dollars):
The Company has various incentive plans that provide long-term incentive and retention awards. These awards include stock options and restricted stock awards. At September 30, 2010, a total of approximately 2.2 million shares were available for future issuance under the plans.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
Stock Options
No stock options were granted during the nine months ended September 30, 2010 and 2009. As of September 30, 2010, there were 620,353 stock options outstanding, all of which are exercisable.
Restricted Stock Awards
In 2006, the Company began issuing restricted stock awards to attract and retain key Company executives. Nearly all of the awards will vest and be transferred to the participant at the end of a three-year restriction period provided that the participant has been an employee of the Company continuously throughout the restriction period. In 2007, the Company also began issuing restricted stock awards to its nonemployee directors. Such awards generally vest each quarter over the first four quarters following the date of grant.
The Company’s restricted stock awards have been classified as equity awards under GAAP. New shares of common stock are issued to satisfy restricted stock award vestings. The Company generally receives a tax deduction for each restricted stock award equal to the fair market value of the restricted stock award on the award’s vesting date. Upon vesting, the Company may withhold shares with value equivalent to the minimum statutory withholding tax obligation and then remit cash to the appropriate taxing authorities. The shares withheld are effectively share repurchases by the Company as they reduce the number of shares that would have otherwise been issued as a result of the vesting.
A summary of the status of the Company’s nonvested restricted stock awards as of September 30, 2010 and changes during the nine-month period ended September 30, 2010 is presented below:
As of September 30, 2010, there was approximately $4.0 million of unrecognized compensation cost related to nonvested restricted stock awards. Such cost is expected to be recognized over a weighted-average period of 1.9 years.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
Basic earnings per share excludes dilution and is computed by dividing income available to RehabCare common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (as calculated utilizing the treasury stock method). These potential shares include dilutive stock options and unvested restricted stock awards.
The following table sets forth the computation of basic and diluted earnings per share attributable to RehabCare stockholders (in thousands, except per share data). The net earnings amounts presented below exclude income and losses attributable to noncontrolling interests in consolidated subsidiaries.
For the three months and nine months ended September 30, 2010, outstanding stock options totaling approximately 565,000 and 162,000 potential shares, respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. For the three months and nine months ended September 30, 2009, outstanding stock options totaling approximately 350,000 and 808,000 potential shares, respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The Company maintains a 40% equity interest in Howard Regional Specialty Care, LLC (“HRSC”), which operates a freestanding rehabilitation hospital in Kokomo, Indiana. The Company uses the equity method to account for its investment in HRSC. The Company’s initial investment in HRSC exceeded the Company’s share of the book value of HRSC’s stockholders’ equity by approximately $3.5 million. This excess is being accounted for as equity method goodwill. The carrying value of the Company’s investment in HRSC was approximately $4.9 million and $4.8 million at September 30, 2010 and December 31, 2009, respectively.
Effective November 24, 2009, the Company acquired all of the outstanding common stock of Triumph HealthCare Holdings, Inc. (“Triumph”) for a total purchase price of approximately $538.5 million, which includes a favorable purchase price adjustment of $5.7 million based on acquired working capital levels as defined in the stock purchase agreement. The seller has disputed the Company’s calculation of the $5.7 million adjustment for acquired working capital levels. Pursuant to the stock purchase agreement, both parties are currently in the process of submitting this issue to arbitration. A final arbitration hearing has been set for mid-December 2010. At the acquisition date, Triumph operated 20 long-term acute care hospitals (“LTACHs”) in seven states. In connection with this transaction, the Company recorded acquisition-related expenses of approximately $0.1 million and $0.4 million in the nine months ended September 30, 2010 and 2009, respectively. Acquisition-related expenses are included in selling, general and administrative expenses in the Company’s consolidated statements of earnings.
