Despite Losses, Analysts Give Beverly CEO Thumbs Up

William R. Floyd wants to be the guy who turned around a floundering company.

The 58-year-old president and CEO of Beverly Enterprises Inc. of Fort Smith now says he’s more than halfway to his goal.

Three years ago, when Beverly tapped Floyd to be president, the company had about $15 million in the bank and about $1 billion in debt. Now, Beverly has $125 million in cash and has knocked its debt down by $200 million.

Floyd said the $450 million in losses that the publicly traded company has reported during the past two years isn’t a good indication of the health of the company. The losses are mainly tied to accounting changes and Medicare reductions, not cash losses, he said.

Stock analysts are giving Floyd high marks for developing a blueprint that looks like it might revive Beverly, which was coughing and wheezing just a few years ago.

“Key indicators like occupancy, patient-mix quality … all continue to trend in the right direction and reflect fundamental improvement in [Beverly’s] core operations,” said a Feb. 21 research bulletin by Stephens Inc. of Little Rock.

Floyd and his new management team have juggled Medicare cuts and rising patient liability insurance rates along with the ghosts of patient neglect charges and overbilling the federal Medicare program.

Still, “they’re doing better than a lot [of nursing home companies],” said analysts James Kumpel for Raymond James & Associates. “They’re certainly not the best in terms of financial performance.”

The company’s stock price has sunk to about $2, after hitting a 52-week high of $9.18 on April 24, 2002. Beverly’s price-to-earning ratio is just 7.8, compared with 12.61 for the industry and 15.38 for the S&P 500.

Beverly on May 13 reported a $12.2 million profit for the first quarter, or about 12 cents per share. That compares to a $56.7 million loss (54 cents per share) for the first quarter of 2002.

Culture of Victimhood

Floyd left his job as CEO of Choice Hotels International Inc. to become president of Beverly in April 2000. Before that he was the former senior vice president of operations of Taco Bell Corp.

He was promoted to chief executive officer in February 2001.

One of the first things that caught Floyd’s attention when he arrived was a prevailing attitude of victimhood, at Beverly and in the nursing home industry as a whole. Floyd believed that any turnaround would have to start with a change of that mindset.

“We have the ability to control our own success,” Floyd preached to the employees.

Meanwhile, reducing the company’s exposure to patient care liability costs needed to be addressed quickly.

He began placing “for sale” signs in the yards of underperforming and troubled nursing homes. The company has sold 82 nursing homes since December 2000, leaving it with 460. The biggest selloff came in 2001 when Beverly abandoned the Florida market, where liability costs had been soaring.

Leaving Florida “was probably the smartest decision I ever made in my business career,” Floyd said.

Beverly still plans to sell “a significant” number of nursing homes in the next two years. Floyd declined to release more specific details, although any and all of its facilities in Arkansas are rumored to be on the block.

Dropping unprofitable nursing homes is a good strategic move, said Jeffrey Hoffman, an analyst for Buckingham Research.

“That’s been a pretty good program in the health care industry to turn profitability around,” he said. “One of the things in a turnaround, you have to get the assets down to a level that you can manage effectively, and so that’s what they’re doing.”

The streamlined company is more efficient than it has been in years, he said.

“It doesn’t show yet because of these other problems, but they’re making progress,” Hoffman said.

New Revenue

While the company is reducing its nursing home portfolio, it has targeted new revenue generators in a traditionally low-growth, low-margin industry.

Floyd is counting on specialized units for Alzheimer’s disease patients to fuel the hottest sales boom at Beverly.

Beverly has about 100 Alzheimer’s care units, and Floyd wants that number to grow to 200 in the next three to five years.

“They’ve been extraordinary in generating profits,” he said. “The investment in an Alzheimer’s care unit is between $200,000-$250,000, and we’ve been constantly generating 20 percent ROI type of returns.”

The Alzheimer’s units are more profitable because they raise the overall occupancy level of a nursing home, which is where the company generates it revenue, said Beverly spokesman Blair Jackson.

Another service on which Beverly is focusing is its AEGIS Therapies corporate units, which provide therapy to patients recovering from a stroke.

Two years ago, Beverly’s rehabilitation business was only serving its own residents.

“Within the last 18 months, because of the quality of the product we provide, we have gone from zero to a run rate of something close to $75 million in revenue,” Floyd said. “The margins on that business are in the 15-20 percent range.”

