Five Star Quality Care, Inc. (FVE)

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Five Star Quality Care, Inc. (FVE)

Q4 2009 Earnings Call Transcript

February 18, 2010 10:00 am ET

Executives

Tim Bonang – VP, IR

Bruce Mackey – President and CEO

Paul Hoagland – Treasurer and CFO

Analysts

Kevin Ellich – RBC Capital

Joel Ray – Davenport

Michael Demaray – Elevated Capital

George Walsh – Gilford Securities

Presentation

Operator

Good day and welcome to the Five Star Quality Care fourth quarter 2009 earnings result conference call. All participants are currently in a listen-only mode. You will have an opportunity to ask questions during the Q&A session. (Operator Instructions) Please note the call is being recorded.

And at the time for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you, operator. Good morning, everyone. Joining me on today's call is Bruce Mackey, Five Star's President and CEO and Paul Hoagland, Five Star's CFO. The agenda for today's call includes a presentation by management followed by a question-and-answer session. I would also like to note the recording and retransmission of today's conference call is strictly prohibited without prior written consent of Five Star.

Before we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities Laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, February 18, 2010. The company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding the supporting period. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements.

And now I would like to turn the call over to Bruce Mackey.

Bruce Mackey

Thanks, Tim and thanks to everyone for joining us this morning. For the three months ended December 31, 2009, net income from continuing operations was $0.02 per basic and diluted share compared to net loss of $0.21 per basic and diluted share, respectively, for the same period last year. However, the fourth quarter of both 2009 and 2008 included certain non-operating items.

The 2009 results included several items that in aggregate resulted in the positive impact of $412,000 or $0.01 per diluted share. These items included, one, a $317,000 gain due to the early extinguishment of our convertible senior notes. Two, a $73,000 unrealized gain on our UBS put right related to our auction rate securities. And three, a $22,000 unrealized gain on our holdings of auction rate securities.

By comparison, the fourth quarter of 2008 included several items that in aggregate had a negative affect of $7.9 million or $0.5 cents per basic and diluted share.

As a reminder, these items included, one, a $5.4 million loss on impairment of our investments in certain marketable securities held by our captive insurance companies. Two, a $5.9 million unrealized loss on our holdings of auction rate securities. Three, a $1.8 million loss due to impairment of long lived assets and four, a $5.9 million loss due to impairment of goodwill, offset by an $11.1 million gain resulting from UBS AG's agreement to repurchase our auction rate securities at par at our election between in June 2010.

Excluding these items, net income from continuing operations per diluted share was $0.01 in the fourth quarter of 2009 versus $0.04 in 2008.

I would like to point out some additional items that on a sequential basis negatively affected our results this quarter. On October 1, our skilled nursing Medicare rates affectively were decreased by 1.1%. This decrease amounted to approximately $400,000 of lost revenues.

In addition, our state Medicaid rates have not kept pace with inflation. Many states are under enormous budgetary pressures right now due to the weak economy and have either cut their Medicaid rates from prior years or reduced the increases they have historically given.

At year end, we pay out accrued vacation time. This year end was no different and we paid out approximately $13.9 million of accrued vacation time. There are many benefits to paying out vacation time such as lower overtime and third-party staffing costs. However, we incurred an additional $725,000 of payroll taxes related to these payouts.

We incurred about $500,000 of extra cost related to holiday activities that took placed during the fourth quarter. Most of this was related to higher food costs that we expect to come back to a normal level during the first quarter of 2010. These extra costs are used to help out in our marketing and resident retention efforts.

And lastly, we took an additional charge of $500,000 related to bad debt expense. Some of this expense is related to our private pay business and the remainder of this charge is related to government reimbursed skilled nursing business. We have seen many states cut the staff and departments responsible to process state payments and this has dragged out our collection efforts. We are hopeful that even though we have taken then charge that we will still recover some of these amounts. In total these additional items account for 5/10 per fully diluted share.

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