LifeCare Holdings, Inc. Announces Fourth Quarter Results
PLANO, Texas, April 2 /PRNewswire/ — LifeCare Holdings, Inc. (the “Company”) today announced its operating results for the three months and year ended December 31, 2006.
On August 11, 2005, we consummated an acquisition (“Transaction”) pursuant to which a corporation formed by investment funds associated with The Carlyle Group and certain members of our management and board of directors, merged with and into our Company, with our Company continuing as the surviving corporation. We have reported our operating results and financial position for the periods subsequent to the Transaction as the Successor Period and all periods prior to the Transaction as Predecessor Periods.
In connection with the Transaction, we borrowed $255.0 million under a senior credit facility and issued $150.0 million of senior subordinated notes. We also entered into a revolving working capital loan agreement (“Revolver”) that provides $75.0 million of potential borrowing capacity. To date, we have made no borrowings pursuant to the Revolver.
Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005
Net Revenues
Our net patient service revenue was $79.9 million for the three months ended December 31, 2006 as compared to $79.2 million for the same period in 2005. This 0.9% increase in net patient service revenue was due to a 2.7% increase in net patient service revenue per patient day, mitigated by a 1.7% decrease in patient days. The increase in net patient service revenue per patient day was due to an increase in the percentage of commercial patient days as a percent of total patient days as well as an increase in the overall acuity of our patients.
Total Expenses
Total expenses decreased by $6.4 million to $100.3 million for the three months ended December 31, 2006 as compared to $106.7 million for the comparable period in 2005. Included in the expenses for the 2006 period is an impairment charge of $19.0 million related to goodwill. An impairment charge of $30.4 million was recorded during the same period in 2005, which was offset by $7.0 million in insurance recoveries associated with Hurricane Katrina losses. For the three months ended December 31, 2006 our New Orleans operations had total expenses of $0.3 million as compared to $(0.1) million during the same period in 2005. Exclusive of the impairment charges, insurance proceeds offset and expenses attributable to our New Orleans operations, total expenses increased by $4.6 million to $81.0 million for the three months ended December 31, 2006 from $76.4 million for the three months ended December 31, 2005.
This $4.6 million increase in total expenses was primarily attributable to increases in salaries, wages and benefits, outside services and contract labor expenses incurred as the result of inflationary increases and the overall increase in patient acuity during the 2006 period as compared to the 2005 period.
Credit Agreement EBITDA
For the quarter ended December 31, 2006, the adjusted EBITDA, as defined in our senior credit facility, which we refer to as Credit Agreement EBITDA, was $12.3 million, for a decrease of $4.0 million, or 24.7% from the prior year period. For the applicable periods, Credit Agreement EBITDA primarily reflects the elimination of our New Orleans operations subsequent to Hurricane Katrina, the goodwill impairment charges and certain other non- recurring/operational expenditures as defined in our credit agreement. As a percent of net patient service revenue, Credit Agreement EBITDA decreased to 15.4% for the 2006 period as compared to 20.7% for the same period in 2005. The decrease in Credit Agreement EBITDA, on a dollar and percentage of net patient service revenue basis, was due primarily to the increases in expenses attributable to the increase in patient acuity and inflationary factors as noted previously.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Net Revenues
Our net patient service revenue decreased by $20.4 million, or 5.9%, for the year ended December 31, 2006, to $325.9 million from $346.3 million for the comparable period in 2005. This decrease was principally the result of the closure of our three New Orleans hospitals, which contributed $29.5 million in net patient service revenue in the year ended December 31, 2005. Exclusive of the decrease in net patient service revenue attributable to New Orleans, our net patient service revenue increased by $9.1 million in the 2006 period to $325.9 million from $316.8 million during the same period in 2005.
This increase was comprised of $8.0 million attributable to an increase in patient days and $8.7 million due to an increase in revenue per patient day, offset by a net decrease of $7.6 million for adjustments related to previously filed cost reports. The increase in revenue per patient day was primarily the result of an increase in the percentage of our revenues generated from commercial payors and our continued focus on treating higher acuity patients. During the twelve months ended December 31, 2006, we recorded a reduction in net patient service revenue of $4.3 million whereas during the year ended December 31, 2005, we recorded an increase in net patient service revenue of $3.3 million related to changes in estimates and settlements on cost reports filed with the Medicare program. The most significant cost report valuation adjustment recognized during the year ended December 31, 2006, relates to two of the Company’s hospitals. In these cases, the actual cost to charge ratio, which is used to determine the reimbursement for short stay and high cost outliers, was outside the 10% limit of the cost to charge ratio amount used by CMS to process interim claims such that it resulted in a reconciliation of payments to the actual cost to charge ratio for these cost report periods.
