Executives
Gordon McCoon – Investor Relations
John H. Short, PhD – President, Chief Executive Officer
Jay W. Shreiner– Chief Financial Officer
Analysts
Robert Hawkins - Stifel Nicolaus & Company, Inc.
Derrick Dagnan - Avondale Partners LLC
Robert Mains – Morgan, Keegan & Company, Inc.
Kemp Dolliver - Cowen and Company
RehabCare Group, Inc. (RHB) Q2 2008 Earnings Call July 30, 2008 10:00 AM ET
Operator
Welcome to the RehabCare 2008 second quarter earnings call. (Operator Instructions) I will now turn the call over to Gordon McCoon.
Gordon McCoon
Welcome again to the conference call to discuss RehabCare’s second quarter 2008 earnings. With us today from management are John Short, Chief Executive Officer of RehabCare Group and other members of the senior management team.
Before we begin, I’d like to remind you that this conference call 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 of the factors that ultimately may affect the company’s ability to achieve results estimated. The company makes no promise to update any forward-looking statements whether as a result of changes and underlying factors, new information, future events or otherwise.
With these introductory comments out of the way, I’d like to turn the call over to Dr. John Short. John, please go ahead.
John H. Short, PhD
I’m John Short, President and CEO of the company. With me are Jay Shreiner, Chief Financial Officer and members of my executive management team. All of them will be available to answer your questions at the conclusion of our remarks.
Earlier this year, I shared with you that much of our focus in 2008 would be returning to our top and bottom-line growth in our CT and HRS divisions. I’m pleased that for the second consecutive quarter we made substantial progress in that direction.
Our Contract Therapy division achieved sequential revenue growth of $2 million and after a 2-year drought in unit growth saw a net gain of 15 operating units in the second quarter. Similarly, our unit count increased in our HRS division after three years of decline. Our strategies to secure new business and build greater value among existing clients are proving their validity and we expect a continued upper trend in operating units for the remainder of 2008.
Profitability also improved in both of our mature businesses with Contract Therapy reporting a 1.6 percentage point sequential gain in operating margins and HRS, a 1.7 percentage point improvement. When excluding the positive impact of the non-compete settlement, the Contract Therapy margin increased 1 percentage point quarter over quarter to 4.7% for the second quarter. The HRS division achieved operating earnings margin of 13.2% solidly within our expected range of 12%-15% for the year, despite lax sequential revenue.
Our Hospital division progress remains an uphill climb. Expected start-up losses for Northland LTAC Hospital in Kansas City, Missouri, our continued investment in infrastructure development and a $1.5 million sequential decline in same-store revenue impeded second quarter results. Operating revenues were down 1.4% sequentially and operating earnings declined to $3.4 million.
We are continuously working on strengthening our Hospital division and are excited to welcome Kevin Gross as our new Senior Vice President of Hospital Operations, effective July 1. Kevin has 25 years experience managing and consulting to hospitals and health systems, most recently serving as president of the Acute Care division of Universal Health Services where he was responsible for a 24-hospital network. He brings proven skills at building strong teams and leadership talent, enhancing market presence and operational viability in strengthening strategies for future success. We welcome him on board.
Now let me give you some other highlights of the quarter as they pertain to our four operating segments. Contract Therapy reported same-store revenue growth of 2% and a 0.6% increase in the average number of locations. The division signed 46 new contracts in the second quarter compared to 30 in the first quarter and had a net gain of 15 units, the first net gain in the two years since we acquired Symphony. We believe we’ve turned a corner with our business development plan of retention efforts and expect operating units to be on the plus side for the remainder of 2008. While the early part of the third quarter will be impacted by the disruption of therapy caps in the first two weeks of July, the division should quickly recover and be within our expected range of 4.5%-5.5% operating earnings margin in the fourth quarter.
