RehabCare Group, Inc. Reports First Quarter 2005 Results

    Business Editors/Health/Medical Writers

    ST. LOUIS--(BUSINESS WIRE)--May 5, 2005--RehabCare Group, Inc. (NYSE:RHB) today reported financial results for the first quarter ended March 31, 2005. Comparative results for the quarter follow.

Quarter Ended Amounts in millions, Mar.31, Mar.31, except per share data 2005 2004 -------------- Consolidated Operating Revenues $102.4 $104.5 Consolidated Net Earnings 4.9 5.1(a) Consolidated Diluted Earnings Per Share 0.29 0.31(a)

Contract Therapy Operating Revenues 52.5 40.8 Contract Therapy Operating Earnings 2.4 2.4(b)

HRS Inpatient Operating Revenues 35.6 35.4 HRS Outpatient Operating Revenues 12.2 11.7 HRS Operating Revenues 47.8 47.1 HRS Operating Earnings 6.7 8.8(b)

Healthcare Management Consulting Operating Revenues 2.3(c) - Healthcare Management Consulting Operating Loss (0.1) -

Staffing Operating Revenues - 16.7(d) Staffing Operating Loss - (0.1)(b)(e)

Equity in After Tax Loss of Affiliates (0.4) (0.4)

(a) Includes an after tax restructuring charge of $1.0 million, or $0.06 per diluted share and an after tax gain on sale of business of $0.3 million, or $0.02 per diluted share.

(b) The first quarter 2004 restructuring charge was included in consolidated operating earnings, but not allocated to the individual operating divisions.

(c) Includes intercompany sales, at market rates, of $0.2 million.

(d) Includes intercompany sales, at market rates, of $0.1 million.

(e) Includes a pretax gain on sale of business of $0.5 million.

    John H. Short, Ph.D., president and chief executive officer, commented, "RehabCare's performance in the 2005 first quarter was as expected. We had good execution by our business development teams that generated an increase in signings of new clients and our operations teams continue to manage through the implementation of the 75% rule, capacity issues caused by the increase in length of stay and the shortage of therapists. We took a conservative approach in our response to recent CMS transmittals, which impacted our inpatient census and discharges in January and February. We are implementing our mitigation strategies and are seeing improvements, which we expect to continue into the second quarter."
    Dr. Short continued, "We were also impacted by the 75% rule in our Contract Therapy division, which drove significant growth in the number of higher acuity Part A patients, and unfavorably affected our operating margins during the quarter. We are addressing the therapist availability and cost pressures with more flexible staffing across our patient care settings."

    Financial Overview of the First Quarter 2005

    Net revenues for the first quarter of 2005 were $102.4 million compared to $104.5 million in the year ago quarter, a decline of 2.0 percent. The decline was due to the sale of the Company's staffing division to InteliStaf Holdings in February 2004, offset mainly by growth in the Company's Contract Therapy division. The staffing division contributed $16.7 million of net revenues in the first quarter of 2004.
    Consolidated net earnings were $4.9 million in the first quarter of 2005 compared to $5.1 million in the prior year period. Earnings per share on a fully diluted basis were $0.29 compared to $0.31 for the same period last year. The net earnings and earnings per share results for the first quarter of 2004 included a pretax restructuring charge of $1.7 million related to the StarMed sale ($1.0 million after tax or $0.06 per diluted share) and a $0.5 million gain on the completion of the StarMed sale ($0.3 million after tax or $0.02 per diluted share). The after-tax effect of these non-recurring items was to reduce earnings by $0.04 per diluted share in the prior year quarter.

    -- The Contract Therapy division's net revenues for the first
    quarter of 2005 increased 28.7 percent to $52.5 million,
    compared to $40.8 million in the year ago quarter. Operating
    earnings for the quarter remained flat compared to the prior
    year quarter at $2.4 million. As of March 31, 2005, the
    division had 716 programs.

    The year-over-year first quarter increase in revenue reflects continued same-store growth, the addition of programs through internal sales initiatives as well as the acquisitions of CPR Therapies in February 2004 and Cornerstone Rehabilitation in December 2004.
    Operating earnings remained flat year over year, despite the increase in revenue. This was primarily due to a shift in our patient mix to lower margin Part A patients exacerbated by an increasing shortage of therapists which increased labor cost.

    -- The Hospital Rehabilitation Services (HRS) division's first
    quarter net revenues increased to $47.8 million compared to
    $47.1 million in last year's first quarter. Operating earnings
    for the quarter were $6.7 million compared to $8.8 million in
    the prior year quarter. As of March 31, 2005, HRS had 182
    programs.

