GENESIS HEALTHCARE CORPORATION REPORTS THIRD QUARTER FISCAL 2005 RESULTS8/1/2005
Kennett Square, PA -- 08/01/2005 --
- Strong Cash Flow From Operations of $51.7 Million Continues to Fund Enhanced Capital Spending, Debt Repayment and Stock Repurchase
- Operating Results In Line with Expectations
- Leverage Profile Continues to Decline
Genesis HealthCare Corporation ("GHC") (NASDAQ:GHCI) today announced income from continuing operations of $9.0 million, or $0.44 per diluted share, and net income of $7.6 million, or $0.38 per diluted share, for the quarter ended June 30, 2005 , up from income from continuing operations of $7.6 million, or $0.38 per diluted share, and net income of $6.7 million, or $0.33 per diluted share, in the comparable period in the prior year.
For the nine months ended June 30, 2005, income from continuing operations was $32.9 million, or $1.61 per diluted share, and net income was $32.0 million, or $1.56 per diluted share, up from pro forma income from continuing operations of $20.0 million, or $1.00 per diluted share, and pro forma net income of $17.1 million, or $0.85 per diluted share, in the comparable period in the prior year. Pro forma results in the prior year period assume the December 1, 2003 spin-off of GHC from NeighborCare, Inc. occurred on October 1, 2003 . (See attached pro forma financial information beginning on page 12).
Revenue for the quarter ended June 30, 2005 grew 9.0% to $409.0 million from $375.3 million in the comparable period in the prior year. Revenue for the nine months ended June 30, 2005 grew 12.7% to $1,262.6 million from $1,120.3 million in the comparable period in the prior year. Revenue growth in the current quarter and year to date period is primarily attributed to rate growth and the recognition of provider assessments implemented in three states since the prior year periods.
EBITDA for the quarter ended June 30, 2005 grew 2.6% to $30.9 million, up from $30.1 million of EBITDA for the comparable period in the prior year. (See attached reconciliation on page 7). Significantly, EBITDA in the quarter ended June 30, 2005 was reduced by $6.9 million, or $0.21 per diluted share, for charges related to the early extinguishment of debt. EBITDA in the quarter ended June 30, 2004 was reduced by $0.4 million, or $0.01 per diluted share, also for charges related to the early extinguishment of debt.
EBITDA for the nine months ended June 30, 2005 grew 19.8% to $105.3 million, up from $87.9 million of EBITDA for the comparable period in the prior year. (See attached reconciliation on page 7). EBITDA in the nine months ended June 30, 2005 benefited from $6.4 million, or $0.19 per diluted share, in prior period provider assessments realized in the second quarter of 2005 and was reduced by $11.8 million, or $0.35 per diluted share, for charges related to the early extinguishment of debt. EBITDA in the nine months ended June 30, 2004 was reduced by $1.3 million, or $0.04 per diluted share, also for charges related to the early extinguishment of debt.
"Overall, our performance was in line with expectations despite seasonal softness in occupancy and a challenging rehabilitation therapy environment," stated George V. Hager, Jr., Chairman and CEO. "The occupancy decline this quarter is consistent with the decline we experienced in the third quarter last year. We are encouraged, however, by positive occupancy trends in the last half of June and through July. Our results this quarter were supported by continued execution of operational efficiencies and reduced costs of capital."
Also, during the quarter, the Company recorded the following adjustments:
- A favorable adjustment from recently settled cost reports resulting in increased EBITDA and net income of $4.3 million and $2.6 million ($0.13, per diluted share), respectively;
- An unfavorable adjustment resulting in reduced EBITDA and net income of $3.0 million and $1.8 million ($0.09 per diluted share), respectively, from a correction in the way in which the Company accounts for its investment in Genesis HealthCare common stock held in a Company sponsored benefit plan. In connection with this accounting correction, GHC's higher stock price during the current quarter further reduced EBITDA and net income $0.4 million and $0.2 million ($0.01, per diluted share), respectively. This matter is described in more detail under the section labeled "Non-Qualified Deferred Compensation Plan";
- An unfavorable non-cash adjustment resulting in reduced EBITDA and net income of $0.9 million and $0.5 million ($0.03 per diluted share), respectively, from the write-off of the unamortized carrying value of time clocks replaced in connection with the roll-out of a new labor management system; and
- A favorable adjustment of income taxes representing tax credits recognized in the current quarter resulting in an increase in net income of $0.6 million ($0.03 per diluted share).
Inpatient services net revenue of $367.0 million in the quarter ended June 30, 2005 grew 10.0%, or $33.5 million, from $333.5 million in the comparable period in the prior year. While occupancy declined 100 basis points in the quarter, strong third party payor rate growth, provider assessments and higher patient acuity contributed to the net revenue growth. Medicare rates grew 4.4% as a result of the October 1, 2004 Medicare rate increases, as well as higher Medicare patient acuity.
Inpatient services EBITDA of $52.6 million in the quarter ended June 30, 2005 grew 28.8%, or $11.8 million, from $40.9 million in the comparable period in the prior year. The Company's operational improvement plan continues to benefit the inpatient services segment as agency labor costs decreased this quarter by 17.0% on a per patient day basis versus the comparable period in the prior year, primarily due to a reduction in professional (RN/LPN) agency utilization. This improvement was achieved while continuing to increase patient acuity without a significant change in overall nursing hours per patient day.