Triumph’s results of operations have been included in the Company’s financial statements prospectively beginning after the date of acquisition. The Company’s statements of earnings for three months and nine months ended September 30, 2010 include operating revenues of approximately $111.5 million and $334.9 million, respectively, and operating earnings of approximately $12.9 million and $43.7 million, respectively, related to Triumph’s hospitals. The following pro forma information assumes the Triumph acquisition had occurred at the beginning of each period presented. Such results have been prepared by adjusting the historical Company results to include Triumph’s results of operations, amortization of acquired finite-lived intangibles and incremental interest related to acquisition debt. The pro forma results do not include any cost savings that may result from the combination of the Company’s and Triumph’s operations. The pro forma results may not necessarily reflect the consolidated operations that would have existed had the acquisition been completed at the beginning of such periods nor are they necessarily indicative of future results. Amounts are in thousands of dollars.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
At September 30, 2010 and December 31, 2009, the Company had the following intangible asset balances (in thousands):
Certain customer contracts and lease arrangements have contractual provisions that enable renewal or extension of the asset's contractual life. Costs incurred to renew or extend the term of a recognized intangible asset are expensed in the period incurred.
Amortization expense incurred by continuing operations was approximately $1,996,000 and $983,000 for the three months ended September 30, 2010 and 2009, respectively, and $6,251,000 and $2,972,000 for the nine months ended September 30, 2010 and 2009, respectively.
There were no changes to the carrying amount of goodwill during the nine months ended September 30, 2010.
Effective June 1, 2009, the Company completed the sale of all the outstanding common stock of Phase 2 Consulting, Inc. (“Phase 2”) to Premier, Inc. for approximately $5.5 million. This transaction allows the Company’s management to focus on its core businesses. Phase 2 provides management and economic consulting services to the healthcare industry and had been a subsidiary of the Company since it was acquired in 2004. In connection with this transaction, the Company recognized a pre-tax loss related to the disposal of the Phase 2 business of approximately $1.2 million in the second quarter of 2009.
Phase 2 was classified as a discontinued operation pursuant to GAAP. The operating results for this discontinued operation are shown in the following table (in thousands):
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
Effective August 30, 2008, the Company completed the sale of equipment, goodwill, other intangible assets and certain related assets associated with an inpatient rehabilitation hospital located in Midland, Texas (the “Midland hospital”) to HealthSouth Corporation for approximately $7.2 million less direct selling costs. This transaction was the result of a strategic review of the Midland-Odessa market. The Midland hospital was classified as a discontinued operation pursuant to GAAP. The operating results for this discontinued operation are shown in the table below (in thousands):
On November 24, 2009, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent and collateral agent, and Banc of America Securities LLC, RBC Capital Markets and BNP Paribas Securities Corp., as joint lead arrangers. The Credit Agreement provides for a six-year $450 million term loan facility, a five-year revolving credit facility of $125 million and a swingline subfacility of up to $25 million. The Company used the proceeds of the term loan facility and approximately $22 million in borrowings under the revolving credit facility to pay a portion of the consideration for its acquisition of Triumph.
Borrowings under the $125 million revolving credit facility bear interest at the Company’s option at either a base rate or the London Interbank Offering Rate (“LIBOR”) for one, two, three or six month interest periods, or a nine or twelve month period if available, plus an applicable margin percentage. The base rate is the greater of the federal funds rate plus one-half of 1%, Bank of America N.A.’s prime rate or one month LIBOR plus 1%. As of September 30, 2010, the balance outstanding under the revolving credit facility was $2.5 million and the interest rate on such borrowings was 6.0%.
The term loan facility requires quarterly installments of $1,125,000 with the balance payable upon the final maturity. In addition, the Company is required to make mandatory principal prepayments equal to a portion of its consolidated excess cash flow (as defined in the Credit Agreement) when its consolidated leverage ratio reaches certain levels. Borrowings under the term loan facility bear interest at either the base rate plus 300 basis points or LIBOR plus 400 basis points with a LIBOR floor of 200 basis points. As of September 30, 2010, the interest rate under the term loan facility was 6.0% and the balance outstanding under the term loan was $406.6 million, which excludes unamortized original issue discount of $7.9 million.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The Credit Agreement is collateralized by substantially all of the Company’s assets. The Credit Agreement contains certain restrictive covenants that, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances and other matters customarily restricted in similar credit facilities. In addition, the Company is required to maintain a maximum ratio of total funded debt to earnings before interest, taxes, depreciation and amortization ((“EBITDA”) as defined in the Credit Agreement), a maximum ratio of senior funded debt to EBITDA and a minimum ratio of adjusted earnings before interest, taxes, depreciation, amortization, rent and operating leases ((“Adjusted EBITDAR”) as defined in the Credit Agreement) to fixed charges. As of September 30, 2010, the Company was in compliance with all debt covenants.
