Form 8-K Genesis Healthcare, Inc. For: Aug 04

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 4, 2016 

Genesis Healthcare, Inc.

(Exact name of registrant as specified in its charter)

(610) 444-6350

(Registrant’s telephone number, including area code)

Not Applicable 

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Item 2.02Results of Operations and Financial Condition.  

On August 4, 2016, Genesis Healthcare, Inc. (“Genesis”) issued the press release furnished herewith as Exhibit 99.1 reporting its operating results for the quarter ended June 30, 2016 (the “Earnings Release”).

Certain information contained in the Earnings Release refers to non-GAAP financial measures and other definitions specific to Genesis’ businesses.  For an explanation of the adjustments and a description of Genesis’ uses of, and the limitations associated with, non-GAAP financial measures, including Adjusted EBITDA, Adjusted EBITDAR, EBITDA and EBITDAR (each as defined below), see “Reasons for Non-GAAP Financial Disclosure” in the Earnings Release.

Definitions of key performance indicators and non-GAAP measures used in the Earnings Release:

The following is a glossary of terms for some key performance indicators and non-GAAP measures used in reference to Genesis:

“Actual Patient Days” is defined as the number of residents occupying a bed (or units in the case of an assisted/senior living center) for one qualifying day in that period.

“Adjusted EBITDA” is defined as EBITDA adjusted for certain excluded items to provide supplemental information regarding our operating performance.

“Adjusted EBITDAR” is defined as EBITDAR adjusted for certain excluded items to provide supplemental information regarding our operating performance.

“Available Patient Days” is defined as the number of available beds (or units in the case of an assisted/senior living center) multiplied by the number of days in that period.

“Average Daily Census” or “ADC” is the number of residents occupying a bed (or units in the case of an assisted/senior living center) over a period of time, divided by the number of calendar days in that period.

“EBITDAR” is defined as net income or loss attributed to Genesis Healthcare, Inc. before net income or loss of non-controlling interests, net income or loss from discontinued operations, depreciation and amortization expense, interest expense and lease expense.

“EBITDA” is defined as EBITDAR less lease expense.

“Insurance” refers collectively to commercial insurance and managed care payor sources, including Medicare Advantage beneficiaries, but does not include managed care payors serving Medicaid residents, which are included in the Medicaid category.

“Occupancy Percentage” is measured as the percentage of Actual Patient Days relative to the Available Patient Days.

“Skilled Mix” refers collectively to Medicare and Insurance payor sources.

“Therapist Efficiency” is computed by dividing billable labor minutes related to patient care by total labor minutes for the period.

This information and the information contained in the press release shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information in this Current Report on Form 8-K is not incorporated by reference into any filings of the Company made under the Securities Act of 1933, as amended, whether made before or after the date of this

Current Report on Form 8-K, regardless of any general incorporation language in the filing, unless specifically stated so therein.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

EXHIBIT INDEX

Exhibit 99.1

FOR IMMEDIATE RELEASE 

Genesis HealthCare Contact:

Investor Relations

610-925-2000

GENESIS HEALTHCARE

REPORTS SECOND QUARTER 2016 RESULTS

Genesis Completes Refinancing of Term Loan Facility Further Strengthening Balance Sheet

KENNETT SQUARE, PA – (August 4, 2016) – Genesis HealthCare (Genesis, or the Company) (NYSE: GEN), one of the largest post-acute care providers in the United States, today announced operating results for the second quarter ended June 30, 2016. 

Summary of Recent Financing Activity    

“The new four-year term loan facility and the amendments to our other loan agreements and significant master leases eliminate short-term debt refinancing risk and create stability in our capital structure providing a stronger foundation to operate and grow our business,” said George V. Hager, Jr., Chief Executive Officer of Genesis.  “We worked in close collaboration with our long-term credit partners on these transactions and appreciate their continued support of our Company.”

Second Quarter 2016 Results 

“I am pleased to announce that Genesis produced a strong, stable quarter due to the hard work and dedication of our caregivers and employees across the country,” continued Hager.  “Second quarter census was in line with our expectations and the rate of year-over-year census decline moderated as compared to the first quarter of 2016.  Our focus on managing the controllable aspects of our business was a key factor in our success this quarter and we expect it will position us well for the second half of 2016.”

“At the same time, we are positioning the Company to thrive in a world that will increasingly reward value-based providers. Our participation in value-based demonstrations and our organizational focus on reducing avoidable hospital readmissions and managing down lengths of stay creates self-imposed near term pressure on skilled census but are vital to our long-term success. We are doing what is required for the long-term strength and success of the Company,” concluded Hager.

