UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended SeptemberJune 30, 2017.2018.
OR
| ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file number: 001-33459
Genesis Healthcare, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
| 20-3934755 |
(State or other jurisdiction of |
| (IRS Employer |
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101 East State Street |
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Kennett Square, Pennsylvania |
| 19348 |
(Address of principal executive offices) |
| (Zip Code) |
(610) 444-6350
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
| Accelerated filer ☒ |
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Non-accelerated filer ☐ |
| Smaller reporting company ☐ |
(do not check if smaller reporting company) |
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Emerging growth company ◻ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 7, 2017,August 8, 2018, was:
Class A common stock, $0.001 par value – 94,100,738101,090,509 shares
Class B common stock, $0.001 par value – 744,396 shares
Class C common stock, $0.001 par value – 61,561,39359,700,801 shares
Genesis Healthcare, Inc.
Form 10-Q
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| Consolidated Balance Sheets — |
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| Consolidated Statements of Cash Flows — |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I — FINANCIAL INFORMATION
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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| September 30, |
| December 31, |
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| December 31, |
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| 2017 |
| 2016 |
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| 2018 |
| 2017 |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
| $ | 50,591 |
| $ | 51,408 |
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| $ | 78,932 |
| $ | 54,525 |
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Restricted cash and investments in marketable securities |
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| 43,965 |
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| 43,555 |
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Accounts receivable, net of allowances for doubtful accounts of $267,321 and $218,383 at September 30, 2017 and December 31, 2016, respectively |
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| 774,052 |
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| 832,109 |
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Restricted cash and equivalents |
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| 6,949 |
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| 4,113 |
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Restricted investments in marketable securities |
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| 29,831 |
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| 33,015 |
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Accounts receivable, net of allowances for doubtful accounts of $313,357 at December 31, 2017 |
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| 687,970 |
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| 724,138 |
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Prepaid expenses |
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| 83,878 |
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| 64,218 |
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| 65,368 |
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| 74,368 |
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Other current assets |
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| 46,306 |
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| 63,641 |
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| 50,239 |
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| 49,748 |
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Assets held for sale |
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| 4,056 |
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| 9,278 |
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Total current assets |
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| 998,792 |
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| 1,058,987 |
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| 928,567 |
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| 939,907 |
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Property and equipment, net of accumulated depreciation of $881,049 and $807,776 at September 30, 2017 and December 31, 2016, respectively |
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| 3,470,946 |
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| 3,765,393 |
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Restricted cash and investments in marketable securities |
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| 96,411 |
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| 112,471 |
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Property and equipment, net of accumulated depreciation of $994,945 and $939,155 at June 30, 2018 and December 31, 2017, respectively |
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| 3,017,243 |
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| 3,413,599 |
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Restricted cash and equivalents |
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| 57,191 |
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Restricted investments in marketable securities |
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| 102,797 |
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| 93,101 |
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Other long-term assets |
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| 122,144 |
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| 137,602 |
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| 105,206 |
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| 109,060 |
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Deferred income taxes |
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| 5,754 |
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| 6,107 |
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| 5,032 |
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| 3,580 |
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Identifiable intangible assets, net of accumulated amortization of $84,073 and $91,155 at September 30, 2017 and December 31, 2016, respectively |
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| 147,239 |
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| 175,566 |
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Identifiable intangible assets, net of accumulated amortization of $94,369 and $88,336 at June 30, 2018 and December 31, 2017, respectively |
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| 131,091 |
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| 142,976 |
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Goodwill |
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| 85,642 |
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| 440,712 |
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| 85,642 |
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| 85,642 |
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Assets held for sale |
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| 82,363 |
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| 112,048 |
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Total assets |
| $ | 4,926,928 |
| $ | 5,779,201 |
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| $ | 4,544,817 |
| $ | 4,787,865 |
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Liabilities and Stockholders' Deficit: |
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Current liabilities: |
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Current installments of long-term debt |
| $ | 851,344 |
| $ | 24,594 |
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| $ | 107,338 |
| $ | 26,962 |
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Capital lease obligations |
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| 949,050 |
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| 1,886 |
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| 2,159 |
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| 2,511 |
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Financing obligations |
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| 2,908,020 |
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| 1,613 |
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| 1,983 |
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| 1,878 |
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Accounts payable |
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| 241,145 |
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| 258,616 |
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| 251,644 |
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| 285,637 |
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Accrued expenses |
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| 220,376 |
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| 215,457 |
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| 201,790 |
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| 233,856 |
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Accrued compensation |
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| 163,727 |
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| 181,841 |
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| 156,773 |
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| 167,368 |
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Self-insurance reserves |
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| 168,933 |
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| 172,565 |
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| 180,459 |
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| 180,982 |
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Current portion of liabilities held for sale |
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| 988 |
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| 2,110 |
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Total current liabilities |
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| 5,502,595 |
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| 857,560 |
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| 904,256 |
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| 899,194 |
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Long-term debt |
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| 284,014 |
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| 1,146,550 |
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| 1,076,537 |
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| 1,050,337 |
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Capital lease obligations |
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| 45,974 |
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| 997,340 |
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| 996,059 |
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| 1,025,355 |
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Financing obligations |
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| 8,711 |
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| 2,867,534 |
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| 2,744,799 |
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| 2,929,483 |
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Deferred income taxes |
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| 25,725 |
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| 22,354 |
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| 7,708 |
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| 7,584 |
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Self-insurance reserves |
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| 454,774 |
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| 445,559 |
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| 442,781 |
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| 436,560 |
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Liabilities held for sale |
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| 69,057 |
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| 118,929 |
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Other long-term liabilities |
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| 133,854 |
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| 103,435 |
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| 101,494 |
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| 119,484 |
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Commitments and contingencies |
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Stockholders’ deficit: |
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Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 93,976,674 and 75,187,388 at September 30, 2017 and December 31, 2016, respectively) |
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| 94 |
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| 75 |
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Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 15,495,019 at September 30, 2017 and December 31, 2016, respectively) |
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| 1 |
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| 16 |
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Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 61,600,511 and 63,849,380 at September 30, 2017 and December 31, 2016, respectively) |
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| 61 |
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| 64 |
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Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 101,009,462 and 97,100,738 at June 30, 2018 and December 31, 2017, respectively) |
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| 101 |
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| 97 |
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Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 744,396 at June 30, 2018 and December 31, 2017, respectively) |
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| 1 |
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| 1 |
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Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 59,700,801 and 61,561,393 at June 30, 2018 and December 31, 2017, respectively) |
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| 59 |
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| 61 |
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Additional paid-in-capital |
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| 296,378 |
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| 305,358 |
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| 266,210 |
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| 290,573 |
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Accumulated deficit |
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| (1,285,356) |
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| (795,615) |
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| (1,482,747) |
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| (1,374,597) |
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Accumulated other comprehensive loss |
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| (134) |
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| (221) |
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| (269) |
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| (362) |
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Total stockholders’ deficit before noncontrolling interests |
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| (988,956) |
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| (490,323) |
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| (1,216,645) |
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| (1,084,227) |
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Noncontrolling interests |
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| (539,763) |
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| (239,865) |
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| (631,101) |
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| (595,905) |
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Total stockholders' deficit |
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| (1,528,719) |
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| (730,188) |
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| (1,847,746) |
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| (1,680,132) |
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Total liabilities and stockholders’ deficit |
| $ | 4,926,928 |
| $ | 5,779,201 |
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| $ | 4,544,817 |
| $ | 4,787,865 |
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See accompanying notes to unaudited consolidated financial statements.
3
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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| Three months ended September 30, |
| Nine months ended September 30, |
| Three months ended June 30, |
| Six months ended June 30, | ||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Net revenues |
| $ | 1,315,452 |
| $ | 1,418,994 |
| $ | 4,045,860 |
| $ | 4,329,570 |
| $ | 1,272,360 |
| $ | 1,341,276 |
| $ | 2,573,432 |
| $ | 2,730,408 |
Salaries, wages and benefits |
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| 739,404 |
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| 834,414 |
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| 2,303,300 |
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| 2,534,824 |
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| 705,754 |
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| 739,402 |
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| 1,441,524 |
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| 1,563,896 |
Other operating expenses |
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| 375,587 |
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| 350,828 |
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| 1,090,139 |
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| 1,062,086 |
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| 370,555 |
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| 396,316 |
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| 754,715 |
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| 762,137 |
General and administrative costs |
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| 40,732 |
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| 46,545 |
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| 127,041 |
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| 139,999 |
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| 39,046 |
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| 41,151 |
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| 78,921 |
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| 86,237 |
Provision for losses on accounts receivable |
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| 25,187 |
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| 25,602 |
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| 72,700 |
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| 81,776 | ||||||||||||
Lease expense |
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| 38,670 |
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| 35,512 |
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| 113,004 |
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| 109,796 |
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| 32,111 |
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| 38,234 |
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| 65,182 |
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| 74,334 |
Depreciation and amortization expense |
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| 59,390 |
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| 61,104 |
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| 183,986 |
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| 190,822 |
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| 63,495 |
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| 60,227 |
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| 114,998 |
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| 124,596 |
Interest expense |
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| 124,431 |
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| 131,812 |
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| 373,473 |
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| 400,853 |
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| 117,955 |
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| 124,288 |
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| 232,992 |
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| 249,042 |
Loss on early extinguishment of debt |
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| 15,363 |
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| 2,301 |
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| 15,830 | ||||||||||||
(Gain) loss on early extinguishment of debt |
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| (501) |
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| 2,301 |
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| 9,785 |
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| 2,301 | ||||||||||||
Investment income |
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| (1,596) |
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| (934) |
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| (4,097) |
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| (2,073) |
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| (1,631) |
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| (1,392) |
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| (2,678) |
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| (2,501) |
Other loss (income) |
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| 2,379 |
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| (5,173) |
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| 15,602 |
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| (48,084) | ||||||||||||
Other (income) loss |
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| (22,220) |
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| 4,190 |
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| (22,152) |
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| 13,224 | ||||||||||||
Transaction costs |
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| 1,056 |
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| 3,057 |
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| 7,862 |
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| 9,804 |
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| 3,112 |
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| 3,781 |
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| 15,207 |
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| 6,806 |
Customer receivership |
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| 297 |
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| — |
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| 35,864 |
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| — | ||||||||||||
Customer receivership and other related charges |
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| — |
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| 35,566 |
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| — |
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| 35,566 | ||||||||||||
Long-lived asset impairments |
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| 163,364 |
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| — |
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| 163,364 |
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| — |
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| 27,257 |
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| — |
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| 55,617 |
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| — |
Goodwill and identifiable intangible asset impairments |
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| 360,046 |
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| — |
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| 360,046 |
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| — |
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| 1,132 |
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| — |
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| 1,132 |
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| — |
Skilled Healthcare and other loss contingency expense |
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| — |
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| — |
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| — |
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| 15,192 | ||||||||||||
Equity in net income of unconsolidated affiliates |
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| (69) |
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| (893) |
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| (291) |
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| (2,153) | ||||||||||||
Loss before income tax expense (benefit) |
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| (613,426) |
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| (78,243) |
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| (798,434) |
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| (179,102) | ||||||||||||
Income tax expense (benefit) |
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| 1,596 |
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| (25,888) |
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| 5,683 |
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| (19,738) | ||||||||||||
Equity in net loss (income) of unconsolidated affiliates |
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| 38 |
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| (88) |
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| 258 |
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| (222) | ||||||||||||
Loss before income tax (benefit) expense |
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| (63,743) |
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| (102,700) |
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| (172,069) |
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| (185,008) | ||||||||||||
Income tax (benefit) expense |
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| (886) |
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| 2,803 |
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| (539) |
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| 4,087 | ||||||||||||
Loss from continuing operations |
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| (615,022) |
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| (52,355) |
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| (804,117) |
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| (159,364) |
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| (62,857) |
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| (105,503) |
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| (171,530) |
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| (189,095) |
Loss from discontinued operations, net of taxes |
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| (2) |
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| (24) |
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| (70) |
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| (1) |
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| — |
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| (47) |
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| — |
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| (68) |
Net loss |
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| (615,024) |
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| (52,379) |
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| (804,187) |
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| (159,365) |
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| (62,857) |
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| (105,550) |
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| (171,530) |
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| (189,163) |
Less net loss attributable to noncontrolling interests |
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| 241,200 |
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| 31,921 |
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| 314,446 |
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| 72,895 |
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| 23,245 |
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| 40,394 |
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| 63,380 |
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| 73,246 |
Net loss attributable to Genesis Healthcare, Inc. |
| $ | (373,824) |
| $ | (20,458) |
| $ | (489,741) |
| $ | (86,470) |
| $ | (39,612) |
| $ | (65,156) |
| $ | (108,150) |
| $ | (115,917) |
Loss per common share: |
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Basic and diluted: |
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Basic and Diluted: |
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Weighted-average shares outstanding for loss from continuing operations per share |
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| 94,940 |
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| 90,226 |
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| 93,376 |
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| 89,617 |
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| 100,596 |
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| 93,273 |
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| 99,430 |
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| 92,581 |
Net loss per common share: |
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Loss from continuing operations attributable to Genesis Healthcare, Inc. |
| $ | (3.94) |
| $ | (0.23) |
| $ | (5.24) |
| $ | (0.96) |
| $ | (0.39) |
| $ | (0.70) |
| $ | (1.09) |
| $ | (1.25) |
Loss from discontinued operations, net of taxes |
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| (0.00) |
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| (0.00) |
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| (0.00) |
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| (0.00) |
|
| — |
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| (0.00) |
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| - |
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| (0.00) |
Net loss attributable to Genesis Healthcare, Inc. |
| $ | (3.94) |
| $ | (0.23) |
| $ | (5.24) |
| $ | (0.96) |
| $ | (0.39) |
| $ | (0.70) |
| $ | (1.09) |
| $ | (1.25) |
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See accompanying notes to unaudited consolidated financial statements.
4
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
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| Three Months Ended September 30, |
| Nine months ended September 30, |
| Three Months Ended June 30, |
| Six months ended June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Net loss |
| $ | (615,024) |
| $ | (52,379) |
| $ | (804,187) |
| $ | (159,365) |
| $ | (62,857) |
| $ | (105,550) |
| $ | (171,530) |
| $ | (189,163) |
Net unrealized gain (loss) on marketable securities, net of tax |
|
| 134 |
|
| (298) |
|
| 160 |
|
| 730 | ||||||||||||
Net unrealized (loss) gain on marketable securities, net of tax |
|
| (273) |
|
| 5 |
|
| (611) |
|
| 26 | ||||||||||||
Comprehensive loss |
|
| (614,890) |
|
| (52,677) |
|
| (804,027) |
|
| (158,635) |
|
| (63,130) |
|
| (105,545) |
|
| (172,141) |
|
| (189,137) |
Less: comprehensive loss attributable to noncontrolling interests |
|
| 241,147 |
|
| 31,921 |
|
| 314,373 |
|
| 72,464 |
|
| 23,825 |
|
| 40,389 |
|
| 64,084 |
|
| 73,226 |
Comprehensive loss attributable to Genesis Healthcare, Inc. |
| $ | (373,743) |
| $ | (20,756) |
| $ | (489,654) |
| $ | (86,171) |
| $ | (39,305) |
| $ | (65,156) |
| $ | (108,057) |
| $ | (115,911) |
See accompanying notes to unaudited consolidated financial statements.
5
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, |
|
| Six months ended June 30, | ||||||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 | ||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (804,187) |
| $ | (159,365) |
|
| $ | (171,530) |
| $ | (189,163) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash interest and leasing arrangements, net |
|
| 51,049 |
|
| 70,228 |
|
|
| 39,016 |
|
| 32,222 |
Other non-cash charges and gains, net |
|
| 15,602 |
|
| (48,084) |
| ||||||
Other non-cash (gains) charges, net |
|
| (22,152) |
|
| 13,224 | |||||||
Share based compensation |
|
| 7,206 |
|
| 6,759 |
|
|
| 4,557 |
|
| 4,767 |
Depreciation and amortization |
|
| 183,986 |
|
| 190,822 |
| ||||||
Provision for losses on accounts receivable |
|
| 72,700 |
|
| 81,776 |
| ||||||
Equity in net income of unconsolidated affiliates |
|
| (291) |
|
| (2,153) |
| ||||||
Provision for deferred taxes |
|
| 3,658 |
|
| (21,957) |
| ||||||
Customer receivership |
|
| 35,864 |
|
| — |
| ||||||
Depreciation and amortization expense |
|
| 114,998 |
|
| 124,596 | |||||||
(Recovery) provision for losses on accounts receivable |
|
| (1,613) |
|
| 47,513 | |||||||
Equity in net loss (income) of unconsolidated affiliates |
|
| 258 |
|
| (222) | |||||||
(Benefit) provision for deferred taxes |
|
| (943) |
|
| 1,661 | |||||||
Customer receivership and other related charges |
|
| — |
|
| 35,566 | |||||||
Long-lived asset impairments |
|
| 163,364 |
|
| — |
|
|
| 55,617 |
|
| — |
Goodwill and identifiable intangible asset impairments |
|
| 360,046 |
|
| — |
|
|
| 1,132 |
|
| — |
Loss on early extinguishment of debt |
|
| 2,301 |
|
| 12,714 |
|
|
| 9,300 |
|
| 2,301 |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (52,572) |
|
| (136,383) |
|
|
| 22,986 |
|
| (16,901) |
Accounts payable and other accrued expenses and other |
|
| 28,632 |
|
| 40,945 |
|
|
| (40,157) |
|
| 13,563 |
Net cash provided by operating activities |
|
| 67,358 |
|
| 35,302 |
|
|
| 11,469 |
|
| 69,127 |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (48,465) |
|
| (70,790) |
|
|
| (27,151) |
|
| (33,841) |
Purchases of marketable securities |
|
| (22,671) |
|
| (38,845) |
|
|
| (40,043) |
|
| (16,848) |
Proceeds on maturity or sale of marketable securities |
|
| 46,210 |
|
| 53,014 |
|
|
| 33,085 |
|
| 15,212 |
Net change in restricted cash and equivalents |
|
| (4,497) |
|
| 20,984 |
| ||||||
Purchases of inpatient assets, net of cash acquired |
|
| — |
|
| (108,299) |
| ||||||
Sales of assets |
|
| 79,307 |
|
| 149,398 |
|
|
| — |
|
| 79,343 |
Other, net |
|
| (484) |
|
| (4,500) |
|
|
| (973) |
|
| (130) |
Net cash provided by investing activities |
|
| 49,400 |
|
| 962 |
| ||||||
Net cash (used in) provided by investing activities |
|
| (35,082) |
|
| 43,736 | |||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
|
| 478,000 |
|
| 662,000 |
| ||||||
Repayments under revolving credit facility |
|
| (509,650) |
|
| (611,000) |
| ||||||
Borrowings under revolving credit facilities |
|
| 1,747,284 |
|
| 351,000 | |||||||
Repayments under revolving credit facilities |
|
| (1,726,455) |
|
| (370,300) | |||||||
Proceeds from issuance of long-term debt |
|
| 23,872 |
|
| 354,137 |
|
|
| 562,386 |
|
| 17,480 |
Proceeds from tenant improvement draws under lease arrangements |
|
| 6,083 |
|
| 1,157 |
|
|
| — |
|
| 6,083 |
Repayment of long-term debt |
|
| (109,798) |
|
| (436,923) |
|
|
| (457,424) |
|
| (99,399) |
Debt issuance costs |
|
| (4,402) |
|
| (12,441) |
|
|
| (16,678) |
|
| (2,667) |
Debt settlement costs |
|
| (485) |
|
| — | |||||||
Distributions to noncontrolling interests and stockholders |
|
| (1,680) |
|
| (897) |
|
|
| (581) |
|
| (458) |
Net cash used in financing activities |
|
| (117,575) |
|
| (43,967) |
| ||||||
Net decrease in cash and cash equivalents |
|
| (817) |
|
| (7,703) |
| ||||||
Cash and cash equivalents: |
|
|
|
|
|
|
| ||||||
Net cash provided by (used in) financing activities |
|
| 108,047 |
|
| (98,261) | |||||||
Net increase in cash, cash equivalents and restricted cash and equivalents |
|
| 84,434 |
|
| 14,602 | |||||||
Cash, cash equivalents and restricted cash and equivalents: |
|
|
|
|
|
| |||||||
Beginning of period |
|
| 51,408 |
|
| 61,543 |
|
|
| 58,638 |
|
| 63,460 |
End of period |
| $ | 50,591 |
| $ | 53,840 |
|
| $ | 143,072 |
| $ | 78,062 |
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 325,229 |
| $ | 333,509 |
|
| $ | 192,831 |
| $ | 217,901 |
Net taxes refunded |
|
| (1,810) |
|
| (9,777) |
| ||||||
Net taxes paid (refunded) |
|
| 4,104 |
|
| (1,871) | |||||||
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases |
| $ | (14,909) |
| $ | (49,622) |
| ||||||
Capital lease obligations and assets |
| $ | (34,980) |
| $ | (14,909) | |||||||
Financing obligations |
|
| 18,279 |
|
| 28,933 |
|
|
| (125,783) |
|
| 11,260 |
Financing obligation assets |
|
| 113,254 |
|
| — |
See accompanying notes to unaudited consolidated financial statements.
6
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company History
Genesis Healthcare, Inc., a Delaware corporation, was incorporated in October 2005 under the name of SHG Holding Solutions, Inc., and subsequently changed its name to Skilled Healthcare Group, Inc. (Skilled). On February 2, 2015, Skilled combined its businesses and operations (the Combination) with FC-GEN Operations Investment, LLC, a Delaware limited liability company (FC-GEN), pursuant to a Purchase and Contribution Agreement dated August 18, 2014. In connection with the Combination, Skilled changed its name to Genesis Healthcare, Inc.
Effective December 1, 2012, FC-GEN completed the acquisition of Sun Healthcare Group, Inc. (Sun Healthcare) and its subsidiaries.
Description of Business
Genesis Healthcare, Inc. is a healthcare services company that, through its subsidiaries (collectively, the Company or Genesis), owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business. The Company has an administrative services company that provides a full complement of administrative and consultative services that allows its affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. At SeptemberJune 30, 2017,2018, the Company provides inpatient services through 472451 skilled nursing, assisted/senior living and behavioral health centers located in 30 states. Revenues of the Company’s owned, leased and otherwise consolidated inpatient businesses constitute approximately 86% of its revenues.
The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others. Recently theThe Company has expanded its delivery model for providing rehabilitation services to community-based and at-home settings, as well as internationally in China. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 11% of the Company’s revenues.
The Company provides an array of other specialty medical services, including management services, physician services, staffing services, and other healthcare related services, which comprise the balance of the Company’s revenues.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In the opinion of management, the consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.
The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The Company presents noncontrolling interests within the stockholders’ deficit section of its consolidated balance sheets. The Company presents the amount of net loss attributable to Genesis Healthcare, Inc. and net loss attributable to noncontrolling interests in its consolidated statements of operations.
The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative
7
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
assessment of power and economics that considers which entity has the power to direct the activities that “most significantly impact” the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's composition of variable interest entitiesVIEs was not material at SeptemberJune 30, 2017.2018.
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by U.S. GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 20162017 filed with the U.S. Securities and Exchange Commission (the SEC) on Form 10-K on March 6, 2017.16, 2018.
Certain prior year disclosure amounts have been reclassified to conform to current period presentation. Restricted cash had previously been included in restricted cash and investments in marketable securities. As a result of recently adopted accounting pronouncements, discussed below, restricted cash will be presented separately on the Company’s consolidated balance sheets. The
7
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
provision for losses on accounts receivable has been combined with other operating expenses and general and administrative costs, on the consolidated statement of operations. See Note 4 – “NetRevenues and Accounts Receivable.”
Going ConcernFinancial Condition and Liquidity Considerations
The accompanying unauditedconsolidated financial statements have been prepared on the basis the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date the Company’s financial statements were issued (November 8, 2017)(August 9, 2018). Management considered the recent results of operations as well as the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due before November 8, 2018.August 9, 2019. Based upon such considerations, management determined that the Company is able to continue as a going concern for 12 months following the date of issuance of these financial statements (August 9, 2018).
The Company’s results of operations have been negatively impacted by the persistent pressure of healthcare reforms enacted in recent years. This challenging operating environment has been most acute in the Company’s inpatient segment, but also has had a detrimental effect on the Company’s rehabilitation therapy segment and its customers. In recent years, the Company has implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment. These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments accelerated in the third quarter of 2017. These factors caused
In response to these issues, the Company entered into a number of agreements, amendments and new financing facilities (the Restructuring Transactions) during the six months ended June 30, 2018. See Note 3 – “Significant Transactions and Events – Restructuring Transactions.” In total, these agreements and amendments are estimated to be unable to complyreduce the Company’s annual cash fixed charges by approximately $62.0 million beginning January 1, 2018. The new financing agreements provided $70.0 million of additional cash and borrowing availability, increasing the Company’s liquidity and financial flexibility. In connection with certainthe Restructuring Transactions, the Company entered into a new asset based lending facility agreement, replacing its prior revolving credit facilities (the Revolving Credit Facilities) and eliminating its forbearance agreement. Also in connection with the Restructuring Transactions, the Company amended the financial covenants at September 30, 2017 underin all of its material loan agreements and all but two of its material master leases. Financial covenants beginning in 2018 were amended to account for changes in the Revolving Credit Facilities,Company’s capital structure as a result of the Term Loans,Restructuring Transactions and to account for the Welltower Bridge Loans and the Master Lease Agreements and other agreements.current business climate. The Company has received waivers from the parties to the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements at September 30, 2017. The Company is engaged in discussions with its counterparties to the Revolving Credit Facilities to secure a 90-day forbearance agreement through late January 2018.
The Company’s ability to service its financial obligations, in addition to its ability to comply with the financial and restrictive covenants contained in the major agreements and other agreements, is dependent upon, among other things, its ability to attain a sustainable capital structure and its future performance which is subject to financial, economic, competitive, regulatory and other factors. Many of these factors are beyond the Company’s control. As currently structured, it is unlikely that the Company will be able to generate sufficient cash flow to cover required financial obligations, including its rent obligations, its debt service obligations and other obligations due to third parties.
The Company and its counterparties to the Restructuring Plans, as defined in Note 16 – “Subsequent Events – Restructuring Plans,” have entered into these preliminary and non-binding agreements in an effort to attain a sustainable capital structure for the Company. The Company believes that it is in the best interest of all creditors to grant necessary
8
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
waivers or reach negotiated settlements to enable the Company to continue as a going concern while it works with its counterparties to the Restructuring Plans to strengthen significantly its capital structure. However, there can be no assurance that timely and adequate waivers will be received in future periods or such settlements reached. If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not timely obtained, the defaults can cause acceleration of the Company’s financial obligations under certaintwo of its material master leases, for which agreements which the Company mayto amend financial covenants were not be in a positionattained, with respect to satisfy. Accordingly, the Company has classified the obligations of the effected agreements as current liabilities in its consolidated balance sheets as of September 30, 2017.
In the event of a failure to obtain necessary and timely waivers or otherwise achieve the fixed charge reductions contained in the Restructuring Plans, the Company may be forced to seek reorganization under the U.S. Bankruptcy Code. See Part II. Item 1A, “compliance with financial covenants. Risk Factors.”
The existence of these factors raises substantial doubt about the Company’s ability to continue as a going concern.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company adopted ASU 2016-09 effective January 1, 2017. Its adoption had no material impact on the Company’s consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which serves to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The adoption of ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU 2017-04 when it performed its annual goodwill impairment test at September 30, 2017. The adoption of ASU 2017-04 eliminated Step 2 of the goodwill impairment test. See Note 15 – “Asset Impairment Charges.”
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09)and all related amendments (ASC 606), which serves to supersede most existing revenue recognition guidance, including guidance specific to the healthcare industry. The FASB later issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations, in March 2016, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, in April 2016, ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients, in May 2016, and ASU 2016-20,
9
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Technical Corrections and Improvements to TopicASC 606 Revenue from Contracts with Customers, in December 2016, all of which further clarified aspects of Topic 606. The standard provides a principles-based framework for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU will be effective for annual and interim reporting periods beginning after December 15, 2017. The standard may be applied retrospectively to each period presented (full retrospective method) or retrospectively with the cumulative effect recognized in beginning retained earnings as of the date of adoption (modified retrospective method). The Company will adopt the requirements of this standardadopted ASC 606 effective January 1, 2018 using the modified retrospective transition method. A cross-functional implementation team has been established consistingThere was no cumulative effect on the opening balance of representatives from allaccumulated deficit as a result of our operating segments. The implementation team is working to analyze the impact ofadopting the standard on the Company’s contract portfolio by reviewing current accounting policiesas of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while comparative information has not been restated and practicescontinues to identify potential differences that would result from applying the requirements of the new standard to revenue contracts. In addition, the Company is in the process of identifying and implementing the appropriate changes to business processes and controls to support recognition and disclosurebe reported under the new standard. The Company expects to apply the portfolio approach practical expedientaccounting standards in effect for those periods. See Note 4 – “NetRevenues and is in the process of reviewing its revenue sources and evaluating the appropriate distribution of patient accounts into portfolios with similar collection experience that, when evaluated for collectibility, will result in a materially consistent revenue amount for such portfolios as if each patient account was evaluated on an individual contract basis. The Company is also evaluating the existence of variable consideration in the form of various reimbursement programs, such as bundled payment initiatives, which could have an impact on the revenue recognized. The Company expects that the adoption of the new standard will impact amounts presented in certain categories on its consolidated statements of operations, as upon adoption, certain amounts currently classified as bad debt expense may be reflected as implicit price concessions, and therefore an adjustment to net revenues. The Company is still evaluating the impact of the standard on its consolidated financial position, results of operations and cash flows. The Company is actively monitoring various industry publications, which continue to evolve. As such, any conclusions reached in the final industry guidance that are inconsistent with the Company's current assessment could result in revisions to the Company's expectations regarding the new standard’s impact on its consolidated financial statements.Accounts Receivable.”
8
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which is intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values; eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value; and requires separate presentation of financial assets and financial liabilities by measurement category. The Company adopted the new guidance is effective January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial condition and results of operations.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which addresses how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The Company adopted the new guidance effective January 1, 2018. Upon assessment of the cash flow issues subject to amendment, the adoption of ASU 2016-15 did not have a material impact on the Company’s consolidated statements of cash flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the new guidance effective January 1, 2018. To better accommodate the adoption of ASU 2016-18, the Company has elected to separately disclose restricted cash on its consolidated balance sheets for annual and interimall periods beginning after December 15,presented. The adoption of ASU 2016-18 did not have a material impact on the Company’s consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combination (805): Clarifying the Definition of a Business (ASU 2017-01), which provides guidance to assist entities with early adoption permitted under certain circumstances.evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted the new guidance effective January 1, 2018. The Company does not expect the adoption of ASU 2016-012017-01 to have a material impact on its consolidated financial condition and results of operations.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance
10
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. ASU 2016-02 must be adopted using a modified retrospective transition.approach, which includes a number of optional practical expedients. The adoption of ASU 2016-02 is expected to have a material impact on the Company’s financial position.position as a result of the recognition of the right-of-use assets and liabilities associated with operating leases as well as the impact of those assets and liabilities currently accounted for as financing obligations. The Company has established a cross-functional implementation team and is still evaluatingcurrently reviewing all lease agreements and service contracts which may contain an embedded lease. The Company has begun to design
9
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
changes to existing processes in conjunction with its review of lease agreements. The Company will adopt the impact on its results of operationsnew lease standard effective January 1, 2019 and does not expect the adoption of this standardexpects to have an impact on liquidity.elect certain available transitional practical expedients.
In August 2016,February 2018, the FASB issued ASU No. 2016-15,2018-02, Statement of Cash Flows (Topic 230): ClassificationReclassification of Certain Cash Receipts and Cash PaymentsTax Effects from Accumulated Other Comprehensive Income (ASU 2016-15), which addresses how certain cash receiptspermits entities to reclassify the disproportionate income tax effects of the Tax Cuts and cash payments shouldJobs Act (Tax Reform Act) on items within accumulated other comprehensive income (loss) to retained earnings. These disproportionate income tax effect items are referred to as "stranded tax effects." Amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act. Other accounting guidance that requires the effect of changes in tax laws or rates to be presented and classifiedincluded in the statement of cash flows. The new guidancenet income from continuing operations is not affected by this update. ASU 2018-02 is effective for annualthe Company beginning January 1, 2019 and interim periods beginning after December 15, 2017, with earlyshould be applied either in the period of adoption permitted.or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The adoption of ASU 2016-15 is2018-02 will not expected to have a material impact on the Company’s consolidated statements of cash flows.financial statements.
In November 2016,March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 2016-18, Statement118. The amendments in this update provide guidance on when to record and disclose provisional amounts for certain income tax effects of Cash Flows (230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, andTax Reform Act. The amendments also require any provisional amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents shouldsubsequent adjustments to be included in net income from continuing operations. Additionally, this ASU discusses required disclosures that an entity must make with cash and cash equivalents when reconcilingregard to the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption ofTax Reform Act. This ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The adoption of ASU 2016-18immediately as new information is not expectedavailable to have a material impact on the Company’s consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combination (805): Clarifying the Definition of a Business (ASU 2017-01), which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted in certain circumstances.adjust provisional amounts that were previously recorded. The Company does not expecthas adopted this standard as of January 1, 2018 and will continue to evaluate indicators that may give rise to a change in its tax provision as a result of the adoption of ASU 2017-01 to have a material impact on its consolidated financial condition and results of operations.Tax Reform Act.
(2) Certain Significant Risks and Uncertainties
Revenue Sources
The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy and other services. The Company’s inpatient services segment derives approximately 79%78% of its revenue from Medicare and various state Medicaid programs. The following table depicts the Company’s inpatient services segment revenue by source for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016.2017.
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| Three months ended September 30, |
| Nine months ended September 30, |
| Three months ended June 30, |
| Six months ended June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Medicare |
| 22 | % |
| 24 | % |
| 23 | % |
| 25 | % |
| 22 | % |
| 23 | % |
| 22 | % |
| 23 | % |
Medicaid |
| 57 | % |
| 55 | % |
| 56 | % |
| 54 | % |
| 57 | % |
| 55 | % |
| 56 | % |
| 55 | % |
Insurance |
| 12 | % |
| 11 | % |
| 12 | % |
| 11 | % |
| 12 | % |
| 12 | % |
| 13 | % |
| 12 | % |
Private and other |
| 9 | % |
| 10 | % |
| 9 | % |
| 10 | % | ||||||||||||
Private |
| 8 | % |
| 9 | % |
| 8 | % |
| 9 | % | ||||||||||||
Other |
| 1 | % |
| 1 | % |
| 1 | % |
| 1 | % | ||||||||||||
Total |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of inpatient facilities, the mix of patients and the rates of reimbursement among payors.
11
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Likewise, payment for ancillary medical services, including services provided by the Company’s rehabilitation therapy services business, varies based upon the type of payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect the Company’s profitability.
It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or other governmental initiatives on the Company’s business and the business of the customers served by the Company’s rehabilitation therapy business. The potential impact of reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, is uncertain at this time. Also, initiatives among managed care payors, conveners and referring acute care hospital systems to reduce
10
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
lengths of stay and avoidable hospital admissions and to divert referrals to home health or other community-based care settings could have a continuing adverse impact on the Company’s business. Accordingly, there can be no assurance that the impact of any future healthcare legislation, regulation or actions by participants in the health care continuum will not adversely affect the Company’s business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company’s financial condition and results of operations are and will continue to be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.
Laws and regulations governing the Medicare and Medicaid programs, and the Company’s business generally, are complex and are often subject to a number of ambiguities in their application and interpretation. The Company believes that it is in substantial compliance with all applicable laws and regulations. However, from time to time the Company and its affiliates are subject to pending or threatened lawsuits and investigations involving allegations of potential wrongdoing, some of which may be material or involve significant costs to resolve and/or defend, or may lead to other adverse effects on the Company and its affiliates including, but not limited to, fines, penalties and exclusion from participation in the Medicare and/or Medicaid programs.
Concentration of Credit Risk
The Company is exposed to the credit risk of its third-party customers, many of whom are in similar lines of business as the Company and are exposed to the same systemic industry risks of operations as the Company, resulting in a concentration of risk. These include organizations that utilize the Company’s rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in regulatory and systemic industry conditions.
Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in the Company’s rehabilitation services business where it has over 200 distinct customers, many being chain operators with more than one location. The four largest customers of the Company’s rehabilitation services business comprise $108.7$62.1 million, approximately 67%54%, of the net outstanding contract receivables in the rehabilitation services business at SeptemberJune 30, 2017.2018. One customer, which is a related party of the Company, comprises $83.2$36.5 million, approximately 52%32%, of the net outstanding contract receivables in the rehabilitation services business at SeptemberJune 30, 2017.2018. See Note 1416 – “Related Party Transactions.” An adverse event impacting the solvency of any one or several of these large customers resulting in their insolvency or other economic distress would have a material impact on the Company.
In July 2017, a significant customer of the Company’s rehabilitation therapy services business filed for receivership. This customer operated 65 skilled nursing facilities in six states at the time of the filing. The Company has recorded a $35.6 million non-cash impairment charge in the nine months ended September 30, 2017 and separately classified the charge in the line item “customer receivership” in the unaudited consolidated statements of operations. In
12
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the three and nine months ended September 30, 2017, the Company recognized revenues of $8.8 million and $27.6 million, respectively, for the customer in receivership compared to $9.5 million and $29.8 million, respectively, for the same periods in the prior year. In the three and nine months ended September 30, 2017, the Company recognized income from continuing operations of $1.2 million and $4.2 million, respectively, for the customer in receivership compared to $1.4 million and $5.1 million, respectively, for the same periods in the prior year.