As of September 30, 2010, the Company had approximately $12.1 million in letters of credit outstanding to its insurance carriers as collateral for reimbursement of claims. The letters of credit reduce the amount the Company may borrow under its revolving credit facility. As of September 30, 2010, after consideration of the letters of credit outstanding and the effects of restrictive covenants, the available borrowing capacity under the revolving credit facility was approximately $110.4 million.
Certain of the Company’s leases that meet the lease capitalization criteria in accordance with FASB ASC 840-30 have been recorded as an asset and liability at the lower of fair value or the net present value of the aggregate future minimum lease payments at the inception of the lease. Interest rates used in computing the net present value of the lease payments ranged from 6.5% to 10.7% and were generally based on the lessee’s incremental borrowing rate at the inception of the lease. The balance outstanding for capital lease obligations was approximately $7.6 million at September 30, 2010 including approximately $2.9 million that is payable within the next twelve months.
In December 2007, the Company entered into a two-year interest rate swap agreement that effectively fixed the interest rate on $25 million of borrowings that were outstanding at the time. This interest rate swap agreement expired in December 2009. The swap agreement was designated as a cash flow hedge. Therefore, the unrealized gains and losses resulting from the change in the fair value of the swap contract were reflected in other comprehensive income. Realized gains and losses were reclassified to interest expense in the period in which the related interest payments being hedged were made. There were no interest rate swaps or other derivative instruments outstanding at September 30, 2010 or December 31, 2009.
The Company operates in the following two reportable business segments, which are managed separately based on fundamental differences in operations: program management services and hospitals. Program management services include hospital rehabilitation services (including inpatient acute and subacute rehabilitation and outpatient therapy programs) and skilled nursing rehabilitation services (including contract therapy in skilled nursing facilities, resident-centered management consulting services and staffing services for therapists and nurses). The Company’s hospitals segment owns and operates 29 long-term acute care hospitals and six inpatient rehabilitation hospitals. Virtually all of the Company’s services are provided in the United States. Summarized information about the Company’s operations in each industry segment is as follows (in thousands):
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The Company purchased air transportation services from 55JS Limited, Co. at an approximate cost of $191,000 and $168,000 for the three months ended September 30, 2010 and 2009, respectively, and $592,000 and $539,000 for the nine months ended September 30, 2010 and 2009, respectively. 55JS Limited, Co. is owned by the Company’s President and Chief Executive Officer, John Short. The air transportation services are billed to the Company for hourly usage of the 55JS Limited, Co. plane for Company business.
At September 30, 2010, the Company’s financial instruments consist of cash equivalents, accounts receivable, marketable securities, accounts payable and long-term debt. The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to their relatively short-term nature. The carrying values of long-term debt were $413.2 million and $455.3 million at September 30, 2010 and December 31, 2009, respectively. The fair values of long-term debt were $421.5 million and $464.2 million at September 30, 2010 and December 31, 2009, respectively, and are based on the interest rates offered for borrowings with comparable maturities. The Company’s marketable securities (which had carrying values of $3.7 million and $3.3 million at September 30, 2010 and December 31, 2009, respectively) are recorded at fair value.
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation: Level 1 - inputs are quoted prices in active markets for the identical assets or liabilities; Level 2 - inputs other than quoted prices that are directly or indirectly observable through market-corroborated inputs; and Level 3 - inputs are unobservable, or observable but cannot be market-corroborated, requiring the Company to make assumptions about pricing by market participants. The following tables set forth information for the Company’s financial assets and liabilities that are measured at fair value on a recurring basis (amounts in thousands):
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The Company’s nonfinancial assets and liabilities (including property and equipment, goodwill and other intangible assets) are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence that impairment may exist. No impairment related to these assets was identified in the nine months ended September 30, 2010.
