Advocat second-quarter revenues increase 3.4% to $141.6 million

Aug 10 2010

Advocat Inc. (Nasdaq:AVCA) today announced its results for the second quarter and six months ended June 30, 2010. On August 5, 2010 the Company declared a third quarter dividend of 5.5 cents per common share. The dividend will be paid October 14, 2010 to shareholders of record on September 30, 2010.

Highlights for Second Quarter 2010

Key highlights of continuing operations for the second quarter of 2010 compared to the second quarter of 2009 include the following:

• Diluted net income per common share from continuing operations was $0.15 in 2010 and $0.10 in 2009.
• Occupancy increased to 78.2% in 2010 compared to 76.4% in 2009, and total average daily census increased to 4,196 in 2010 from 4,090 in 2009, an increase of 2.6%. 
• Medicare average daily census increased to 565 in 2010 compared to 553 in 2009, an increase of 2.2%. Medicare and managed care census combined increased 2.8%.
• Revenue increased 3.2%, to $71.5 million in 2010, compared to $69.3 million in 2009.
• Medicare rates decreased 2.9% compared to 2009 as a result of CMS reducing Medicare rates effective October 1, 2009.
• Medicaid rates increased 2.0% in 2010 compared to 2009 due to patient acuity levels and rate increases in certain states. These rate increases were partially funded by increased provider taxes.
• General and administrative expenses increased $0.4 million primarily due to non-recurring costs totaling $0.4 million for executive severance for the Company's Senior Vice President of Nursing Home Operations and hiring and relocation costs related to the new Chief Operating Officer and other regional management positions. 

CEO Remarks

William R. Council, III, noted, "Second quarter results reflect our continued trend of steady improvements to our business. Revenue, occupancy and net income from continuing operations were higher again this quarter. We saw a combined increase of 2.8% in our skilled Medicare and managed care average daily census compared to the second quarter of 2009, and a 2.6% increase in total census. This is the seventh consecutive quarter where our results have shown sequential improvement in at least one of our three critical measurements: average daily census, Medicare census, and funds from operations."

Other Highlights for the Second Quarter 2010

Revenue increased to $71.5 million in 2010 from $69.3 million in 2009, an increase of $2.2 million, or 3.2%. This increase is primarily due to higher patient census and increased Medicaid rates in certain states, partially offset by the effects of lower Medicare rates following a reduction effective October 1, 2009. 

The following table summarizes key revenue and census statistics for continuing operations for each period:    

The Company's average rate per day for Medicare Part A patients decreased 2.9% in 2010 compared to 2009 primarily as a result of a CMS reduction in Medicare rates effective October 1, 2009. The Company's average rate per day for Medicaid patients increased 2.0% in 2010 compared to 2009 as a result of rate increases in certain states, partially funded by increased provider taxes, and increasing patient acuity levels. Taking higher provider taxes into consideration, the net increase in average rate per day for Medicaid patients was 1.5%. 

• Operating expense increased to $56.4 million in 2010 from $54.1 million in 2009, an increase of $2.3 million, or 4.3%. Operating expense increased to 78.9% of revenue in 2010, compared to 78.0% of revenue in 2009. The increase in operating expense as a percent of revenue is due to the effects of the Medicare rate cut imposed in 2009 together with lower Medicaid rate increases. 
• The largest component of operating expenses is wages, which increased to $34.5 million in 2010 from $33.1 million in 2009, an increase of $1.4 million, or 4.2%. Average merit increases for operating personnel were approximately 2.8% for the period, and census increases accounted for the remaining increase. 
• Cash expenditures for professional liability costs of continuing operations were $0.4 million higher in 2010 compared to 2009. 
• General and administrative expenses were $5.1 million in 2010, compared to $4.7 million in 2009, an increase of $0.4 million.  The increase was primarily due to non-recurring costs totaling $0.4 million for executive severance for the Company's Senior Vice President of Nursing Home Operations and hiring and relocation costs related to the new Chief Operating Officer and other regional management positions. Excluding these nonrecurring costs, general and administrative expenses were 6.5% of revenue in 2010, compared to 6.7% in 2009. 

Funds Provided by Operations

Funds provided by operations were $3.1 million in the second quarter of 2010 compared to $4.1 million in 2009. The decrease is primarily due to the effects of Medicare rate cuts that reduced revenue by approximately $0.7 million in 2010, cash payments for professional liability costs, which were approximately $0.4 million higher in 2010 compared to 2009, and non-recurring costs for executive severance, hiring and relocation costs discussed above.  

Revenue and Income Highlights for Six Months

Revenues increased to $141.6 million in 2010 from $137.0 million in 2009, an increase of $4.6 million, or 3.4%. This increase is primarily due to higher patient census and increased Medicaid rates in certain states, partially offset by the effects of lower Medicare rates following a reduction effective October 1, 2009.

Net income from continuing operations was $1.7 million for six months ended June 30, 2010 compared to $899,000 for the same period in 2009. Diluted net income from continuing operations per common share was $0.26 and $0.13 for 2010 and 2009, respectively.

Facility Renovations 

As of June 30, 2010, the Company has completed renovations at thirteen facilities and its fourteenth and fifteenth projects were completed July 2010. The Company is developing plans for additional renovation projects. A total of $21.2 million has been spent on the renovation program to date, with $14.1 million financed through Omega, $6.0 million financed with internally generated cash, and $1.1 million financed with long-term debt. A table is included with this press release summarizing operating results at renovated nursing centers.

Lease agreement – West Virginia Nursing Center 

On July 14, 2010, the Company entered into an agreement with a real estate developer that will construct, furnish, and equip a 90 bed skilled nursing facility in Milton, West Virginia which we will then lease. The facility will utilize a Certificate of Need the Company initially obtained in the June 2009 acquisition of certain assets of a skilled nursing facility in Milton, West Virginia. The initial lease term is 20 years from the date the facility is completed and fit for occupancy as a skilled nursing facility. The Company has the option to renew the lease for two additional five-year periods. The lease is conditioned upon the Company obtaining the approval of the West Virginia Health Care Authority and the developer obtaining a commitment for a loan to finance the facility's construction cost. The agreement also provides the Company the right to purchase the facility beginning on the twelfth month of the initial term of the lease and ending after the sixtieth month of the Lease for a purchase price ranging from 110% to 120% of the total project cost.