Financing and Portfolio Management Activities

Financing Activities Occurring Subsequent to Quarter End

On July 29, 2016, Genesis entered into a new term loan agreement maturing July 29, 2020 in the aggregate principal amount of $120.0 million. Interest on the new term loan is equal to a base rate (subject to a floor of 1.00%) plus 13%, of which 2% may be paid-in-kind.  The new term loan does not contain any pre-payment penalty provision.  Genesis used the net proceeds of the new term loan, along with available cash, to repay in full the remaining $156.5 million obligation under the prior term loan agreement, including a 2% prepayment penalty.  The prior term loan and all related guarantees and liens were terminated upon such payments.

Also, on July 29, 2016, Genesis entered into an amendment to its revolving credit facilities.  The amendment modifies financial covenants and increases the interest rate margin applicable to the three credit facility tranches by 0.25% to 1.00%.

Also, on July 29, 2016, Genesis entered into amendments to its master leases with Welltower Inc. (Welltower), Sabra Healthcare REIT, Inc. (Sabra) and Omega Healthcare Investors, Inc. and its bridge loan agreements with Welltower to revise the financial covenants under such agreements. 

The agreements described above reset financial covenants effective June 30, 2016 at levels approximating a 20%-25% cushion to current and projected EBITDA. 

Financing Activities Occurring During the Second Quarter

Year-to-date, Genesis has closed on 18 HUD guaranteed mortgages totaling $129.1 million ($61.2 million during the second quarter) that, together with $54.2 million of asset sale proceeds, were used to pay down partially $183.3 million of the Company’s real estate bridge loans with Welltower.  Welltower real estate bridge loans totaling $310.8 million remain outstanding as of June 30, 2016. Genesis expects to continue to refinance the real estate bridge loans with lower cost and longer maturity HUD guaranteed mortgages or other permanent financing through the end of 2016.

Portfolio Management Activities
In May 2016, Genesis purchased for $55 million the real estate of five Genesis facilities previously under lease agreements that had annual rent of $6.3 million.  The purchase was financed in part with a $44 million real estate bridge loan issued by a third-party bank that has a three-year term and interest at LIBOR plus 4.00%.  The Company intends to refinance this mortgage debt with HUD guaranteed mortgages by the end of 2016.

In June 2016, Genesis signed an agreement to divest of nine underperforming leased assisted living facilities in the states of Pennsylvania, Delaware and West Virginia.  The nine facilities have annual revenue of $22.5 million, $5 million in lease expense, no Adjusted EBITDA and $2.8 million of pre-tax net loss. This transaction is expected to close in the second half of 2016.

As previously announced, in May 2016, Genesis completed the sale of its hospice and home health operations.  The operations were sold for $84 million – consisting of cash consideration of $72 million and a $12 million short-term note. Proceeds were used to repay partially the Company’s prior term loan dated December 3, 2012. The Company recorded a $43.8 million gain on the sale of these businesses in the second quarter of 2016, which is included in other income.

“These portfolio management activities have been executed in line with our priorities to reduce leverage and increase free cash flow of the Company,” noted Hager.

Restructuring of Sabra Master Leases

Subsequent to the end of the second quarter, Genesis entered into a memorandum of understanding with Sabra outlining the terms of a restructuring to its master lease agreements.  The significant features of the restructuring include:

The restructuring provides a long-term solution to Genesis’ master leases with Sabra.  Based upon the estimated sale proceeds of certain assets and the excess rent associated with the rent reallocation, Genesis projects the annual rent reduction by 2021 to be between $11.0 million and $13.0 million.

China Update

In June 2016, an international affiliate of Genesis Rehabilitation Services (GRS) opened Qinhuangdao Taisheng-GRS International Rehabilitation Center, the first rehabilitation center in the Beijing, Tianjin and Hebei metropolitan areas.  The 174-bed, 15,000 square meters center provides Western rehabilitation technologies and service philosophies that are localized for the China market and sets industry standards for Chinese rehabilitation services. This facility was built applying PowerBack Rehabilitation standards used in the United States. 

Currently, GRS operates a total of seven locations comprised of the two Vitality Centers in China and Hong Kong, the Qinhuangdao Taisheng facility, and inpatient and outpatient rehabilitation services in four hospitals.  GRS plans to open two additional Vitality Centers and four hospital joint ventures in August 2016, bringing GRS to a total of 13 facilities in China. Through the second half of 2016, GRS’ strategic footprint will cover Beijing, Shanghai, Guangzhou and Hong Kong.