In the fourth quarter of 2009, the Company eliminated 13 corporate positions in an effort to reduce corporate overhead and eliminate redundancies created by the acquisition of Triumph. The following table provides a roll-forward of the liability for accrued severance costs related to such actions from January 1, 2010 through September 30, 2010 (amounts in thousands):
Pursuant to a rights agreement, dated as of August 28, 2002, by and between the Company and Computershare Trust Company, N.A., as Rights Agent (the “Rights Agent”), the Company distributed one preferred share purchase right for each outstanding share of the Company’s common stock. On April 1, 2010, the Company and the Rights Agent entered into an amendment to the rights agreement. Pursuant to the amendment, the final expiration date of the rights was changed from October 1, 2012 to April 1, 2010. As a result of the amendment, effective April 1, 2010, the rights are no longer outstanding and are not exercisable.
Nine of Triumph’s LTACHs in Houston are jointly owned under three limited partnerships and the noncontrolling interests in these partnerships ranged from 12.9% to 14.9% as of December 31, 2009. The noncontrolling interests in these partnerships were primarily owned by individual physicians located in the Houston area, and certain of these physicians expressed interest in selling all or part of their limited partnership interests to the Company following the Company’s acquisition of Triumph. In April 2010, the Company offered each of the physicians an opportunity to retain all, sell 50% or sell 100% of their limited partnership interests for a fixed purchase price in cash. As of September 30, 2010, the Company entered into agreements with 112 physicians to purchase all or 50% of their limited partnership interests for combined cash consideration totaling approximately $8.6 million. In accordance with GAAP, these payments have been accounted for as equity transactions. As of September 30, 2010, the noncontrolling interests in these three limited partnerships ranged from 5.4% to 8.6%.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table discloses the effects on the Company’s equity for the nine-month period ended September 30, 2010 of all changes in the Company’s ownership interest in consolidated subsidiaries including the changes noted in the paragraph above (amounts in thousands):
During the third quarter of 2009, the FASB Accounting Standards Codification (“ASC” or “Codification”) became the Company’s single official source of authoritative GAAP (other than guidance issued by the Securities and Exchange Commission), superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. The FASB now issues new standards in the form of Accounting Standards Updates (“ASUs”).
In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements.” ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company will adopt ASU 2009-13 effective January 1, 2011. The Company does not expect adoption of ASU 2009-13 to have a material impact on the Company’s consolidated financial position or results of operations.
In December 2009, the FASB issued ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amends the related subsections of the Codification to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. In addition, the new standard amends the pre-existing guidance for determining whether an entity is a variable interest entity and for identifying the primary beneficiary of a variable interest entity. The Company adopted ASU 2009-17 effective January 1, 2010. The Company’s adoption of ASU 2009-17 did not have a material impact on the Company’s financial position or results of operations.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
In August 2010, the FASB issued ASU 2010-24, “Presentation of Insurance Claims and Related Insurance Recoveries,” which addresses the current diversity in practice related to the accounting by health care entities for medical malpractice claims and similar liabilities and their related anticipated insurance recoveries. Many health care entities, including the Company, have netted anticipated insurance recoveries against the related accrued liability. ASU 2010-24 clarifies that a health care entity should not net insurance recoveries against the related claim liability and the amount of the claim liability should be determined without consideration of insurance recoveries. ASU 2010-24 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company will adopt ASU 2010-24 effective January 1, 2011. The Company believes ASU 2010-24 will not have a material impact on the Company’s consolidated financial position or results of operations.
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REHABCARE GROUP, INC.
This Quarterly Report on Form 10-Q contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties may include but are not limited to the following items, many of which are described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009:
Many of these risks and uncertainties are beyond our control. We undertake no duty to update these forward-looking statements, even though our situation may change in the future.
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REHABCARE GROUP, INC.
Results of Operations
We operate in the following two business segments, which are managed separately based on fundamental differences in operations: program management services and hospitals. Program management services include hospital rehabilitation services (including inpatient acute and subacute rehabilitation and outpatient therapy programs) and skilled nursing rehabilitation services (including contract therapy in skilled nursing facilities, resident-centered management consulting services and staffing services for therapists and nurses). Our hospitals segment owns and operates 29 long-term acute care hospitals (“LTACHs”) and six inpatient rehabilitation hospitals (“IRFs”).
