GENESIS HEALTHCARE CORPORATION REPORTS FISCAL YEAR END 2005 RESULTS12/1/2005
KENNETT SQUARE, PA -- 12/1/2005 --
- Revenues Increase 11% to $1.68 billion
- Diluted Earnings Per Share from Continuing Operations Increase 39%, to $2.12 Per Share
- Capital Expenditures Total $55.2 Million as Facility Renovation Effort Expands
- Occupancy Rebounds to 90.6% in Fourth Quarter
Genesis HealthCare Corporation (“GHC”) (NASDAQ:GHCI) today announced income from continuing operations of $42.4 million, or $2.12 per diluted share, and net income of $42.2 million, or $2.11 per diluted share, for the year ended September 30, 2005, up from pro forma income from continuing operations of $30.6 million, or $1.52 per diluted share, and pro forma net income of $27.9 million, or $1.39 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 15).
For the quarter ended September 30, 2005, income from continuing operations was $9.5 million, or $0.48 per diluted share, and net income was $10.2 million, or $0.51 per diluted share, down from income from continuing operations of $10.5 million, or $0.52 per diluted share, and net income of $10.8 million, or $0.53 per diluted share, in the comparable period in the prior year.
Reported results in the quarter ended September 30, 2005 were reduced by a $1.7 million ($0.05 per diluted share) pre-tax impairment charge to write-off the investment related to an abandoned rehabilitation services application system, and $1.3 million ($0.04 per diluted share) of net pre-tax adjustments to recognize a correction to the way in which the Company accounts for certain of its leases. In addition, an increase in the Company’s effective tax rate, primarily due to changes in the amount of permanent deductions, reduced results in the current quarter by approximately $0.02 per diluted share. All of these adjustments are non-cash charges. The lease accounting adjustments are more fully described below under the section entitled Lease Accounting Adjustments. Results in the quarter ended September 30, 2004 were reduced by a pre-tax charge of $0.4 million ($0.01 per diluted share) related to the early extinguishment of debt.
Revenue for the year ended September 30, 2005 grew 10.9% to $1.683 billion from $1.518 billion in the prior year. Revenue for the quarter ended September 30, 2005 grew 5.9% to $420.8 million from $397.3 million in the comparable period of the prior year. Revenue growth in the quarter and year ended September 30, 2005 is primarily attributed to third party payor rate growth and the recognition of provider assessments implemented in three states since the prior year periods.
EBITDA for the year ended September 30, 2005 grew 19.9% to $148.8 million, up from $124.1 million in the prior year. (See attached reconciliation on page 10). EBITDA for the year ended September 30, 2005 benefited from $8.0 million of net adjustments to lease expense recorded in the fourth quarter and $14.2 million in incremental provider assessments. EBITDA was reduced by $11.8 million and $1.7 million for charges related to the early extinguishment of debt in the years ended September 30, 2005 and 2004, respectively.
EBITDA for the quarter ended September 30, 2005 increased 20.1% to $43.4 million, up from $36.2 million of EBITDA for the comparable period in the prior year. (See attached reconciliation on page 10). EBITDA for the quarter ended September 30, 2005 benefited from the $8.0 million of net adjustments to lease expense and was reduced $1.7 million by the impairment charge previously described and by a $2.3 million decline in net provider assessments recognized in the current year quarter compared to the prior year quarter. EBITDA for the quarter ended September 30, 2004 was reduced by $0.4 million for charges related to the early extinguishment of debt.
“I am pleased by the overall performance of our Inpatient services segment this quarter and the strength of our balance sheet,” stated George V. Hager, Jr., Chairman and Chief Executive Officer. “We were successful in rebuilding our census back to historical levels and continue to experience stable occupancy. We were able to achieve consolidated results within our previously provided guidance range despite the disappointing results of our Rehabilitation services segment, and before considering the impairment and lease charges, and the higher than expected effective income tax rate, which were not included in our earnings guidance. The softness in the Rehabilitation services segment was driven by greater than anticipated utilization of higher cost contract labor during the summer vacation months, as well as severance charges relating to organizational changes. We believe that our strategy of improving the recruitment and retention capabilities of that business while also being more aggressive in pricing our services and more selective in our external customer base will restore this business to profitability. During the quarter we moved aggressively to implement a more efficient and integrated billing and time collection system to improve the productivity of our therapist workforce.”