In-patient operating revenues in our Hospital Rehabilitation Services division improved $100,000 or 0.4% quarter over quarter that was offset by a $100,000 decline sequentially or 0.7% in our outpatient business. At the end of the second quarter, we operated 154 programs compared to 153 at the end of the first quarter. A number of managed in-patient rehabilitation facilities or IRFs and outpatient units remain constant at 107 and 33 respectively. We added 1 subacute contract. We also signed three new IRF clients and opened two new units in the second quarter. At June 30, 2008, the pipeline of signed but unopen IRF contracts stood at six, four of which are expected to open in the balance of 2008. We expect to achieve a net gain of IRFs over the balance of this year.
In the second quarter, 69.5% of our admissions were qualifying patients compared to 63.2% in the first quarter. Same-store acute discharges decreased 0.7% primarily due to lower census in host hospitals. 40% of our units are ending their 60% qualifying period and a shortage of nurses in certain client hospitals. We continue to believe we will reach our 3%-5% growth target over last year for same-store discharges.
As we had anticipated, operating earnings in our Hospital division were unfavorably affected by total start-up losses in the second quarter of $1.4 million, primarily for Northland LTAC Hospital. We opened the doors to Northland in mid-April and in early May the hospital received its Medicare provider number. It is currently undergoing a Medicare length-of-stay demonstration period until early November which means it will be reimbursed if Medicare is lower in patient expected payment system rates during the 6-month period. Earnings were also impacted by lower revenues and margins in our existing hospitals and the continued investments we are making in back-office infrastructure to support our growth strategy.
The critical drivers of that growth strategy are our joint venture partnerships. On June 1, we completed our joint venture with Floyd Healthcare Resources after receiving state attorney general approval in May. We now hold an 80% ownership in The Specialty Hospital, a 24-bed, long-term acute hospital in Rome, Georgia. There will be no start-up or ramp-up costs associated with this joint venture. We have a certificate of need to expand this hospital and have begun the development of the 45-bed replacement LTACH which is scheduled to open in the second quarter of 2010.
Our joint venture with Landmark Health Systems Inc. to purchase a majority interest in and operate the Rehabilitation Hospital of Rhode Island is still awaiting approval by the state’s attorney general as well as the state’s Department of Health. We now expect to begin operation of the 41-bed facility at the beginning of 2009 rather than in 2008. We also have a certificate of need to develop a 40-bed LTACH with Landmark which should open late in 2009.
Construction continues on St. Luke’s Rehabilitation Hospital in St. Louis, Missouri, our joint venture with St. Luke’s Hospital. We are projecting this 35-bed hospital will open in October of 2008. Our planned development of a LTACH with our existing rehabilitation hospital partner in Kokomo, Indiana should open in the second or third quarter of 2009.
In the second quarter of 2009, we expect to open the Greater Peoria Specialty Hospital, a 50-bed LTACH we are developing in Peoria, Illinois with Methodist Medical Center. Construction started on a 60-bed LTACH in Reading, Pennsylvania which we plan to own and operate in conjunction with our longtime client The Reading Hospital and Medical Center. We expected to begin operation of the LTACH in the third quarter of 2009. These projects will grow our hospital division from its 11 existing hospitals to a total of 17 by the end of 2009.
On the legislative front, our efforts to secure passage of the Medicare Improvements for Patients and Providers Act of 2008 were rewarded with a successful override of a Presidential veto on July 15. This resulted in an extension of both the Medicare Physician Fee Schedule, an increase of 0.5% and the Medicare Part B Therapy Caps exception process through December 31, 2009. The law provides adequate Medicare coverage for beneficiaries and gives our therapists the continued ability to provide necessary care to their patients.
We anticipate final rules soon from CMS for both IRFs and skill nursing facilities for 2009. While we do not believe it will be a significant impact on our HRS or Hospital business, we are less certain about the effect on our Contract Therapy business. CMS has also issued an interim final hold for LPACs which outlined us for exemption from the three-year moratorium and provided exceptions to this rule.
