Earnings Release

GENESIS HEALTHCARE REPORTS FISCAL YEAR END 2014 RESULTS
2/19/2015

Genesis Healthcare, Inc. (Genesis) (NYSE:GEN), one of the largest post-acute care providers in the United States, today announced the consolidated operating results for the quarter and year ended December 31, 2014, separately for each of FC-GEN Operations Investment, LLC, the parent company of Genesis HealthCare, LLC prior to the combination (also referred to as “Genesis” or the “Company” herein), and Skilled Healthcare Group (Skilled). 

Genesis HealthCare, LLC and Skilled combined on February 2, 2015 to form Genesis Healthcare, Inc. “The combination of our portfolios enables Genesis to re-enter the public equity markets and expand opportunities in new markets with our sub-acute and long-term care facilities and our rehabilitation services business,” stated Genesis Chief Executive Officer, George V. Hager, Jr. “We believe the opportunities of scale created by this combination better position Genesis to meet the challenges facing the post-acute industry and enhance our ability to partner successfully with payors and providers across the country.”

 

Full Year 2014 Results

Genesis’ revenue and adjusted revenue for the year ended December 31, 2014 was $4.77 billion and $4.75 billion, respectively, up from revenue and adjusted revenue of $4.71 billion and $4.69 billion, respectively, in the year ended December 31, 2013.  Genesis’ skilled patient days mix remained relatively constant at 21.7% in the year ended 2014 versus 21.8% in the same period a year ago. Occupancy based on available operating beds increased 90 basis points to 89.2% at the year ended 2014 from 88.3% at the year ended 2013.

Skilled’s revenue for the year ended December 31, 2014 was $833.3 million, a decrease of 1.1% when compared to $842.3 million in the year ended December 31, 2013. Skilled’s skilled patient days mix remained constant at 21.8% in the year ended 2014 and for the same period a year ago. Occupancy based on available operating beds declined 60 basis points to 81.6% at December 31, 2014 from 82.2% at December 31, 2013.

Genesis reported adjusted EBITDAR of $589.8 million and adjusted EBITDA of $140.6 million for the year ended December 31, 2014, an increase of less than 1% from adjusted EBITDAR of $589.7 million and a decrease of 11.9% from adjusted EBITDA of $159.6 million in the prior year.

For the year ended December 31, 2014, Skilled reported adjusted EBITDAR of $98.8 million and adjusted EBITDA of $78.8 million, an increase of 8.4% from adjusted EBITDAR of $91.2 million and an increase of 9.0% from adjusted EBITDA of $72.3 million in the prior year.

Genesis’ loss from continuing operations for the year ended December 31, 2014 totaled $237.5 million, as compared to a loss from continuing operations of $169.6 million in the prior year. Genesis’ adjusted income from continuing operations for the year ended December 31, 2014 totaled $24.7 million compared to adjusted income from continuing operations of $26.6 million in the prior year. Adjusted income from continuing operations excludes other adjustments as found in the Reconciliation of Net (Loss) Income to EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR table in this press release.

Skilled’s loss from continuing operations for the year ended December 31, 2014 totaled $0.9 million, as compared to a loss from continuing operations of $6.2 million in the prior year. Skilled’s adjusted income from continuing operations for the year ended December 31, 2014 totaled $15.5 million compared to adjusted income from continuing operations of $12.0 million in the prior year. Adjusted income from continuing operations excludes certain items as described in the Reconciliation of Net (Loss) Income to EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR table at the end of this press release.

Skilled’s loss from continuing operations per diluted share was $0.02 for the year ended December 31, 2014, as compared to loss from continuing operations per diluted share $0.17 for the year ended December 31, 2013. Adjusted income from continuing operations per diluted share was $0.40 for the year ended December 31, 2014, an increase of 25.0% compared to adjusted income from continuing operations per diluted share of $0.32 for the year ended December 31, 2013.

 

Fourth Quarter 2014 Results

Genesis’ revenue and adjusted revenue for the quarter ended December 31, 2014 was $1.19 billion, respectively, up from revenue and adjusted revenue of $1.19 and $1.18 billion, respectively, in the comparable period of the prior year.  Genesis’ skilled patient days mix increased 60 basis points to 21.4% in the fourth quarter of 2014 from 20.8% in the fourth quarter of 2013. Occupancy based on available operating beds increased 30 basis points to 88.6% in the fourth quarter of 2014 from 88.3% in the fourth quarter of 2013.