    The increase in HRS operating revenues of 1.5% from the prior year quarter reflects modest growth in our outpatient business and a small increase in inpatient revenues driven by a full quarter's revenue from VitalCare (acquired March 1, 2004), partially offset by the impact of the 75% rule. The implementation of the 75% rule, as previously discussed, has negatively impacted our unit level census and subsequently has lowered the number of discharges for the quarter as these patients are now being treated in other patient care settings.
    The year-over-year decline in operating earnings is largely the result of lower earnings from the inpatient business unit in 2005 compared to 2004. The decline is the result of the negative impact on revenues of the 75% rule, and replacing higher margin acute rehabilitation units that were closed with lower margin VitalCare subacute units that were acquired. Because of the 75% rule mitigation strategies, our inpatient units are now seeing more clinically complex patients that tend to require more therapist treatment time than patients have historically without an increase in billings to the host facility.

    -- Our investment in InteliStaf Holdings for the quarter resulted
    in an equity share loss of $0.4 million as InteliStaf
    completed a debt re-financing and operational restructuring.

    The Company's balance sheet at March 31, 2005 remains strong with $42.4 million in cash, cash equivalents and restricted cash, minimal long-term debt and a credit facility with an available balance of approximately $115 million to support strategic initiatives. Days sales outstanding at quarter end decreased to 65.6 days from 66.5 days at the end of 2004. Cash flow used in operations was $6.2 million during the first quarter 2005 as compared with $8.9 million provided from operations in the same period of 2004. The change in operating cash flow from the prior year quarter is the result of the lower operating margins, first quarter 2005 income tax payments and growth in accounts receivable brought about by the significant growth in our contract therapy division. For the quarter, the Company spent $1.7 million on capital expenditures, principally information technology, and $3.6 million on its investment in the Kokomo, IN joint venture with Howard Regional Health System.
    The Company filed an 8-K on April 18, 2005, indicating its decision to not adopt FAS 123R until January 1, 2006 based on the SEC's announcement to delay the required implementation timeframe.
    Dr. Short concluded, "Looking beyond the current challenges, we remain optimistic about the trends affecting our business and the model for care that we are bringing to the market. We completed the first quarter with solid backlogs of new openings in the inpatient, outpatient and contract therapy business units. We have greater clarity on how to contend with the 75% rule; only 2 of our units are currently out of compliance, and both will be in compliance by the end of their cost reporting periods. Despite our case mix index increasing from 1.07 to 1.09, our length of stay has been care managed down by over 1 day and our discharges have increased 10% since January 2005. We are responding to the Part A/Part B mix shift and cost pressures in Contract Therapy and expect to see improved profitability over the course of 2005. Finally, we are not changing our previously provided guidance of revenues between $418 million and $438 million, and earnings per diluted share of $1.58 to $1.73."

    RehabCare Group, Inc., headquartered in St. Louis, MO, is a leading provider of contract therapy and program management services for hospital inpatient rehabilitation, skilled nursing units, and outpatient therapy programs in conjunction with more than 890 hospitals and skilled nursing facilities in 37 states, the District of Columbia and Puerto Rico. RehabCare is pleased to be included in the Russell 2000 and Standard and Poor's Small Cap 600 indices.

    A listen-only simulcast of RehabCare's first quarter conference call will be available on the Company's web site at www.rehabcare.com and online at www.companyboardroom.com, beginning at 10:00 Eastern time. An online replay will be available for at least 21 days after the call. A telephonic replay of the call will be available beginning at 1:00 P.M. Eastern time today and ending at midnight on May 27, 2005. The dial-in number for the replay is (630) 652-3041 and the access code is 11563417.

    This release 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 RehabCare's actual results in future periods to differ materially from forecasted results. These risks and uncertainties may include, but are not limited to, the ability of RehabCare to integrate acquisitions and to implement client partnering relationships within the expected timeframes and to achieve the revenue and earnings levels from such acquisitions and relationships at or above the levels projected; changes in and compliance with governmental reimbursement rates and other regulations or policies affecting RehabCare's businesses; RehabCare's ability to attract new client relationships or to retain and grow existing client relationships through expansion of RehabCare's contract therapy and hospital rehabilitation service offerings and the development of alternative product offerings; the future financial results of InteliStaf Holdings, Inc., and RehabCare's other unconsolidated affiliates, and the effect of those results on the financial condition and results of operations of RehabCare; the adequacy and effectiveness of RehabCare's operating and administrative systems; RehabCare's ability to attract and the additional costs of attracting administrative, operational and professional employees; significant increases in health, workers' compensation and professional and general liability costs; litigation risks of RehabCare's past and future business, including RehabCare's ability to predict the ultimate costs and liabilities or the disruption of its operations; competitive and regulatory effects on pricing and margins; and general and economic conditions, including efforts by governmental reimbursement programs, insurers, healthcare providers and others to contain healthcare costs.
    NOTE: More information on RehabCare can be found on the World Wide Web at http://www.rehabcare.com