Agreement in Principle on Financial Terms of a Settlement of Four Matters

In July 2016, the Company and the US Department of Justice (DOJ) reached an agreement in principle on the financial terms of a settlement regarding four matters arising out of the activities of Skilled Healthcare or Sun Healthcare prior to their operations becoming part of the Company’s operations (the Successor Matters).  The four matters are: the Creekside Hospice Litigation, the Therapy Matters Investigation, the Staffing Matters Investigation and the SunDance Part B Therapy Matter (each, as defined in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016).  The Company has agreed to the settlement in principle in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.

Based on the agreement in principle and in anticipation of the execution of final agreements and payment of a settlement amount of $52.7 million (the Settlement Amount), the Company recorded an additional loss contingency expense in the amount of $13.6 million in the second quarter of 2016, to increase its previously estimated and recorded liability.  The Company expects to remit the Settlement Amount to the government over a period of five years, once the agreement has been fully documented.

The agreement in principle is subject to negotiation, completion and execution of appropriate implementing agreements, including a settlement agreement or agreements, which are expected to be finalized in the second half of 2016, and the final approval of the respective parties.  There can be no assurance that the Company will enter into a final settlement agreement with the DOJ.  At this time, management believes that the ultimate outcome of the Successor Matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations and cash flows.

2016 Guidance

The Company reaffirms its previously announced guidance for fiscal 2016.

See reconciliation of forward looking non-GAAP financial measures included herein.

The Company is withdrawing its previously issued 2016 guidance with respect to Adjusted Diluted (Loss) Earnings Per Share and Recurring Free Cash Flow in response to the SEC’s updated guidance on non-GAAP financial measures and related disclosures.

Conference Call

Genesis HealthCare will hold a conference call at 8:30 a.m. Eastern Time on Friday, August 5, 2016 to discuss financial results for the second quarter of 2016.  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 (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 1,700 healthcare providers in 45 states, the District of Columbia and China.  References made in this release to “Genesis,” “the Company,” “we,” “us” and “our” refer to Genesis HealthCare 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,” “plans,” or “prospect,” or the negative or other variations thereof or comparable terminology. They include, but are not limited to, statements about Genesis’ expectations and beliefs regarding its future financial performance, anticipated cost management, anticipated acquisitions, anticipated divestitures, anticipated business development, anticipated refinancing opportunities and other financing activities, anticipated synergies, the anticipated resolution of government investigations and litigation and anticipated compliance with covenants. These forward-looking statements are based on current expectations and projections about future events, including the assumptions stated in this release, and there can be no assurance that they will be achieved or occur, in whole or in part, in the timeframes anticipated by the Company or at all. 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:

The Company’s Annual Report on Form 10-K for the year ended December 31, 2015, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with the U.S. Securities and Exchange Commission, including the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 when it is filed, discuss the foregoing risks as well as other important risks and uncertainties of which investors should be aware. Any forward-looking statements contained herein are made only as of the date of this release. Genesis disclaims any obligation to update its forward-looking statements or any of the information contained in this release. Investors are cautioned not to place undue reliance on these forward-looking statements.

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GENESIS HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

GENESIS HEALTHCARE, INC.

SELECTED BALANCE SHEET DATA

(UNAUDITED)

(IN THOUSANDS)

GENESIS HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

(1) - Net cash provided by (used in) operating activities in the six months ended June 30, 2016 and June 30, 2015 includes approximately $7 million and $62 million, respectively, of cash payments for transaction-related costs.

GENESIS HEALTHCARE, INC.

KEY FINANCIAL PERFORMANCE INDICATORS

(UNAUDITED)

*Inpatient Segment Key Financial Performance Indicators for the six months ended June 30, 2015 include Skilled Healthcare beginning February 1, 2015.

** In 2015 and 2016, includes 20 facilities located in Texas for which the real estate is owned by Genesis.

Reasons for Non-GAAP Financial Disclosure

The following discussion includes references to EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA, which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures). For purposes of SEC Regulation G, a non-GAAP financial measure is a numerical measure of a registrant’s historical or future financial performance, financial position and cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States. Pursuant to the requirements of Regulation G, we have provided reconciliations of the Non-GAAP Financial Measures to the most directly comparable GAAP financial measures.

We believe the presentation of Non-GAAP Financial Measures provides useful information to investors regarding our results of operations because these financial measures are useful for trending, analyzing and benchmarking the performance and value of our business. By excluding certain expenses and other items that may not be indicative of our core business operating results, these Non-GAAP Financial Measures:

allow investors to evaluate our performance from management’s perspective, resulting in greater transparency with respect to supplemental information used by us in our financial and operational decision making;

facilitate comparisons with prior periods and reflect the principal basis on which management monitors financial performance;

facilitate comparisons with the performance of others in the post-acute industry;

provide better transparency as to the relationship each reporting period between our cash basis lease expense and the level of operating earnings available to fund lease expense; and

allow investors to view our financial performance and condition in the same manner its significant landlords and lenders require us to report financial information to them in connection with determining our compliance with financial covenants.

