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01/11 11:49
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call presents a mixed picture: strong revenue growth in some divisions, but challenges in critical illness recovery. The reaffirmed guidance and strategic focus on joint ventures are positive. However, regulatory issues and unclear management responses about critical illness impact cast doubts. The stock repurchase is a positive sign, but the debt level and margin declines in some areas are concerning. Given the market cap and mixed signals, a neutral stock price reaction is expected.
Consolidated Revenue Revenue grew nearly 5% to $1.3 billion year-over-year. The increase was attributed to overall growth in operations.
Adjusted EBITDA Increased to $125.4 million from $124.7 million in the prior year, reflecting operational improvements.
Earnings per Common Share Rose 88% to $0.32 from $0.17 per share in the same quarter prior year, driven by improved profitability.
Inpatient Rehab Hospital Division Revenue Revenue rose 17% year-over-year to $313.8 million. The growth was driven by increased demand and expansion of services.
Inpatient Rehab Hospital Division Adjusted EBITDA Increased nearly 15% to $71 million, with adjusted EBITDA margin slightly declining to 22.6% from 23.1% in the prior year due to early-stage operations of new hospitals.
Outpatient Rehabilitation Division Revenue Revenue increased 3.8%, driven by a corresponding 3.8% increase in patient volume. However, a 3.2% reduction in Medicare physician fee schedule rates caused a $3 million decrease in revenue.
Outpatient Rehabilitation Division Adjusted EBITDA Increased 6.1% year-over-year, with the division's adjusted EBITDA margin increasing to 9.3% from 9.1%.
Critical Illness Recovery Hospitals Division Revenue Revenue was $601.1 million, a decline of 1% from the same quarter last year, primarily due to regulatory changes such as the increase in high-cost outlier threshold and the 20% transmittal rule.
Critical Illness Recovery Hospitals Division Adjusted EBITDA Declined 22% year-over-year, with adjusted EBITDA margin decreasing to 9.4% from 11.9% in the prior year, mainly due to regulatory changes.
Debt Outstanding $1.9 billion of debt outstanding at the end of the quarter, including $1.04 billion in term loans, $250 million in revolving loans, $550 million in senior notes, and $33 million in other debt.
Cash Flow from Operating Activities Generated $110.3 million of cash flow in the second quarter, reflecting strong operational performance.
Cash Used in Investing Activities $64.7 million used for purchases of property and equipment in the second quarter.
Cash Used in Financing Activities $46.5 million used, including $85.1 million for share repurchases, $7.9 million in dividends, and $12 million in net distributions, offset by $70 million in net borrowings.
Recognition of Rehabilitation Hospitals: 8 hospitals recognized among the nation's best by U.S. News & World Report, including Kessler Institute for Rehabilitation at #4 and Baylor Scott & White Institute for Rehabilitation at #8.
New Hospital Openings and Expansions: Opened a second hospital with UPMC in Central Pennsylvania, added a 12-bed acute rehab unit in Tallahassee, Florida, and expanded the Pensacola, Florida hospital with 8 additional beds. Launched a 12-bed neuro transitional care unit with SSM Health in Missouri.
Future Expansion Plans: Plans to add 382 rehab beds by mid-2027, including new hospitals and expansions in key markets such as Temple, Texas; Memphis, Tennessee; Orlando, Florida; Tucson, Arizona; Ozark, Missouri; and Jersey City.
Outpatient Rehabilitation Division Growth: Expanded clinic count by 8 in the last quarter, reflecting growth in outpatient services.
Inpatient Rehabilitation Division Demand: Continued focus on growing presence in key markets due to increasing demand for inpatient rehab services.
Revenue Growth: Consolidated revenue grew nearly 5% to $1.3 billion in Q2 2025.
Adjusted EBITDA: Increased to $125.4 million from $124.7 million in the prior year.
Earnings Per Share: Rose 88% to $0.32 from $0.17 in the same quarter prior year.
Stock Repurchase Program: Repurchased over 5.7 million shares at an average price of $14.86, totaling $85.1 million.
Dividend Declaration: Declared a cash dividend of $0.0625 per share, payable on August 28, 2025.
Policy Advocacy: Engaging with regulators for potential reforms in LTAC reimbursement policies to address challenges in high-acuity patient care.
LTAC Reimbursement System Challenges: The company faces headwinds with the LTAC reimbursement system, including a 56% reduction in Medicare spend since the enactment of the 2013 LTAC criteria policy. This has led to the closure of over 100 LTAC hospitals (24% closure rate) and a significant reduction in reimbursement for higher acuity patients. The high-cost outlier threshold, developed for a less acute patient population, has further reduced reimbursement rates.
Regulatory Changes Impacting Critical Illness Recovery Hospitals: Regulatory changes, including the implementation of the 20% transmittal rule and an increase in the high-cost outlier threshold, have negatively impacted revenue and adjusted EBITDA in the critical illness recovery hospitals division. Revenue declined by 1%, and adjusted EBITDA dropped by 22% year-over-year.
Medicare Rate Reductions: A 3.2% reduction in Medicare physician fee schedule rates caused a $3 million decrease in revenue for the outpatient rehabilitation division during the quarter. This reduction offsets improvements in commercial managed care rates.
Occupancy Rate Challenges in Inpatient Rehab Hospitals: The occupancy rate in inpatient rehab hospitals was lower than the prior year at 82%, reflecting early-stage operations of new hospitals. This could impact revenue and operational efficiency.
Debt Levels and Interest Expenses: The company has $1.9 billion in debt, with interest expenses rising to $30 million in the second quarter compared to $28 million in the prior year. High debt levels and increasing interest expenses could strain financial resources.
Future Expansion Plans: The company plans to add 382 rehab beds by the end of the first half of 2027, including 294 consolidating beds, 88 non-consolidating beds, and 30 critical illness beds. This will be achieved through new openings and bed additions in high-demand markets.
Upcoming Openings in 2025: In Q3 2025, the company plans to open a 45-bed hospital in Temple, Texas, and a 30-bed critical illness recovery hospital in Memphis, Tennessee. Later in 2025, they plan to open their fourth Cleveland Clinic Rehab Hospital, a 32-bed acute rehab unit in Orlando, Florida, and complete a 10-bed expansion in an existing rehab hospital.
2026 Expansion Plans: The company plans to open three rehab hospitals in 2026, including a 58-bed facility in Tucson, Arizona, a 63-bed hospital in Ozark, Missouri, and a 60-bed hospital in New Jersey. They also plan to add an acute rehab unit and two neuro transitional units.
2027 Expansion Plans: In 2027, the company plans to open a 76-bed facility in Jersey City under the Kessler brand and expand an existing hospital.
Capital Allocation Strategy: The company will continue to evaluate capital allocation strategies, including strategic investments for growth, debt reduction, share repurchases, and cash dividends.
Revenue and Earnings Guidance for 2025: The company reaffirms its 2025 revenue guidance of $5.3 billion to $5.5 billion, adjusted EBITDA of $510 million to $530 million, and adjusted earnings per share of $1.09 to $1.19.
Capital Expenditures for 2025: The company narrows its 2025 capital expenditure projection to $180 million to $200 million.
Cash Dividend: The Board of Directors declared a cash dividend of $0.0625 per share, payable on August 28, 2025, to stockholders of record as of August 13, 2025.
Share Repurchase Program: The company repurchased over 5.7 million shares of stock at an average price of $14.86 per share, totaling $85.1 million under the Board-authorized stock repurchase program.
Despite strong financial metrics and expansion plans, the lack of raised guidance due to outpatient segment softness and unchanged EBITDA guidance offset positive impacts. The Q&A revealed pressures from Medicare rates and payer mix shifts, which may concern investors. The market cap suggests moderate stock price movement. Thus, a neutral rating is appropriate.
The earnings call presents a mixed picture: strong revenue growth in some divisions, but challenges in critical illness recovery. The reaffirmed guidance and strategic focus on joint ventures are positive. However, regulatory issues and unclear management responses about critical illness impact cast doubts. The stock repurchase is a positive sign, but the debt level and margin declines in some areas are concerning. Given the market cap and mixed signals, a neutral stock price reaction is expected.
The earnings call revealed mixed financial performance with a decline in EBITDA and concerns over regulatory risks, particularly affecting LTAC. Despite positive growth in the Inpatient Rehab division and shareholder returns through dividends and stock repurchases, the company's high debt level and regulatory uncertainties pose significant risks. The Q&A highlighted management's unclear responses regarding mitigation strategies for regulatory impacts, adding to the negative sentiment. Given these factors and the market cap, a negative stock price movement is anticipated over the next two weeks.
The earnings call presents a mixed outlook. Financial performance shows growth in revenue and EBITDA, but there are concerns with debt levels, declining margins in the inpatient rehab division, and operational challenges. The Q&A section highlights uncertainties, particularly around startup costs and margin impacts. Positive factors include revenue growth and optimistic guidance for new facilities, but high debt and lack of share repurchase are negative. Given the market cap, these mixed signals likely lead to a neutral stock price movement.
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