I will now turn the call over to Jay Shreiner who will review our financial results for the quarter.
Jay W. Shreiner
Consolidated net revenues for the second quarter 2008 were $185.5 million compared to $184.1 million in the first quarter of 2008, a $1.4 million or 0.8% increase. Consolidated net earnings were $4.5 million or $0.25 per diluted share in both the first and second quarters. Second quarter earnings benefitted from a non-compete settlement agreement as well as an improved operating earnings performance in Contract Therapy and HRS. However, earnings were negatively impacted by a $3.7 million loss in the Hospital division.
Net revenues for the Contract Therapy division were $106.3 million, an increase from the first quarter of $2 million or 1.9%. This increase was driven by a 0.6% increase in the average number of locations and same-store revenue growth of 2%. The division’s operating earnings were $5.6 million in the second quarter of 2008 compared to $3.8 million in the first quarter. This increase includes a $600,000 favorable non-compete settlement net of related legal costs, higher revenues and margins, lower bad debt and health insurance expenses that occurred in the second quarter. Excluding the net settlement, the division improved operating earnings margins from 3.7% in the first quarter to 4.7% in the second quarter. During the second quarter, 30 programs closed and 45 opened.
Second quarter revenues in our HRS division remained flat on a sequential basis at $40.2 million. In-patient operating revenues improved 0.4% but were offset by 0.7% sequential decline in outpatient operating revenues. Operating earnings for the division were $5.3 million, a 14.5% increase from the $4.6 million in the first quarter. This increase includes lower bad debt and health insurance expenses recognized in the second quarter.
The Hospital division reported operating revenues of $28.8 million, a sequential decline of 1.4%. The division incurred an operating loss of $3.7 million in the second quarter compared to an operating loss of $300,000 in the previous quarter. The $3.4 million sequential decline in earnings primarily resulted from a combination of the following: a $1.5 million lower same-store revenues which resulted in $1.2 million lower earnings in our mature hospitals, $800,000 in higher start-up and ramp-up losses, a $400,000 increase in bad debt expense, and an increase of $600,000 in selling, general and administrative expenses relating to our continued investment in a back-office infrastructure to support the expected growth in this division in 2008 and 2009.
We expect same-store revenues to return to first quarter levels by the fourth quarter. EBITDA will be negatively impacted by start-up and ramp-up losses associated with our new majority owned joint venture hospitals planned for 2008 and 2009. Hospitals’ underdevelopment and an operation for less than one year are expected to generate a net EBITDA drag of $1.4-$1.9 million during the second half of 2008. The impact of this drag on earnings per share will be partially offset by the respective minority partner share of these costs. The eight hospitals that had been in operation more than one year are expected to return to 13%-15% EBITDA margins before corporate overhead in the fourth quarter of 2008. The division managed its rehab hospitals to an average 60% rule compliance level of 58.5% at the end of the quarter.
For the six month period ended June 30, 2008, we generated cash from operations of $18.6 million. We spent $7.5 million for capital expenditures including $5.7 million in our Hospital division primarily on developing joint ventures. The remaining $1.8 million of capital expenditures was principally related to information systems. In addition to the $5.7 million of Hospital division capital expenditures, we invest approximately $7 million net of cash acquired for an 80% interest in The Specialty Hospital in Rome, Georgia.
Days sales outstanding in accounts receivable increased from 69.4 at the end of the first quarter to 69.6 at the end of the second quarter. At June 30, 2008, we had approximately $14.3 million in cash and cash equivalents compared to $15.2 million at March 31, 2008. Total debt outstanding at June 30 was $71 million compared to $75.7 million at March 31.
During the second half of 2008, we expect capital expenditures of approximately $13.5 million of which $9.5 million relates to hospital strategic and maintenance capital and the remaining $4 million relates principally to information systems investments. We are expecting to receive approximately $1.7 million from our minority joint venture partners to fund their respective shares of each hospital’s capital expenditures and working capital requirements.