Total Expenses
Total expenses decreased by $72.7 million to $363.0 million for the year ended December 31, 2006 as compared to $435.7 million for the comparable period in 2005. Included in the expenses for the 2006 period is $43.6 million related to goodwill impairment charges and a gain of $1.3 million related to the early extinguishment of debt. Included in the expenses for the 2005 period are impairment charges of $74.2 million and Transaction related expenses of $62.1 million. For the twelve months ended December 31, 2006, our New Orleans operations had total expenses of $(3.6) million as compared to $23.4 million during the same period in 2005. The New Orleans’ expenses for the years ended December 31, 2006 and 2005 include credits of $5.3 million and $7.0 million, respectively, related to the recording of insurance proceeds during these periods. Exclusive of the goodwill impairment charges, the gain on early extinguishment of debt, Transaction related expenses, and net expenses attributable to our New Orleans operations, total expenses increased by $47.3 million to $323.4 million for the year ended December 31, 2006 from $276.0 million for the year ended December 31, 2005.
Of this $47.3 million increase in total expenses, approximately $18.6 million was attributable to an increase in net interest expense and $2.9 million was attributable to an increase in depreciation and amortization expense. The increase in net interest expense was the result of the additional borrowings that occurred in connection with the Transaction during 2005. Depreciation and amortization expense increased during the year ended December 31, 2006 primarily due to an increase in depreciation expense as a result of adjusting property and equipment to fair market value as of the date of the Transaction and amortization expense recorded on the identifiable intangible assets established as a result of the Transaction. Additionally, during the year-ended December 31, 2006, our Chester County facility’s expenses were $7.1 million greater than the same period in 2005 principally due to the opening of this new facility during the third quarter of 2005.
The remaining $18.7 million of the total $47.3 million increase was the result of a combination of the increase in patient days and increases in salaries, wages and benefits, supplies, outside services and contract labor expenses incurred as the result of inflationary increases and the overall increase in patient acuity during the 2006 period as compared to the same period in 2005.
Credit Agreement EBITDA
For the year ended December 31, 2006, the adjusted EBITDA as defined in our senior credit facility, which we refer to as Credit Agreement EBITDA, was $57.7 million, a decrease of $19.0 million, or 24.7%, from the prior year period. Credit Agreement EBITDA reflects the elimination of the impact of Hurricane Katrina on our operations, impairment charges and certain other non- recurring/operational expenditures as defined in our credit agreement. As a percent of net patient service revenue, Credit Agreement EBITDA decreased to 17.7% for the 2006 period as compared to 22.2% for the same period in 2005. During 2005, prior to the impact of Hurricane Katrina, our New Orleans operations contributed $8.1 million to our 2005 Credit Agreement EBITDA. The decrease in Credit Agreement EBITDA, on a dollar and percentage of net patient service revenue basis, was principally due to the increases in expenses attributable to the increase in patient acuity and inflationary factors discussed above and the adjustments to previously filed cost reports.
Recent Developments
On May 2, 2006 CMS issued the final regulations for the 2007 fiscal year starting on July 1, 2006 regarding the prospective payment system for LTACHs. The final rule included, among other things, (i) a change in the payment provisions related to short-stay outliers; (ii) an increase in the outlier fixed-loss amount from $10,501 to $14,887; (iii) an increase in the labor- related share of the prospective payment system federal rate from 72.855% to 75.665%; (iv) elimination of the surgical case exception to the three-day or less interruption of stay policy; and (v) a freeze on the fiscal 2007 federal rate at the 2006 level. CMS estimated that exclusive of the freeze of the federal rate for fiscal 2007, these changes would result in a decrease in Medicare reimbursement of 3.7% for LTACH providers.
