Skilled Healthcare Group announces fourth-quarter and full-year 2009 results

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Skilled Healthcare GroupFeb 9 2010

Skilled Healthcare Group, Inc. (NYSE:SKH) today reported consolidated revenues for the year ended December 31, 2009 of $759.8 million, an increase of 3.6 percent compared to 2008. Consolidated revenues were $189.0 million for the three-month period ended December 31, 2009, compared to $189.8 million for the three-month period ended December 31, 2008.

“Additionally, the goodwill impairment charge does not affect our operations.”

Prior to the goodwill impairment charge discussed further below, adjusted net income for the fourth quarter and full year of 2009 were $9.3 million and $37.4 million, respectively, or $0.25 per diluted share and $1.01 per diluted share, respectively. This compares to net income for the fourth quarter and full year of 2008 of $9.3 million and $34.1 million, respectively, or $0.25 per diluted share and $0.92 per diluted share, respectively. During the fourth quarter, a non-cash goodwill impairment charge of $170.6 million was recorded. Including this charge, the net loss for the quarter ended December 31, 2009 was $161.3 million, or $4.37 per diluted share. For the full year ended December 31, 2009, the Company reported a net loss of $133.2 million, or $3.61 per diluted share.

U.S. generally accepted accounting principles require companies to perform an annual test for goodwill impairment at the reporting unit level. The Company recorded a goodwill impairment charge at the long-term care reporting unit. This is a non-cash adjustment to the Company’s financial statements that does not affect its cash flows or its liquidity position and is not expected to have any impact on the Company’s business or compliance with its debt covenants.

“It is important to understand that a write-down of goodwill is a non-cash charge to our consolidated statement of income which does not impact our cash flows,” noted Boyd Hendrickson, Chairman and Chief Executive Officer. “Additionally, the goodwill impairment charge does not affect our operations.”

Long-Term Care Services - Fourth Quarter 2009 Segment Results

Total revenue for the long-term care services segment, which represented 88.6 percent of consolidated revenues, was $167.4 million for the quarter ended December 31, 2009, compared to $166.0 million for the fourth quarter of 2008.
Skilled mix was 22.1 percent in the fourth quarter of 2009, compared to 22.4 percent during the third quarter of 2009. Skilled mix was 23.3 percent during the fourth quarter of 2008.

Occupancy rates were 83.1 percent during the fourth quarter of 2009, compared to 83.2 percent during the third quarter of 2009. Occupancy rates were 84.5 percent in the fourth quarter of 2008.

The percentage of Medicare days in the upper nine RUG categories increased to 42.6 percent in the fourth quarter of 2009, compared to 41.2 percent during the third quarter of 2009. The percentage of Medicare days in the upper nine RUG categories was 40.1 percent during the fourth quarter of 2008.

Ancillary Services – Fourth Quarter 2009 Segment Results

The Company’s third-party rehabilitation therapy services reporting unit revenue was $17.6 million for the quarter ended December 31, 2009, a decrease of 3.3 percent, compared to the quarter ended December 31, 2008.
Third-party rehabilitation therapy accounted for 9.3 percent of total consolidated revenues in the fourth quarter of 2009, compared to 9.6 percent the fourth quarter of 2008.
The Company’s hospice business, which represented 2.1 percent of total consolidated revenues in the fourth quarter of 2009, reported total revenue of $4.0 million for the quarter ended December 31, 2009, compared to $5.5 million in the fourth quarter of 2008.

Long-Term Care Services – Full Year 2009 Segment Results

Total revenue for the long-term care services segment, which represented 87.8 percent of total consolidated revenue, was $666.8 million for the year ended December 31, 2009, an increase of $23.3 million, or 3.6 percent, compared to 2008.
Skilled mix was 23.1 percent for the year ended December 31, 2009, compared to 24.2 percent for 2008.
Occupancy rates were 83.7 percent for the year ended December 31, 2009, compared to 84.5 percent in 2008.
The percentage of Medicare days in the upper nine RUG categories was 41.7 percent in 2009, an increase of 160 basis points, compared to 40.1 percent in 2008.