I will turn the call back over to John.
John H. Short, PhD
In closing, we still expect strong growth in consolidated net earnings for the full year. However, quarterly consolidated operating earnings will continue to be uneven with all quarters impacted by hospital start-up and ramp-up losses. These losses are a necessary byproduct of an aggressive growth strategy for our Hospital division. Just as we were able to overcome the temporary strain of the Symphony integration in our CT business, we have proven authority to aggressively work through the challenges to accompany major investments. I know that Kevin Gross shares this vision and we are all pleased to have him leading our efforts.
Thank you for your continued support and to my colleagues, I extend my appreciation for your drive and sacrifice and the commitment we share to making a difference in people’s lives. With that, Operator, I’d like to open the call to questions.
Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from Rob Hawkins from Stifel Nicolaus.
Robert Hawkins - Stifel Nicolaus & Company, Inc.
I guess I would like to first start with a little bit more color on the rehab volume growth in the HRS and the same-store volumes and the free-standing Hospital division. Can you give us some thoughts there on maybe what’s going on. You mentioned some softness in the host hospital environment and I just wanted to get a sense of where you think the quarter is and how the current hospital environment looks.
John H. Short, PhD
Both in our HRS division and in our own hospitals we saw softness in the second quarter. When we looked at the two companies that have reported so far, they’re reporting soft census. So clearly some of this has been environmental because it was throughout most of our portfolio of 107 as well as in most of our 11 own hospitals. Now, we are starting to see it pick up especially towards the end of July and so we’re pretty optimistic about the third quarter. We believe the fourth quarter should be back on track. I’m not exactly sure why it was as soft as it was on the acute side of the business but it clearly is, at least from our perspective.
Robert Hawkins - Stifel Nicolaus & Company, Inc.
Is there much difference in the LTACH side of things in terms of how the free-standing shook out and with the rehab still getting kind of impacted? Is it related to some of the JVs or how are your feelings about the LTACH versus rehab?
John H. Short, PhD
We saw it in both. Remember, we’re the back door of acute hospitals. Virtually all of the hospitals that are referral sources to us reported soft census that progressively got softer as the quarter progressed. Again, we are starting to see a turnaround mid-July because it’s nothing we monitor on a daily basis. I don’t know if it was just an outbreak of good health or what was going on. It was certainly more than we anticipated.
Robert Hawkins - Stifel Nicolaus & Company, Inc.
It sounds like a little bit more difficult seasonality than usual. In terms of start-up losses, are you feeling pretty good? Last quarter you mentioned that you were feeling pretty good, you were getting some standardization and progress in bringing these on this quarter, the start-up losses and some of the performance in the free-standing business. It looked a little bit off. Have your thoughts changed any in terms of how these start-ups look? I know they are always a bumpy road, each one is a little different.
John H. Short, PhD
No, in fact with our North Kansas City project, we are actually beating our start-up budget. So we are basically on track in terms of our start-up, ramp-up and our investments and infrastructure. The thing that really took us by surprise this quarter was the decline in core hospital revenue and the fact that we didn’t grow things in our HRS division at the rate we anticipated.
Robert Hawkins - Stifel Nicolaus & Company, Inc.
It looks like you guys are seeing some nice growth out of the CT division. Any more color there and what’s the pipeline looking like?
John H. Short, PhD
It’s due to brilliant marketing, great business development, and outstanding management. You know, we turned the quarter. We put things behind us. Our business development folks are clicking on all cylinders. We’re doing a good job of dealing with the continuing challenge of finding therapists. We’re delivering our commitment to get our operating earnings margins back in the 4.5%-5.5% range. If Congress would just leave us alone on our GAAP, we’d show very impressive progress in this regard. So we continue to expect growth in units, growth in top-line, and growth in margin.