Skilled’s revenue for the quarter ended December 31, 2014 was $210.4 million, an increase of 1% when compared to $208.3 million in the fourth quarter of 2013. Skilled’s skilled patient days mix increased 10 basis points to 21.4% in the fourth quarter of 2014 from 21.3% in the fourth quarter of 2013. Occupancy based on available operating beds declined 110 basis points to 81.1% in the fourth quarter of 2014 from 82.2% in the fourth quarter of 2013.

For the quarter ended December 31, 2014, Genesis’ adjusted EBITDAR was $125.7 million and adjusted EBITDA was $12.0 million, a decrease of 15.4% from adjusted EBITDAR of $148.5 million and a decrease of 70.2% from adjusted EBITDA of $40.4 million in the comparable period in the prior year. 

For the quarter ended December 31, 2014, Skilled reported adjusted EBITDA of $20.9 million and adjusted EBITDAR of $26.1 million, an increase of 26.3% from adjusted EBITDA of $16.5 million and an increase of 22.9% from adjusted EBITDAR of $21.2 million in the comparable period in the prior year. 

Genesis’ loss from continuing operations for the quarter ended December 31, 2014 totaled $123.2 million, as compared to a loss from continuing operations of $54.2 million in the comparable period in the prior year. Genesis’ adjusted loss from continuing operations for the quarter ended December 31, 2014 totaled $2.3 million compared to adjusted income from continuing operations of $2.8 million in the same period in the prior year. Adjusted income from continuing operations excludes other adjustments as found in the Reconciliation of Net (Loss) Income to EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR table in this press release.

For the quarter ended December 31, 2014, Skilled’s loss from continuing operations totaled less than $0.1 million, as compared to income from continuing operations of $0.6 million for the fourth quarter of 2013. Adjusted income from continuing operations for the quarter ended December 31, 2014 totaled $5.2 million compared to adjusted income from continuing operations of $2.1 million for the fourth quarter of 2013. Adjusted income from continuing operations excludes certain items as described in the Reconciliation of Net (Loss) Income to EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR table at the end of this press release.

Skilled’s loss from continuing operations per diluted share was less than $0.01 for the quarter ended December 31, 2014, as compared to income from continuing operations per diluted share of $0.02 for the same period in 2013. Adjusted income from continuing operations per diluted share was $0.14 for the quarter ended December 31, 2014 compared to adjusted income from continuing operations per diluted share of $0.06 for the quarter ended December 31, 2013.

 Management Commentary
“After strong performance for the first three quarters of 2014, fourth quarter earnings were below our expectations,” said George V. Hager, CEO of Genesis. “Our occupancy and skilled mix in the fourth quarter were relatively stable as compared to the first three quarters of 2014 and the fundamentals of the business remain strong.  The earnings shortfall as compared to our guidance is primarily attributed to a few controllable areas of the business and unexpected growth in employee health benefit expenses.”

Genesis’ adjusted EBITDAR for the full fiscal year 2014 and fourth quarter was approximately $31 million below the low end range of previously announced guidance.  The shortfall is primarily attributed to the following:

See table in full document


Therapist Efficiency
Therapist efficiency in the fourth quarter fell short of Genesis’ expectations by approximately 300 basis points. After three consecutive quarters of improvement over the prior year, fourth quarter 2014 therapist labor hours were elevated relative to patient volumes.  Therapist efficiency for the first nine months of 2014 was 69% as compared to 67% for the first nine months of 2013.  In the fourth quarter of 2014, therapist efficiency dropped to 65% from 68% in the same period of the prior year.  Therapist efficiency is computed by dividing billable labor minutes related to patient care by total labor minutes for the period.

Controllable Routine Costs
Controllable routine costs in Genesis’ inpatient services segment were $9.8 million higher than projected.  About half of the incremental cost was driven by variable nursing labor hours that were not matched to occupancy levels.  The remaining half of the increased costs was attributable to higher dietary and property maintenance costs.

Self-Insured Expenses
Self-insured expenses recognized in the fourth quarter were $10.3 million higher than projected, largely driven by greater utilization of self-insured employee health benefits in the fourth quarter as compared to the first three quarters of 2014.  Genesis believes the increased utilization was, in part, a response to employee health benefit plan modifications set to take effect January 1, 2015 and does not expect this level of elevated utilization to reoccur. 