I. Condensed Consolidated Statements of Earnings (Unaudited, Amounts in thousands, except per share data)

Three Months Ended March 31, ------------------------------ 2005 2004 % Change -------- -------- -------- Operating revenues $102,431 $104,497 (2.0) Costs & expenses Operating 76,498 76,067 0.6 Selling, general & administrative Divisions 8,635 9,673 (10.7) Corporate 5,999 6,317 (5.0) Restructuring charge - 1,666 N/M Gain on sale of business - (485) N/M Depreciation & amortization 2,293 1,768 29.7 -------- -------- Total costs & expenses 93,425 95,006 (1.7) -------- --------

Operating earnings, net 9,006 9,491 (5.1)

Other income (expense), net 14 (7) (300.0)

Interest expense, net (42) (161) (73.9) -------- -------- Earnings before income taxes and equity in net loss of affiliates 8,978 9,323 (3.7)

Income taxes 3,635 3,864 (5.9)

Equity in net loss of affiliates (441) (353) 24.9 -------- -------- Net earnings $ 4,902 $ 5,106 (4.0) ======== ======== Diluted earnings per share $ 0.29 $ 0.31 (6.5) Weighted average diluted shares outstanding 17,145 16,728 2.5

II. Condensed Consolidated Balance Sheets (Amounts in thousands)

Unaudited March 31, Dec. 31, 2005 2004 ---------- ---------- Assets Cash & restricted cash $ 42,444 $ 53,478 Accounts receivable, net 76,450 69,565 Deferred tax assets 10,816 10,252 Other current assets 2,383 1,690 ---------- ---------- Total current assets 132,093 134,985 Equipment, net 15,206 15,149 Excess of cost over net assets acquired, net 68,681 68,340 Intangible assets 11,638 11,884 Investment in unconsolidated affiliates 42,465 39,269 Other assets 8,175 8,039 ---------- ---------- $278,258 $277,666 ========== ==========

Liabilities & Stockholders' Equity Current portion of long-term debt $ 5,003 $ 4,731 Payables & accruals 46,581 53,803 ---------- ---------- Total current liabilities 51,584 58,534

Long-term debt, less current portion 1,941 2,142 Other non-current liabilities 9,741 9,962 Stockholders' equity 214,992 207,028 ---------- ---------- $278,258 $277,666 ========== ==========

III. Operating Statistics (Unaudited, Revenues and Operating Earnings in 000's)

Three Months Ended Mar 31, Mar 31, 2005 2004 ---------- ---------- Contract Therapy ----------------

Operating Revenues $52,459 $40,754

Division Operating Earnings(a)(b) $ 2,393 $2,438 Average Number of Locations 715 536 End of Quarter Number of Locations 716 564

Hospital Rehabilitation Services --------------------------------

Operating Revenues Inpatient $35,632 $35,343 Outpatient 12,181 11,744 ---------- ---------- Total $47,813 $47,087

Division Operating Earnings(a)(b) $ 6,676 $ 8,797

Average Number of Programs Inpatient 143 130 Outpatient 41 43 ---------- ---------- Total 184 173

End of Quarter Number of Programs Inpatient 141 146 Outpatient 41 42 ---------- ---------- Total 182 188

Healthcare Management Consulting --------------------------------

Operating Revenues (c) $ 2,310 -

Division Operating Earnings (Loss)(a) $ (63) -

(a) Division Operating Earnings are earnings attributable to the division before interest, income taxes and other income (expense).

(b) The first quarter 2004 restructuring charge was not allocated to the operating segments.

(c) Includes intercompany revenues, at market rates, of $0.2 million for the quarter ended March 31, 2005.

    WE INVITE YOU TO VISIT OUR WEB SITE AFTER NOON TODAY TO VIEW KEY STATISTICS IN GREATER DETAIL at www.rehabcare.com.

--30--AWG/na*

CONTACT: RehabCare Group, Inc. Investor Relations: Vincent L. Germanese or Betty Cammarata, 314-863-7422 or Media Relations: David Totaro, 314-863-7422 www.rehabcare.com or Financial Dynamics Gordon McCoun/Lanie Marcus/Sean Leous, 212-850-5600

KEYWORD: MISSOURI INDUSTRY KEYWORD: HUMAN RESOURCES MEDICAL EARNINGS CONFERENCE CALLS SOURCE: RehabCare Group, Inc.

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