Genesis Healthcare Corporation Reports Second Quarter 2007 Results

KENNETT SQUARE, Pa., April 27 /PRNewswire-FirstCall/ -- Genesis HealthCare Corporation (GHC) today announced income from continuing operations of $5.8 million, or $0.29 per diluted share, and net income of $5.4 million, or $0.26 per diluted share, for the quarter ended March 31, 2007, compared with income from continuing operations of $8.3 million, or $0.43 per diluted share, and net income of $8.1 million, or $0.42 per diluted share, in the comparable period in the prior year.

Earnings in the quarter were reduced by $0.32 per diluted share due to certain transaction, severance, deferred compensation plan and tax expenses, including $5.2 million, or $0.15 per diluted share, of transaction related costs from the proposed merger with affiliates of Formation Capital, LLC and JER Partners, $2.7 million, or $0.08 per diluted share, of severance related costs, $2.0 million, or $0.06 per diluted share, of incremental stock based compensation associated with the growth in the value of GHC's common stock held in a deferred compensation plan and $0.03 per diluted share for an increase in GHC's effective tax rate caused by the non-deductibility of certain merger related transaction costs.

For the six months ended March 31, 2007, income from continuing operations was $16.5 million, or $0.83 per diluted share, and net income was $16.1 million, or $0.81 per diluted share, compared with income from continuing operations of $19.6 million, or $1.00 per diluted share, and net income of $19.5 million, or $1.00 per diluted share, in the comparable six month period in the prior year.

Revenue for the quarter ended March 31, 2007 grew 13.7% to $496.1 million compared to revenue of $436.3 million in the comparable period in the prior year. Approximately $30.3 million of the increase in revenue was related to acquisitions and newly consolidated joint ventures. Adjusted for these items, revenues grew 6.7%. Revenue for the six months ended March 31, 2007 grew to $972.0 million compared to revenue of $871.9 million in the comparable period in the prior year. Approximately $39.3 million of the increase in revenue was related to acquisitions and newly consolidated joint ventures. Adjusted for these items, revenues grew 6.7%.

EBITDA for the quarter ended March 31, 2007 totaled $37.3 million compared to $35.6 million in the comparable period in the prior year. EBITDA for the quarter ended March 31, 2007 was negatively impacted by $9.9 million of transaction, severance and deferred compensation plan expenses. Furthermore, the quarter was positively impacted by $5.6 million related to acquisitions and newly consolidated joint ventures. EBITDA for the quarter ended March 31, 2006 was negatively impacted by $0.2 million of debt extinguishment costs. (See attached reconciliation on page 7).

EBITDA for the six months ended March 31, 2007 totaled $79.9 million compared to $75.9 million in the comparable period in the prior year. EBITDA for the six months ended March 31, 2007 was negatively impacted by $13.5 million of transaction, severance and deferred compensation plan expenses along with debt extinguishment costs incurred in the first quarter. Furthermore, the six month period was positively impacted by $7.7 million related to acquisitions and newly consolidated joint ventures. EBITDA for the six months ended March 31, 2006 was negatively impacted by $0.2 million of debt extinguishment costs. (See attached reconciliation on page 7).

The following table provides a reconciliation of the current quarter GAAP earnings per share to Non-GAAP earnings per share.

Three months Six months ended ended March 31, 2007 Diluted EPS from continuing operations - GAAP $0.29 $0.83 Adjust for: Debt extinguishment costs - 0.02 Transaction costs on proposed Merger 0.15 0.24 Incremental compensation costs for company shares held in deferred compensation plan 0.06 0.06 Severance costs 0.08 0.08 Effective tax rate adjusted to 40% 0.03 0.04 Diluted EPS from continuing operations - Non GAAP $0.61 $1.28 Inpatient Services

Inpatient services net revenue grew 13.7% to $445.7 million in the quarter ended March 31, 2007 from $392.0 million in the prior year quarter. Acquisitions and newly consolidated joint ventures generated $30.3 million of the revenue growth, with the remainder attributed to an increase in non- Medicaid days mix and an increase in payor rates, while occupancy remained stable at 91.6%. Medicare rates in the quarter ended March 31, 2007 grew 5.6% to approximately $419 per patient day from the prior year quarter as a result of the October 1, 2006 inflationary increase as well as higher Medicare patient acuity. Medicaid rates in the quarter ended March 31, 2007 grew 4.4% to approximately $192 per patient day from the prior year quarter due to an increase in state Medicaid rates as well as higher patient acuity.

Inpatient services EBITDA grew 20.1% to $62.2 million in the quarter ended March 31, 2007 from $51.7 million in the comparable period in the prior year. Excluding acquisitions and the newly consolidated facilities, EBITDA grew 11.2% over the comparable period in the prior year. In addition to the revenue increases previously discussed, EBITDA growth was driven by improved cost control.