“We take pride in our ability to manage cost levels to business volume and have implemented a number of actions to improve performance and adjust our cost structure permanently,” noted Mr. Hager.  We are focused on better managing variable costs to patient volume while maintaining quality of care.  I expect that we will be back on track with respect to routine cost management in the first quarter of 2015 and our results in January 2015 are encouraging.”

The planned cost reductions are expected to result in year-over-year improvement in pre-tax cash flow between $30 and $40 million.  All actions necessary to realize these savings have been executed, including:  the elimination of overhead positions and reduction in staff hours approximating over 300 full time equivalent employees and modifications to employee benefit programs. The cost reductions also include leveraging best practices across Genesis’ portfolio of centers.

Skilled Healthcare’s fourth quarter and full year 2014 results fell approximately $1.5 million short of the low end of previously announced guidance. The shortfall is attributed to higher than anticipated professional liability expenses and a higher than anticipated drop in hospice segment patient days.

Cash Flow and Balance Sheet

For the year ended December 31, 2014, Genesis generated operating cash flow of $107.7 million and Skilled generated operating cash flow of $26.3 million. 

In connection with the Skilled combination, Genesis entered into a five year Revolving Credit Facility having a total commitment size of $550 million, with borrowings subject to a borrowing base.  Genesis also entered into a two year $360 million Real Estate Bridge Loan with proceeds used to refinance Skilled’s previously held non-HUD real estate and revolving credit facility loans. 

Total net debt at the date of the combination approximated $970 million, resulting in pro forma net funded leverage of 3.5x and lease adjusted net leverage of 6.4x, using the mid-point of the guidance described below.

“We are committed to reducing our leverage and fixed charges during this year,” stated Tom DiVittorio, Chief Financial Officer of Genesis.  “The Company is in the process of initiating a HUD financing program.  Our goal is to refinance, within the next twelve months, 67 properties currently under the bridge loan with HUD mortgages at an estimated annual pretax interest savings of approximately $14 million.  We also continue to evaluate the prospect of selling non-core assets and other deleveraging initiatives as a means to reduce our debt and fixed charges.”

2015 Guidance

The Company expects adjusted net income from continuing operations on a diluted per share basis of $0.34 to $0.39 in 2015, adjusted EBITDAR of $755.0 million to $770.0 million and adjusted EBITDA of $267.6 million to $282.6 million.  The 2015 guidance is based on 154.6 million diluted weighted average common shares outstanding and common stock equivalents on a fully exchanged basis. The Company’s earnings guidance was prepared on a pro forma basis to reflect full year estimates assuming the operations of Skilled were combined with Genesis as of January 1, 2015. It also assumes realization of approximately $13.0 million of synergies in 2015, with fourth quarter 2015 synergies approximating $5.2 million. The Company expects to reach approximately $25.0 million of annualized run-rate synergies by mid-2016.

The following table illustrates projected key growth drivers to bridge proforma combined 2014 adjusted EBITDAR to the low and high end ranges of the Company’s 2015 adjusted EBITDAR guidance:

See table in full document

Cash basis rent expense is projected to grow $18.2 million, with approximately $13.1 million driven by fixed rent escalators and the remainder due to incremental rent from newly acquired or built facilities.

Recurring free cash flow in 2015 is projected to approximate $70.0 million after accounting for projected cash interest of $72.0 million, recurring capital expenditures of $76.0 million and cash taxes of $56.0 million.  Cash income taxes assume tax depreciation and amortization expense approximating $62.0 million and a tax rate of 40.0%.

“Our growth beyond 2015 is expected to be fueled by a combination of organic growth, continued expansion of our best in class rehabilitation therapy segment and selective acquisitions and facility development; with an emphasis on growing our short stay PowerBack Rehabilitation brand,” stated Hager. 

Conference Call

Genesis HealthCare will hold a conference call at 8:30 a.m. Eastern Time on Friday, February 20, 2015 to discuss fourth quarter and year ended December 31, 2014 financial results.  Investors can access the conference call by calling (855) 849-2198 or live via a listen-only webcast through the Genesis web site at http://www.genesishcc.com/investor-relations/, where a replay of the call will also be posted for one year. 

