Sun Healthcare Group, Inc. (SUNH)

[Frankiy]

Sun Healthcare Group, Inc. Updates 2011 Guidance
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Sun Healthcare Group, Inc. (NASDAQ: SUNH) today announced its updated financial guidance for the year ending December 31, 2011.

Reissuance of 2011 Financial Guidance

Sun Healthcare announced the withdrawal of its full-year 2011 guidance on August 1, 2011 in order to have time to evaluate the impact of the final rule for skilled nursing facilities that was published by the Centers for Medicare and Medicaid Services ("CMS") on July 29, 2011. After completing that review, the Company is reissuing and updating its full year 2011 guidance. The significant changes include:

consolidated revenues are expected to be between $1.925 billion and $1.945 billion, compared to a previously expected range of $1.950 billion to $1.995 billion;
consolidated adjusted EBITDAR is expected to be between $237 million and $242 million, compared to a previously expected range of $259 million to $265 million; and
diluted earnings per share from continuing operations is expected to be between $0.83 and $0.94, compared to a previously expected range of $1.30 to $1.45.

The CMS final rule includes a parity adjustment reducing Medicare rates by 11.1 percent, changes to group therapy reimbursement, and the introduction of new change-of-therapy provisions as patients move through their post-acute stay. Based on a thorough review of the final rule's impact, the Company estimates that the parity adjustment will impact adjusted EBITDAR negatively by $15 million in the fourth quarter of 2011. The impact of group therapy and change-of-therapy provisions established in the final rule have required substantial changes in the methods by which therapy services are delivered and are estimated to have a combined negative impact on adjusted EBITDAR of between $10 million and $12 million in the fourth quarter of 2011, including the changes in methods by which therapy services are delivered.

The Company has commenced a broad-based mitigation initiative, which includes infrastructure cost reductions that will reduce the net impact of the final rule during the fourth quarter and is expected to continue to ramp up into 2012. The Company expects that after giving effect to these mitigation efforts, there will be a net negative impact of the final rule to 2011 adjusted EBITDAR of between $22 million and $23 million as reflected in the Company's updated financial guidance. The Company anticipates that the net negative impact of the final rule on the Company's results of operations in 2012, after the mitigation initiatives are fully realized and changes in methods of delivering therapy services are fully implemented, will be between $45 million and $50 million.

William A. Mathies, Sun's chairman and chief executive officer, commented, "Our analysis demonstrates that the rate reductions imposed by the CMS final rule have far exceeded the stated goal of parity with prior Medicare rates, and we remain concerned that these reductions may have serious consequences for our entire industry. That said, we are moving expeditiously to mitigate the impact of the rule on our operations while retaining our focus on our primary mission of providing quality care."

Mathies added, "We continue to closely monitor our spending programs, including reducing our capital expenditures, and expect to have 2011 free cash flow of approximately $20 million. We believe we have sufficient liquidity to satisfy our financial covenants and will continue to evaluate opportunities to pursue additional flexibility."

The table below sets forth Sun's updated 2011 full-year guidance which includes transaction and integration costs related to the disposition of closed operations: