Manor Care 2Q earnings drop 6%; accelerated share buyback possible with funding from securities offer

By Rebecca Melvin

Princeton, N.J., July 22 - Manor Care Inc. reported Friday a 6% fall in its second-quarter earnings amid several one-time charges and an unexpected drop in occupancy rates at its facilities.

The Toledo, Ohio-based owner and operator of long-term care centers also said that it has refinanced a longer, larger revolver and may repurchase shares with funding from a new securities offering.

The company did not specify what type of securities it planned to offer but said that the financing would be of the same stripe that it has offered in the past.

In 2003 the company issued $90 million of convertible senior notes due 2023 to repurchase company shares.

In addition, the company said Friday that it's looking for ways to deal with expected cuts in funding from the Centers for Medicare & Medicaid Services (CMS) next year.

Manor Care's quarterly income fell to $37.9 million, or 43 cents per share, from $40.1 million, or 45 cents per share, a year ago. One-time net charges of five cents per share from stock-based compensation expenses, an adjustment to lease expenses, and the write-off of deferred finance fees affected the bottom line.

Revenue rose 4.3% to $834 million, compared with $799 million a year ago.

During an earnings conference call, Manor Care chief executive Paul A. Ormand focused on lower occupancy rates for the weakness in its second quarter.

The company warned on July 11 that earnings would be lower than expected primarily as a result of weaker-than-expected census during the last part of the quarter. Occupancy in the company's skilled-nursing facilities dropped more than 1% from the near-record high levels achieved in the first quarter.

"The slippage in our occupancy rates was both unusual and disappointing," Ormand said. Census had been building, including in the first quarter, and it was expected that the momentum would be maintained, he said

A review of lower admission patterns didn't point to a particular geographic region or quality mix for the decline, he said. Instead, average length of stay of patients has dropped and now stands at less than 40 days for Medicare patients. These shorter stays provoke volatility or swings that are generally short-lived, he said.

"These disconnects arise when you have shorter length-of-stay patients," Ormand said.

Manor Care's pricing in the second quarter was up less than 1% compared to the first quarter. And while funding levels from the CMS are set to increase by $10 per patient day in October, by January that funding will be cut by more than $20 per patient day, the company estimates.

"We are disappointed that the proposed rule would reduce rates in 2006 for the care we provide for some of our most critically ill patients," Ormand said. "We and others in our industry have made extensive recommendations to CMS to correct errors in their calculations and to include changes to reflect a more appropriate level of reimbursement before they finalize the rule."

CMS has proposed adding new categories to the skilled nursing Medicare payment structure, which is expected to eventually help offset a portion of the lower average reimbursement.

In addition, the company expects to be able to take advantage of CMS' finalizing its rule, revising the criteria for classifying hospitals as inpatient rehabilitation facilities for purposes of Medicare payment.

The rule is recognition that several diagnoses, particularly therapy following joint replacement, do not require intense rehabilitation provided by inpatient rehabilitation facilities, and appropriate care can be provided more cost-effectively in a skilled nursing center.

"It is still not clear what changes CMS will adopt before finalizing the new rates, but we are already analyzing alternatives for our operating strategy based on the information we have," Ormond said.

At the end of the quarter, the company reported a per day rate for Medicare patients of $355.26, and $146.97 for Medicaid patients. Manor Care derives 30% of its revenue from Medicaid and 38% from Medicare.

The company said that a one-time charge of one cent was related to renewal of its revolver, which was increased to $300 million from $200 million. It includes an accordion that allows an additional $100 million of financing for a total of $400 million. The revolver was also lengthened to five years from three years.

Manor Care also said its board has approved an additional $300 million for share repurchases, with the authorization running through the end of 2006.

Under a previously approved plan, there is about $44 million in share repurchase authority remaining.

The company intends to finance the repurchase of common stock through sources of funding that it has employed in the past. The sources may include offerings of securities not registered under the Securities Act of 1933, the company said.

In discussing financing alternatives for the accelerated repurchase activity, Ormand referred to $86 million in cash, a new, larger bank facility, and the company's access to markets for an offering of securities.

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