Effective November 24, 2009, we acquired all of the outstanding common stock of Triumph HealthCare Holdings, Inc. (“Triumph”) for a purchase price of approximately $538.5 million. On the acquisition date, Triumph operated 20 LTACHs in seven states. At September 30, 2010, we owned and operated 29 LTACHs, making us the third largest LTACH provider in the United States. Triumph’s results of operations have been included in the Company’s financial statements prospectively beginning after the date of acquisition.
Effective June 1, 2009, the Company completed the sale of all the outstanding common stock of Phase 2 Consulting, Inc. (“Phase 2”) to Premier, Inc. for approximately $5.5 million. Phase 2 provides management and economic consulting services to the healthcare industry and had been a subsidiary of the Company since it was acquired in 2004. This transaction allows the Company’s management to focus on its core businesses. Phase 2 was classified as a discontinued operation pursuant to U.S. generally accepted accounting principles (“GAAP”).
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REHABCARE GROUP, INC.
Selected Operating Statistics:
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Operating Revenues
Consolidated operating revenues during the third quarter of 2010 increased by approximately $134.7 million, or 64.7%, to $342.7 million compared to $208.0 million in the third quarter of 2009. The revenue increase reflects the continued growth of our skilled nursing rehabilitation services and hospital businesses. The third quarter 2010 growth in our hospital business is primarily due to the acquisition of Triumph on November 24, 2009 but also reflects same store revenue growth. Revenues for our hospital rehabilitation services business increased 1.2% in the third quarter of 2010.
Skilled nursing rehabilitation services (“SRS”) operating revenues increased $7.6 million or 6.2% in the third quarter of 2010 compared to the third quarter of 2009. This increase is primarily attributable to a 4.3% increase in the average number of contract therapy locations operated and a 3.4% increase in same store contract therapy revenues in the third quarter of 2010 as compared to the third quarter of 2009. The same store revenue growth rate in the third quarter of 2010 declined from the 10.0% same store growth rate achieved in the third quarter of 2009 as compared to the third quarter of 2008. The decline in the same store revenue growth rate is partially attributable to the impact of the skilled nursing facility final rule for rate year 2010 Medicare reimbursement. This rule, which was effective beginning October 1, 2009, resulted in a net 1.1% rate decrease for our SRS clients and in turn created pricing pressure for us and contributed to the reduction in our same store revenue growth rate. We also believe the higher same store revenue growth rate in the prior year reflected the continued development and implementation of clinical programs, and there is currently less of an opportunity for incremental growth from such programs.
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REHABCARE GROUP, INC.
Hospital rehabilitation services (“HRS”) operating revenues increased by 1.2% in the third quarter of 2010 compared to the third quarter of 2009 as inpatient revenue declined by 1.0% and outpatient revenue increased by 7.3%. The decline in inpatient revenue in the third quarter of 2010 was primarily due to a 2.6% decline in the average number of inpatient programs operated, partially offset by a 1.6% increase in average revenue per program. The increase in average revenue per program reflects same store inpatient rehabilitation facility (“IRF”) revenue and discharge growth of 3.3% and 4.7%, respectively, compared to the third quarter of 2009. HRS operated 106 IRF programs as of September 30, 2010 compared to 110 as of September 30, 2009. The increase in outpatient revenue in the third quarter of 2010 reflects a 22.2% increase in average revenue per program due to an 8.0% increase in outpatient same store revenues, an 8.3% increase in same store outpatient units of service and a change in contract mix. The average number of outpatient units operated declined by 12.1% in the third quarter of 2010 compared to the third quarter of 2009.
Hospital segment revenues were $166.2 million in the third quarter of 2010 compared to $39.7 million in the third quarter of 2009. Triumph contributed incremental revenues of $111.5 million in the third quarter of 2010. The increase in revenues in 2010 also reflects the August 2009 opening of an LTACH in Peoria, Illinois, which has completed its LTACH demonstration period and is expected to become certified as an LTACH effective May 1, 2010. As of September 30, 2010, the LTACH in Peoria had not yet received an LTACH provider number, but will retroactively bill Medicare back to M | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||