On August 1, 2006 CMS issued changes to the Medicare hospital payment system, including changes to the relative weights and lengths of stay for the diagnosis related groups treated by LTACHs. This final rule was effective for Medicare discharges on or after October 1, 2006. CMS estimated these changes would result in a reduction of payments to LTAC providers by 1.3% based on the then current reimbursement regulations that were in place. This reduction is in addition to the reduction discussed previously as a result of the fiscal 2007 rule changes.
On January 2, 2007, CMS issued proposed changes to the Medicare hospital payment system which it projects will reduce overall payments to LTAC hospitals by 2.9%. These changes include: (i) an increase to the standard federal payment rate; (ii) revisions to payment methodologies impacting short- stay outliers; (iii) adjustments to the wage index component of the federal payment; (iv) an extension of the policy known as the “25 Percent Rule” to all LTAC hospitals; (v) the elimination of the “grandfather’ status that previously exempted certain hospitals from the “25 Percent Rule;” and, (vi) a proposed increase in the high-cost outlier fixed-loss threshold amount from $14,887 to $18,477. CMS is also proposing that the annual update to the DRG classifications and relative weights would be made in a budget neutral manner, effective October 1, 2007. As such, the estimated aggregate industry LTACH PPS payments would be unaffected by the annual recalibration of DRG payment weights. These reductions would be in addition to the reductions discussed herein that became effective during 2006. We believe that the proposed rule, if adopted, will reduce our Medicare reimbursement, in which case, we will attempt to mitigate the effect of the proposed rule.
Regulatory changes enacted by CMS and the loss of our New Orleans operations have resulted in operating profits that are significantly less than our operating profits at the time we entered into our senior credit facility. The margins by which we adhere to the financial ratios required in our senior credit facility have consistently decreased and do not allow for additional shortfalls. If we are unable to maintain compliance with our financial covenants, an event of default could occur unless we are able to obtain a waiver or enter into an amendment with the senior lenders to revise the covenant requirements. If we are required to obtain a waiver or amendment, we would likely incur one-time fees and expenses, and be required to pay a higher interest margin on our indebtedness in subsequent periods.
Forward-Looking Statements
This press release includes forward-looking statements regarding, among other items, operations, proposed regulations and their possible affect on the Company’s results. Such statements are subject to a number of uncertainties and risks that could significantly affect current plans. Furthermore, actual results may differ materially from those experienced or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, risks relating to operating in a regulated environment, implementing our business plan, maintaining relationships with physicians in our markets, availability of sufficient nurses and therapists, competition, retaining key management, ability to service our debt requirements and availability of insurance. Further information about factors that could affect the Company’s financial and other results is included in our Annual Report on Form 10-K as filed on April 2, 2007, which can be viewed on the SEC’s website. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. As a result, you should not place undue reliance on forward-looking statements, which reflect management’s views only as the date hereof. The Company undertakes no obligation to revise or update any forward-looking statement, or to make any other forward-looking statements whether as a result of new information, future events or otherwise.
Non-GAAP Financial Measures
Credit Agreement EBITDA is used in the calculations of the interest coverage and leverage ratios that are included in the covenants contained in our existing senior secured credit agreement. Credit Agreement EBITDA is not a measure of financial performance computed in accordance with GAAP and should not be considered in isolation or as a substitute for operating income, net income, cash flows from operations or other statement of operations or cash flow data prepared in conformity with GAAP, or as measures of profitability or liquidity. In addition the calculation of Credit Agreement EBITDA is susceptible to varying interpretations and calculation, and the amounts presented may not be comparable to similarly titled measures of other companies. Credit Agreement EBITDA may not be indicative of historical operating results, and we do not mean for it to be predictive of future results of operations or cash flows.
Accompanying Schedules
We have reported our operating results and financial position for all periods subsequent to August 11, 2005, as Successor Periods and all periods prior to August 11, 2005, as Predecessor Periods. For purposes of presenting a comparison of our 2005 results to the 2006 periods, we have presented our 2005 results in the accompanying schedules as the mathematical addition of our operating results for the Predecessor Period from January 1, 2005 through August 10, 2005, and our operating results for the Successor Period from August 11, 2005 to December 31, 2005 (“Combined”). We believe that this presentation provides the most meaningful information about our operating results. This approach is not consistent with GAAP and may yield results that are not strictly comparable on a period-to-period basis.