Over the next three to five years, Beverly is banking on bringing the division to $200 million-$300 million in annual revenue.

“AEGIS is clearly the lead horse in our service business,” Floyd said.

A third strategy for growth is developing a department for new products and innovations.

Floyd said the people he has quizzed about the nursing homes business told him the method for delivering long-term care is broken. And the company that can repair it will be successful.

“In this industry, there is no innovation,” Floyd said. “I’ve never worked in an industry where you don’t have new products and innovations.”

As a result of the department, Beverly recently unveiled a new type of nursing home that “creates a nursing home environment where … you treat people in a much more caring way, in addition to their clinical needs,” Floyd said.

Beverly currently has four of these types of homes across the country.

“We’re excited about it because we think this will provide us the opportunity to provide leadership in the industry and to change the model for what a nursing home is and how it’s perceived by the general public.”

The Settlements

In trying to bury the past, Beverly in recent months settled several high-profile cases.

A nurse at a Beverly nursing home in Santa Barbara, Calif., committed suicide in 2000 by shooting herself in the heart. She left behind a journal that launched an investigation into the nursing home and resulted in the California Attorney General’s office charging Beverly with two felony counts of elder abuse.

Beverly pleaded no contest on Aug. 1 to the charges and agreed to pay $2.6 million.

“We stand by the quality of care that we provided,” Floyd said. “We vigorously dispute the facts of the thing, but there was a lot of politics involved.”

In October, Beverly reached a final settlement with the Centers for Medicare and Medicaid Services and agreed to repay the federal government $175 million for fraudulent billings. The settlement involves Medicare reimbursement problems since 1996.

On March 4, Beverly also agreed to a $1.5 million settlement with the Arkansas Attorney’s General’s Office over complaints of patient neglect.

“We don’t agree with the findings,” Floyd said. “A lot of these things had not been investigated … We felt it was in our best interest to put the past behind us, which we did in this settlement.”

Thrifty Employees

Just as Beverly seemed to be gaining momentum, Medicare funding for nursing homes was slashed 10 percent in October. For Beverly, the cuts meant a $56 million reduction in its annual cash flow.

Although there is talk in Congress that the funding might be restored later this year, Floyd isn’t holding his breath.

“We did not build our 2003 plan on hope,” he said. “We did not build it on what might be.”

As a result of Medicare cuts, rising liability and workers’ compensation insurance premiums and other increases, Beverly was facing a $100 million shortfall in 2003.

Floyd turned to his employees for help. He wanted them to submit cost-saving strategies to their supervisors without touching the quality of care or the ability to comply with the various regulatory requirements.

He expected employees could come up with about $2 million-$3 million worth of ideas, but they surprised him by finding ways to save $15 million.

“Three years ago this would have never happened,” Floyd said. “People would have been passive. People would have thought, well, there’s nothing I could do about it, anyway.”

To Floyd, it indicated that the culture at Beverly was changing.

“People were willing to say, ‘Hey I can control my destiny. We’re not just going to be reactive. We can actually do something about the cutbacks in Medicare,'” he said.

After meeting with the management team, Floyd slashed $54 million from the budget.

“We could have gotten to $100 million, but I felt [more cuts] weren’t in the long-term interest of the company,” he said.

Occupancy Up

The company has already suffered through two years of losses under Floyd.

In 2001, it reported a net loss of $301.4 million. For 2002, the bottom line was a negative $146.1 million on revenue of $2.42 billion.

But Floyd said the real barometer for the company involves such indicators as occupancy rates. Beverly’s 2002 occupancy rate of 87.9 percent was the best since 1998.

Still, Beverly has a fair amount of debt, said Kumpel, the Raymond James analyst.

Beverly is “still essentially captive to a number of the strategic decisions made by the prior management team over the last decade,” Kumpel said. “I personally admire the work that Bill Floyd and [Chief Financial Officer] Jeff Freimark and the team at Beverly have done in attempting to position Beverly for success in the long run. But in the meantime, it’s a painful, difficult process for employees, for shareholders, and I’m sure for management as well.”

Kumpel said his company hasn’t provided any investment banking services to Beverly and he doesn’t own any stock in it, although some affiliates of Raymond James may own Beverly stock.

Floyd said every single thing that has adversely impacted the company’s earnings had to do with things that took place before he or any of his management team arrived.

“Now, do I like it? Hell no, I don’t like it. But I gotta tell you: When you sign up for a turnaround, that’s part of what you do,” he said.