Press Releases

GENESIS HEALTHCARE CORPORATION REPORTS SECOND QUARTER FISCAL 2006 RESULTS
4/27/2006

Kennett Square, PA -- 04/27/2006--

  •  Revenues Grow 5.8% on Adjusted Basis Over Prior Year
  •  Earnings Guidance Revised Upward
  •  Capital Spending Program To Be Expanded
  •  $150.0 Million Share Repurchase Program Authorized
  •  Historical Financial Statements to be Restated

Genesis HealthCare Corporation (GHC) (NASDAQ: GHCI) today announced income from continuing operations of $8.2 million, or $0.42 per diluted share, and net income of $8.1 million, or $0.42 per diluted share, for the quarter ended March 31, 2006.  Results in the quarter were negatively impacted by the following three items that were not considered in GHC’s earnings guidance:  $0.05 per diluted share of incremental stock based compensation associated with the growth in value of GHC’s common stock held in its deferred compensation plan, $0.01 per diluted share related to early extinguishment of debt charges, and $0.01 per diluted share related to the restatement of GHC’s financial statements as described in more detail under “Restatement” below.  Estimated restated income from continuing operations in the comparable period in the prior year totaled $12.8 million, or $0.63 per diluted share, and estimated restated net income totaled $12.7 million, or $0.63 per diluted share.   The prior year results include provider assessment revenues and expenses that were recognized in the second quarter of fiscal 2005 attributable to prior periods. (See attached provider assessment table on page 15).  

“While there were a number of significant challenges in the quarter including the implementation of the new 53 RUGs classification system, the launch of Medicare Part D, and therapy caps which impacted rehab caseload and Part B revenues, I am proud of our ability to manage through these sweeping changes,” stated George V. Hager, Jr., Chairman and Chief Executive Officer.  “We worked hard to prepare for the implementation of the new RUGs system and continue our infrastructure improvement in systems and facility renovations as quickly and efficiently as possible. We are encouraged by the early results in our completed specialty units and renovated assets, and look forward to leveraging the impact of these efforts with continued improvement in acuity while seeking to maintain occupancy.” 

Income from continuing operations and net income were $19.6 million, or $1.00 per diluted share, for the six months ended March 31, 2006.  Estimated restated income from continuing operations in the comparable period in the prior year totaled $24.1 million, or $1.19 per diluted share, and estimated restated net income totaled $24.6 million, or $1.21 per diluted share.

Revenue for the quarter ended March 31, 2006 totaled $431.6 million compared to estimated restated revenue of $453.1 million in the comparable period in the prior year.  Revenue for the six months ended March 31, 2006 totaled $862.2 million compared to estimated restated revenue of $851.6 million in the same period in the prior year.  Year-over-year revenue was impacted by $45.1 million and $35.2 million of provider assessments recognized in the quarter and six months periods ended March 31, 2005, respectively, which pertained to prior periods.  Excluding these prior period assessments, revenues for the quarter ended March 31, 2006 grew 5.8%.

EBITDA for the quarter ended March 31, 2006 totaled $34.2 million compared to estimated restated EBITDA of $39.1 million in the prior year quarter.  (See attached reconciliation on page 10).  EBITDA for the quarter ended March 31, 2006 was negatively impacted by $0.2 million, or $0.01 per diluted share, related to early extinguishment of debt charges and $1.0 million, or $0.03 per diluted share, of incremental stock based compensation associated with the October 1, 2005 adoption of SFAS 123R.  The quarter ended March 31, 2005 benefited from $7.7 million, or $0.23 per diluted share, associated with prior period provider assessments, and was negatively impacted by $4.3 million, or $0.12 per diluted share, associated with early extinguishment of debt charges. 

EBITDA for the six months ended March 31, 2006 totaled $73.0 million compared to $76.0 million of estimated restated EBITDA for the comparable period in the prior year.  (See attached reconciliation on page 10).  EBITDA for the six months ended March 31, 2006 was negatively impacted by $0.2 million, or $0.01 per diluted share, related to early extinguishment of debt charges and $1.5 million, or $0.05 per diluted share, of incremental stock based compensation associated with the October 1, 2005 adoption of SFAS 123R.  Estimated restated EBITDA for the six months ended March 31, 2005 benefited from $6.4 million, or $0.19 per diluted share, associated with prior period provider assessments, and was negatively impacted by $4.8 million, or $0.14 per diluted share, associated with early extinguishment of debt charges.

Excluding provider assessments and stock based compensation, EBITDA for the quarter ended March 31, 2006 was in line with estimated restated EBITDA in the comparable period in the prior year.  While top line growth remains strong, margins were impacted by continuing pressures in the rehabilitation services segment and a sharp increase in utility costs.  In addition, earnings per share was impacted by investments in computer hardware related to the deployment of new systems resulting in higher levels of depreciation expense.