In September 2017, another customer of the Company’s rehabilitation services business filed for receivership. The Company, however, only provided services to one of the skilled nursing facilities included in the receivership filing. The Company recorded a non-cash customer receivership charge of $0.3 million in the three months ended September 30, 2017.
The Company’s business is subject to a number of other known and unknown risks and uncertainties, which are discussed in Part II. Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, which was filed with the SEC on March 6, 2017,16, 2018, and in the Company’s Quarterly Reports on Form 10-Q, including the risk factors discussed herein in Part II. Item 1A.
Covenant Compliance
Should the Company fail to comply with its debt and lease covenants at a future measurement date, it could, absent necessary and timely waivers and/or amendments, be in default under certain of its existing debt and lease agreements. To the extent any cross-default provisions may apply, the default could have an even more significant impact on the Company’s financial position.
Although the Company is in compliance and projects to be in compliance with its material debt and lease covenants, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on the Company’s ability to remain in compliance with its covenants. Such uncertainty includes changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Patient Protection and Affordable Care Act of 2010 currently being considered in Congress, among others.
11
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company’s ability to maintain compliance with its debt and lease covenants depends in part on management’s ability to increase revenue and control costs. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly debt and lease covenant compliance requirements. Should the Company fail to comply with its debt and lease covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing credit agreements. To the extent any cross-default provisions may apply, the default would have an even more significant impact on the Company’s financial position.
There can be no assurance that the confluence of these and other factors will not impede the Company’s ability to meet its debt and lease covenants in the future.
(3) Significant Transactions and Events
Skilled Nursing FacilityRestructuring Transactions
Overview
In the first quarter of 2018, the Company entered into a number of agreements, amendments and new financing facilities further described below in an effort to strengthen significantly its capital structure. In total, the Restructuring Transactions are estimated to reduce the Company’s annual cash fixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing the Company’s liquidity and financial flexibility.
In connection with the Restructuring Transactions, the Company entered into a new asset based lending facility agreement, replacing its prior Revolving Credit Facilities, expanding its term loan borrowings, amending its real estate loans with Welltower Inc. (Welltower) while refinancing some of those loan amounts through new real estate loans. The new asset based lending facility agreement and real estate loans are financed through MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap), respectively. For further information on these debt refinancings, see Note 8 – “Long-Term Debt.” Also in connection with the Restructuring Transactions, the Company amended the financial covenants in all of its material loan agreements and all but two of its material master leases. Financial covenants beginning in 2018 were amended to account for changes in the Company’s capital structure as a result of the Restructuring Transactions and to account for the current business climate.
Welltower Master Lease Amendment
On February 21, 2018, the Company entered into a definitive agreement with Welltower to amend the Welltower Master Lease (the Welltower Master Lease Amendment). The Welltower Master Lease Amendment reduces the Company’s annual base rent payment by $35.0 million effective retroactively as of January 1, 2018, reduces the annual rent escalator from approximately 2.9% to 2.5% on April 1, 2018 and further reduces the annual rent escalator to 2.0% beginning January 1, 2019. In addition, the Welltower Master Lease Amendment extends the initial term of the master lease by five years to January 31, 2037 and extends the renewal term of the master lease by five years to December 31, 2048. The Welltower Master Lease Amendment also provides a potential upward rent reset, conditioned upon achievement of certain upside operating metrics, effective January 1, 2023. If triggered, the incremental rent from the rent reset is capped at $35.0 million.
Omnibus Agreement
On February 21, 2018, the Company entered into an Omnibus Agreement with Welltower and Omega Healthcare Investors, Inc. (Omega), pursuant to which Welltower and Omega committed to provide up to $40.0 million in new term loans and amend the current term loan agreement to, among other things, accommodate a refinancing of the Company’s existing asset based credit facility, in each case subject to certain conditions, including the completion of a restructuring of certain of the Company’s other material debt and lease obligations.
12
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Omnibus Agreement also provides that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50.0 million of outstanding indebtedness owed to Welltower will be written off and (b) the Company may request conversion of not more than $50.0 million of the outstanding balance of the Company’s Welltower Real Estate Loans into equity. If the proposed equity conversion would result in any adverse REIT qualification, status or compliance consequences to Welltower, then the debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind interest at 2% per annum compounded quarterly, with a term of ten years commencing on the date the applicable conditions precedent to the equity conversion have been satisfied. Moreover, the Company agreed to support Welltower in connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating and entering into definitive new master lease agreements with third party buyers.
In connection with the Omnibus Agreement, the Company agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of the Company’s Class A Common Stock at an exercise price equal to $1.33 per share. Issuance of the warrant to Welltower is subject to the satisfaction of certain conditions. The warrants may be exercised at any time during the period commencing six months from the date of issuance and ending five years from the date of issuance.
Lease Transactions and Divestitures
TheSabra Divestitures
On April 1, 2018, the Company divested or closed 28five skilled nursing facilities. All five of the skilled nursing facilities, three located in the nine months ended September 30, 2017.
OneMassachusetts and two located in Kentucky, were terminated from their respective master lease agreements with Sabra Health Care REIT, Inc. (Sabra). The five skilled nursing facility located in California was closed on September 28, 2017. The skilled nursing facility remains subject to a master lease agreement and hadfacilities generated annual revenuerevenues of $6.9$28.5 million and pre-tax net loss of $1.6$2.9 million. On May 4, 2018, Sabra completed the sale and lease termination of one skilled nursing facility in California that had been closed in 2017. The Company recognized a lossnet gain on the write off of $0.5certain lease liabilities, offset by exit costs, of $0.7 million on the six skilled nursing facilities.
On June 1, 2018, Sabra completed the sale and lease termination of 12 skilled nursing facilities located in Florida and New Hampshire. As a result of the sale, the Company will receive an annual rent credit of $12.0 million for the remainder of the lease term. The Company continues to operate these facilities under a new lease with a new landlord, Next Healthcare. See Note 16 – “Related Party Transactions.” As a result of the sale, the Company recognized accelerated depreciation expense of $6.0 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $7.0 million.
On June 29, 2018, Sabra completed the sale and lease termination of eight skilled nursing facilities and one assisted/senior living facility located in seven different states. As a result of the sale, the Company will receive an annual rent credit of $7.4 million for the remainder of the lease term. The Company continues to operate these facilities under a lease agreement with a new landlord. The new lease has a ten-year initial term, one five-year renewal option and initial annual rent of $7.4 million As a result of the sale, the Company recognized accelerated depreciation expense of $3.6 million on the property and equipment sold and a gain on the write off of certain lease liabilities of $2.9 million.
OneSecond Spring Divestitures
On June 1, 2018 and on June 13, 2018, Second Spring Healthcare Investments (Second Spring) completed the sale and lease termination of eight skilled nursing facilityfacilities located in Colorado was divested on July 10, 2017. ThePennsylvania and four skilled nursing facility was subject to a master lease agreement and hadfacilities located in New Jersey, respectively. The combined 12 skilled nursing facilities generated annual revenuerevenues of $5.7$146.2 million and pre-tax net loss of $2.2$19.3 million. The Company recognizedAs a loss of $0.5 million.
One skilled nursing facility located in North Carolina was divested on June 1, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $6.4 million and pre-tax net loss of $1.0 million. The Company recognized a loss of $0.5 million.
Eighteen skilled nursing facilities (16 owned and 2 leased) located in Kansas, Missouri, Nebraska and Iowa were divested on April 1, 2017. The 18 skilled nursing facilities had annual revenue of $110.1 million, pre-tax net loss of $10.7 million and total assets of $91.6 million. Sale proceeds of approximately $80 million, net of transaction costs, were used principally to repay the indebtednessresult of the skilled nursing facilities. Thesale and lease termination, the Company recognized a loss of $6.3 million, which is included in other loss (income) on the consolidated statements of operations. The 16 owned skilled nursing facilities qualified and were presented as assets held for sale at December 31, 2016. One of the leased skilled nursing facilities was subleased to a new operator resulting in a loss associated with a cease to use asset of $4.1 million.
One skilled nursing facility located in Tennessee was divested on April 1, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $7.4 million and pre-tax net income of $0.5 million. The Company recognized a loss of $0.7 million.
Four skilled nursing facilities located in Massachusetts were subject to a master lease agreement and were divested on March 14, 2017. These facilities, along with two other facilities that were divested previously and subleased to a third-party operator, were sold and terminated from the master lease resulting in an annual rent credit of $1.2 million. The master lease termination resulted in a capital lease net asset and obligation write-down of $14.9$16.8 million, a financing obligation net asset write-down of $113.3 million and a financing obligation write-down of $134.5 million. The fourresulting gain of $21.2 million was offset by $6.3 million of exit costs. In the three months ended June 30, 2018, there was accelerated depreciation expense of $5.3 million on the property and equipment sold.
13
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other Lease Amendments and Divestitures
For the six months ended June 30, 2018, the Company divested or amended the lease agreements to six other skilled nursing facilities had annual revenuefacilities. The lease agreement to one behavioral outpatient clinic expired on June 30, 2018. As a result of $26.7 millionthese lease amendments and pre-tax net income of $1.2 million. Thedivestitures, the Company recognized a loss for exit costs and the write off of $1.4certain lease assets of $3.3 million.
Two skilled nursing facilities located in Georgia were divestedIn total for the six months ended June 30, 2018, the Company recorded a net gain on February 1, 2017 at the expirationlease transactions and divestitures of their respective lease terms. The two skilled nursing facilities had annual revenue of $10.6$22.2 million and pre-tax net loss of $0.4 million. The Company recognized a loss of $0.5 million.
Losses are presentedwhich is included in other (income) loss (income) on the consolidated statements of operations.
HUD Financings(4) Net Revenues and Accounts Receivable
Revenue Streams
Inpatient Services
The Company generates revenues primarily by providing services to patients within its facilities. The Company uses interdisciplinary teams of experienced medical professionals to provide services prescribed by physicians. These teams include registered nurses, licensed practical nurses, certified nursing assistants and other professionals who provide individualized comprehensive nursing care. Many of the Company’s facilities are equipped to provide specialty care, such as on-site dialysis, ventilator care, cardiac and pulmonary management, as well as standard services, such as room and board, special nutritional programs, social services, recreational activities and related healthcare and other services. The Company assesses collectibility on all accounts prior to providing services.
Rehabilitation Therapy Services
The Company generates revenues by providing rehabilitation therapy services, including speech-language pathology, physical therapy, occupational therapy and respiratory therapy at its skilled nursing facilities and assisted/senior living facilities, as well as facilities of third-party skilled nursing operators and other outpatient settings. The majority of revenues generated by rehabilitation therapy services rendered are billed to contracted third party providers.
Other Services
The Company generates revenues by providing an array of other specialty medical services, including physician services, staffing services, and other healthcare related services.
Revenue Recognition
The Company generates revenues, primarily by providing healthcare services to its customers. Revenues are recognized when control of the promised good or service is transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled from patients, third-party payers (including government programs and insurers) and others, in exchange for those goods and services.
Performance obligations are determined based on the nature of the services provided. The majority of the Company’s healthcare services represent a bundle of services that are not capable of being distinct and as such, are treated as a single performance obligation satisfied over time as services are rendered. The Company also provides certain ancillary services which are not included in the bundle of services, and as such, are treated as separate performance obligations satisfied at a point in time, if and when, those services are rendered.
The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the
14
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. Variable consideration also exists in the form of settlements with Medicare and Medicaid as a result of retroactive adjustments due to audits and reviews. The Company applies constraint to the transaction price, such that net revenues are recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenues in the period such variances become known. Adjustments arising from a change in the transaction price were not significant for the three and six months ended June 30, 2018.
The Company has elected a practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component due to its expectation that the period between the time the service is provided and the time payment is received will be one year or less.
Adoption of ASC 606
The Company’s adoption of ASC 606 primarily impacts the presentation of revenues due to the inclusion of variable consideration in the form of implicit price concessions contained in certain of its contracts with customers. Under ASC 606, amounts estimated to be uncollectable are generally considered implicit price concessions that are a direct reduction to net revenues. Prior to adoption of ASC 606, such amounts were classified as provision for losses on accounts receivable. For the three and six months ended June 30, 2018, the Company recorded approximately $22.0 million and $46.8 million, respectively, of implicit price concessions as a direct reduction of net revenues that would have been recorded as operating expenses prior to the adoption of ASC 606. The adoption of ASC 606 is not expected to have a material impact on net income on an ongoing basis. To the extent there are material subsequent events that affect the payor's ability to pay, such amounts are recorded within operating expenses.
At June 30, 2018, the remaining balance of allowance for doubtful accounts previously disclosed on the consolidated balance sheets relating to accounts receivable with December 31, 2017 and prior service dates is $277.4 million.
InThe Company has reclassified the nineprovision for losses on accounts receivable of $24.0 million and $47.5 million for the three and six months ended SeptemberJune 30, 2017, respectively, to other operating expenses in the Company completedconsolidated statements of operations. These reclassifications had no effect on the financingsreported results of three skilled nursing facilities with the U.S. Department of Housing and Urban Development (HUD) insured loans. The total loan amount of the three financings was $23.9 million. Proceeds from the financings along with other cash on hand was used to partially pay down a Real Estate Bridge Loan by $25.1 million. See Note 8 – “operations.Long-Term Debt – Real Estate Bridge Loans” and“Long-Term Debt – HUD Insured Loans.”
DiningUnder ASC 606, the Company recognizes revenue in the statements of operations and Nutrition Partnershipcontract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.
In April 2017,Under ASC 606, payments that the Company entered into a strategic diningreceives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to private pay patients, which are billed monthly in advance. The Company had no material contract liabilities or activity as of and nutrition partnership to further leverage its national platforms, process expertisefor the three and technology. The relationship, which is expected to be accretive to the Company, will provide additional liquidity, cost efficiency and enhanced operational performance.six months ended June 30, 2018.
Disaggregation of Revenues
The Company disaggregates revenue from contracts with customers by reportable operating segments and payor type. The Company notes that disaggregation of revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source. Payments are generally received within 30 to 60 days after billed. See Note 6 – “Segment Information.”
15
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The composition of net revenues by payor type and operating segment for the three and six months ended June 30, 2018 and 2017 are as follows (in thousands):
|
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|
| Three months ended June 30, 2018 |
| ||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
| ||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
| |||
|
| Services |
| Services |
| Services |
| Total |
| ||||
Medicare |
| $ | 232,594 |
| $ | 23,622 |
| $ | — |
| $ | 256,216 |
|
Medicaid |
|
| 619,735 |
|
| 465 |
|
| — |
|
| 620,200 |
|
Insurance |
|
| 132,824 |
|
| 6,095 |
|
| — |
|
| 138,919 |
|
Private |
|
| 87,079 | (1) |
| 92 |
|
| — |
|
| 87,171 |
|
Third party providers |
|
| — |
|
| 108,474 |
|
| 22,476 |
|
| 130,950 |
|
Other |
|
| 18,377 | (2) |
| 7,039 | (2) |
| 13,488 | (3) |
| 38,904 |
|
Total net revenues |
| $ | 1,090,609 |
| $ | 145,787 |
| $ | 35,964 |
| $ | 1,272,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, 2017 (4) |
| ||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
| ||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
| |||
|
| Services |
| Services |
| Services |
| Total |
| ||||
Medicare |
| $ | 260,295 |
| $ | 22,091 |
| $ | — |
| $ | 282,386 |
|
Medicaid |
|
| 628,065 |
|
| 9 |
|
| — |
|
| 628,074 |
|
Insurance |
|
| 149,367 |
|
| 6,074 |
|
| — |
|
| 155,441 |
|
Private |
|
| 97,272 | (1) |
| 168 |
|
| — |
|
| 97,440 |
|
Third party providers |
|
| — |
|
| 115,919 |
|
| 23,915 |
|
| 139,834 |
|
Other |
|
| 21,585 | (2) |
| 4,160 | (2) |
| 12,356 | (3) |
| 38,101 |
|
Total net revenues |
| $ | 1,156,584 |
| $ | 148,421 |
| $ | 36,271 |
| $ | 1,341,276 |
|
(1) | Includes Assisted/Senior living revenue of $23.7 million and $24.1 million for the three months ended June 30, 2018 and 2017, respectively. Such amounts do not represent contracts with customers under ASC 606. |
(2) | Primarily consists of revenue from Veteran Affairs and administration of third party facilities. |
(3) | Includes net revenues from all payors generated by the other services, excluding third party providers. |
(4) | The Company adopted the new revenue standard using the modified retrospective transition method. As a result, the prior period amounts have not been adjusted. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended June 30, 2018 |
| ||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
| ||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
| |||
|
| Services |
| Services |
| Services |
| Total |
| ||||
Medicare |
| $ | 483,819 |
| $ | 46,105 |
| $ | — |
| $ | 529,924 |
|
Medicaid |
|
| 1,241,168 |
|
| 1,040 |
|
| — |
|
| 1,242,208 |
|
Insurance |
|
| 275,829 |
|
| 12,609 |
|
| — |
|
| 288,438 |
|
Private |
|
| 173,740 | (1) |
| 251 |
|
| — |
|
| 173,991 |
|
Third party providers |
|
| — |
|
| 219,164 |
|
| 45,506 |
|
| 264,670 |
|
Other |
|
| 36,384 | (2) |
| 10,449 | (2) |
| 27,368 | (3) |
| 74,201 |
|
Total net revenues |
| $ | 2,210,940 |
| $ | 289,618 | . | $ | 72,874 |
| $ | 2,573,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended June 30, 2017 (4) |
| ||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
| ||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
| |||
|
| Services |
| Services |
| Services |
| Total |
| ||||
Medicare |
| $ | 545,205 |
| $ | 48,070 |
| $ | — |
| $ | 593,275 |
|
Medicaid |
|
| 1,270,752 |
|
| 596 |
|
| — |
|
| 1,271,348 |
|
Insurance |
|
| 299,263 |
|
| 12,326 |
|
| — |
|
| 311,589 |
|
Private |
|
| 196,872 | (1) |
| 357 |
|
| — |
|
| 197,229 |
|
Third party providers |
|
| — |
|
| 234,548 |
|
| 48,666 |
|
| 283,214 |
|
Other |
|
| 40,418 | (2) |
| 8,211 | (2) |
| 25,124 | (3) |
| 73,753 |
|
Total net revenues |
| $ | 2,352,510 |
| $ | 304,108 |
| $ | 73,790 |
| $ | 2,730,408 |
|
(1) | Includes Assisted/Senior living revenue of $47.2 million and $48.1 million for the six months ended June 30, 2018 and 2017, respectively. Such amounts do not represent contracts with customers under ASC 606. |
(2) | Primarily consists of revenue from Veteran Affairs and administration of third party facilities. |
16
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) | Includes net revenues from all payors generated by the other services, excluding third party providers. |
(4) | The Company adopted the new revenue standard using the modified retrospective transition method. As a result, the prior period amounts have not been adjusted. |
(5)Loss Per Share
The Company has three classes of common stock. Classes A and B are identical in economic and voting interests. Class C has a 1:1 voting ratio with the other two classes, representing the voting interests of the noncontrolling interest of the legacy FC-GEN Operations Investment, LLC (FC-GEN) owners. Class C common stock is a participating security; however, it shares in a de minimis economic interest and is therefore excluded from the denominator of the basic earnings (loss) per share (EPS) calculation.
Basic EPS was computed by dividing net loss by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing net loss plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding common shares after giving effect to all potential dilutive common shares.
14
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per common share follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
| Nine months ended September 30, |
| Three months ended June 30, |
| Six months ended June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
| $ | (615,022) |
| $ | (52,355) |
| $ | (804,117) |
| $ | (159,364) |
| $ | (62,857) |
| $ | (105,503) |
| $ | (171,530) |
| $ | (189,095) |
Less: Net loss attributable to noncontrolling interests |
|
| (241,200) |
|
| (31,921) |
|
| (314,446) |
|
| (72,895) |
|
| (23,245) |
|
| (40,394) |
|
| (63,380) |
|
| (73,246) |
Loss from continuing operations attributable to Genesis Healthcare, Inc. |
| $ | (373,822) |
| $ | (20,434) |
| $ | (489,671) |
| $ | (86,469) |
| $ | (39,612) |
| $ | (65,109) |
| $ | (108,150) |
| $ | (115,849) |
Loss from discontinued operations, net of taxes |
|
| (2) |
|
| (24) |
|
| (70) |
|
| (1) |
|
| — |
|
| (47) |
|
| — |
|
| (68) |
Net loss attributable to Genesis Healthcare, Inc. |
| $ | (373,824) |
| $ | (20,458) |
| $ | (489,741) |
| $ | (86,470) |
| $ | (39,612) |
| $ | (65,156) |
| $ | (108,150) |
| $ | (115,917) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic and diluted net loss per share |
|
| 94,940 |
|
| 90,226 |
|
| 93,376 |
|
| 89,617 |
|
| 100,596 |
|
| 93,273 |
|
| 99,430 |
|
| 92,581 |
Basic and diluted net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Genesis Healthcare, Inc. |
| $ | (3.94) |
| $ | (0.23) |
| $ | (5.24) |
| $ | (0.96) |
| $ | (0.39) |
| $ | (0.70) |
| $ | (1.09) |
| $ | (1.25) |
Loss from discontinued operations, net of taxes |
|
| (0.00) |
|
| (0.00) |
|
| (0.00) |
|
| (0.00) |
|
| — |
|
| (0.00) |
|
| - |
|
| (0.00) |
Net loss attributable to Genesis Healthcare, Inc. |
| $ | (3.94) |
| $ | (0.23) |
| $ | (5.24) |
| $ | (0.96) |
| $ | (0.39) |
| $ | (0.70) |
| $ | (1.09) |
| $ | (1.25) |
The following shares were excluded from the computation of diluted net loss attributable to Genesis Healthcare, Inc. and the weighted-average diluted shares computation forper common share in the three and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, as their inclusion would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Three months ended September 30, |
| Nine months ended September 30, |
| Three months ended June 30, |
| Six months ended June 30, | ||||||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||||||||||
|
| Net loss |
|
|
| Net loss |
|
|
| Net loss |
|
|
| Net loss |
|
| ||||||||||||||||
|
| attributable to |
|
|
| attributable to |
|
|
| attributable to |
|
|
| attributable to |
|
| ||||||||||||||||
|
| Genesis |
| Anti-dilutive |
| Genesis |
| Anti-dilutive |
| Genesis |
| Anti-dilutive |
| Genesis |
| Anti-dilutive | ||||||||||||||||
|
| Healthcare, Inc. |
| shares |
| Healthcare, Inc. |
| shares |
| Healthcare, Inc. |
| shares |
| Healthcare, Inc. |
| shares | ||||||||||||||||
Exchange of restricted stock units of noncontrolling interests |
| $ | (242,806) |
| 61,692 |
| $ | (26,959) |
| 64,391 |
| $ | (319,784) |
| 62,108 |
| $ | (58,465) |
| 64,437 | ||||||||||||
Exchange of noncontrolling interests |
|
| 59,711 |
|
| 61,811 |
| 60,583 |
|
| 62,320 | |||||||||||||||||||||
Employee and director unvested restricted stock units |
|
| — |
| 40 |
| — |
| — |
| — |
| 988 |
| — |
| — |
|
| 964 |
|
| 1,129 |
| 630 |
|
| 1,541 | ||||
Convertible note |
|
| 113 |
| 3,000 |
| — |
| — |
| 335 |
| 3,000 |
| — |
| — |
|
| — |
|
| 3,000 |
| — |
|
| 3,000 | ||||
Stock Warrants |
|
| 1,500 |
|
| — |
| 1,288 |
|
| — |
The combined impact of the assumed conversion to common stock and related tax implications attributable to the noncontrolling interest, the grants under the 2015 Omnibus Equity Incentive Plan, and the convertible notestock warrants are anti-dilutive to EPS because the Company is in a net loss position for the three and ninesix months ended SeptemberJune 30, 2017 and 2016.2018. As of SeptemberJune 30, 2017,2018, there were 61,600,51159.7 million units attributable to the noncontrolling interests outstanding. In addition to the outstanding units attributable to the noncontrolling interests, the conversion of all of those units will result in the issuance of an incremental 10,726 shares of Class A common stock.
1517
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5)(6)Segment Information
The Company has three reportable operating segments: (i) inpatient services; (ii) rehabilitation therapy services; and (iii) other services.
A summary of the Company’s segmented revenues follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
|
|
|
|
|
| Three months ended June 30, |
|
|
|
|
| ||||||||||||||||||
|
| 2017 |
| 2016 |
| Increase / (Decrease) |
|
| 2018 |
| 2017 |
| Increase / (Decrease) |
| ||||||||||||||||||
|
| Revenue |
| Revenue |
| Revenue |
| Revenue |
|
|
|
|
|
|
| Revenue |
| Revenue |
| Revenue |
| Revenue |
|
|
|
|
|
| ||||
|
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| Dollars |
| Percentage |
|
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing facilities |
| $ | 1,103,554 |
| 83.8 | % | $ | 1,192,498 |
| 84.0 | % | $ | (88,944) |
| (7.5) | % |
| $ | 1,065,310 |
| 83.8 | % | $ | 1,130,525 |
| 84.2 | % | $ | (65,215) |
| (5.8) | % |
Assisted/Senior living facilities |
|
| 24,185 |
| 1.8 | % |
| 29,423 |
| 2.1 | % |
| (5,238) |
| (17.8) | % |
|
| 23,742 |
| 1.9 | % |
| 24,125 |
| 1.8 | % |
| (383) |
| (1.6) | % |
Administration of third party facilities |
|
| 2,266 |
| 0.2 | % |
| 2,659 |
| 0.2 | % |
| (393) |
| (14.8) | % |
|
| 2,300 |
| 0.2 | % |
| 2,319 |
| 0.2 | % |
| (19) |
| (0.8) | % |
Elimination of administrative services |
|
| (370) |
| — | % |
| (340) |
| — | % |
| (30) |
| 8.8 | % |
|
| (743) |
| (0.1) | % |
| (385) |
| — | % |
| (358) |
| 93.0 | % |
Inpatient services, net |
|
| 1,129,635 |
| 85.8 | % |
| 1,224,240 |
| 86.3 | % |
| (94,605) |
| (7.7) | % |
|
| 1,090,609 |
| 85.8 | % |
| 1,156,584 |
| 86.2 | % |
| (65,975) |
| (5.7) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehabilitation therapy services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total therapy services |
|
| 244,471 |
| 18.6 | % |
| 261,543 |
| 18.4 | % |
| (17,072) |
| (6.5) | % |
|
| 234,674 |
| 18.4 | % |
| 242,917 |
| 18.1 | % |
| (8,243) |
| (3.4) | % |
Elimination intersegment rehabilitation therapy services |
|
| (92,573) |
| (7.0) | % |
| (101,156) |
| (7.1) | % |
| 8,583 |
| (8.5) | % |
|
| (88,887) |
| (7.0) | % |
| (94,496) |
| (7.0) | % |
| 5,609 |
| (5.9) | % |
Third party rehabilitation therapy services |
|
| 151,898 |
| 11.6 | % |
| 160,387 |
| 11.3 | % |
| (8,489) |
| (5.3) | % |
|
| 145,787 |
| 11.4 | % |
| 148,421 |
| 11.1 | % |
| (2,634) |
| (1.8) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other services |
|
| 42,901 |
| 3.3 | % |
| 40,376 |
| 2.8 | % |
| 2,525 |
| 6.3 | % |
|
| 51,345 |
| 4.0 | % |
| 44,221 |
| 3.3 | % |
| 7,124 |
| 16.1 | % |
Elimination intersegment other services |
|
| (8,982) |
| (0.7) | % |
| (6,009) |
| (0.4) | % |
| (2,973) |
| 49.5 | % |
|
| (15,381) |
| (1.2) | % |
| (7,950) |
| (0.6) | % |
| (7,431) |
| 93.5 | % |
Third party other services |
|
| 33,919 |
| 2.6 | % |
| 34,367 |
| 2.4 | % |
| (448) |
| (1.3) | % |
|
| 35,964 |
| 2.8 | % |
| 36,271 |
| 2.7 | % |
| (307) |
| (0.8) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
| $ | 1,315,452 |
| 100.0 | % | $ | 1,418,994 |
| 100.0 | % | $ | (103,542) |
| (7.3) | % |
| $ | 1,272,360 |
| 100.0 | % | $ | 1,341,276 |
| 100.0 | % | $ | (68,916) |
| (5.1) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended June 30, |
|
|
|
|
| |||||||||
|
| 2018 |
| 2017 |
| Increase / (Decrease) |
| |||||||||
|
| Revenue |
| Revenue |
| Revenue |
| Revenue |
|
|
|
|
|
| ||
|
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing facilities |
| $ | 2,160,612 |
| 83.9 | % | $ | 2,300,450 |
| 84.1 | % | $ | (139,838) |
| (6.1) | % |
Assisted/Senior living facilities |
|
| 47,246 |
| 1.8 | % |
| 48,077 |
| 1.8 | % |
| (831) |
| (1.7) | % |
Administration of third party facilities |
|
| 4,552 |
| 0.2 | % |
| 4,752 |
| 0.2 | % |
| (200) |
| (4.2) | % |
Elimination of administrative services |
|
| (1,470) |
| — | % |
| (769) |
| — | % |
| (701) |
| 91.2 | % |
Inpatient services, net |
|
| 2,210,940 |
| 85.9 | % |
| 2,352,510 |
| 86.1 | % |
| (141,570) |
| (6.0) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehabilitation therapy services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total therapy services |
|
| 471,251 |
| 18.3 | % |
| 499,134 |
| 18.3 | % |
| (27,883) |
| (5.6) | % |
Elimination intersegment rehabilitation therapy services |
|
| (181,633) |
| (7.1) | % |
| (195,026) |
| (7.1) | % |
| 13,393 |
| (6.9) | % |
Third party rehabilitation therapy services |
|
| 289,618 |
| 11.2 | % |
| 304,108 |
| 11.2 | % |
| (14,490) |
| (4.8) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other services |
|
| 99,853 |
| 3.9 | % |
| 90,267 |
| 3.3 | % |
| 9,586 |
| 10.6 | % |
Elimination intersegment other services |
|
| (26,979) |
| (1.0) | % |
| (16,477) |
| (0.6) | % |
| (10,502) |
| 63.7 | % |
Third party other services |
|
| 72,874 |
| 2.9 | % |
| 73,790 |
| 2.7 | % |
| (916) |
| (1.2) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
| $ | 2,573,432 |
| 100.0 | % | $ | 2,730,408 |
| 100.0 | % | $ | (156,976) |
| (5.7) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, |
|
|
|
|
| |||||||||
|
| 2017 |
| 2016 |
| Increase / (Decrease) |
| |||||||||
|
| Revenue |
| Revenue |
| Revenue |
| Revenue |
|
|
|
|
|
| ||
|
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing facilities |
| $ | 3,404,181 |
| 84.0 | % | $ | 3,595,258 |
| 82.9 | % | $ | (191,077) |
| (5.3) | % |
Assisted/Senior living facilities |
|
| 72,262 |
| 1.8 | % |
| 90,772 |
| 2.1 | % |
| (18,510) |
| (20.4) | % |
Administration of third party facilities |
|
| 6,841 |
| 0.2 | % |
| 8,608 |
| 0.2 | % |
| (1,767) |
| (20.5) | % |
Elimination of administrative services |
|
| (1,139) |
| — | % |
| (1,077) |
| — | % |
| (62) |
| 5.8 | % |
Inpatient services, net |
|
| 3,482,145 |
| 86.0 | % |
| 3,693,561 |
| 85.2 | % |
| (211,416) |
| (5.7) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehabilitation therapy services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total therapy services |
|
| 743,605 |
| 18.4 | % |
| 821,704 |
| 19.1 | % |
| (78,099) |
| (9.5) | % |
Elimination intersegment rehabilitation therapy services |
|
| (287,599) |
| (7.1) | % |
| (311,060) |
| (7.2) | % |
| 23,461 |
| (7.5) | % |
Third party rehabilitation therapy services |
|
| 456,006 |
| 11.3 | % |
| 510,644 |
| 11.9 | % |
| (54,638) |
| (10.7) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other services |
|
| 133,168 |
| 3.3 | % |
| 142,336 |
| 3.3 | % |
| (9,168) |
| (6.4) | % |
Elimination intersegment other services |
|
| (25,459) |
| (0.6) | % |
| (16,971) |
| (0.4) | % |
| (8,488) |
| 50.0 | % |
Third party other services |
|
| 107,709 |
| 2.7 | % |
| 125,365 |
| 2.9 | % |
| (17,656) |
| (14.1) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
| $ | 4,045,860 |
| 100.0 | % | $ | 4,329,570 |
| 100.0 | % | $ | (283,710) |
| (6.6) | % |
1618
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the Company’s unaudited condensed consolidated statement of operations follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three months ended September 30, 2017 |
|
| Three months ended June 30, 2018 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
|
|
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
|
|
| ||||||
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
| ||||||||||||
Net revenues |
| $ | 1,130,005 |
| $ | 244,471 |
| $ | 42,778 |
| $ | 123 |
| $ | (101,925) |
| $ | 1,315,452 |
|
| $ | 1,091,352 |
| $ | 234,674 |
| $ | 51,325 |
| $ | 20 |
| $ | (105,011) |
| $ | 1,272,360 |
|
Salaries, wages and benefits |
|
| 507,075 |
|
| 205,232 |
|
| 27,097 |
|
| — |
|
| — |
|
| 739,404 |
|
|
| 489,778 |
|
| 187,946 |
|
| 28,030 |
|
| — |
|
| — |
|
| 705,754 |
|
Other operating expenses |
|
| 442,816 |
|
| 19,455 |
|
| 15,242 |
|
| — |
|
| (101,926) |
|
| 375,587 |
|
|
| 439,224 |
|
| 14,400 |
|
| 21,943 |
|
| — |
|
| (105,012) |
|
| 370,555 |
|
General and administrative costs |
|
| — |
|
| — |
|
| — |
|
| 40,732 |
|
| — |
|
| 40,732 |
|
|
| — |
|
| — |
|
| — |
|
| 39,046 |
|
| — |
|
| 39,046 |
|
Provision for losses on accounts receivable |
|
| 22,078 |
|
| 1,974 |
|
| 447 |
|
| 688 |
|
| — |
|
| 25,187 |
| |||||||||||||||||||
Lease expense |
|
| 37,895 |
|
| (14) |
|
| 302 |
|
| 487 |
|
| — |
|
| 38,670 |
|
|
| 31,494 |
|
| — |
|
| 316 |
|
| 301 |
|
| — |
|
| 32,111 |
|
Depreciation and amortization expense |
|
| 51,666 |
|
| 3,497 |
|
| 167 |
|
| 4,060 |
|
| — |
|
| 59,390 |
|
|
| 56,750 |
|
| 3,138 |
|
| 168 |
|
| 3,439 |
|
| — |
|
| 63,495 |
|
Interest expense |
|
| 103,306 |
|
| 14 |
|
| 9 |
|
| 21,102 |
|
| — |
|
| 124,431 |
|
|
| 93,028 |
|
| 13 |
|
| 9 |
|
| 24,905 |
|
| — |
|
| 117,955 |
|
Gain on extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| (501) |
|
| — |
|
| (501) |
| |||||||||||||||||||
Investment income |
|
| — |
|
| — |
|
| — |
|
| (1,596) |
|
| — |
|
| (1,596) |
|
|
| — |
|
| — |
|
| — |
|
| (1,631) |
|
| — |
|
| (1,631) |
|
Other loss |
|
| 2,379 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,379 |
| |||||||||||||||||||
Other income |
|
| (22,220) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (22,220) |
| |||||||||||||||||||
Transaction costs |
|
| — |
|
| — |
|
| — |
|
| 1,056 |
|
| — |
|
| 1,056 |
|
|
| — |
|
| — |
|
| — |
|
| 3,112 |
|
| — |
|
| 3,112 |
|
Customer receivership |
|
| — |
|
| 297 |
|
| — |
|
| — |
|
| — |
|
| 297 |
| |||||||||||||||||||
Long-lived asset impairments |
|
| 161,483 |
|
| 1,881 |
|
| — |
|
| — |
|
| — |
|
| 163,364 |
|
|
| 27,257 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 27,257 |
|
Goodwill and identifiable intangible asset impairments |
|
| 360,046 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 360,046 |
|
|
| 1,132 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,132 |
|
Equity in net (income) loss of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| (571) |
|
| 502 |
|
| (69) |
|
|
| — |
|
| — |
|
| — |
|
| (352) |
|
| 390 |
|
| 38 |
|
(Loss) income before income tax benefit |
|
| (558,739) |
|
| 12,135 |
|
| (486) |
|
| (65,835) |
|
| (501) |
|
| (613,426) |
|
|
| (25,091) |
|
| 29,177 |
|
| 859 |
|
| (68,299) |
|
| (389) |
|
| (63,743) |
|
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| 1,596 |
|
| — |
|
| 1,596 |
| |||||||||||||||||||
Income tax benefit |
|
| — |
|
| — |
|
| — |
|
| (886) |
|
| — |
|
| (886) |
| |||||||||||||||||||
(Loss) income from continuing operations |
| $ | (558,739) |
| $ | 12,135 |
| $ | (486) |
| $ | (67,431) |
| $ | (501) |
| $ | (615,022) |
|
| $ | (25,091) |
| $ | 29,177 |
| $ | 859 |
| $ | (67,413) |
| $ | (389) |
| $ | (62,857) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, 2016 |
|
| Three months ended June 30, 2017 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
|
|
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
|
|
| ||||||
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
| ||||||||||||
Net revenues |
| $ | 1,224,580 |
| $ | 261,543 |
| $ | 40,226 |
| $ | 150 |
| $ | (107,505) |
| $ | 1,418,994 |
|
| $ | 1,156,969 |
| $ | 242,917 |
| $ | 44,144 |
| $ | 77 |
| $ | (102,831) |
| $ | 1,341,276 |
|
Salaries, wages and benefits |
|
| 586,654 |
|
| 219,864 |
|
| 27,896 |
|
| — |
|
| — |
|
| 834,414 |
|
|
| 508,509 |
|
| 201,944 |
|
| 28,949 |
|
| — |
|
| — |
|
| 739,402 |
|
Other operating expenses |
|
| 428,820 |
|
| 18,903 |
|
| 10,610 |
|
| — |
|
| (107,505) |
|
| 350,828 |
|
|
| 462,158 |
|
| 22,308 |
|
| 14,681 |
|
| — |
|
| (102,831) |
|
| 396,316 |
|
General and administrative costs |
|
| — |
|
| — |
|
| — |
|
| 46,545 |
|
| — |
|
| 46,545 |
|
|
| — |
|
| — |
|
| — |
|
| 41,151 |
|
| — |
|
| 41,151 |
|
Provision for losses on accounts receivable |
|
| 21,088 |
|
| 4,722 |
|
| (161) |
|
| (47) |
|
| — |
|
| 25,602 |
| |||||||||||||||||||
Lease expense |
|
| 34,745 |
|
| 24 |
|
| 269 |
|
| 474 |
|
| — |
|
| 35,512 |
|
|
| 37,449 |
|
| 7 |
|
| 300 |
|
| 478 |
|
| — |
|
| 38,234 |
|
Depreciation and amortization expense |
|
| 53,313 |
|
| 2,943 |
|
| 163 |
|
| 4,685 |
|
| — |
|
| 61,104 |
|
|
| 51,837 |
|
| 3,866 |
|
| 172 |
|
| 4,352 |
|
| — |
|
| 60,227 |
|
Interest expense |
|
| 109,339 |
|
| 14 |
|
| 10 |
|
| 22,449 |
|
| — |
|
| 131,812 |
|
|
| 103,325 |
|
| 14 |
|
| 10 |
|
| 20,939 |
|
| — |
|
| 124,288 |
|
Loss on extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 15,363 |
|
| — |
|
| 15,363 |
|
|
| — |
|
| — |
|
| — |
|
| 2,301 |
|
| — |
|
| 2,301 |
|
Investment income |
|
| — |
|
| — |
|
| — |
|
| (934) |
|
| — |
|
| (934) |
|
|
| — |
|
| — |
|
| — |
|
| (1,392) |
|
| — |
|
| (1,392) |
|
Other income |
|
| (4,991) |
|
| — |
|
| (182) |
|
| — |
|
| — |
|
| (5,173) |
| |||||||||||||||||||
Other loss |
|
| 4,190 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,190 |
| |||||||||||||||||||
Transaction costs |
|
| — |
|
| — |
|
| — |
|
| 3,057 |
|
| — |
|
| 3,057 |
|
|
| — |
|
| — |
|
| — |
|
| 3,781 |
|
| — |
|
| 3,781 |
|
Customer receivership and other related charges |
|
| — |
|
| 35,566 |
|
| — |
|
| — |
|
| — |
|
| 35,566 |
| |||||||||||||||||||
Equity in net (income) loss of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| (1,608) |
|
| 715 |
|
| (893) |
|
|
| — |
|
| — |
|
| — |
|
| (563) |
|
| 475 |
|
| (88) |
|
(Loss) income before income tax benefit |
|
| (4,388) |
|
| 15,073 |
|
| 1,621 |
|
| (89,834) |
|
| (715) |
|
| (78,243) |
| |||||||||||||||||||
Income tax benefit |
|
| — |
|
| — |
|
| — |
|
| (25,888) |
|
| — |
|
| (25,888) |
| |||||||||||||||||||
(Loss) income before income tax expense |
|
| (10,499) |
|
| (20,788) |
|
| 32 |
|
| (70,970) |
|
| (475) |
|
| (102,700) |
| |||||||||||||||||||
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| 2,803 |
|
| — |
|
| 2,803 |
| |||||||||||||||||||
(Loss) income from continuing operations |
| $ | (4,388) |
| $ | 15,073 |
| $ | 1,621 |
| $ | (63,946) |
| $ | (715) |
| $ | (52,355) |
|
| $ | (10,499) |
| $ | (20,788) |
| $ | 32 |
| $ | (73,773) |
| $ | (475) |
| $ | (105,503) |
|
1719
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, 2017 |
|
| Six months ended June 30, 2018 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
|
|
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
|
|
| ||||||
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
| ||||||||||||
Net revenues |
| $ | 3,483,284 |
| $ | 743,605 |
| $ | 132,718 |
| $ | 450 |
| $ | (314,197) |
| $ | 4,045,860 |
|
| $ | 2,212,410 |
| $ | 471,251 |
| $ | 99,800 |
| $ | 53 |
| $ | (210,082) |
| $ | 2,573,432 |
|
Salaries, wages and benefits |
|
| 1,597,007 |
|
| 619,928 |
|
| 86,365 |
|
| — |
|
| — |
|
| 2,303,300 |
|
|
| 996,808 |
|
| 387,777 |
|
| 56,939 |
|
| — |
|
| — |
|
| 1,441,524 |
|
Other operating expenses |
|
| 1,303,448 |
|
| 56,433 |
|
| 44,456 |
|
| — |
|
| (314,198) |
|
| 1,090,139 |
|
|
| 895,025 |
|
| 28,816 |
|
| 40,957 |
|
| — |
|
| (210,083) |
|
| 754,715 |
|
General and administrative costs |
|
| — |
|
| — |
|
| — |
|
| 127,041 |
|
| — |
|
| 127,041 |
|
|
| — |
|
| — |
|
| — |
|
| 78,921 |
|
| — |
|
| 78,921 |
|
Provision for losses on accounts receivable |
|
| 62,448 |
|
| 8,641 |
|
| 995 |
|
| 616 |
|
| — |
|
| 72,700 |
| |||||||||||||||||||
Lease expense |
|
| 110,661 |
|
| — |
|
| 897 |
|
| 1,446 |
|
| — |
|
| 113,004 |
|
|
| 63,928 |
|
| — |
|
| 643 |
|
| 611 |
|
| — |
|
| 65,182 |
|
Depreciation and amortization expense |
|
| 159,483 |
|
| 11,110 |
|
| 506 |
|
| 12,887 |
|
| — |
|
| 183,986 |
|
|
| 101,080 |
|
| 6,332 |
|
| 337 |
|
| 7,249 |
|
| — |
|
| 114,998 |
|
Interest expense |
|
| 309,948 |
|
| 42 |
|
| 28 |
|
| 63,455 |
|
| — |
|
| 373,473 |
|
|
| 186,647 |
|
| 27 |
|
| 18 |
|
| 46,300 |
|
| — |
|
| 232,992 |
|
Loss on extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 2,301 |
|
| — |
|
| 2,301 |
| |||||||||||||||||||
Loss on early extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 9,785 |
|
| — |
|
| 9,785 |
| |||||||||||||||||||
Investment income |
|
| — |
|
| — |
|
| — |
|
| (4,097) |
|
| — |
|
| (4,097) |
|
|
| — |
|
| — |
|
| — |
|
| (2,678) |
|
| — |
|
| (2,678) |
|
Other loss |
|
| 15,112 |
|
| 732 |
|
| — |
|
| (242) |
|
| — |
|
| 15,602 |
| |||||||||||||||||||
Other (income) loss |
|
| (22,230) |
|
| — |
|
| 78 |
|
| — |
|
| — |
|
| (22,152) |
| |||||||||||||||||||
Transaction costs |
|
| — |
|
| — |
|
| — |
|
| 7,862 |
|
| — |
|
| 7,862 |
|
|
| — |
|
| — |
|
| — |
|
| 15,207 |
|
| — |
|
| 15,207 |
|
Customer receivership |
|
| — |
|
| 35,864 |
|
| — |
|
| — |
|
| — |
|
| 35,864 |
| |||||||||||||||||||
Long-lived asset impairments |
|
| 161,483 |
|
| 1,881 |
|
| — |
|
| — |
|
| — |
|
| 163,364 |
|
|
| 55,617 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 55,617 |
|
Goodwill and identifiable intangible asset impairments |
|
| 360,046 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 360,046 |
|
|
| 1,132 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,132 |
|
Equity in net (income) loss of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| (1,702) |
|
| 1,411 |
|
| (291) |
|
|
| — |
|
| — |
|
| — |
|
| (506) |
|
| 764 |
|
| 258 |
|
(Loss) income before income tax benefit |
|
| (596,352) |
|
| 8,974 |
|
| (529) |
|
| (209,117) |
|
| (1,410) |
|
| (798,434) |
|
|
| (65,597) |
|
| 48,299 |
|
| 828 |
|
| (154,836) |
|
| (763) |
|
| (172,069) |
|
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| 5,683 |
|
| — |
|
| 5,683 |
| |||||||||||||||||||
Income tax benefit |
|
| — |
|
| — |
|
| — |
|
| (539) |
|
| — |
|
| (539) |
| |||||||||||||||||||
(Loss) income from continuing operations |
| $ | (596,352) |
| $ | 8,974 |
| $ | (529) |
| $ | (214,800) |
| $ | (1,410) |
| $ | (804,117) |
|
| $ | (65,597) |
| $ | 48,299 |
| $ | 828 |
| $ | (154,297) |
| $ | (763) |
| $ | (171,530) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Nine months ended September 30, 2016 |
|
| Six months ended June 30, 2017 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
| |||||||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
|
|
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
| |||||||||
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
| ||||||||||||
Net revenues |
| $ | 3,694,638 |
| $ | 821,704 |
| $ | 141,970 |
| $ | 366 |
| $ | (329,108) |
| $ | 4,329,570 |
|
| $ | 2,353,279 |
| $ | 499,134 |
| $ | 89,940 |
| $ | 327 |
| $ | (212,272) |
| $ | 2,730,408 |
|
Salaries, wages and benefits |
|
| 1,748,232 |
|
| 689,833 |
|
| 96,759 |
|
| — |
|
| — |
|
| 2,534,824 |
|
|
| 1,089,932 |
|
| 414,696 |
|
| 59,268 |
|
| — |
|
| — |
|
| 1,563,896 |
|
Other operating expenses |
|
| 1,296,069 |
|
| 58,927 |
|
| 36,198 |
|
| — |
|
| (329,108) |
|
| 1,062,086 |
|
| 901,002 |
|
| 43,645 |
|
| 29,762 |
|
| — |
|
| (212,272) |
|
| 762,137 |
| |
General and administrative costs |
|
| — |
|
| — |
|
| — |
|
| 139,999 |
|
| — |
|
| 139,999 |
|
| — |
| — |
| — |
| 86,237 |
| — |
| 86,237 |
| ||||||
Provision for losses on accounts receivable |
|
| 68,757 |
|
| 12,165 |
|
| 993 |
|
| (139) |
|
| — |
|
| 81,776 |
| |||||||||||||||||||
Lease expense |
|
| 107,047 |
|
| 71 |
|
| 1,209 |
|
| 1,469 |
|
| — |
|
| 109,796 |
|
| 72,766 |
|
| 14 |
|
| 595 |
|
| 959 |
|
| — |
|
| 74,334 |
| |
Depreciation and amortization expense |
|
| 167,208 |
|
| 9,137 |
|
| 805 |
|
| 13,672 |
|
| — |
|
| 190,822 |
|
| 107,817 |
|
| 7,613 |
|
| 339 |
|
| 8,827 |
|
| — |
|
| 124,596 |
| |
Interest expense |
|
| 328,385 |
|
| 43 |
|
| 30 |
|
| 72,395 |
|
| — |
|
| 400,853 |
|
|
| 206,642 |
|
| 28 |
|
| 19 |
|
| 42,353 |
|
| — |
|
| 249,042 |
|
Loss on extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 15,830 |
|
| — |
|
| 15,830 |
| |||||||||||||||||||
Loss on early extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 2,301 |
|
| — |
|
| 2,301 |
| |||||||||||||||||||
Investment income |
|
| — |
|
| — |
|
| — |
|
| (2,073) |
|
| — |
|
| (2,073) |
|
|
| — |
|
| — |
|
| — |
|
| (2,501) |
|
| — |
|
| (2,501) |
|
Other income |
|
| (4,119) |
|
| — |
|
| (43,965) |
|
| — |
|
| — |
|
| (48,084) |
| |||||||||||||||||||
Other loss (income) |
|
| 12,732 |
|
| 732 |
|
| — |
|
| (240) |
|
| — |
|
| 13,224 |
| |||||||||||||||||||
Transaction costs |
|
| — |
|
| — |
|
| — |
|
| 9,804 |
|
| — |
|
| 9,804 |
|
|
| — |
|
| — |
|
| — |
|
| 6,806 |
|
| — |
|
| 6,806 |
|
Skilled Healthcare and other loss contingency expense |
|
| — |
|
| — |
|
| — |
|
| 15,192 |
|
| — |
|
| 15,192 |
| |||||||||||||||||||
Customer receivership and other related charges |
|
| — |
| 35,566 |
| — |
| — |
| — |
| 35,566 |
| ||||||||||||||||||||||||
Equity in net (income) loss of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| (3,894) |
|
| 1,741 |
|
| (2,153) |
|
|
| — |
|
| — |
|
| — |
|
| (1,131) |
|
| 909 |
|
| (222) |
|
(Loss) income before income tax expense |
|
| (16,941) |
|
| 51,528 |
|
| 49,941 |
|
| (261,889) |
|
| (1,741) |
|
| (179,102) |
| |||||||||||||||||||
Income tax benefit |
|
| — |
|
| — |
|
| — |
|
| (19,738) |
|
| — |
|
| (19,738) |
| |||||||||||||||||||
(Loss) income from continuing operations |
| $ | (16,941) |
| $ | 51,528 |
| $ | 49,941 |
| $ | (242,151) |
| $ | (1,741) |
| $ | (159,364) |
| |||||||||||||||||||
Loss before income tax expense |
|
| (37,612) |
|
| (3,160) |
|
| (43) |
|
| (143,284) |
|
| (909) |
|
| (185,008) |
| |||||||||||||||||||
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| 4,087 |
|
| — |
|
| 4,087 |
| |||||||||||||||||||
Loss from continuing operations |
| $ | (37,612) |
| $ | (3,160) |
| $ | (43) |
| $ | (147,371) |
| $ | (909) |
| $ | (189,095) |
|
1820
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the segment assets as of SeptemberJune 30, 20172018 compared to December 31, 20162017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
|
| June 30, 2018 |
| December 31, 2017 |
| ||||
Inpatient services |
| $ | 4,376,132 |
| $ | 5,194,811 |
|
| $ | 3,992,053 |
| $ | 4,303,370 |
|
Rehabilitation therapy services |
|
| 411,195 |
|
| 454,723 |
|
|
| 352,490 |
|
| 351,711 |
|
Other services |
|
| 52,236 |
|
| 67,348 |
|
|
| 54,438 |
|
| 50,127 |
|
Corporate and eliminations |
|
| 87,365 |
|
| 62,319 |
|
|
| 145,836 |
|
| 82,657 |
|
Total assets |
| $ | 4,926,928 |
| $ | 5,779,201 |
|
| $ | 4,544,817 |
| $ | 4,787,865 |
|
The following table presents segment goodwill as of SeptemberJune 30, 20172018 compared to December 31, 20162017 (in thousands):
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||
Inpatient services |
| $ | — |
| $ | 355,070 |
|
Rehabilitation therapy services |
|
| 73,814 |
|
| 73,814 |
|
Other services |
|
| 11,828 |
|
| 11,828 |
|
Total goodwill |
| $ | 85,642 |
| $ | 440,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Inpatient |
| Rehabilitation Therapy Services |
| Other Services |
| Consolidated | ||||
Balance at December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 351,470 |
|
| 73,814 |
|
| 11,828 |
|
| 437,112 |
Accumulated impairment losses |
|
| (351,470) |
|
| — |
|
| — |
|
| (351,470) |
|
| $ | — |
| $ | 73,814 |
| $ | 11,828 |
| $ | 85,642 |
Balance at June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 351,470 |
|
| 73,814 |
|
| 11,828 |
|
| 437,112 |
Accumulated impairment losses |
|
| (351,470) |
|
| — |
|
| — |
|
| (351,470) |
|
| $ | — |
| $ | 73,814 |
| $ | 11,828 |
| $ | 85,642 |
The Company conducted its annual goodwill impairment analysis as of September 30, 2017, resulting in an impairment charge of $351.5 million in the inpatient services segment. See Note 15 – “Asset Impairment Charges – Goodwill.” The divestiture of nine of the Company’s skilled nursing facilities and planned divestitures of seven other sklled nursing facilities resulted in a derecognition of goodwill in the nine months ended September 30, 2017, of $3.6 million in its inpatient services segment. See Note 3 – “Significant Transactions and Events – Skilled Nursing Facility Divestitures.”
(6)(7)Property and Equipment
Property and equipment consisted of the following as of SeptemberJune 30, 20172018 and December 31, 20162017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
|
| June 30, 2018 |
| December 31, 2017 |
| ||||
Land, buildings and improvements |
| $ | 604,985 |
| $ | 673,092 |
|
| $ | 486,031 |
| $ | 591,022 |
|
Capital lease land, buildings and improvements |
|
| 745,245 |
|
| 818,273 |
|
|
| 720,465 |
|
| 752,657 |
|
Financing obligation land, buildings and improvements |
|
| 2,522,415 |
|
| 2,584,178 |
|
|
| 2,349,850 |
|
| 2,525,551 |
|
Equipment, furniture and fixtures |
|
| 456,990 |
|
| 447,767 |
|
|
| 417,696 |
|
| 453,230 |
|
Construction in progress |
|
| 22,360 |
|
| 49,859 |
|
|
| 38,146 |
|
| 30,294 |
|
Gross property and equipment |
|
| 4,351,995 |
|
| 4,573,169 |
|
|
| 4,012,188 |
|
| 4,352,754 |
|
Less: accumulated depreciation |
|
| (881,049) |
|
| (807,776) |
|
|
| (994,945) |
|
| (939,155) |
|
Net property and equipment |
| $ | 3,470,946 |
| $ | 3,765,393 |
|
| $ | 3,017,243 |
| $ | 3,413,599 |
|
At June 30, 2018, the Company classified the property and equipment of 23 skilled nursing facilities that qualified as assets held for sale. The total net reduction of property and equipment of $112.0 million was primarily classified in the “Land, buildings and improvements” line item. See Note 15 – “Assets Held for Sale.”
In the ninesix months ended SeptemberJune 30, 2017,2018, the Company amended one of its master lease agreements resulting in a net capital lease asset write-down of $14.9$18.2 million. See Note 3 – “Significant Transactions and Events – Skilled Nursing Facility Divestitures.Welltower Master Lease Amendment.” The write-down consisted of $55.6 million of gross capital lease asset included in the line description “Capital lease land, buildings and improvements” offset by $40.7 million of accumulated depreciation.
In the three and ninesix months ended SeptemberJune 30, 2017,2018, the Company divested 12 skilled nursing facilities, which were terminated from their master lease agreement, resulting in a net financing obligation asset write-down of $113.3 million and capital lease asset write-down of $16.8 million. See Note 3 – “Significant Transactions and Events – Second Spring Divestitures.”
In the six months ended June 30, 2018, the Company recognized an impairment chargecharges of $163.4$55.6 million on its property and equipment. See Note 1514 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”
19
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(7)Goodwillland under “Financing obligation land, buildings and Identifiable Intangible Assets
The changes in the carrying valueimprovements” of goodwill are as follows (in thousands):
|
|
|
|
|
| Total | |
Balance at December 31, 2016 |
| $ | 440,712 |
|
|
|
|
Goodwill disposal associated with inpatient divestitures |
|
| (3,600) |
Goodwill impairment associated with inpatient segment |
|
| (351,470) |
Balance at September 30, 2017 |
| $ | 85,642 |
The Company has no accumulated amortization of goodwill.
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.
The Company conducted its annual goodwill impairment analysis as of September 30, 2017, resulting in an impairment charge of $351.5 million in the inpatient services segment. See Note 15 – “$7.0 million.Asset Impairment Charges – Goodwill.” The divestiture of nine of the Company’s skilled nursing facilities and planned divestitures of seven other sklled nursing facilities resulted in a derecognition of goodwill in the nine months ended September 30, 2017, of $3.6 million in its inpatient services segment. See Note 3 – “Significant Transactions and Events – Skilled Nursing Facility Divestitures.”
Identifiable intangible assets consist of the following at September 30, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
| September 30, 2017 |
| Weighted Average Remaining Life (Years) | |
Customer relationship assets, net of accumulated amortization of $52,667 |
| $ | 60,166 |
| 8 |
Favorable leases, net of accumulated amortization of $31,406 |
|
| 36,517 |
| 10 |
Trade names |
|
| 50,556 |
| Indefinite |
Identifiable intangible assets |
| $ | 147,239 |
|
|
|
|
|
|
|
|
|
| December 31, 2016 |
| Weighted Average Remaining Life (Years) | |
Customer relationship assets, net of accumulated amortization of $43,862 |
| $ | 67,348 |
| 9 |
Management contracts, net of accumulated amortization of $17,872 |
|
| 14,651 |
| 2 |
Favorable leases, net of accumulated amortization of $29,421 |
|
| 43,011 |
| 10 |
Trade names |
|
| 50,556 |
| Indefinite |
Identifiable intangible assets |
| $ | 175,566 |
|
|
Acquisition-related identified intangible assets consist of customer relationship assets, management contracts, favorable lease contracts and trade names.
Customer relationship assets exist in the Company’s rehabilitation services, respiratory services, management services and medical staffing businesses. These assets are amortized on a straight-line basis over the expected period of benefit.
Management contracts are derived through the organization of facilities under an upper payment limit supplemental payment program in Texas that provides supplemental Medicaid payments with federal
20
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
matching funds for skilled nursing facilities that are affiliated with county-owned hospital districts. Under this program, the Company acts as the manager of the facilities and shares in these supplemental payments with the county hospitals.
Favorable lease contracts represent the estimated value of future cash outflows of operating lease contracts compared to lease rates that could be negotiated in an arms-length transaction at the time of measurement. Favorable lease contracts are amortized on a straight-line basis over the lease terms.
The Company’s trade names have value, in particular in the rehabilitation business which markets its services to other providers of skilled nursing and assisted/senior living services. The trade name asset has an indefinite life and is measured no less than annually or if indicators of potential impairment become apparent.
For the three months ended September 30, 2017 and 2016, the amortization expense related to customer relationship assets totaled $2.6 million and $2.6 million, respectively. For the nine months ended September 30, 2017 and 2016, the amortization expense related to customer relationship assets totaled $7.7 million and $7.7 million, respectively.
For the three months ended September 30, 2017 and 2016, the amortization expense related to management contracts totaled $2.3 million and $2.3 million, respectively. For the nine months ended September 30, 2017 and 2016, the amortization expense related to management contracts totaled $6.8 million and $6.8 million, respectively.
For the three months ended September 30, 2017 and 2016, the amortization expense related to favorable leases totaled $1.7 million and $2.0 million, respectively. For the nine months ended September 30, 2017 and 2016, the amortization expense related to favorable leases totaled $5.3 million and $6.1 million, respectively.
Based upon amounts recorded at September 30, 2017, total estimated twelve months ended amortization expense of identifiable intangible assets will be $17.0 million in 2018, $16.7 million in 2019, $12.6 million in 2020, $11.1 million in 2021, and $7.2 million in 2022 and $32.1 million, thereafter.
Asset impairment charges for the three and nine months ended September 30, 2017, totaled $8.5 million. The Company recorded a $7.3 million impairment of its management contract assets related to the expiration of and lack of a sustained, state sponsored replacement program for the Texas Minimum Payment Amount Program (MPAP). The impairment is included in goodwill and identifiable intangible asset impairments on the consolidated statements of operations. See Note 15 – “Asset Impairment Charges - Identifiable Intangible Assets with a Definite Useful Life – Management Contracts.” The remaining $1.2 million pertains to the impairment on favorable lease assets associated with the underperforming properties. The impairment is included in goodwill and identifiable intangible asset impairments on the consolidated statements of operations. See Note 15 – “Asset Impairment Charges – Identifiable Intangible Assets with a Definite Useful Life – Favorable Leases.” For the three and nine months ended September 30, 2016, no impairment charges were recorded.
21
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(8) Long-Term Debt
Long-term debt at SeptemberJune 30, 20172018 and December 31, 20162017 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| September 30, 2017 |
| December 31, 2016 |
| ||
Revolving credit facilities, net of debt issuance costs of $9,952 at September 30, 2017 and $9,220 at December 31, 2016 |
| $ | 351,247 |
| $ | 383,630 |
|
Term loan agreement, net of debt issuance costs of $3,312 at September 30, 2017 and $3,859 at December 31, 2016 |
|
| 116,290 |
|
| 116,174 |
|
Real estate bridge loans, net of debt issuance costs of $3,710 at September 30, 2017 and $4,400 at December 31, 2016 |
|
| 289,120 |
|
| 313,549 |
|
HUD insured loans, net of debt issuance costs of $5,396 at September 30, 2017 and $4,773 at December 31, 2016 |
|
| 261,370 |
|
| 241,570 |
|
Notes payable, net of convertible debt discount of $842 at September 30, 2017 and $990 at December 31, 2016 |
|
| 76,337 |
|
| 73,829 |
|
Mortgages and other secured debt (recourse) |
|
| 12,711 |
|
| 13,235 |
|
Mortgages and other secured debt (non-recourse), net of debt issuance costs of $121 at September 30, 2017 and $131 at December 31, 2016 |
|
| 28,283 |
|
| 29,157 |
|
|
|
| 1,135,358 |
|
| 1,171,144 |
|
Less: Current installments of long-term debt |
|
| (851,344) |
|
| (24,594) |
|
Long-term debt |
| $ | 284,014 |
| $ | 1,146,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| June 30, 2018 |
| December 31, 2017 |
| ||
Asset based lending facilities, net of debt issuance costs of $12,696 and $0 at June 30, 2018 and December 31, 2017, respectively |
| $ | 396,133 |
| $ | — |
|
Revolving credit facilities, net of debt issuance costs of $0 and $10,109 at June 30, 2018 and December 31, 2017, respectively |
|
| — |
|
| 303,091 |
|
Term loan agreements, net of debt issuance costs of $2,435 and $3,020 and debt premium balance of $12,124 and $0 at June 30, 2018 and December 31, 2017, respectively |
|
| 180,739 |
|
| 120,706 |
|
Real estate loans, net of debt issuance costs of $5,740 and $3,486 and debt premium balance of $33,824 and $0 at June 30, 2018 and December 31, 2017, respectively |
|
| 301,005 |
|
| 281,039 |
|
HUD insured loans, net of debt issuance costs of $5,313 and $5,590 and debt premium balance of $877 and $13,590 at June 30, 2018 and December 31, 2017, respectively |
|
| 183,542 |
|
| 263,827 |
|
Notes payable |
|
| 82,705 |
|
| 68,122 |
|
Mortgages and other secured debt (recourse) |
|
| 12,573 |
|
| 12,536 |
|
Mortgages and other secured debt (non-recourse), net of debt issuance costs of $203 and $99 and debt premium balance of $1,569 and $1,618 at June 30, 2018 and December 31, 2017, respectively |
|
| 27,178 |
|
| 27,978 |
|
|
|
| 1,183,875 |
|
| 1,077,299 |
|
Less: Current installments of long-term debt |
|
| (107,338) |
|
| (26,962) |
|
Long-term debt |
| $ | 1,076,537 |
| $ | 1,050,337 |
|
Asset Based Lending Facilities
On March 6, 2018, the Company entered into a new asset based lending facility agreement with MidCap. The agreement provides for a $555 million asset based lending facility comprised of (a) a $325 million first lien term loan facility, (b) a $200 million first lien revolving credit facility and (c) a $30 million delayed draw term loan facility (collectively, the ABL Credit Facilities). The commitments under the delayed draw loan facility will be reduced to $20 million in the year 2020. Proceeds were used to replace and repay in full the Company’s existing $525 million Revolving Credit Facilities.
The ABL Credit Facilities have a five-year term set to mature on March 6, 2023. The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans, in the event those agreements are not extended or refinanced. The revolving credit facility includes a swinging lockbox arrangement whereby the Company transfers all funds deposited within its designated lockboxes to MidCap on a daily basis and then draws from the revolving credit facility as needed. In accordance with U.S. GAAP, the Company has presented the entire revolving credit facility borrowings balance of $83.8 million in current installments of long-term debt at June 30, 2018. Despite this classification, the Company expects that it will have the ability to borrow and repay on the revolving credit facility through its maturity on March 6, 2023.
$57.2 million of the proceeds received under the ABL Credit Facilities remain in a restricted account. This amount is pledged to cash collateralize letters of credit previously issued under the Revolving Credit Facilities. The Company has classified this deposit as restricted cash and equivalents on the consolidated balance sheets at June 30, 2018.
Borrowings under the term loan and revolving credit facility components of the ABL Credit Facilities bear interest at a 90-day LIBOR rate (subject to a floor of 0.5%) plus an applicable margin of 6%. Borrowings under the delayed draw component bear interest at a 90-day LIBOR rate (subject to a floor of 1%) plus an applicable margin of 11%. Borrowing levels under the term loan and revolving credit facility components of the ABL Credit Facilities are limited to a borrowing base that is computed based upon the level of eligible accounts receivable.
In addition to paying interest on the outstanding principal borrowed under the revolving credit facility, the Company is required to pay a commitment fee to the lenders for any unutilized commitments. The commitment fee rate equals 0.5% per annum
22
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
on the revolving credit facility and 2% on the delayed draw term loan facility. The Company will be charged a letters of credit fee equal to 6% on any undrawn letters of credit.
The term loan facility and revolving credit facility include a termination fee equal to 2% if the loans are prepaid within the first year, 1% if the loans are prepaid after year one and before year two, and 0.5% thereafter. The term loan facility and revolving credit facility include an exit fee equal to $1.6 million and $1.0 million, respectively, due and payable on the earlier of the loans retirement or on the maturity date.
The ABL Credit Facilities contain representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default and security interests that are customarily required for similar financings. Financial covenants include a minimum consolidated fixed charge coverage ratio, a maximum leverage ratio and minimum liquidity.
Borrowings and interest rates under the ABL Credit Facilities were as follows at June 30, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
| Average |
|
ABL Credit Facilities |
| Commitment |
|
| Borrowings |
| Interest |
| ||
Term loan facility |
| $ | 325,000 |
|
| $ | 325,000 |
| 8.34 | % |
Revolving credit facility (Non-HUD) |
|
| 155,000 |
|
|
| 54,816 |
| 8.34 | % |
Revolving credit facility (HUD) |
|
| 45,000 |
|
|
| 29,013 |
| 8.34 | % |
Delayed draw facility |
|
| 30,000 |
|
|
| — |
| 13.34 | % |
|
| $ | 555,000 |
|
| $ | 408,829 |
| 8.34 | % |
As of June 30, 2018, the Company had a total borrowing base capacity of $464.4 million with outstanding borrowings under the ABL Credit Facilities of $408.8 million, leaving the Company with approximately $55.6 million of available borrowing capacity under the ABL Credit Facilities.
Revolving Credit Facilities
ThePrior to March 6, 2018, the Company’s revolving credit facilities,Revolving Credit Facilities, as amended, (the Revolving Credit Facilities) consistconsisted of a senior secured, asset-based revolving credit facility of up to $525.0 million under threetwo separate tranches: Tranche A-1 Tranche A-2 and HUD Tranche. The Revolving Credit FacilitiesTranche and were set to mature on February 2, 2020. Interest accruesaccrued at a per annum rate equal to either (x) a base rate (calculated as the highest of the (i) prime rate, (ii) the federal funds rate plus 3.00%, or (iii) LIBOR plus the excess of the applicable margin between LIBOR loans and base rate loans) plus an applicable margin or (y) LIBOR plus an applicable margin. The applicable margin iswas based on the level of commitments for all threeboth tranches, and in regards to LIBOR loans (i) for Tranche A-1 ranges from 3.00% to 3.50%; (ii) for Tranche A-2 ranges from 3.00% to 3.50%; and (iii)(ii) for HUD Tranche ranges from 2.50% to 3.00%. The applicable margin iswas based on the level of commitments for all threeboth tranches, and in regards to base rate loans (i) for Tranche A-1 ranges from 2.00% to 2.50%; and (ii) for HUD Tranche A-2 ranges from 2.00% to 2.50%; and (iii) for HUD Tranche ranges from 1.50% to 2.00%.
Borrowing levels under the Revolving Credit Facilities are limited to a borrowing base that is computed based upon the level of the Company’s eligible accounts receivable, as defined therein. In addition to paying interest on the outstanding principal borrowed under the Revolving Credit Facilities, the Company is required to pay a commitment fee to the lenders for any unutilized commitments. The commitment fee rate ranges from 0.375% per annum to 0.50% depending upon the level of unused commitment.
The Revolving Credit Facilities contain financial, affirmative and negative covenants, and events of default that are substantially identical to those of the Term Loan Agreement (as defined below), but also contain a minimum liquidity covenant and a springing minimum fixed charge coverage covenant tied to the minimum liquidity requirement. The most restrictive financial covenant is the maximum leverage ratio which requires the Company to maintain a leverage ratio, as defined, of no more than 7.25 to 1.0 through December 31, 2017 and stepping down gradually over the course of the loan to 6.5 to 1.0 beginning in 2020.
22
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Borrowings and interest rates under the three tranches were as follows at September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
| Average |
|
Revolving Credit Facilities |
| Commitment |
|
| Borrowings |
| Interest |
| ||
Tranche A-1 |
| $ | 440,000 |
|
| $ | 300,000 |
| 5.14 | % |
Tranche A-2 |
|
| 50,000 |
|
|
| 35,800 |
| 4.74 | % |
HUD tranche |
|
| 35,000 |
|
|
| 25,400 |
| 4.50 | % |
|
| $ | 525,000 |
|
| $ | 361,200 |
| 5.06 | % |
As of September 30, 2017, the Company had a total borrowing base capacity of $457.9 million with outstanding borrowings under the Revolving Credit Facilities of $361.2 million and $54.8 million of drawn letters of credit securing insurance and lease obligations, leaving the Company with approximately $41.9 million of available borrowing capacity under the Revolving Credit Facilities.
Term Loan AgreementAgreements
The Company and certain of its affiliates, including FC-GEN Operations Investment, LLC (the Borrower) are party to a four-year term loan agreement (the Term Loan Agreement) with an affiliate of Welltower Inc. (Welltower) and an affiliate of Omega Healthcare Investors, Inc. (Omega).Omega. The Term Loan Agreement providesoriginally provided for term loans (the Term Loans) in the aggregate principal amount of $120.0 million, with scheduled annual amortization of 2.5% of the initial principal balance in years one, two and three, and 5.0% in year four. On March 6, 2018, the Company entered into an amendment to the Term Loans (the Term Loan Amendment) pursuant to which the Company borrowed an additional $40 million to be used for certain debt repayment and general corporate purposes (the 2018 Term Loan). The Term Loan Agreement hascontinues to have a maturity date of July 29, 2020. Borrowings under theThe 2018 Term Loan Agreement bearbears interest at a rate equal to a base rate (subject to a floor of 1.00%) or an ABR rate (subject to a floor of 2.0%), plus in each case a specified applicable margin. The initial applicable margin for base rate loans is 13.0%10.0% per annum, and the initial applicable margin for ABR rate loans is 12.0% per annum. At the Company’s election, with respect to either base rate or ABR rate loans, up to 2.0% of5% per annum to be paid in kind. The Term Loan Amendment also changes the interest mayrate applicable to the Term Loans to be equal to 14% per annum, with up to 9% per annum to be paid either in cash or paid-in-kind.kind. As of SeptemberJune 30, 2017,2018, the Term Loans and 2018 Term Loan had an outstanding principal balance of $119.6$171.1 million. Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.
23
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Term Loan Agreement is secured by a first priority lien on the equity interests of the subsidiaries of the Company and the Borrower as well as certain other assets of the Company, the Borrower and their subsidiaries, subject to certain exceptions. The Term Loan Agreement is also secured by a junior lien on the assets that secure the RevolvingABL Credit Facilities as amended, on a first priority basis.
Welltower and Omega, or their respective affiliates, are each currently landlords under certain master lease agreements to which the Company and/or its affiliates are tenants.
The Term Loan Agreement contains financial, affirmative and negative covenants, and events of default that are customary for debt securities of this type. Financial covenants include four maintenance covenants which require the Company to maintain a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and maximum capital expenditures. The most restrictive financial covenant is the maximum leverage ratio which requires the Company to maintain a leverage ratio, as defined therein, of no more than 7.259.0 to 1.0 through December 31, 20172018 and stepping down gradually over the course of the loandecreasing by 0.25 annually to 6.58.5 to 1.0 beginning in 2020.