About Genesis HealthCare

Genesis HealthCare, Inc. (NYSE: GEN) is a holding company with subsidiaries that, on a combined basis, comprise one of the nation's largest post-acute care providers with more than 500 skilled nursing centers and assisted/senior living communities in 34 states nationwide. Genesis subsidiaries also supply rehabilitation and respiratory therapy to more than 1,800 healthcare providers in 47 states and the District of Columbia.  References made in this release to "Genesis," "the Company," "we," "us" and "our" refer to Genesis HealthCare, Inc. and each of its wholly-owned companies. Visit our website at www.genesishcc.com.

Forward-Looking Statements

This release includes "forward-looking statements" within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements contain words such as "may," "will," "project," "might," "expect," "believe," "anticipate," "intend," "could," "would," "estimate," "continue," "pursue" or “prospect,” or the negative or other variations thereof or comparable terminology. They include, but are not limited to, statements about Genesis’ beliefs regarding its governance structure and its opportunities for the future. These forward-looking statements are based on current expectations and projections about future events, including the assumptions stated in this release.

Investors are cautioned that forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that cannot be predicted or quantified and, consequently, the actual performance of Genesis may differ materially from that expressed or implied by such forward-looking statements.

These risks and uncertainties include, but are not limited to the following:

•  reductions in Medicare reimbursement rates, or changes in the rules governing the Medicare program could have a material adverse effect on our revenue, financial condition and results of operations;

•  continued efforts of federal and state governments to contain growth in Medicaid expenditures could adversely affect our revenue and profitability;

•  recent federal government proposals could limit the states' use of provider tax programs to generate revenue for their Medicaid expenditures, which could result in a reduction in our reimbursement rates under Medicaid;

•  revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction;

•  our success is dependent upon retaining key executive and personnel;

•  health reform legislation could adversely affect our revenue and financial condition;

•  annual caps that limit the amounts that can be paid for outpatient therapy services rendered to any Medicare beneficiary may negatively affect our results of operations;

•  we are subject to a Medicare cap amount for our hospice business. Our net patient service revenue and profitability could be adversely affected by limitations on Medicare payments;

•  we are subject to extensive and complex laws and government regulations. If we are not operating in compliance with these laws and regulations or if these laws and regulations change, we could be required to make significant expenditures or change our operations in order to bring our facilities and operations into compliance;

•  we face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business;

•  significant legal actions, which are commonplace in our professions, could subject us to increased operating costs and substantial uninsured liabilities, which would materially and adversely affect our results of operations, liquidity and financial condition;

•  insurance coverage may become increasingly expensive and difficult to obtain for health care companies, and our self-insurance may expose us to significant losses;

•  we may be unable to reduce costs to offset decreases in our patient census levels or other expenses completely;

•  future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities;

•  we lease a significant number of our facilities and may experience risks relating to lease termination, lease extensions and special charges;

•  our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our financial obligations;

•  following the combination of FC-GEN Operations Investment LLC and Skilled Healthcare Group, Inc., we may not be able to successfully integrate our operations, which could adversely affect us and the market price of our common stock;

•  We have incurred substantial costs and expect to incur additional transaction and integration costs in connection with the combination of FC-GEN Operations Investment LLC and Skilled Healthcare Group, Inc;

•  the holders of a majority of the voting power of Genesis’ common stock have entered into a voting agreement, and the control group’s interests may conflict with yours;

•  some of our directors are significant stockholders or representatives of significant stockholders, which may result in the diversion of corporate opportunities and other potential conflicts; and

•  we are a “controlled company” within the meaning of NYSE rules and, as a result, qualify for and rely on exemptions from certain corporate governance requirements.

Genesis’ (formerly known as Skilled) Annual Report on Form 10-K for the year ended December 31, 2013, subsequent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K, and other filings with the U.S. Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 when it is filed, discuss the foregoing risks as well as other important risks and uncertainties. Any forward-looking statements contained herein are made only as of the date of this release. Genesis disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

Note Regarding Use of Non-GAAP Financial Measures
For a discussion of the reasons why the Company utilizes non-GAAP financial measures and believes that the presentation of such measures provides useful information to investors regarding the Company’s financial condition and results of operations, see the Current Report on Form 8-K furnished with the U.S. Securities and Exchange Commission on February 19, 2015.

Click Here for Full Earnings Release and Tables

###