Further commenting on the results, Hager noted, “Our core Inpatient services segment, on an as-adjusted basis, produced strong earnings growth in the fourth quarter compared to the same quarter last year. We end fiscal 2005 with impressive year over year earnings growth, significant levels of operating cash flow and a strong balance sheet. We look forward to continuing to execute on our strategy of investment in our core skilled nursing business in fiscal 2006, and believe that the Rehabilitation services operating issues are being aggressively addressed.”
Inpatient services net revenue of $375.1 million in the quarter ended September 30, 2005 grew 5.5%, or $19.5 million, from $355.6 million in the prior year. Provider assessments and acquisitions generated approximately $2.3 million and $2.6 million of the revenue growth, respectively. The remaining revenue growth is attributed to other third party payor rate growth and higher patient acuity. Medicare rates in the quarter ended September 30, 2005 grew 4.6% to $370 per patient day as a result of the October 1, 2004 2.8% Medicare rate increase as well as higher Medicare patient acuity. Occupancy this quarter grew 1.2% from the immediately preceding quarter to 90.6%, and exceeded the prior year fourth quarter occupancy of 90.5%.
Inpatient services net revenue in the year ended September 30, 2005 of $1.506 billion grew 11.3% or $152.8 million from $1.353 billion in the prior year. Provider assessments and acquisitions generated approximately $74.4 million and $14.1 million of the revenue growth, respectively. The remaining revenue growth is attributed to other third party payor rate growth and higher patient acuity, offset by lower occupancy. Medicare rates in the current year grew 5.1% per patient day as a result of the October 1, 2004 2.8% Medicare rate increase as well as higher Medicare patient acuity. Occupancy in the year ended September 30, 2005 declined 0.7% to 90.1% from 90.8% in the prior year.
Inpatient services EBITDA of $59.8 million in the quarter ended September 30, 2005 was up $8.9 million over the prior year quarter. EBITDA was positively impacted by the $8.0 million lease accounting adjustments and $0.5 million from acquisitions, offset by $2.3 million of lower net provider assessments principally due to the retroactive recognition of provider assessments in the State of New Hampshire in the quarter ended September 30, 2004. After adjusting for these items, Inpatient services generated 6.0% EBITDA growth driven by operational improvements and improved payor mix.
Inpatient services EBITDA of $218.2 million in the year ended September 30, 2005 was up $47.1 million over the prior year. EBITDA was positively impacted by the $8.0 million lease accounting adjustments, $2.7 million from acquisitions, $2.0 million of net positive Medicaid cost report settlements and $14.2 million of incremental provider assessments recognized in the current year above those recognized in the prior year. After considering these items, Inpatient services generated 12.1% EBITDA growth driven by operational improvements, lower bad debt expense and third party payor rate growth.
Employed nursing labor and benefit costs on a per patient day basis increased 5.7% for the quarter ended September 30, 2005 from the same quarter last year. By reducing our reliance on agency nurses in favor of employed nurses the Company was able to limit growth in overall nursing labor costs to 4.7% on a per patient day basis.
Rehabilitation services revenues grew to $53.8 million in the quarter ended September 30, 2005 from $50.2 million in the prior year. Rehabilitation services revenue grew to $211.7 million in the year ended September 30, 2005 from $197.1 million in the prior year.
Rehabilitation services EBITDA decreased to a loss of $2.6 million in the quarter ended September 30, 2005 from a positive $0.9 million in the prior year quarter. EBITDA in the current year quarter was reduced by the $1.7 million impairment charge discussed previously, continued pricing pressure, increased therapist salary costs, severance costs and higher contract labor utilization as a result of a continuing shortage of therapists. Increased utilization of higher cost contract labor resulted in a $1.5 million decline in current quarter EBITDA compared to the prior year quarter.