Inpatient Services
Inpatient services net revenue totaled $384.5 million in the quarter ended March 31, 2006 compared to inpatient services net revenue of $409.8 million in the prior year quarter, which was impacted by the prior period provider assessments as previously discussed.  Excluding these provider assessments, revenue grew 5.4% in the quarter ended March 31, 2006 primarily due to third party payor rate growth, growth in occupancy and Medicare acuity.  Medicare rates in the quarter ended March 31, 2006 grew 8.0% to $398 per patient day from the prior year quarter as a result of the 3.1% market basket adjustment received on October 1, 2005, and higher Medicare patient acuity.  Medicaid rates in the quarter ended March 31, 2006 grew 2.5% to $184 per patient day from the prior year quarter.  GHC’s reported occupancy grew 140 basis points to 91.6% from 90.2% in the prior year quarter with an average daily census improvement of more than 100 patients in this quarter versus the same period in the prior year.  Adjusting for the change in licensed beds quarter over prior year quarter, occupancy grew 70 basis points. 

Inpatient services EBITDA totaled $50.2 million in the quarter ended March 31, 2006 compared to estimated restated inpatient services EBITDA of $55.8 million in the prior year quarter.  Inpatient estimated restated EBITDA in the quarter ended March 31, 2005 benefited from $7.7 million associated with the prior period provider assessments.  Excluding these provider assessments, inpatient EBITDA grew 4.4% versus the same period in the prior year.

“We had another strong quarter, as our occupancy remained stable, our labor costs moderated, and we successfully transitioned to the new 53 RUGs classification system,” stated James V. McKeon, Chief Financial Officer. “These gains were somewhat offset by higher than expected utility costs, increased depreciation expense, and the impact of therapy caps in the quarter.  Despite all these challenges, on an as adjusted basis, we met expectations for the quarter and we remain optimistic for the balance of the year.”

Rehabilitation Services
Rehabilitation services revenues totaled $58.2 million in the quarter ended March 31, 2006 compared to $53.1 million in the prior year quarter.  Revenues benefited from the implementation of higher pricing, higher patient acuity and improved caseload.

Rehabilitation services EBITDA totaled $3.4 million in the quarter ended March 31, 2006 compared to estimated restated rehabilitation services EBITDA of $4.5 million in the prior year quarter.  Rehabilitation EBITDA was primarily impacted by a reduction of Part B therapy revenue prior to the finalization of the therapy cap exception process.  The rehabilitation business also played a key role in the transition to the new RUGs classification system, contributing to the performance of the inpatient business.  As a result of this emphasis on the inpatient business, together with the Medicare Part B therapy caps, rehab Part B caseload and revenue mix were negatively impacted. 

Balance Sheet and Cash Flow
GHC generated operating cash flow of $28.1 million in the quarter ended March 31, 2006.  The Company ended the quarter with $405.5 million of debt and cash of $91.1 million.  
Capital spending in the quarter ended March 31, 2006 was $21.5 million versus $12.0 million in the prior year quarter and $31.6 million in the immediately preceding quarter.  “The early progress on our capital spending program is promising and we continue to see additional opportunities for investment in our portfolio,” noted McKeon.  “As a result, we are raising our CAPEX guidance for fiscal 2006 to $90 million to $100 million from our previous guidance of $65 million to $75 million.”  

Share Repurchase Program
On April 26, 2006, GHC’s Board of Directors authorized the repurchase of up to $150.0 million of the Company’s common stock, with such repurchases to take place at GHC management’s discretion and/or under pre-established, non-discretionary programs from time to time, depending on market conditions, in the open market and in privately negotiated transactions, subject to any covenants or restrictions contained in agreements governing GHC’s indebtedness.

Reimbursement Update
Starting January 1, 2006, the Centers for Medicare and Medicaid Services’ (CMS) new resource utilization group classification system, often referred to as RUGs refinement, went into effect.  The new system establishes nine new RUG payment classifications, alters the case-mix weights for the remaining 44 RUG payment categories, and adjusts upward the nursing component of each reimbursement schedule. 

Also, starting January 1, 2006, Medicaid coverage of prescription drugs for Medicare beneficiaries who are also eligible for Medicaid have been shifted to the Medicare program under Part D.

Adoption of Share-Based Payment Accounting Pronouncement
Effective October 1, 2005, the Company adopted the provisions of Statement of Financial Accounting Standard No. 123(R), “Share-Based Payment” (SFAS 123R). In connection with the adoption of SFAS 123R, the Company recognized $1.0 million, or $0.03 per diluted share, and $1.5 million, or $0.05 per diluted share, of compensation expense associated with the vesting of employee stock options in the quarter and six months ended March 31, 2006.

Effective Tax Rate
The Company’s effective tax rate continues to be adversely impacted by the lapsing of certain jobs related tax credit provisions at December 31, 2005, which have increased GHC’s effective tax rate for fiscal 2006 by almost 1%.  GHC continues to carry significant net operating loss carryforwards to shield taxable income.

Outlook
The Company is raising its fiscal 2006 earnings guidance by $0.10 per diluted share.  The revised guidance of $2.20 to $2.25 per diluted share on a Non-GAAP basis is up from $2.10 to $2.15 per diluted share.  The Non-GAAP guidance excludes the impact of incremental stock-based compensation related to changes in the Company’s common stock, excludes the costs related to debt extinguishment charges and assumes an effective tax rate of 40%.  Click here for a reconciliation of GAAP guidance to Non-GAAP guidance.