We use Non-GAAP Financial Measures primarily as performance measures and believe that the GAAP financial measure most directly comparable to them is net income (loss) attributed to Genesis Healthcare, Inc. We use Non-GAAP Financial Measures to assess the relative performance of our operating businesses, as well as the employees responsible for operating such businesses. Non-GAAP Financial Measures are useful in this regard because they do not include such costs as interest expense, income taxes and depreciation and amortization expense which may vary from business unit to business unit depending upon such factors as the method used to finance the original purchase of the business unit or the tax law in the state in which a business unit operates. By excluding such factors when measuring financial performance, many of which are outside of the control of the employees responsible for operating our business units, we are better able to evaluate the operating performance of the business unit and the employees responsible for business unit performance. Consequently, we use these Non-GAAP Financial Measures to determine the extent to which our employees have met performance goals, and therefore may or may not be eligible for incentive compensation awards.

We also use Non-GAAP Financial Measures in our annual budget process. We believe these Non-GAAP Financial Measures facilitate internal comparisons to historical operating performance of prior periods and external comparisons to competitors’ historical operating performance. The presentation of these Non-GAAP Financial Measures is consistent with our past practice and we believe these measures further enable investors and analysts to compare current non-GAAP measures with non-GAAP measures presented in prior periods.

Although we use Non-GAAP Financial Measures as financial measures to assess the performance of our business, the use of these Non-GAAP Financial Measures is limited because they do not consider certain material costs necessary to operate the business.  Because Non-GAAP Financial Measures do not consider these important elements of our cost structure, a user of our financial information who relies on Non-GAAP Financial Measures as the only measures of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net income (loss) attributed to Genesis Healthcare, Inc. as an important measure of its financial performance because it provides the most complete measure of our performance.

Other companies may define Non-GAAP Financial Measures differently and, as a result, our Non-GAAP Financial Measures may not be directly comparable to those of other companies.  Non-GAAP Financial Measures do not represent net income (loss), as defined by GAAP. Non-GAAP Financial Measures should be considered in addition to, not a substitute for, or superior to, GAAP Financial Measures.

We use the following Non-GAAP Financial Measures that we believe are useful to investors as key measures of our operating performance:

EBITDAR and EBITDA

“EBITDAR” is defined as net income or loss attributable to Genesis Healthcare, Inc. before net income or loss of non-controlling interests, net income or loss from discontinued operations, depreciation and amortization expense, interest expense and lease expense.  We believe EBITDAR is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (interest and lease expense) and our asset base (depreciation and amortization expense) from our operating results.  We also use EBITDAR as one measure in determining the value of prospective acquisitions or divestitures.  EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare industry. In addition, covenants in our lease agreements use EBITDAR as a measure of financial compliance.

“EBITDA” is defined as EBITDAR less lease expense.   We believe EBITDA is useful to an investor in evaluating our operating performance for the same reasons identified with respect to EBITDAR.  EBITDA is a commonly used measure to estimate the enterprise value of businesses in the healthcare industry.  In addition, covenants in our debt agreements use EBITDA as a measure of financial compliance.

Adjustments to EBITDAR and EBITDA

We adjust EBITDAR and EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDAR and Adjusted EBITDA, when combined with GAAP net income (loss) attributable to Genesis Healthcare, Inc., EBITDAR and EBITDA, is beneficial to an investor’s complete understanding of our operating performance.  In addition, such adjustments are substantially similar to the adjustments to EBITDAR and EBITDA provided for in the financial covenant calculations contained in our lease and debt agreements.

We adjust EBITDAR and EBITDA for the following items:

Adjustments to EBITDA

GENESIS HEALTHCARE, INC.

RECONCILIATION OF NET LOSS ATTRIBUTABLE TO GENESIS HEALTHCARE, INC. TO EBITDA, EBITDAR, ADJUSTED EBITDA AND ADJUSTED EBITDAR

(UNAUDITED)

(IN THOUSANDS)

GENESIS HEALTHCARE, INC.

RECONCILIATION OF FORWARD LOOKING NET LOSS ATTRIBUTABLE TO GENESIS HEALTHCARE, INC. TO EBITDA, EBITDAR, ADJUSTED EBITDA AND ADJUSTED EBITDAR

(UNAUDITED)

(IN THOUSANDS)