Rehabilitation services revenues grew to $52.8 million in the quarter ended June 30, 2005 versus $50.4 million in the comparable period in the prior year. Rehabilitation services EBITDA decreased to $2.3 million in the quarter ended June 30, 2005 versus $4.6 million in the comparable period in the prior year. The rehabilitation services performance was negatively impacted by increasing pricing pressure, increasing therapist salary costs as a result of a shortage of therapists, and increased therapist recruitment costs.
Balance Sheet and Cash Flow
GHC generated operating cash flow of $51.7 million in the quarter. The Company ended the quarter with $377.7 million of debt and $113.3 million in cash. During the quarter, GHC repurchased 96,600 shares of its common stock for $4.4 million and $47.3 million principal amount of 8% senior subordinated notes due 2013.
Capital spending in the quarter increased to $17.0 million, totaling $40.0 million for the year to date period. "We believe our facility and information system modernization efforts are on target for total capital expenditures of $50 to $60 million in fiscal 2005," stated James V. McKeon, Chief Financial Officer. "Capital spending continues to ramp up as we invest in best-in-class information systems and in the renovation of our facility portfolio. We look to these investments to provide the base for our future growth through improved efficiency within our clinical operations and a stronger competitive position within our markets. At the same time, we continue to explore other alternatives to deploy capital to enhance shareholder return."
On July 28, 2005 , the Centers for Medicare and Medicaid Services (CMS) issued a final rule for Medicare reimbursement for fiscal 2006. "While we are still evaluating the final rule, we believe the change will have a negative impact to Medicare rates starting January 1, 2006 ," stated Hager. "Effective October 1, 2005 , we estimate that our Medicare rates will increase by $10 per patient day. Starting January 1, 2006 , we estimate that our Medicare rates could be reduced by as much $20 per day as a result of RUGs refinement. Thus, our Medicare rates could decline by $10 per patient day off of our current Medicare per diems effective January 1, 2006 ."
Net Operating Loss Carryforward
As a result of NeighborCare's filing of its consolidated federal tax return for the year ended September 30, 2004 , GHC estimates its remaining net operating loss carryforward (NOL) to be approximately $128 million as of June 30, 2005 with an annual utilization limitation of $33 million. The NOL continues to be subject to a 100% valuation allowance.
During the third quarter, GHC completed its annual liability insurance renewal process for the June 2005 ¿ 2006 policy year. The annual expense on the insurance program increased by inflationary levels and the program retains both per occurrence and aggregate coverage levels of the prior year policy.
GHC is revising its fiscal 2005 GAAP earnings guidance to a range of $2.19 to $2.24 per diluted share from continuing operations. GHC's financial statements and earnings guidance are presented on a GAAP basis. As a consequence, certain adjustments such as charges for early extinguishment of debt are included in GHC's financial results, but were not considered in its previously communicated earnings guidance. Reference to the following compilation will assist investors in understanding changes to GHC's previously communicated earnings guidance. Earnings Guidance Reconciliation Table
Non-Qualified Deferred Compensation Plan
During the quarter, the Company determined that its accounting for GHC common stock held in its "rabbi trust" did not conform with Emerging Issues Task Force (EITF) Issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in Rabbi Trust and Invested." Specifically, the Company has determined that investments in Company common stock held in the trust should be treated in a manner similar to treasury stock. Consequently, changes in the fair value of GHC common stock held by the trust have the effect of increasing or decreasing compensation cost with no corresponding adjustment to investment earnings resulting from such changes in fair value. In effect, EITF Issue No. 97-14 requires companies with plan types like GHC's to recognize non-cash fluctuations in Company common stock through earnings, to the extent deferred compensation plan participants elect to invest their deferrals in GHC common stock.
Basis of Presentation
The accompanying financial information through November 30, 2003 was prepared on a basis which reflects the historical financial information of GHC assuming the operations of NeighborCare, Inc. contributed in the spin-off were organized as a separate legal entity, owning certain net assets of NeighborCare, Inc. Beginning December 1, 2003 , the accompanying financial information has been prepared on a basis which reflects the net operations of GHC as a stand alone entity. The allocation methodologies followed in preparing the accompanying financial information prior to the December 1, 2003 spin-off may not necessarily reflect the results of operations, cash flows, or financial position of GHC in the future, or what the results of operations, cash flows or financial position would have been had GHC been a separate stand-alone entity for all periods presented.
Genesis HealthCare Corporation will hold a conference call at 10:00 a.m. Eastern Time on Tuesday, August 2, 2005 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.
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 .
Visit our website at www.genesishcc.com.
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, the effect of the spin-off on our operations, expected reimbursement rates, including RUGs changes, our net operating loss carryforwards, agency labor utilization, debt repayments, share repurchases, provider tax assessments, changes in state Medicaid rates, levels of capital spending, and our anticipated results of operations for fiscal 2005. Factors that could cause actual results to differ materially include, but are not limited to, the following: 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; the expiration of enactments providing for additional government funding; 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; changes in interest expense; 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.