Operator
Our next question comes from Derrick Dagnan from Avondale Partners.
Derrick Dagnan - Avondale Partners LLC
John, can you give us some color on the margin improvement in both Contract Therapy and HRS? I’m looking to see if you made any progress on labor costs management there because the magnitude of the sequential increase, it’s pretty impressive. We just want to make sure and see how you are doing on labor.
John H. Short, PhD
We continue to manage labor to about a 1% per quarter increase. Both HRS and CT showed improvement in productivity and an improvement in their ability to shift labor between our various units. The other significant enhancement there was we made changes to our health benefit plan that are taking effect which is having the effect of lowering our healthcare costs. So we benefitted from that in both the first and even more in the second quarter. Mostly it’s just we knew we were going to get this kind of margin improvement at the beginning of the year. We were a little late in terms of exactly when it was going to show up. As you can see the dramatic improvements on that promise in the second quarter and with the exception on CT, the therapy caps interruption in the first half of July, they’re on track to continue to improve those margins.
Derrick Dagnan - Avondale Partners LLC
Can you talk a little bit about that, because you mentioned, I think in the press release you mentioned both the CT and HRS divisions benefitted from lower bad debt costs but you had higher bad debt costs in the free-standing division. Is that more of a payor issue, a payor mix issue, can you talk about that?
Jay W. Shreiner
Relative to HRS and CT, I think the ability to reduce our bad debt expense in the second quarter is really attributable to the increased focus that we had been putting on this area over the last five to six quarters. So I think its paying dividends allowing us to take a lower charge to earnings. With respect to the Hospital division, we’re moving to that same type of program where we are centralizing and in the process of centralizing our billing and collections for the Hospital division here in St. Louis. As we go through that, we’re moving our portfolios from the field into St. Louis and we’re doing another review. We’re looking at them and we’re doing new estimates. I think for the Hospital division, what we’ve seen is that what I would call a temporary increase this quarter. Over the longer term, I believe we can use the same approach we have taken on the other divisions and the focus that we put on it in a centralized mode can drive down our allowance for bad debt, our provision for bad debt. We’re just on the front end of this process for the Hospital division. So it may be another couple quarters before we even start there.
Derrick Dagnan - Avondale Partners LLC
On the CT and HRS, you mentioned five to six quarters where you have been working on the issue but since you know how to navigate the issue now, it may take less time for the hospital?
Jay W. Shreiner
There are different types of portfolios, keep in mind, in HRS and CT. We are billing and collecting from our client. In the case of hospitals, it’s Medicare and Managed Care. It’s different in that regard.
John H. Short, PhD
The other thing, Derrick, is Contract Therapy and in HRS over the last 18 months, we’ve done a lot of cleanup of our portfolio and installed more rigors in terms of our credit criteria. I think you’re seeing that take hold as well.
Derrick Dagnan - Avondale Partners LLC
If I could one more and I will just go back in the queue. It looked to me like cash flow from ops was strong in comparison to the first quarter report. So you gave us a view on CAPEX, so I think the question for me would be should we look at the first half of cash flow from ops as being a run rate for half of a year or should we look more at the second quarter cash flow from operations?
John H. Short, PhD
I think by looking at the first half as more representative of cash flow.
Operator
Our next question comes from Rob Mains from Morgan Keegan.
Robert Mains – Morgan, Keegan & Company, Inc.
John, it’s your lot to get questions on free-standing hospital divisions from guys named Rob, I think. Am I correct in what you are saying, that when you saw the quarter was, start-up losses more or less in line with what you expected but a bigger seasonal impact?
John H. Short, PhD
That’s correct.
Robert Mains – Morgan, Keegan & Company, Inc.
If I could click off on the seasonal impact, and actually move the margins on your non-start-up hospitals?
John H. Short, PhD
No.
Robert Mains – Morgan, Keegan & Company, Inc.
