Skilled Healthcare Group Reports Full Year 2009 Results

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.

Prior to the goodwill impairment charge discussed further below, adjusted net income(1) 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(5) 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(6) 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(7) 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.

Conference Call

A conference call and webcast will be held tomorrow, Tuesday, February 9, at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) to discuss Skilled Healthcare's consolidated financial results for the fourth quarter and full year of 2009 and its outlook for the future.

To participate in the call, interested parties may dial (866) 730-5765 within the U.S. and (857) 350-1589 internationally and reference passcode 28744353. Alternatively, interested parties may access the call in listen-only mode via Skilled Healthcare Group’s Web site - www.skilledhealthcaregroup.com. A replay of the conference call will be available after 11:30 a.m. Pacific Time on February 9, 2010 via Skilled Healthcare Group’s Web site or by dialing (888) 286-8010 within the U.S. and (617) 801-6888 internationally and referencing passcode 42362880. The replay will be available until February 16, 2010.

About Skilled Healthcare Group

Skilled Healthcare Group, Inc. based in Foothill Ranch, California, is a holding company with subsidiary healthcare services companies, which in the aggregate have consolidated annual revenues of over $750 million and approximately 14,000 employees. Skilled Healthcare and its wholly-owned companies, collectively referred to as the “Company,” operate long-term care facilities and provide a wide range of post-acute care services, with a strategic emphasis on sub-acute specialty health care. The Company operates facilities in California, Iowa, Kansas, Missouri, Nevada, New Mexico and Texas, including 78 skilled nursing facilities that offer sub-acute care and rehabilitative and specialty health skilled nursing care, and 22 assisted living facilities that provide room and board and social services. In addition, the Company provides physical, occupational and speech therapy in Company-operated facilities and unaffiliated facilities. Furthermore, the Company provides hospice care in the California and New Mexico markets. References made in this release to Skilled Healthcare, “the Company," "we," "us" and "our" refer to Skilled Healthcare Group, Inc. and each of its wholly-owned companies. More information about Skilled Healthcare is available at its Web site -- www.skilledhealthcaregroup.com.

Footnotes

Forward-Looking Statements

This release includes "forward-looking statements." 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" or "pursue," or the negative or other variations thereof or comparable terminology. In particular, they include the statements made by Mr. Hendrickson regarding the impact of the goodwill impairment charge, the Company’s cost control measures, and the restructuring of the Company’s hospice business, as well as the outlook for, and assumptions underlying, Skilled Healthcare's full year 2010 revenue, net income per diluted share, EBITDA and EBITDAR. 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 Skilled Healthcare may differ materially from that expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to, the factors described in Skilled Healthcare's amended Annual Report on Form 10-K/A for the year ended December 31, 2008 filed with the Securities and Exchange Commission (including the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein), our amended Quarterly Report on Form 10-Q/A for the period ended March 31, 2009 and in our subsequent reports on Form 10-Q and Form 8-K.

Any forward-looking statements are made only as of the date of this release. Skilled Healthcare disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

On June 29, 2009, we restated our financial statements for the annual periods in fiscal years 2006 through 2008 and the quarterly periods in fiscal years 2007 and 2008 in our amended Annual Report on Form 10-K/A for the year ended December 31, 2008 and for the first quarter of 2009 in our amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2009. Throughout this press release, all referenced amounts for affected periods and affected period comparisons reflect the affected balances and amounts on a restated basis. Please refer to our amended Annual Report on Form 10-K/A for the year ended December 31, 2008 and our amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2009 for more information regarding the restatement.

We believe that the presentation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR provide useful information to investors regarding our operational performance because they enhance an investor’s overall understanding of the financial performance and prospects for the future of our core business activities. Specifically, we believe that a report of EBITDA, Adjusted EBITDA and Adjusted EBITDAR provide consistency in our financial reporting and provide a basis for the comparison of results of core business operations between our current, past and future periods. EBITDA, Adjusted EBITDA and Adjusted EBITDAR are primary indicators management uses for planning and forecasting in future periods, including trending and analyzing the core operating performance of our business from period-to-period without the effect of U.S. generally accepted accounting principles, or GAAP, expenses, revenues and gains (losses) that are unrelated to the day-to-day performance of our business. We also use EBITDA, Adjusted EBITDA and Adjusted EBITDAR to benchmark the performance of our business against expected results, to analyze year-over-year trends, as described below, and to compare our operating performance to that of our competitors.

Management uses EBITDA, Adjusted EBITDA and Adjusted EBITDAR to assess the performance of our core business operations, to prepare operating budgets and to measure our performance against those budgets on an administrative services segment and a facility by facility level. We typically use Adjusted EBITDA and Adjusted EBITDAR for these purposes, on a consolidated basis (because the adjustments to EBITDA are not generally allocable to any individual business unit), and we typically use EBITDA and EBITDAR to compare the operating performance of each skilled nursing and assisted living facility, as well as to assess the performance of our reporting segments: long term care services, which includes the operation of our skilled nursing and assisted living operating companies; and ancillary services, which includes our rehabilitation therapy and hospice operating companies. EBITDA, Adjusted EBITDA and Adjusted EBITDAR are useful in this regard because they do not include such costs as interest expense, income taxes, depreciation and amortization expense, rent cost of revenue and special charges, which may vary from business unit to business unit and period to period depending upon various factors, including the method used to finance the business, the amount of debt that we have determined to incur, whether a facility is owned or leased, the date of acquisition of a facility or business, the original purchase price of a facility or business unit or the tax law of the state in which a business unit operates. These types of charges are dependent on factors unrelated to the underlying business unit performance. As a result, we believe that the use of EBITDA and Adjusted EBITDA provide a meaningful and consistent comparison of our underlying businesses between periods by eliminating certain items required by GAAP which have little or no significance in the day-to-day operations. Additionally, because Adjusted EBITDAR excludes rent cost of revenue, it is useful in comparing leased facilities to owned facilities.

We also make capital allocations to each of our companies based on expected EBITDA returns and establish compensation programs and bonuses for the facility level employees that are based in part upon the achievement of pre-established EBITDA and Adjusted EBITDA targets.