Rehabilitation services EBITDA decreased to $5.9 million in the year ended September 30, 2005 from $14.2 million in the prior year. EBITDA in the current year was reduced by the $1.7 million impairment charge and each of the pricing and labor related pressures described in the previous paragraph. Increased utilization of higher cost contract labor resulted in a $5.9 million decline in current year EBITDA compared to the prior year.
Balance Sheet and Cash Flow
GHC generated operating cash flow of $14.4 million in the quarter and $125.0 million for the full fiscal year ended September 30, 2005. Fourth quarter operating cash flow was reduced by the timing of payments, including scheduled payments to excess general and professional liability insurance carriers, real estate taxing authorities and the timing of payroll. The Company ended the year with $410.2 million of debt and cash of $109.0 million. Debt increased $33.3 million during the quarter as a result of changes to the classification of five leases from operating to capital leases. “Although our balance sheet debt increased as a result of the reclassification of certain leases as capital leases, our obligations on a cash basis are unchanged,” stated James V. McKeon, Chief Financial Officer. “We also continue to benefit from significant net operating loss carryforwards that result in cash earnings in excess of GAAP earnings.”
Capital spending in the quarter ended September 30, 2005 increased to $15.2 million, totaling $55.2 million for fiscal 2005. “Our fiscal 2005 capital expenditures were nearly double that of our historical run rate,” noted McKeon. “Investment in information systems and in the renovation of our facility portfolio is at the core of our long-term strategy to generate operating efficiencies and create a stronger competitive position within our markets. Continuing this commitment to core operations, we expect to make capital expenditures between $65 million and $75 million in fiscal 2006, including as many as 33 facility renovation and modernization projects. We also continue to explore fill-in acquisitions in our Inpatient services segment, as well as other opportunities to ensure the most efficient use of our capital.”
During the quarter ended September 30, 2005, the Company repurchased 170,737 shares of its common stock for $6.9 million, and repurchased 787,337 shares of its common stock for $32.1 million for the year ended September 30, 2005.
Lease Accounting Adjustments
During the fourth quarter of fiscal 2005, the Company revised its accounting to record operating lease expense on a straight-line basis, as required by Statement of Financial Accounting Standards No. 13, “Accounting for Leases”, and Financial Accounting Standards Board Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases”. The impact of this correction through September 30, 2005 resulted in a $1.3 million pre-tax increase to lease expense, of which $0.7 million relates to prior years.
In addition, the Company reevaluated the classification of certain of its leases and determined that five of its facility leases previously classified as operating leases should have been classified as capital leases beginning in fiscal 2004. The cumulative effect of correcting this accounting is an increase to depreciation expense of $4.7 million, an increase to interest expense of $4.7 million and a decrease to lease expense of $9.3 million, having no impact on pre-tax or net income. The capitalization of these leases also had the effect of increasing total assets and total liabilities approximately $34.0 million. These accounting adjustments have no impact on the underlying economics of the leases.
These adjustments were not deemed material to the current fiscal year or prior periods and do not have any impact on prior year or future cash flows. However, as a result of the reclassification of the leases and the straight-line accounting for operating lease costs, the Company expects lease, interest and depreciation and amortization expense to approximate $21.9 million, $22.9 million and $55.6 million, respectively, in fiscal 2006.
In July 2005, the Centers for Medicare and Medicaid Services released the final fiscal 2006 Medicare payment rules, including refinement to the resource utilization group classification system, often referred to as RUGs refinement. Effective October 1, 2005, the Medicare payment rates increased by a 3.1% annual inflation factor, or approximately $11 per Medicare patient day. Starting January 1, 2006, the rules establish nine new RUG payment classifications, alter the case-mix weights for the remaining 44 RUG payment categories and adjust upward the nursing component of each reimbursement schedule. After considering the distribution of our Medicare patient population under the new system, RUGs refinement is expected to reduce GHC’s Medicare payment rates by approximately $9 per Medicare patient day beginning January 1, 2006, thereby reducing fiscal 2006 revenue and EBITDA approximately $7.5 million and reducing net income $4.5 million or $0.23 per diluted share.
The Commonwealth of Pennsylvania has proposed a reduction in the reimbursement allowance under its provider assessment program effective July 1, 2005 through June 30, 2006. If the proposed reduction is made final as expected, the amount the Company must pay the Commonwealth under this program will exceed the amount the Company is reimbursed. In the quarter ended September 30, 2005, the Company’s revenue and EBITDA were reduced $0.6 million, and its net income was reduced $0.4 million or $0.02 per diluted share for the provider assessment reduction.
The Company is closely monitoring developments on the topics of Medicare Part B therapy caps, the Medicare Modernization Act, reimbursement of uncollectible Medicare co-insurance receivables and final 2005-06 Commonwealth of Pennsylvania Medicaid payor rates. Resolution to any one or all of these matters could have a significant impact on the Company’s future results of operations.
Net Operating Loss Carryforward
As of September 30, 2005, the Company has net operating loss (NOL) carryforward available of $120.9 million, which can be utilized to offset future taxable income subject to an annual limitation of $33.1 million. The Company regularly assesses its ability to realize the tax benefit from its NOL. The filing of fiscal 2004 federal and state income tax returns by NeighborCare, Inc. and the Company in June and July, 2005, and the further evaluation of tax issues related to the spin-off, has significantly reduced the uncertainty that previously caused management to reserve fully the value of the deferred tax benefit of the NOL. Consequently, the Company has eliminated the NOL valuation allowance and, accordingly, the Company’s balance sheet now includes, on an after-tax basis, a $50.8 million deferred tax asset and a corresponding increase of $50.8 million to additional paid-in capital.
Interest Rate Environment
In March 2005, the Company repaid its entire previously held variable rate senior credit facility indebtedness with the proceeds of newly issued 2.5% fixed rate convertible senior subordinated debentures. At September 30, 2005, the Company’s overall debt mix is approximately 98% fixed and 2% variable, effectively eliminating any exposure to rising rates of interest.
Diluted Per Common Share Data
In the quarter ended September 30, 2005, the Company reduced the number of weighted average shares used to determine diluted earnings per share in its previously reported three quarters ended June 30, 2005, reflecting a modification to the Company’s calculation of the dilutive effect of unvested restricted shares and stock options. This change results in an increase of $0.01 to the Company’s diluted earnings per share for each of the first three quarters of fiscal 2005, or $0.03 for the nine months ended June 30, 2005. Page 9 provides a consolidated statement of operations for each of the fiscal 2005 quarters on an as-adjusted basis.
The Company’s fiscal 2006 GAAP earnings from continuing operations guidance is provided as a range of $2.10 to $2.15 per diluted share. The Company’s earnings guidance considers the impact of RUGs refinement, reduced Commonwealth of Pennsylvania provider assessment revenue and the impact of the Company’s October 1, 2005 adoption of Financial Accounting Standards Board Statement No. 123 (revised 2004), “Share Based Payment” (SFAS 123R). The impact of adopting SFAS 123R is estimated to reduce fiscal 2006 earnings by approximately $0.10 per diluted share. The impact of adopting SFAS 123R could differ from this estimate depending upon the number and timing of options granted during fiscal 2006, as well as their vesting period and vesting criteria.
While the Company does not provide quarterly earnings guidance, the Company notes that its first fiscal quarter ending December 31, 2005 will not be impacted by the adverse affects of RUGs refinement.
The fiscal 2006 guidance represents the Company’s views as of December 1, 2005. Investors are reminded that actual results may differ from these estimates for the reasons, among others, described herein and in the Company’s filings with the Securities and Exchange Commission.
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 Friday, December 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.
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, agency labor utilization, voluntary 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.