I guess it is how you parse it out. When you look at the mix there, I’m trying to think of things that could be contributing. Did your private versus Medicare mix change much at the hospital?
John H. Short, PhD
No.
Robert Mains – Morgan, Keegan & Company, Inc.
When you look at the bad debts, is the growth there, is it uninsured, is it co-pays or is that also kind of a static figure?
Jay W. Shreiner
What I would say is going back to John’s comment is just putting more regular into the estimation process and bringing down estimates particularly for non-Medicare related accounts.
Robert Mains – Morgan, Keegan & Company, Inc.
So effectively, it is more of the algorithm that what you are seeing in terms of the field effectively?
John H. Short, PhD
Yes, from a standardized, consolidated, all of 11 processes. We found more variation than we would like. So a lot of this is a byproduct of standardizing the algorithms between our hospital sites.
Robert Mains – Morgan, Keegan & Company, Inc.
You got to 2% same-store sequential growth in CT, do you have the year-over-year same-store number?
John H. Short, PhD
Same-store year-over-year was 12.3%.
Robert Mains – Morgan, Keegan & Company, Inc.
I thought I heard two different numbers. The number of Contract Therapy locations that you added in the quarter was it 45 or 46?
John H. Short, PhD
45 openings and 30 closings
Robert Mains – Morgan, Keegan & Company, Inc.
In the HRS division, can you give the breakdown by the three types of how many openings and closings you had?
Jay W. Shreiner
In IRPs, we had two openings and two closings and in subacute, we had one opening, no closings. There’s no change or activity in outpatient.
Robert Mains – Morgan, Keegan & Company, Inc.
Regarding the comments about partial therapy caps, the last time we went through this, you got kind of an initial hit but also there is sort of a behavioral hangover where even though the exceptions were put in place, you didn’t get the behavior changes in the field immediately. Any sense as to how it’s playing out now? Is this strictly a first weeks of July phenomenon or is there some weakness that you’re seeing now that we are in August?
John H. Short, PhD
We had a significant impact on the first two weeks. We’re basically had a lot of heartbeat patients and our therapists waited to see what was going to happen. About half of that impact has been mitigated in the last half of July and we think the other half will be mitigated in the first half of August. Unfortunately, that’s probably going to mean that we’re not going to repeat our 4.7% operating earnings margin in Q3 although we’d like to get as close as possible.
Robert Mains – Morgan, Keegan & Company, Inc.
So when you say mitigated, are you talking about the pent-up demand getting filled now or just in terms of getting back where you did if the cap exceptions had been in place on 7-1?
John H. Short, PhD
More getting back to where we would have been.
Robert Mains – Morgan, Keegan & Company, Inc.
So you still see relative to where you might have been some weakness through the rest of July?
John H. Short, PhD
Correct.
Operator
Our next question comes from Kemp Dolliver from Cowen and Company.
Kemp Dolliver - Cowen and Company
First on the same-store growth outlook for HRS, you’re still expecting 3%-5% despite the softness you saw in the current quarter. John, I just don’t recall where you were in Q1. that number has always struck me as a bit aggressive and I’m wondering why you are sticking with it given your experience in the first half.
John H. Short, PhD
Historically, before the implementation of the 75% rule, we grew at 3%-5% for over a decade every year. When we take a look at the aging of the population and the youth rates and multiply those two things together, at least our math gets us to 3%-5%. So we believe it exists. Now, the second quarter was again soft on the acute short-stay hospital side so it was soft on our side as well. Luckily, we’re seeing a relatively strong rebound in the latter part of July and we think that will carry over into the balance of the third quarter. So until we get multiple quarters proving me wrong, I’m hanging in there.
Kemp Dolliver - Cowen and Company
As you looked at second quarter relative to the first quarter, it was an odd year because you had leap year and Easter coming early, and to some extent, I think a probably inflated Q1. As you analyzed the seasonal trends, do your comments and thoughts take that into consideration?