Restatement
On March 17, 2006, the Company received a review letter from the Securities and Exchange Commission (the SEC) relating to GHC’s annual report on Form 10-K for the fiscal year ended September 30, 2005 and the quarterly report for the fiscal quarter ended December 31, 2005 (the Reports) in connection with a routine review of the Company’s Reports.  The letter addressed GHC’s financial statements and related disclosure in the Reports and included, among other matters, inquiries into GHC’s policies for discounting loss reserves in connection with its self-insurance programs and its previously reported accounting errors. 

Historically, GHC recorded outstanding losses and loss expenses for both general and professional liability and workers’ compensation liability based on the estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary, and GHC management’s judgment using its past experience and industry experience.  General and professional liability and workers’ compensation claims were discounted at a rate of 4.5% during the fiscal years ended September 30, 2003, 2004 and 2005 and the fiscal quarter ended December 31, 2005.  This rate estimated the present value of funds required to pay losses at a future date.   

During the fiscal year ended September 30, 2005, GHC identified and corrected certain errors in previously issued consolidated financial statements related to accounting for operating lease expense on a straight-line basis, the classification of certain leases, accounting for GHC stock held in the deferred compensation plan, the useful lives assigned to certain fixed assets and unaccrued costs resulting from purchasing cut-off procedures.  Based upon its evaluation, GHC’s management concluded that the errors were not material to GHC’s consolidated financial statements taken as a whole and adjusted for the errors in the period such errors were identified. 

On March 31, 2006, GHC responded to the review letter and on April 21, 2006, the SEC issued a supplemental review letter.  The supplemental letter included, among other matters, additional inquiries into GHC’s policies for discounting loss reserves and previously reported accounting errors. 
After review and consultation with its Audit Committee and KPMG, LLP, its independent registered public accounting firm, GHC has determined that its loss reserves in connection with its self-insurance programs should be reported on an undiscounted basis to comply with generally accepted accounting principles.  Accordingly, GHC’s management and its Audit Committee have determined that GHC will restate its historical financial statements for the fiscal years ended September 30, 2003, 2004 and 2005 and the fiscal quarter ended December 31, 2005 to reflect claims on a non-discounted basis.  The restatement will also correct the previously reported errors described above to include them in the appropriate period.

“The items that required restatement were principally non-cash and do not have a significant impact on our current or prospective earnings,” stated McKeon.  “The most significant adjustments relate to fiscal 2003, the year immediately preceding the spin-off.”

Click here to view the estimated impact of the restatement on income from continuing operations.

All estimates in this press release are subject to change pending GHC’s completion of its restated financial statements.  Resolution of the remaining items raised in the SEC letters may impact GHC’s consolidated financial statements for the quarter ended March 31, 2006 and for previously reported periods as well as the guidance previously provided and updated herein, which impact is not expected to be material.

Conference Call
Genesis HealthCare Corporation will hold a conference call at 9:00 a.m. Eastern Time on Friday, April 28, 2006 to discuss the results.  Investors can access the conference call by phone at (888) 798-1823 or live via webcast through the GHC web site at http://www.genesishcc.com, where a replay of the call will also be posted for one year.  

Genesis HealthCare Corporation Financial Statements

About Genesis HealthCare Corporation
Genesis HealthCare Corporation (NASDAQ: GHCI) is one of the nation’s largest long-term care providers with over 200 skilled nursing centers and assisted living residences in 12 eastern states. Genesis also supplies contract rehabilitation therapy to over 650 healthcare providers in 18 states and the District of Columbia.  

Statements made in this release, our website and in our other public filings and releases, which are not historical facts contain “forward-looking” statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include, but are not limited to, statements containing words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may,” “target,” “appears” and similar expressions. Such forward looking statements include, without limitation expected reimbursement rates, including RUGs changes, our net operating loss carryforwards, our 2006 effective tax rate, agency labor utilization, wage rates, debt repayments, share repurchases, provider tax assessments, changes in state Medicaid rates, our plans to improve the operating performance of our Rehabilitation services segment and progress to date, the extent and effectiveness of our facilities renovation program, levels of lease expense, interest expense, depreciation expense, capital spending, our anticipated results of operations for fiscal 2006 and the anticipated impact of the restatement of our historical financial statements.  Factors that could cause actual results to differ materially include, but are not limited to, the following: changes in our estimates of the impact of the restatement, costs, changes in the reimbursement rates or methods of payment from Medicare or Medicaid, or the implementation of other measures to reduce reimbursement for our services; efforts of third party payors to control costs; the impact of federal and state regulations; changes in payor mix and payment methodologies; competition in our business; an increase in insurance costs and potential liability for losses not covered by, or in excess of, our insurance; competition for and availability of qualified staff in the healthcare industry; our ability to control operating costs, and generate sufficient cash flow to meet operational and financial requirements; and an economic downturn or changes in the laws affecting our business in those markets in which we operate. The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control.  We caution investors that any forward-looking statements made by us are not guarantees of future performance.  We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments. 
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