The Term Loan Agreement includes a non-cash debt premium balance of $12.1 million at June 30, 2018. As the terms under the Term Loan Amendment were negotiated and executed at the same time as other Welltower amendments included in the Restructuring Transactions (i.e. the Real Estate BridgeLoan Amendments and Welltower Master Lease Amendment), U.S. GAAP requires the Company record interest expense for each instrument at a rate equal to the combined effective interest rate rather than the stated interest rate of each instrument individually. The effective interest rate was calculated by measuring the aggregate cash flows payable to Welltower under the combined amended agreements compared to the carrying value of the original obligations on March 6, 2018. Since the combined effective interest rate of all the Restructuring Transactions involving Welltower of approximately 7.5% is lower than the Term Loan Amendment weighted interest rate of 13.0%, the Company recorded a debt premium, which was offset by a corresponding discount on the Welltower financing obligation, and will amortize over the life of the Term Loan Amendment. See Note 10 – “Financing Obligation.”
Real Estate Loans
On March 30, 2018, the Company entered into two real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million, $73.0 million of which was drawn as of June 30, 2018. The MidCap Real Estate Loans are secured by 18 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023. The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated. The loans, which are interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%. Beginning April 1, 2019, mandatory principal payments commenced with the balance of the loans to be repaid at maturity. Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans (defined below).
The Company is partysubject to four separate bridgemultiple real estate loan agreements with Welltower (Welltower BridgeReal Estate Loans). The Welltower Bridge Loans have an effective date of October 1, 2016 and are the result of the combination of two real estate bridge loans executed in 2015 upon the Company’s separate acquisitions of the real property of 87 skilled nursing and assisted living facilities. The Welltower Bridge Loans are subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale
23
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and/or refinance of the underlying facilities such net proceeds are required to be used to repay the outstanding principal balance of the Welltower Bridge Loans. Each Welltower Bridge Loan has a maturity date of January 1, 2022 and a 10.0% interest rate that increases annually by 0.25% beginning January 1, 2018. At September 30, 2017, the Welltower Bridge Loans are secured by a mortgage lien on the real property of the 39 facilities and a second lien on certain receivables of the operators of 24 of the facilities. In the nine months ended September 30, 2017, the Welltower Bridge Loans were paid down $27.6 million, $9.0 million for the sale of three skilled nursing facilities and $18.6 million for the refinancing of bridge loan debt with HUD insured loans. See Note 3 – “Significant Transactions and Events - Skilled Nursing Facility Divestitures” and“Significant Transactions and Events - HUD Financings.” Of the four original separate bridge loan agreements, one was fully retired using proceeds from the sale of the three skilled nursing facilities in the nine months ended September 30, 2017. The three remaining Welltower Bridge Loans have an outstanding principal balance of $282.9 million at September 30, 2017.
On April 1, 2016, the Company acquired one skilled nursing facility and entered into a $9.9 million real estate bridge loan (the Other Real Estate Bridge Loan). The Other Real Estate Bridge Loan has a term of three years and accrues interest at a rate equal to LIBOR plus a margin of 4.00%. The Other Real Estate Bridge Loan bore interest of 5.23% at September 30, 2017. The Other Real Estate Bridge Loan isLoans are subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale and/or refinance of the underlying facilities such net proceeds are required to be used to pay downrepay the outstanding principal balance of the OtherWelltower Real Estate Bridge Loan. The OtherLoans. Each Welltower Real Estate Bridge Loan has a maturity date of January 1, 2022 and had a 10.25% interest rate beginning January 1, 2018.
On February 21, 2018, the Company entered into amendments to the Welltower Real Estate Loans (the Real Estate Loan Amendments). The Real Estate Loan Amendments adjusted the annual interest rate beginning February 15, 2018 to 12%, of which 7% will be paid in cash and 5% will be paid in kind. In connection with the Real Estate Loan Amendments, the Company agreed to make commercially reasonable efforts to secure commitments by April 1, 2018 to repay no less than $105 million of the Welltower Real Estate Loan obligations. As of June 30, 2018, the Company secured repayments or commitments totaling approximately $82 million. As a result, the annual cash component of the interest payments will be increased by approximately $2.0 million with a corresponding decrease in the paid in kind component of interest. At June 30, 2018, the Welltower Real Estate Loans are secured by a mortgage lien on the real property and a second lien on certain receivables of the operators of the 15 remaining facilities subject to
24
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Welltower Real Estate Loans. In the six months ended June 30, 2018, the Welltower Real Estate Loans were paid down $69.7 million using proceeds from the MidCap Real Estate Loans. The Welltower Real Estate Loans have an outstanding principal balance of $212.6 million at June 30, 2018.
The Welltower Real Estate Loans include a non-cash debt premium balance of $33.8 million at June 30, 2018. As the terms under the Real Estate Loan Amendments were negotiated and executed at the same time as other Welltower amendments included in the Restructuring Transactions (i.e. the Term Loan Amendment and Welltower Master Lease Amendment), U.S. GAAP requires the Company record interest expense for each instrument at a rate equal to the combined effective interest rate rather than the stated interest rate of each instrument individually. The effective interest rate was calculated by measuring the aggregate cash flows payable to Welltower under the combined amended agreements compared to the carrying value of the original obligations on March 6, 2018. Since the combined effective interest rate of all the Restructuring Transactions involving Welltower of approximately 7.5% is lower than the Real Estate Loan Amendments weighted interest rate of 12.0%, the Company recorded a debt premium, which was offset by a corresponding discount on the Welltower financing obligation, and will amortize over the life of the Real Estate Loan Amendments. See Note 10 – “Financing Obligation.”
Thirteen skilled nursing facilities subject to the Welltower Real Estate Loans, balances included in the disclosures noted above, were reclassified as assets held for sale in the consolidated balance sheets at June 30, 2018. These 13 skilled nursing facilities had an aggregate principal balance of $109.3 million, of which $12.6 million will be retired using proceeds from the sale and are classified as held for sale. The sale is expected to be completed in the third or fourth quarter of 2018. See Note 15 – “Assets Held for Sale.”
On April 1, 2016, the Company acquired one skilled nursing facility and entered into a $9.9 million at September 30, 2017.real estate loan (the Other Real Estate Loan). On February 22, 2018, the skilled nursing facility subject to the Other Real Estate Loan was refinanced through a loan insured through the U.S. Department of Housing and Urban Development (HUD). Some of the proceeds from the refinancing were used to payoff fully the Other Real Estate Loan.
HUD Insured Loans
As of SeptemberJune 30, 20172018, the Company has 2931 skilled nursing facility loans insured by HUD with a combined aggregate principal balance of $266.8$277.6 million, which includes a $13.7$13.4 million debt premium on 10 skilled nursing facility loans established in purchase accounting in connection with the Combination.2015. In the ninesix months ended SeptemberJune 30, 2017, 132018, one skilled nursing facilitiesfacility was financed with a HUD insured loans were sold andloan for $10.9 million using some of the loans totaling $63.1 million were retired. See Note 3 – “Significant Transactions and Events - Skilled Nursing Facility Divestitures.” Also inproceeds to retire the nine months ended September 30, 2017, three skilled nursing facilities were financed with HUD insured loans for $23.9 million. See Note 3 – “Significant Transactions and Events - HUD Financings.”Other Real Estate Loan.
The HUD insured loans have an original amortization term of 30 to 35 years and an average remaining term of 30 years with fixed interest rates ranging from 3.0% to 4.2% and a weighted average interest rate of 3.5%. Depending on the mortgage agreement, prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required thereafter. Any further HUD insured loans will require additional HUD approval.
All HUD insured loans are non-recourse loans to the Company. All loans are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of SeptemberJune 30, 2017,2018, the Company has total escrow reserve funds of $21.2$25.4 million with the loan servicer that are reported within prepaid expenses.
The HUD loans of nine skilled nursing facilities, balances included in the disclosures noted above, were reclassified as assets held for sale in the consolidated balance sheets at June 30, 2018. These nine skilled nursing facilities had an aggregate principal balance of $88.5 million, net of debt issuance costs and debt premiums, and aggregate escrow reserve funds of $9.3 million. The nine skilled nursing facilities are expected to be sold in the third or fourth quarter of 2018. See Note 15 – “Assets Held for Sale.”
25
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Notes Payable
On January 17, 2018, the Company converted $19.6 million of its trade payables into a notes payable. The note, as amended, will be repaid in equal monthly installments through December 2019 at an annual interest rate of 5.75% and has an outstanding balance of $11.6 million at June 30, 2018.
In connection with Welltower’s sale of 64 skilled nursing facilities to Second Spring Healthcare Investments (Second Spring) on November 1, 2016, the Company issued a note totaling $51.2 million to Welltower. The note accrues cash interest at 3% and paid-in-kind interest at 7%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every May 1 and November 1. The note matures on October 30, 2020. The note has an outstanding accreted balance of $53.0$57.9 million at SeptemberJune 30, 2017.
24
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2018.
In connection with Welltower’s sale of 28 skilled nursing facilities to Cindat Best Years Welltower JV LLC (CBYW) on December 23, 2016, the Company issued two notes totaling $23.7 million to Welltower. The first note has an initial principal balance of $11.7 million and accrues cash interest at 3% and paid-in-kind interest at 7%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every June 15 and December 15. The note matures on December 15, 2021. The note has an outstanding accreted principal balance of $12.1$13.2 million at SeptemberJune 30, 2017.2018. The second note hashad an initial principal balance of $12.0 million and accrues cash interest at 3% and paid-in-kind interest at 3%. Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every June 15 and December 15. From the second anniversary up to the day before the note matures, CBYW can convert all or any portion of the notewas converted into fully paid3.0 million shares of common stock at the conversion rate of 3,000,000 shares of common stock per the full accreted principal amount of the note. The note matures on December 15, 2021. The note has an outstanding accreted principal balance of $12.2 million at September 30, 2017.November 13, 2017 and cancelled.
Other Debt
Mortgages and other secured debt (recourse). The Company carries mortgage loans and notes payable on certain of its corporate office buildings and other acquired assets. The loans are secured by the underlying real property and have fixed or variable rates of interest with a weighted average interest rate of 3.3%3.7% at SeptemberJune 30, 2017,2018, with maturity dates ranging from 2018 to 2020.
Mortgages and other secured debt (non-recourse). Loans are carried by certain of the Company’s consolidated joint ventures. The loans consist principally of revenue bonds and secured bank loans. Loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest with a weighted average interest rate of 4.6%4.9% at SeptemberJune 30, 2017.2018. Maturity dates range from 20182023 to 2034. Loans are labeled “non-recourse” because neither the Company nor any of its wholly owned subsidiaries is obligated to perform under the respective loan agreements. The aggregate principal balance of these loans includes a $1.6 million debt premium on one debt instrument. The Company’s consolidated current installment of long-term debt increased $11.5decreased $10.9 million due to the reclassification of a non-recourse loan to long term upon the completion of $11.5 million, which has a maturity date ofrefinancing in March 27, 2018.
Debt Covenants
The RevolvingABL Credit Facilities, the Term Loan Agreement and the Welltower BridgeReal Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio, a springing minimum fixed charge coverage ratio tied to minimum liquidity and maximum capital expenditures. At SeptemberJune 30, 2017,2018, the Company was not in compliance with certain of theits financial covenants contained in the Credit Facilities. The Company received timely waivers from the counterparties to the Term Loan Agreement and the Welltower Bridge Loans for any and all breaches of financial or other covenants as of September 30, 2017. The Company is engaged in discussions with our counterparties to the Revolving Credit Parties to secure a 90-day forbearance agreement through late January 2018.
The Company’s ability to maintain compliance with its debt covenants depends in part on management’s ability to increase revenue and control costs. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly debt covenant compliance requirements. Should the Company fail to comply with its debt covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing credit agreements. To the extent any cross-default provisions may apply, the default would have an even more significant impact on the Company’s financial position.
The Company believes that it is in the best interests of all creditors to grant necessary waivers or reach negotiated settlements to enable the Company to execute and complete the Restructuring Plans in order to establish a sustainable capital structure. However, there can be no assurance that such timely and adequate waivers will be received in future periods or such settlements will be reached or executed. If the defaults are not cured within applicable cure periods, if
2526
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
any, and if waivers or other necessary relief are not obtained, the defaults can cause acceleration of the Company’s financial obligations under certain of its agreements, which the Company may not be in a position to satisfy.
There can be no assurances that any of these efforts will prove successful. In the event of a failure to obtain timely and necessary waivers or otherwise achieve a viable restructuring of the Company’s financial obligations, it may be forced to seek reorganization under the U.S. Bankruptcy Code.
The maturity of total debt of $1,143.3$1,161.9 million, excluding debt issuance costs and other non-cash debt discounts and premiums, at SeptemberJune 30, 20172018 is as follows (in thousands):
|
|
|
|
|
|
|
Twelve months ended September 30, |
|
|
| |||
2018 |
| $ | 28,372 | |||
Twelve months ended June 30, |
|
|
| |||
2019 |
|
| 17,584 |
| $ | 107,373 |
2020 |
|
| 486,141 |
|
| 11,019 |
2021 |
|
| 59,069 |
|
| 236,580 |
2022 |
|
| 313,491 |
|
| 219,897 |
2023 |
|
| 408,280 | |||
Thereafter |
|
| 238,686 |
|
| 178,719 |
Total debt maturity |
| $ | 1,143,343 |
| $ | 1,161,868 |
The debt maturity table has been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of the consolidated financial statements. However, for the reasons described in Note 1 – “General Information – Going Concern Considerations,” $851.3 million, related to several of the Company’s debt instruments with the stated maturities as summarized above are classified as a current liability at September 30, 2017. These debt instruments include the Revolving Credit Facilities, the Term Loan Agreement, the Welltower Bridge Loans and the Notes Payable.
(9) Leases and Lease Commitments
The Company leases certain facilities under capital and operating leases. Future minimum payments for the next five years and thereafter under such leases at SeptemberJune 30, 20172018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended September 30, |
| Capital Leases |
| Operating Leases | ||||||||
2018 |
| $ | 90,425 |
| $ | 142,646 | ||||||
Twelve months ended June 30, |
| Capital Leases |
| Operating Leases | ||||||||
2019 |
|
| 93,333 |
|
| 139,688 |
| $ | 91,414 |
| $ | 121,271 |
2020 |
|
| 92,453 |
|
| 139,419 |
|
| 89,998 |
|
| 120,032 |
2021 |
|
| 94,561 |
|
| 135,437 |
|
| 91,913 |
|
| 119,863 |
2022 |
|
| 96,755 |
|
| 112,149 |
|
| 93,921 |
|
| 104,072 |
2023 |
|
| 95,988 |
|
| 87,304 | ||||||
Thereafter |
|
| 2,967,233 |
|
| 227,737 |
|
| 3,400,760 |
|
| 400,888 |
Total future minimum lease payments |
|
| 3,434,760 |
| $ | 897,076 |
|
| 3,863,994 |
| $ | 953,430 |
Less amount representing interest |
|
| (2,439,736) |
|
|
|
|
| (2,865,776) |
|
|
|
Capital lease obligation |
|
| 995,024 |
|
|
|
|
| 998,218 |
|
|
|
Less current portion |
|
| (949,050) |
|
|
|
|
| (2,159) |
|
|
|
Long-term capital lease obligation |
| $ | 45,974 |
|
|
|
| $ | 996,059 |
|
|
|
26
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The lease commitment table has been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of the consolidated financial statements. However, for the reasons described in Note 1 – “General Information – Going Concern Considerations,” $949.1 million, related to several of the Company’s capital lease commitments with the stated maturities as summarized above are classified as a current liability at September 30, 2017. While obligations under the operating leases are not included on the balance sheet, approximately $617.8 million will become due and payable, if defaulted upon.
Capital Lease Obligations
The capital lease obligations represent the present value of future minimum lease payments under such capital lease and cease to use arrangements and bear a weighted average imputed interest rate of 10.0% at SeptemberJune 30, 2017,2018, and mature at dates ranging from 20172026 to 2047.2048.
Deferred Lease Balances
At SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company had $36.5$28.2 million and $43.0$34.9 million, respectively, of favorable leases net of accumulated amortization, included in identifiable intangible assets, and $19.0$9.3 million and $28.8$15.5 million, respectively, of unfavorable leases net of accumulated amortization included in other long-term liabilities on the consolidated balance sheet.sheets. Favorable and unfavorable lease assets and liabilities arise through the acquisition of operating leases in place that requires those contracts be recorded at their then fair value. The fair value of a lease is determined through a comparison of the actual rental rate with rental rates prevalent for similar assets in similar markets. A favorable lease asset to the Company represents a rental stream that is below market, and conversely an unfavorable lease is one with its cost above market rates. These assets and liabilities amortize as lease expense over the remaining term of the respective leases on a straight-line basis. At SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company had $34.4$22.2 million and $31.6$28.7 million, respectively, of deferred straight-line rent balances included in other long-term liabilities on the consolidated balance sheet.sheets.
27
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Lease Covenants
Certain lease agreements contain a number of restrictive covenants that, among other things, and subject to certain exceptions, impose operating and financial restrictions on the Company and its subsidiaries. These leases also require the Company to meet defined financial covenants, including a minimum level of consolidated liquidity, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage.
The Company has master lease agreements with Welltower, Sabra Health Care REIT, Inc. (Sabra), Second Spring and Omega (collectively, the Master Lease Agreements). The Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity. At SeptemberJune 30, 2017,2018, the Company is not in compliance with the financial covenants contained in the Master Lease Agreements.
The Company has a master lease agreement with Second Spring involving 52 of its facilities. The Company did not meet a financial covenant contained in this master lease agreement at June 30, 2018. The Company received waivers from the counterparties to the Master Lease Agreementsa waiver for any and all breaches of financial and other covenants as of September 30, 2017.
this covenant breach.
The Company has a master lease agreement with CBYW involving 28 of its facilities. The Company did not meet certain financial covenants contained in this master lease agreement at SeptemberJune 30, 2017.2018. The Company received a waiver for these covenant breaches through October 24, 2019.
27
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
breaches.
At SeptemberJune 30, 2017,2018, the Company did not meet certain financial covenants contained in threeseven leases related to 2645 of its facilities. The Company is and expects to continue to be current in the timely payment of its obligations under such leases. These leases do not have cross default provisions, nor do they trigger cross default provisions in any of the Company’s other loan or lease agreements. The Company will continue to work with the related credit parties to amend such leases and the related financial covenants. The Company does not believe the breach of such financial covenants hasat June 30, 2018 will have a material adverse impact on it at September 30, 2017.it. The Company has been afforded certain cure rights to such defaults by posting collateral in the form of additional letters of credit or security deposit.
The Company’s ability to maintain compliance with its lease covenants depends in part on management’s ability to increase revenue and control costs. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly lease covenant compliance requirements. Should the Company fail to comply with its lease covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing lease agreements. To the extent any cross-default provisions may apply, the default would have an even more significant impact on the Company’s financial position.