John H. Short, PhD
I will be the first to admit that I know for a fact that when we were doing our budget, the beginning of ’08, we did not factor in the kind of seasonality that we’ve seen in Q1 and Q2 in our budget forecasts. In part, because historically we didn’t have as many free-standing hospitals as we got now. Historically, we didn’t see the same kind of seasonality on our acute post-hospitals that we saw between Q1 and Q2. So we learned a valuable lesson, we have to pay attention to what our acute brethren are saying about their seasonal expectations and better factor that into our expectations.
Kemp Dolliver - Cowen and Company
The compliance level for the free-standing hospital division was 58.5 units below the 60%. Over what period of time do you have for those hospitals to hit 60% in order to be in compliance?
John H. Short, PhD
They’re all January 1 Medicare dates so we’ve got six months to get them into compliance. They’re all within; a lot of them already are in compliance. Some of them are 1 or 2 percentage points below. Those are the ones we’re working on. We should be at or above 60% entering Q4.
Kemp Dolliver - Cowen and Company
For the second half of the year, start-up costs are at $1.4-$1.9 million. How many projects does that involve? Is it three that are in start-up?
John H. Short, PhD
Again, that is a net number so all of our hospitals that are not in the mature state. So we have the eight that we classify in operations for more than one year. The other group is $1.4-$1.9 EBITDA, so that would include Austin and Rome who are in operation and are positive. It would include North Kansas City which started in the second quarter and it includes St. Luke’s which we are going to open in the fourth quarter. Those are the four most significant in that group.
Kemp Dolliver - Cowen and Company
For Rome, you are including their start-up costs; I thought there weren’t going to be any?
Jay W. Shreiner
We figures that Austin and Rome were going to be accretive within that group. So the net amount of drag for that group of hospitals is $1.4-$1.9 million.
Kemp Dolliver - Cowen and Company
It’s really mainly the St. Luke’s and North Kansas City.
John H. Short, PhD
Correct.
Operator
We have a follow-up question from Rob Mains from Morgan Keegan.
Robert Mains – Morgan, Keegan & Company, Inc.
Can you explain a little bit the $600,000 non-compete settlement?
John H. Short, PhD
We have a non-compete agreement with one of our division operating folks. He chose to prematurely violate that agreement by joining a competitor and attempting to take some of our business with him. We sued and got a favorable judgment out of his now current employer that basically covered our operating losses for this year.
Robert Mains – Morgan, Keegan & Company, Inc.
So it’s a one-time event, no spillover into the next quarter?
John H. Short, PhD
That’s correct. We received the money, we netted it against the legal fees and that’s what it is. It’s done. There will be no positive or negative impact in Q3 or Q4.
Robert Mains – Morgan, Keegan & Company, Inc.
The last question, you’ve given us good backdrop on how seasonality has proven to be a little bit more aggressive than what you expected. If you take a step back from the revenue side of seasonality and how it’s affecting admissions, can you just refresh us on what to expect in terms of the cost side of seasonality in Q3, Q4, how your business is typically offset by holidays and vacations and whatnot?
John H. Short, PhD
It historically hasn’t affected us significantly in the third quarter. In the fourth quarter we got the holiday season which is a drag on both our top-line as well as our labor costs. We basically factored that into our budgeting because we had that every year since I’ve been associated with the company. So I think the biggest thing that caught us off guard was Q1 was much better in terms of acute discharges than we gave it credit for. Q2, therefore, had a much more noticeable decline. Because most of our facilities are relatively small, we’re talking about 40-50 bed facilities, it’s much harder for us to flex or decline through these charges than our short-stay acute care brethren who operate much larger facilities.
Operator
We have no further questions at this time.
John H. Short, PhD
Thank you. As a reminder, this conference call is being webcast live on our website, www.rehabcare.com and will be available for replay beginning at 1 pm ET today. Thank you all for joining us and we appreciate your time and attention.
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