LifeCare, based in Plano, Texas, operates 19 long term acute care hospitals located in nine states. Long term acute care hospitals specialize in the treatment of medically complex patients who typically require extended hospitalization. For more information on LifeCare, visit our website at http://www.lifecare-hospitals.com/.
Schedule 1A Condensed Consolidated Statements of Operations For the Three Months Ended December 31, 2005 and 2006 (In thousands) (Unaudited) % 2005 2006 Change Net patient service revenue $79,158 $79,868 0.9% Expenses: Salaries, wages and benefits 36,365 36,765 1.1% Supplies 7,967 7,281 -8.6% Rent 4,262 4,541 6.5% Other operating expense 17,507 17,087 -2.4% Provision for doubtful accounts 4,836 3,385 -30.0% Depreciation and amortization 4,073 3,054 -25.0% Goodwill impairment charges 30,403 19,000 -37.5% Long-lived asset impairment charges – 945 – Insurance recoveries (7,000) – -100.0% 98,413 92,058 -6.5% Operating income (19,255) (12,190) -36.7% Interest expense, net 8,283 8,234 -0.6% Gain on early extinguishment of debt – – – Income before income taxes (27,538) (20,424) -25.8% Provision for income taxes (1,522) (802) -47.3% Net income $(26,016) $ (19,622) -24.6% Reconciliation to Credit Agreement EBITDA: Operating Income – per above $(19,255) $ (12,190) -36.7% Adjusted for: Depreciation and amortization 4,073 3,054 -25.0% Stock compensation expense – 164 – South Texas relocation expenses – 1,580 – New Orleans operations, net of proceeds (54) 297 -650.0% Start-up losses 793 22 -97.2% Impairment charges 30,403 19,000 -37.5% Other credit agreement add-back items 411 406 -1.7% Credit Agreement EBITDA $16,371 $12,333 -24.7% Schedule 1B Condensed Consolidated Statements of Operations For the Year Ended December 31, 2005 and 2006 (In thousands) (Unaudited) % 2005 2006 Change Net patient service revenue $346,270 $325,882 -5.9% Expenses: Salaries, wages and benefits 150,324 145,340 -3.3% Stock compensation associated with merger 54,530 – -100.0% Supplies 32,410 32,144 -0.8% Rent 17,786 18,080 1.7% Other operating expense 79,380 77,206 -2.7% Provision for doubtful accounts 9,234 7,673 -16.9% Depreciation and amortization 9,471 11,856 25.2% Goodwill impairment charges 68,000 43,600 -35.9% Long-lived asset impairment charges 6,206 – -100.0% Insurance recovery (7,000) (5,333) -23.8% 420,341 330,566 -21.4% Operating income (74,071) (4,684) -93.7% Gain on early extinguishment of debt – (1,329) – Loss of disposition of asset – 945 – Interest expense, net 15,400 32,819 113.1% Income before income taxes (89,471) (37,119) -58.5% Provision for income taxes (6,770) 3,707 -154.8% Net income $ (82,701) $(40,826) -50.6% Reconciliation to Credit Agreement EBITDA: Operating Income – per above $ (74,071) $(4,684) -93.7% Adjusted for: Depreciation and amortization 9,471 11,856 25.2% Cost report adjustment – 3,871 – Stock compensation expense 54,530 632 -98.8% South Texas relocation expenses – 1,709 – Other merger related expenses 6,791 – -100.0% New Orleans operations, net of proceeds 1,509 (3,573) -336.8% Start-up losses 1,077 1,489 38.3% Goodwill impairment charge 74,206 43,600 -41.2% Other credit agreement add-back items 3,220 2,850 -11.5% Credit Agreement EBITDA $76,733 $57,750 -24.7% Schedule 2 Condensed Consolidated Balance Sheets As of December 31, 2005 and 2006 (In thousands) (Unaudited) December 31, December 31, 2005 2006 Assets Current assets: Cash and cash equivalents $19,843 $33,250 Accounts receivable, net 63,283 67,464 Estimated third-party payer settlements 8,267 – Income taxes receivable 17,380 6,418 Deferred income taxes 8,020 9,604 Other current assets 13,034 8,058 Total current assets 129,827 124,794 Property and equipment, net 61,100 78,418 Goodwill and other identifiable intangibles, net 338,550 318,745 Other assets 14,637 14,461 $544,114 $536,418 Liabilities and Stockholder’s Equity Current liabilities: Payables and accruals $39,384 $45,346 Estimated third-party payer settlements – 8,308 Current installments of long-term debt 2,550 3,188 Current installments of obligations under capital leases 5,364 3,925 Total current liabilities 47,298 60,767 Obligations under capital leases, excluding current installments 4,767 1,909 Long-term debt, excluding current installments 401,813 396,262 Accrued insurance 7,194 6,348 Deferred income taxes 14,539 13,599 Other noncurrent liabilities 2,411 7,035 Total liabilities 478,022 485,920 Stockholder’s equity 66,092 50,498 $544,114 $536,418 Schedule 3 Condensed Consolidated Statements of Cash Flows For the Year Ended December 31, 2005 and 2006 (In thousands) 2005 2006 Cash flows from operating activities: Net (loss) $(82,701) $(40,826) Adjustments to reconcile net (loss) to net cash provided by operating activities: Depreciation and amortization 10,386 13,102 Provision for doubtful accounts 9,234 7,673 Impairment charges 74,206 43,600 Gain on early extinguishment of debt – (1,329) Loss on disposition of asset – 945 Accrued interest on shares subject to mandatory redemption 733 – Deferred income taxes (6,180) (2,524) Equity compensation amortization – 632 Changes in operating assets and liabilities: Patient accounts receivable (20,055) (11,854) Other current assets (23,952) 15,150 Other assets (847) (1,209) Estimated third-party payer settlements 5,556 16,574 Accounts payable and accrued expenses 70,115 5,962 Other liabilities 1,105 3,777 Net cash provided by operating activities 37,600 49,673 Cash used in investing activities: Merger transaction, net of cash acquired (518,642) – Purchases of property and equipment (3,855) (28,235) Insurance recoveries for property and equipment – 788 Net cash used in investing activities (522,497) (27,447) Cash flows used in financing activities: Equity investment by Holdco 132,698 – Restricted stock awards granted 28 – Proceeds from credit facility 255,000 – Proceeds from senior subordinated notes 150,000 – Deferred financing costs (12,613) – Payments of notes payable and long-term debt (12,411) (3,443) Payments on obligations under capital leases (4,850) (5,376) Net cash provided by (used in) financing activities 507,852 (8,819) Net increase in cash and cash equivalents 22,955 13,407 Cash and cash equivalents, beginning of period 6,678 19,843 Less: Ending cash on August 10, 2005 acquired in Transaction included in investing activities (9,790) – Cash and cash equivalents, end of period $19,843 $33,250 Schedule 4 Selected Operating Statistics For the Year Ended December 31, 2005 and 2006 Three months Three months ended ended December 31, December 31, 2005 2006 Number of hospitals within hospitals (end of period) 12 12 Number of freestanding hospitals (end of period) 6 8 Number of total hospitals (end of period) 18 20 Licensed beds (end of period) 893 926 Average licensed beds (1) 899 905 Admissions 2,111 2,099 Patient days 57,410 56,410 Average length of stay 27.0 26.9 Occupancy rate 69.4% 67.8% Percent net patient service revenue from Medicare 74.6% 72.1% Percent net patient service revenue from commercial payors and Medicaid (2) 25.4% 27.9% Net patient service revenue per patient day $1,379 $1,416 Year ended Year ended December 31, December 31, 2005 2006 Number of hospitals within hospitals (end of period) 12 12 Number of freestanding hospitals (end of period) 6 8 Number of total hospitals (end of period) 18 20 Licensed beds (end of period) 893 926 Average licensed beds (1) 969 889 Admissions 9,182 8,318 Patient days 242,080 226,863 Average length of stay 26.7 27.3 Occupancy rate 68.5% 69.9% Percent net patient service revenue from Medicare 76.0% 71.6% Percent net patient service revenue from commercial payors and Medicaid (2) 24.0% 28.4% Net patient service revenue per patient day $1,430 $1,436 (1) The average licensed beds are only calculated on the beds at locations that were open for operations during the applicable period, and excludes bed at locations prior to openings or subsequent to closures. (2) The percentage of net patient service revenue from Medicaid is less than one percent for each of the periods presented.
LifeCare Holdings, Inc.
CONTACT: Phillip Douglas for LifeCare Holdings, Inc., +1-469-241-5137
Web site: http://www.lifecare-hospitals.com/