Rehabilitation Services

Rehabilitation services revenues grew 22.0% to $71.0 million in the quarter ended March 31, 2007 from $58.2 million in the prior year quarter. Revenues benefited from new business, higher pricing and higher patient acuity in the inpatient business.

Rehabilitation services EBITDA grew 51.5% to $5.1 million in the quarter ended March 31, 2007 from $3.4 million in the prior year quarter. In addition to the revenue increases, rehabilitation EBITDA improved due to therapist and operational efficiencies.

Balance Sheet and Cash Flow

GHC ended the quarter with $475.2 million of debt and $33.1 million of cash. Included within these balances is $43.7 million of non-recourse debt and $7.8 million in cash related to consolidated variable interest entities and other partnerships. During the quarter, GHC repaid $36.5 million of debt principally under the revolving credit facility. GHC's operating cash flow for the quarter was $41.8 million. Capital expenditures in the quarter ended March 31, 2007 totaled $26.1 million.

Acquisitions, Dispositions and Newly Consolidated Joint Ventures Acquisitions

Effective January 1, 2007, GHC completed a lease and purchase option agreement for 11 facilities in Maine with 748 skilled nursing and 220 residential care beds. Under the agreement, GHC leases the facilities for 25 years with an annual lease payment of approximately $5 million. GHC paid approximately $15 million in cash in exchange for tangible operating assets and has entered into a $53 million fixed price purchase option exercisable in 2026. The transaction is accounted for as a capital lease resulting in $40 million of capital lease obligations. The incremental interest and depreciation expense associated with this transaction totaled $1.1 million and $0.6 million, respectively in the quarter ended March 31, 2007.

On November 1, 2006, GHC completed the acquisition of a skilled nursing facility in Maryland with 115 beds, and on December 1, 2006 acquired two additional skilled nursing facilities and four assisted living facilities with a combined complement of 405 beds in West Virginia.

On June 1, 2006, GHC purchased its joint venture partners' interests in three skilled nursing facilities located in West Virginia having a combined 208 beds.

Dispositions

During the second quarter, GHC closed a 90 bed skilled nursing facility which had annual revenues of approximately $5 million. Accordingly, GHC has accounted for this property as a discontinued operation in all periods presented herein.

Newly Consolidated Joint Ventures

Effective October 1, 2006, GHC began consolidating two partnerships in accordance with EITF Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights." One of the partnerships is a jointly owned and managed skilled nursing facility having 112 beds. The second partnership owns the real estate of a skilled nursing facility that is leased to GHC.

Income Taxes

GHC's effective tax rate of 45.9% in the quarter ended March 31, 2007 was adversely impacted by certain nondeductible transaction costs of the proposed merger.

No Earnings Conference Call, Webcast or Earnings Guidance

Genesis HealthCare will not host an earnings conference call or webcast, and will not provide fiscal 2007 earnings guidance.

About Genesis HealthCare Corporation

Genesis HealthCare Corporation is one of the nation's largest long-term care providers with over 200 skilled nursing centers and assisted living residences in 13 eastern states. Genesis also supplies contract rehabilitation therapy to over 600 healthcare providers in 20 states and the District of Columbia.

Visit our website at http://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, closure/timing of transactions including the amended agreement and plan of merger, expected reimbursement rates, our net operating loss carryforwards, our effective tax rate, agency labor utilization, wage rates, debt repayments, share repurchases, provider tax assessments, changes in state Medicaid rates the extent and effectiveness of our facilities renovation program, our expected income from continuing operations, earnings per diluted share, EBITDA and capital expenditures for fiscal 2007. Factors that could cause actual results to differ materially include, but are not limited to, the following: costs, changes in the reimbursement rates and timing/method of payment from Medicare or Medicaid, or the implementation of other measures to reduce reimbursement for our services; community-based care trends, capitation or other risk sharing reimbursement trends, 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; the capital intensive nature of our inpatient services segment and the need for extensive capital expenditures in order to improve our physical infrastructure; 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 and risks of potential strikes; our ability to control operating costs, and generate sufficient cash flow to meet operational and financial requirements; our ability to fulfill debt obligations; our covenants which limit our discretion in the operation of our business; an economic downturn or changes in the laws affecting our business in those markets in which we operate; the impact of new accounting pronouncements; the impact of implementing new information systems; the impact of acquisitions; the impact to our ongoing business caused by the diversion of management's attention prior to the completion of the merger; when and if the proposed merger will be completed; financial and other implications if the proposed merger is terminated; and other matters beyond our control.

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.

Genesis HealthCare Contact: Lori Mayer Investor Relations 610-925-2000 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Three months ended March 31, 2007 March 31, 2006 Net revenues $496,070 $436,265 Operating expenses: Salaries, wages and benefits 302,998 267,717 Other operating expenses 147,863 129,338 Loss on early extinguishment of debt - 188 Transaction costs of proposed Merger 5,196 - Lease expense 5,540 5,620 Depreciation and amortization expense 18,508 15,530 Interest expense 7,679 6,357 Investment income (2,834) (2,237) Income before income tax expense, equity in net income of unconsolidated affiliates and minority interests 11,120 13,752 Income tax expense 4,933 5,579 Income before equity in net income of unconsolidated affiliates and minority interests 6,187 8,173 Equity in net income of unconsolidated affiliates 179 435 Minority interests (552) (323) Income from continuing operations 5,814 8,285 Loss from discontinued operations, net of taxes (453) (217) Net income $5,361 $8,068 Per common share data: Basic: Income from continuing operations $0.30 $0.43 Loss from discontinued operations (0.02) (0.01) Net income $0.27 $0.42 Weighted average shares 19,495,676 19,234,656 Diluted: Income from continuing operations $0.29 $0.43 Loss from discontinued operations (0.02) (0.01) Net income $0.26 $0.42 Weighted average shares 20,246,698 19,434,096 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 2007 AND 2006 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Six months ended March 31, 2007 March 31, 2006 Net revenues $972,043 $871,871 Operating expenses: Salaries, wages and benefits 590,126 535,727 Other operating expenses 287,677 253,103 Loss on early extinguishment of debt 766 188 Transaction costs of proposed Merger 7,985 - Lease expense 11,004 11,086 Depreciation and amortization expense 36,128 30,269 Interest expense 14,388 12,855 Investment income (5,398) (4,176) Income before income tax expense, equity in net income of unconsolidated affiliates and minority interests 29,367 32,819 Income tax expense 12,275 13,394 Income before equity in net income of unconsolidated affiliates and minority interests 17,092 19,425 Equity in net income of unconsolidated affiliates 415 969 Minority interests (1,041) (818) Income from continuing operations 16,466 19,576 Loss from discontinued operations, net of taxes (383) (71) Net income $16,083 $19,505 Per common share data: Basic: Income from continuing operations $0.85 $1.01 Loss from discontinued operations (0.02) (0.00) Net income $0.83 $1.01 Weighted average shares 19,472,439 19,349,677 Diluted: Income from continuing operations $0.83 $1.00 Loss from discontinued operations (0.02) (0.00) Net income $0.81 $1.00 Weighted average shares 19,836,027 19,599,130 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES RECONCILIATION OF NET INCOME TO EBITDA (IN THOUSANDS) Three months ended Six months ended March 31, March 31, March 31, March 31, 2007 2006 2007 2006 Net income $5,361 $8,068 $16,083 $19,505 Add back: Loss from discontinued operations, net of taxes 453 217 383 71 Equity in net income of unconsolidated affiliates (179) (435) (415) (969) Minority interests 552 323 1,041 818 Income tax expense 4,933 5,579 12,275 13,394 Interest expense 7,679 6,357 14,388 12,855 Depreciation and amortization expense 18,508 15,530 36,128 30,269 EBITDA $37,307 $35,639 $79,883 $75,943 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) March 31, 2007 September 30, 2006 Assets: Current assets: Cash and equivalents $33,092 $74,819 Current portion of restricted cash and investments in marketable securities 31,044 35,160 Accounts receivable, net 253,164 226,689 Prepaid expenses and other current assets 47,618 48,583 Deferred income taxes 39,704 45,206 Total current assets 404,622 430,457 Property and equipment, net 997,365 873,164 Restricted cash and investments in marketable securities 62,293 64,819 Deferred income taxes 8,105 5,830 Other long-term assets 99,934 98,260 Total assets $1,572,319 $1,472,530 Liabilities and Shareholders' Equity: Current liabilities: Current installments of long-term debt $15,009 $4,829 Accounts payable and accrued expenses 192,465 162,978 Current portion of self-insurance liability reserves 36,554 40,455 Total current liabilities 244,028 208,262 Long-term debt 460,239 440,005 Self-insurance liability reserves 77,946 70,682 Other long-term liabilities 66,954 53,107 Commitments and contingencies Total shareholders' equity 723,152 700,474 Total liabilities and shareholders' equity $1,572,319 $1,472,530 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (IN THOUSANDS) Three months ended March 31, 2007 March 31, 2006 Cash flows from operating activities: Net income $5,361 $8,068 Net charges included in operations not requiring funds 26,229 26,323 Changes in assets and liabilities: Accounts receivable (14,363) (9,492) Accounts payable and other accrued expenses 21,508 (2,061) Other, net 3,114 5,595 Total adjustments 36,488 20,365 Net cash provided by operating activities 41,849 28,433 Cash flows from investing activities: Capital expenditures (26,062) (21,921) Net proceeds on maturity or sale (purchases) of restricted marketable securities 5,103 (4,035) Net change in restricted cash and equivalents 21 (23) Purchase of eldercare centers (19,097) 200 Other, net 479 543 Net cash used in investing activities (39,556) (25,236) Cash flows from financing activities: Net repayments under revolving credit facility (33,000) - Repayment of long-term debt (3,481) (3,737) Debt prepayment premium - (130) Proceeds from exercise of stock options 679 839 Other, net 331 234 Net cash used in financing activities (35,471) (2,794) Net (decrease) increase in cash and equivalents $(33,178) $403 Cash and equivalents: Beginning of period 66,270 88,240 End of period $33,092 $88,643 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 2007 AND 2006 (IN THOUSANDS) Six months ended March 31, 2007 March 31, 2006 Cash flows from operating activities: Net income $16,083 $19,505 Net charges included in operations not requiring funds 63,918 52,363 Changes in assets and liabilities: Accounts receivable (35,842) (29,739) Accounts payable and other accrued expenses 38,917 (20) Other, net 1,261 5,900 Total adjustments 68,254 28,504 Net cash provided by operating activities 84,337 48,009 Cash flows from investing activities: Capital expenditures (53,157) (53,962) Net proceeds on maturity or sale of restricted marketable securities 13,904 475 Net change in restricted cash and equivalents (7,088) (621) Purchase of eldercare centers (68,716) (4,823) Consolidation of partnerships 2,324 - Other, net (164) 6,828 Net cash used in investing activities (112,897) (52,103) Cash flows from financing activities: Repayment of long-term debt (13,991) (5,212) Debt prepayment premium and debt issuance costs (383) (130) Purchase of common stock for treasury - (10,691) Proceeds from exercise of stock options 767 1,108 Other, net 440 312 Net cash used in financing activities (13,167) (14,613) Net decrease in cash and equivalents $(41,727) $(18,707) Cash and equivalents: Beginning of period 74,819 107,350 End of period $33,092 $88,643 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (UNAUDITED) Three months ended Six months ended Segment Data (dollars in March 31, March 31, March 31, March 31, thousands) 2007 2006 2007 2006 Inpatient services Revenue $445,677 $392,047 $871,985 $783,830 EBITDA - $ 62,150 51,729 123,610 104,244 EBITDA - % 13.9% 13.2% 14.2% 13.3% EBITDA - $ per patient day $33.52 $30.28 $33.92 $30.21 Rehabilitation therapy services (including intersegment amounts) Revenue $71,043 $58,214 $138,818 $116,359 EBITDA - $ 5,114 3,375 10,711 8,061 EBITDA - % 7.2% 5.8% 7.7% 6.9% Three months ended Six months ended Selected Operating Statistics March 31, March 31, March 31, March 31, (Inpatient services segment) 2007 2006 2007 2006 Occupancy - Licensed Beds 91.6% 91.7% 91.7% 91.6% Patient Days: Private and other 403,203 347,783 780,849 703,824 Medicare 305,980 272,655 589,934 536,120 Medicaid 1,145,104 1,087,901 2,273,564 2,210,929 Total Days 1,854,287 1,708,339 3,644,347 3,450,873 Per Diems: Private and other $221.23 $216.57 $220.55 $213.96 Medicare 419.25 396.96 418.17 394.49 Medicaid (Pro Forma) (1) 192.44 184.28 192.59 183.61 Revenue quality mix (non-Medicaid) (1) 50.6% 48.7% 49.8% 48.1% Nursing labor costs per patient day: Employed labor $87.35 $85.93 $87.07 $85.36 Agency labor 2.08 1.83 2.07 2.00 Total $89.43 $87.76 $89.14 $87.36 At March 31, 2007: Inpatient Inpatient Licensed Facility Beds Count Owned - Skilled Nursing 15,579 125 - Assisted Living 996 11 Total Owned 16,575 136 Leased - Skilled Nursing 4,411 36 - Assisted Living 777 6 Total Leased 5,188 42 Total Owned and Leased (Consolidated) 21,763 178 Jointly Owned - Skilled Nursing 745 4 - Assisted Living 586 5 Managed - Skilled Nursing 2,767 21 - Assisted Living 638 4 - Transitional Care Units 206 8 Total Jointly Owned and Managed- (Unconsolidated) 4,942 42 (1) - Medicaid per diems and quality revenue mix are presented on a pro forma basis to reflect retroactive provider assessments and other reimbursement settlements in the period they relate to.