Ancillary Services – Full Year 2009 Segment Results

The Company’s third-party rehabilitation therapy services’ reporting unit revenue was $74.7 million for the year ended December 31, 2009, an increase of 6.9 percent, compared to 2008.
Third-party rehabilitation therapy accounted for 9.8 percent of total consolidated revenues in 2009, an increase from 9.5 percent in 2008.
The Company’s hospice business, which represented 2.4 percent of total consolidated revenues in 2009, reported total revenue of $18.2 million for the year ended December 31, 2009, compared to $19.9 million in 2008. As previously mentioned in last quarter’s earnings release, hospice revenues in the third quarter of 2009 were reduced by a $2.1 million reserve as a result of a Medicare patient reimbursement limitation, or cap, overage.

Management Discussion – Fourth Quarter and Full Year 2009 Results

Long-term care services revenue for the three- and twelve-month periods ended December 31, 2009 increased 0.8 percent and 3.6 percent, respectively, compared to the same periods in 2008 due primarily to higher rates in the first nine months of the year, which were offset slightly by lower Medicare rates during the fourth quarter of 2009. In addition, revenues were impacted due to slightly lower occupancy levels during the year as compared to 2008 primarily due to economic challenges and competition from new development in Texas.

Boyd Hendrickson, Chairman and Chief Executive Officer, commented on the long-term care services results stating, “2009 was one of the most challenging economic and operational environments I have encountered during my long tenure in long-term care. It was also a period of great uncertainty within the healthcare industry. In our long-term care services segment, we experienced pressure on our occupancy rates and skilled mix as we endured these challenging times. However, in the fourth quarter, we saw improved occupancy rates California, Kansas and Missouri on a sequential and year-over-year basis. In addition, January 2010 occupancy rates have improved to 83.4% and skilled mix has risen to 22.8%.”

In response to the challenging reimbursement environment, Mr. Hendrickson continued, “As I mentioned last quarter, we have implemented a cost reduction program that we believe will help to offset the Medicare rate cut of approximately one percent effective October 1, 2009 and the Kansas Medicaid rate cut of 10 percent effective January 1, 2010. Even though Kansas only represents approximately seven percent of our total consolidated revenues, we are currently working with the Kansas state legislature to explore ways in which we could mitigate the Medicaid rate cut.”

The Company’s ancillary services segment, which includes its third-party rehabilitation services and hospice businesses, represents approximately 12 percent of total consolidated revenues. In 2009, the Company’s third-party rehabilitation services business increased revenues primarily due to new business, higher rates and productivity. With respect to the Company’s hospice business, revenues and earnings before interest, taxes, depreciation and amortization, or EBITDA, were impacted by a Medicare cap overage in the third quarter of 2009. As mentioned last quarter, the Company has taken several steps designed to improve the hospice business.

Consolidated net income for the year ended December 31, 2009, prior to the goodwill impairment charge, was positively impacted primarily by lower interest expenses and a benefit to the provision for income taxes, compared to the year ended December 31, 2008. The effective tax rate, prior to the goodwill impairment charge, for the year ended December 31, 2009 was 32.1 percent, compared to an effective tax rate of 34.7 percent for the year ended December 31, 2008. Additionally, interest expense for the year ended December 31, 2009 was $33.0 million, down 11.5 percent, from $37.3 million for the year ended December 31, 2008. Lower interest expense was due primarily to lower weighted-average interest rates and a reduction of long-term debt of approximately $11.6 million.

2010 Guidance

Skilled Healthcare Group is initiating its 2010 full year guidance and expects revenue to be between $775.0 million and $785.0 million. EBITDAR is expected to be in the range of $127.0 million to $132.0 million and EBITDA is expected to be in the range of $108.5 million to $113.5 million. Diluted net income per common share is expected to be between $0.90 and $0.95. This guidance assumes:

No change in Medicare rates for fiscal year 2011. Medicare rates declined by 1.1 percent in fiscal year 2010, effective October 1, 2009. No impact from RUGs IV.
No change in Medicaid rates with the exception of a Medicaid rate cut of 10 percent for Kansas effective January 1, 2010, and an increase in California provider taxes of $2.11 per patient day with no corresponding rate increase.
The retroactive extension of the Part B therapy cap exceptions.
An increase in unemployment insurance expense of approximately $1.0 million.
Nominal increase in rent expense due to substantial property ownership.
Average interest rate on debt of approximately 6 ¾ percent.
Labor expense increases of approximately 2 percent.
Start-up losses on the new Ft. Worth facility of approximately $1.3 million.
Capital expenditures of approximately $30.0 million.
Cost reductions of $3.0 million to $3.5 million annually commencing October 1, 2009.
No additional acquisitions or dispositions.
An effective tax rate of 39 percent.