The Company believes that it is in the best interests of all creditors to grant necessary and timely waivers or reach negotiated settlements to enable the Company to execute and complete the Restructuring Plans in order to establish a sustainable capital structure. However, there can be no assurance that such waivers will be received in future periods or such settlements will be reached. If the defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained timely, the defaults can cause acceleration of the Company’s financial obligations under certain of its agreements, which the Company may not be in a position to satisfy.
There can be no assurances that any of these efforts will prove successful. In the event of a failure to obtain necessary waivers or otherwise achieve a viable restructuring of the Company’s financial obligations, it may be forced to seek reorganization under the U.S. Bankruptcy Code.
(10)Financing Obligation
Financing obligations represent the present value of future minimum lease payments under such lease arrangements and bear a weighted average imputed interest rate of 10.6%approximately 9.1% at SeptemberJune 30, 2017,2018, and mature at dates ranging from 2021 to 2043.2048.
Future minimum paymentsThe Welltower Master Lease Amendment includes a non-cash financing obligation discount balance of $49.4 million at June 30, 2018. As the terms under the Welltower Master Lease Amendment were negotiated and executed at the same time as other Welltower amendments included in the Restructuring Transactions (i.e. the Term Loan Amendment and Real Estate Loan Amendment), U.S. GAAP requires the Company record interest expense for each instrument at a rate equal to the next five years and thereaftercombined effective interest rate rather than the stated interest rate of each instrument individually. The effective interest rate was calculated by measuring the aggregate cash flows payable to Welltower under leases classified as financingthe combined amended agreementscompared to the carrying value of the original obligations at September 30, 2017 are as follows (in thousands):
|
|
|
|
Twelve months ended September 30, |
|
|
|
2018 |
| $ | 275,150 |
2019 |
|
| 281,193 |
2020 |
|
| 287,838 |
2021 |
|
| 294,677 |
2022 |
|
| 292,964 |
Thereafter |
|
| 7,929,586 |
Total future minimum lease payments |
|
| 9,361,408 |
Less amount representing interest |
|
| (6,444,677) |
Financing obligations |
| $ | 2,916,731 |
Less current portion |
|
| (2,908,020) |
Long-term financing obligations |
| $ | 8,711 |
on March 6, 2018. Since the combined effective interest rate of all the Restructuring Transactions involving Welltower of approximately 7.5% is higher than the Welltower Master Lease Amendment weighted interest rate of
28
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Theapproximately 7.0%, the Company recorded a financing obligation table has been prepared assumingdiscount, which was offset by a corresponding premium on each of the CompanyWelltower Real Estate Loans and Term Loan Amendment, and will continue as a going concern, which contemplates continuityamortize over the life of operations, the realization of assetsWelltower Master Lease Amendment. See Note 8 – “Long-Term Debt – Term Loan Agreements” and the satisfaction of liabilities in the normal course of business“Long-Term Debt – Real Estate Loans.”
Future minimum payments for the 12-month period following the date of the consolidated financial statements. However, for the reasons described in Note 1 – “General Information – Going Concern Considerations,” $2.9 billion, related to several of the Company’s financing obligation commitments with the stated maturities as summarized above arenext five years and thereafter under leases classified as a current liabilityfinancing obligations at SeptemberJune 30, 2017. 2018 are as follows (in thousands):
|
|
|
|
Twelve months ended June 30, |
|
|
|
2019 |
| $ | 234,780 |
2020 |
|
| 239,316 |
2021 |
|
| 244,073 |
2022 |
|
| 242,594 |
2023 |
|
| 244,414 |
Thereafter |
|
| 6,726,252 |
Total future minimum lease payments |
|
| 7,931,429 |
Less amount representing interest |
|
| (5,184,647) |
Financing obligations |
| $ | 2,746,782 |
Less current portion |
|
| (1,983) |
Long-term financing obligations |
| $ | 2,744,799 |
(11)Income Taxes
The Company effectively owns 60.6%63.0% of FC-GEN, an entity taxed as a partnership for U.S. income tax purposes. This is the Company’s only source of taxable income. FC-GEN is subject to income taxes in several U.S. state and local jurisdictions. The income taxes assessed by these jurisdictions are included in the Company’s tax provision, but at its 60.6%63.0% ownership of FC-GEN.
For the three months ended SeptemberJune 30, 2017,2018, the Company recorded income tax expensebenefit of $1.6$0.9 million from continuing operations, representing an effective tax rate of (0.3)%1.4%, compared to income tax benefitexpense of $25.9$2.8 million from continuing operations, representing an effective tax rate of 33.1%(2.7)%, for the same period in 2016.2017.
For the ninesix months ended SeptemberJune 30, 2017,2018, the Company recorded income tax expensebenefit of $5.7$0.5 million from continuing operations, representing an effective tax rate of (0.7)%0.3%, compared to income tax benefitexpense of $19.7$4.1 million from continuing operations, representing an effective tax rate of 11.0%(2.2)%, for the same period in 2016.2017.
The change in the effective tax rate for the three and ninesix months ended SeptemberJune 30, 2017,2018, is attributable to a reduced projected change in the following:Company’s hanging credit deferred tax liability compared to the prior period that is the result of the goodwill impairment recorded against the inpatient services business in the third quarter of 2017.
|
|
|
|
|
|
|
|
The Company continues to assess the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard. Management had previously determined that the Company would not realize its deferred tax assets and established a valuation allowance against the deferred tax assets. As of SeptemberJune 30, 2017,2018, management has determined that the valuation allowance is still necessary.
The Company’s Bermuda captive insurance company is expected to generate positiveproduce a U.S. federal taxable loss in 2018. The captive is expected to generate positive pre-tax income in 2017, with no net operating lossfuture periods to offsetoff-set its taxable income.deferred tax assets. The captive also does not have any tax credits to offset its2018 U.S. federal income tax.taxable loss cannot be carried back but can be carried forward indefinitely.
The Company provides rehabilitation therapy services within the People’s Republic of China and Hong Kong. At SeptemberJune 30, 2017,2018, these business operations remain in their respective startup stage.do not comprise a significant portion of the Company’s overall operating results. Management does not anticipate these operations will generate taxable income in the near term. The operations currently do not have a material effect on the Company’s effective tax rate.
29
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) on December 23, 2017. SAB 118 provides a one-year measurement period from a registrant’s reporting period that includes the Tax Reform Act enactment date to allow the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under ASC 740. The Company's federal net operating losses that have been incurred prior to January 1, 2018, will continue to have a 20-year carryforward limitation applied and will need to be evaluated for recoverability in the future as such. For net operating losses created after December 31, 2017, the net operating losses will have an indefinite life, but usage will be limited to 80% of taxable income in any given year. The Company has estimated the impact of the Tax Reform Act on state income taxes reflected in its income tax expense for the three and six months ended June 30, 2018. Reasonable estimates for the Company’s state and local provision were made based on the Company's analysis of tax reform. These provisional amounts may be adjusted in future periods during 2018 when additional information is obtained. Additional information that may affect the Company's provisional amounts would include further clarification and guidance on how the Internal Revenue Service (IRS) will implement tax reform and further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state and local income tax returns, state and local net operating losses and corresponding valuation allowances.
Exchange Rights and Tax Receivable Agreement
Following the Combination, theThe owners of FC-GEN have the right to exchange their membership units in FC-GEN, along with an equivalent number of Class C shares, for shares of Class A common stock of the Company or cash, at the Company’s option. As a result of such exchanges, the Company’s membership interest in FC-GEN would increase and its purchase price would be reflected in its share of the tax basis of FC-GEN’s tangible and intangible assets. Any resulting increases in tax basis are likely to increase tax depreciation and amortization deductions and, therefore, reduce the amount of income tax the Company would otherwise be required to pay in the future. Any such increase would also decrease gain (or increase loss) on future dispositions of the affected assets. There were exchanges of 2,248,8691,860,592 FC-GEN units and Class C shares duringin the ninesix months ended SeptemberJune 30, 20172018 equating to 2,249,2561,860,912 Class A shares. The exchanges during the ninesix months ended SeptemberJune 30, 20172018 resulted in a $14.5$9.5 million IRCinternal revenue code (IRC) Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN. There were exchanges of 200,0002,048,869 FC-GEN units and Class C shares during the ninesix months ended SeptemberJune 30, 20162017 equating to 200,0342,049,222 Class A shares. The exchanges during the ninesix months ended SeptemberJune 30, 20162017 resulted in a $0.9$12.8 million IRC Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN.
Concurrent with the Combination, theThe Company entered intohas a tax receivable agreement (TRA) with the owners of FC-GEN. The agreement provides for the payment by the Company to the owners of FC-GEN of 90% of the cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of (i) the increases in tax basis attributable to the owners of FC-GEN and (ii) tax benefits related to imputed interest deemed to be paid by the Company as a result of the TRA. Under the TRA, the benefits deemed realized by the Company as a result of the increase in tax basis attributable to the owners of FC-GEN generally will be computed by comparing the actual income tax liability of the Company to the amount of such taxes that the Company would have been required to pay had there been no such increase in tax basis.
Estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis and deductions, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including:
· | the timing of exchanges—for instance, the increase in any tax deductions will vary depending on the fair value of the depreciable or amortizable assets of FC-GEN and its subsidiaries at the time of each exchange, which fair value may fluctuate over time; |
· | the price of shares of Company Class A common stock at the time of the exchange—the increase in any tax deductions, and the tax basis increase in other assets of FC-GEN and its subsidiaries is directly proportional to the price of shares of Company Class A common stock at the time of the exchange; |
· | the amount and timing of the Company’s income—the Company is required to pay 90% of the deemed benefits as and when deemed realized. If FC-GEN does not have taxable income, the Company is generally not required (absent a |
30
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
change of control or circumstances requiring an early termination payment) to make payments under the TRA for that taxable year because no benefit will have been actually realized. However, any tax benefits that do not result in realized benefits in a given tax year likely will generate tax attributes that may be utilized to generate benefits in previous or future tax years. The utilization of such tax attributes will result in payments under the TRA; and |
· | future tax rates of jurisdictions in which the Company has tax liability. |
The TRA also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, FC-GEN (or its successor’s) obligations under the TRA would be based on certain assumptions
30
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
defined in the TRA. As a result of these assumptions, FC-GEN could be required to make payments under the TRA that are greater or less than the specified percentage of the actual benefits realized by the Company that are subject to the TRA. In addition, if FC-GEN elects to terminate the TRA early, it would be required to make an early termination payment, which upfront payment may be made significantly in advance of the anticipated future tax benefits.
Payments generally are due under the TRA within a specified period of time following the filing of FC-GEN’s U.S. federal and state income tax return for the taxable year with respect to which the payment obligation arises. Payments under the TRA generally will be based on the tax reporting positions that FC-GEN will determine. Although FC-GEN does not expect the Internal Revenue Service (IRS)IRS to challenge the Company’s tax reporting positions, FC-GEN will not be reimbursed for any overpayments previously made under the TRA, but any overpayments will reduce future payments. As a result, in certain circumstances, payments could be made under the TRA in excess of the benefits that FC-GEN actually realizes in respect of the tax attributes subject to the TRA.
The term of the TRA generally will continue until all applicable tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA and make an early termination payment.
In certain circumstances (such as certain changes in control, the election of the Company to exercise its right to terminate the agreement and make an early termination payment or an IRS challenge to a tax basis increase) it is possible that cash payments under the TRA may exceed actual cash savings.
(12)Commitments and Contingencies
Loss Reserves For Certain Self-Insured Programs
General and Professional Liability and Workers’ Compensation
The Company self-insures for certain insurable risks, including general and professional liabilities and workers’ compensation liabilities through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary among states in which the Company operates, including wholly owned captive insurance subsidiaries, to provide for potential liabilities for general and professional liability claims and workers’ compensation claims. Policies are typically written for a duration of 12 months and are measured on a “claims made” basis. Regarding workers’ compensation, the Company self-insures to its deductible and purchases statutorily required insurance coverage in excess of its deductible. There is a risk that amounts funded by the Company’s self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments. This liability includes an estimate of the development of reported losses and losses incurred but not reported. Provisions for changes in insurance reserves are made in the period of the related coverage. The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.
The Company’s management employs its judgment and periodic independent actuarial analysis in determining the adequacy of certain self-insured workers’ compensation and general and professional liability obligations recorded as liabilities in the Company’s financial statements. The Company evaluates the adequacy of its self-insurance reserves on a semi-annual basis or more frequently when it is aware of changes to its incurred loss patterns that could impact the accuracy of those reserves. The methods of making
31
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. The foundation for most of these methods is the Company’s actual historical reported and/or paid loss data. Any adjustments resulting therefrom are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.
The Company utilizes third-party administrators (TPAs) to process claims and to provide it with the data utilized in its assessments of reserve adequacy. The TPAs are under the oversight of the Company’s in-house risk management and
31
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
legal functions. These functions ensure that the claims are properly administered so that the historical data is reliable for estimation purposes. Case reserves, which are approved by the Company’s legal and risk management departments, are determined based on an estimate of the ultimate settlement and/or ultimate loss exposure of individual claims.
The reserves for loss for workers’ compensation risks are discounted based on actuarial estimates of claim payment patterns using a discount rate of approximately 1% for each policy period presented.estimates. The discount rate for the current policy year is 1.48%2.66%. The discount rates are based upon the risk-free rate for the appropriate duration for the respective policy year. The removal of discounting would have resulted in an increased reserve for workers’ compensation risks of $6.5$7.3 million and $8.9$6.7 million as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. The reserves for general and professional liability are recorded on an undiscounted basis.
For the three and nine months ended SeptemberJune 30, 20172018 and 2016,2017, the provision for general and professional liability risk totaled $33.8$26.0 million and $34.1$33.9 million, respectively. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the provision for general and professional liability risk totaled $102.2$54.2 million and $104.3$68.4 million, respectively. The reserves for general and professional liability were $425.6$450.9 million and $392.1$442.9 million as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.
For the three months ended SeptemberJune 30, 20172018 and 2016,2017, the provision for workers’ compensation risk totaled $16.4$11.1 million and $20.2$11.7 million, respectively. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the provision for workers’ compensation risk totaled $45.3$26.4 million and $42.2$28.9 million, respectively. The reserves for workers’ compensation risks were $198.1$172.3 million and $226.0$174.6 million as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.
Health Insurance
The Company offers employees an option to participate in self-insured health plans. Health insurance claims are paid as they are submitted to the plans’ administrators. The Company maintains an accrual for claims that have been incurred but not yet reported to the plans’ administrators and therefore have not yet been paid. This accrual for incurred but not yet reported claims was $18.1 million and $19.6$17.5 million as of SeptemberJune 30, 20172018 and December 31, 2016, respectively.2017. The liability for the self-insured health plan is recorded in accrued compensation in the consolidated balance sheets. Although management believes that the amounts provided in the Company’s consolidated financial statements are adequate and reasonable, there can be no assurances that the ultimate liability for such self-insured risks will not exceed management’s estimates.
Legal Proceedings
The Company and certain of its subsidiaries are involved in various litigation and regulatory investigations arising in the ordinary course of business. While there can be no assurance, based on the Company’s evaluation of information currently available, with the exception of the specific matters noted below, management does not believe the results of such litigation and regulatory investigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company. However, the Company’s assessment of materiality may be affected by limited information (particularly in the early stages of government investigations). Accordingly, the Company’s assessment of materiality may change in the future based upon availability of discovery and further developments in the proceedings at issue. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.
From time to time the Company may enter into confidential discussions regarding the potential settlement of pending investigations or litigation. There are a variety of factors that influence the Company’s decisions to settle and the amount it may
32
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
choose to pay, including the strength of the Company’s case, developments in the investigation or litigation, the behavior of other interested parties, the demand on management time and the possible distraction of the Company’s employees associated with the case and/or the possibility that the Company may be subject to an injunction
32
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
or other equitable remedy. The settlement of any pending investigation, litigation or other proceedings could require the Company to make substantial settlement payments and result in its incurring substantial costs.
Settlement Agreement
On June 9, 2017, the Company and the U.S. Department of Justice (the DOJ) entered into a settlement agreement regarding four matters arising out of the activities of Skilled or Sun Healthcare prior to their operations becoming part of the Company’s operations (collectively, 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 below). The Company agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.
The settlement agreement calls for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program. The Settlement Amount has been recorded fully in accrued expenses in the consolidated balance sheets at December 31, 2016. The Company will remit the Settlement Amount over a period of five (5) years. The first installment was paid in June 2017. The remaining outstanding Settlement Amount at September 30, 2017 is $49.2 million, of which $9.0 million is recorded in accrued expenses and $40.2 million is recorded in other long-term liabilities.
Creekside Hospice Litigation
On August 2, 2013, the United States Attorney for the District of Nevada and the Civil Division of the DOJ informed Skilled that its Civil Division was investigating Skilled, as well as its then subsidiary, Creekside Hospice II, LLC, for possible violations of federal and state healthcare fraud and abuse laws and regulations (the Creekside Hospice Litigation). Those laws could have included the federal False Claims Act (FCA) and the Nevada False Claims Act (NFCA). The FCA provides for civil and administrative fines and penalties, plus treble damages. The NFCA provides for similar fines and penalties, including treble damages. Violations of those federal or state laws could also subject the Company and/or its subsidiaries to exclusion from participation in the Medicare and Medicaid programs.
On or about August 6, 2014, in relation to the investigation the DOJ filed a notice of intervention in two pending qui tam proceedings filed by private party relators under the FCA and the NFCA and advised that it intended to take over the actions. The DOJ filed its complaint in intervention on November 25, 2014, against Creekside, Skilled Healthcare Group, Inc., and Skilled Healthcare, LLC, asserting, among other things, that certain claims for hospice services provided by Creekside in the time period 2010 to 2013 (prior to the Combination) did not meet Medicare requirements for reimbursement and were in violation of the civil False Claims Act.
Therapy Matters Investigation
In February 2015, representatives of the DOJ informed the Company that they were investigating the provision of therapy services at certain Skilled facilities from 2005 through 2013 (prior to the Combination) and may pursue legal action against the Company and certain of its subsidiaries including Hallmark Rehabilitation GP, LLC for alleged violations of the federal and state healthcare fraud and abuse laws and regulations related to such services (the Therapy Matters Investigation). Those laws could have included the FCA and similar state laws.
Staffing Matters Investigation
In February 2015, representatives of the DOJ informed the Company that it intended to pursue legal action against the Company and certain of its subsidiaries related to staffing and certain quality of care allegations at certain Skilled facilities that occurred prior to the Combination, related to the issues adjudicated against the Company and those
33
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
subsidiaries in a previously disclosed class action lawsuit that Skilled settled in 2010 (the Staffing Matters Investigation). Those laws could have included the FCA and similar state laws.
SunDance Part B Therapy Matter
A subsidiary of Sun Healthcare, SunDance Rehabilitation Corp. (SunDance), operates an outpatient agency licensed to provide Medicare Part B therapy services at assisted/senior living facilities in Georgia and is a party to a qui tam proceeding that was filed by a private party relator under the FCA. No SunDance agencies outside of Georgia are part of the qui tam proceeding. The Civil Division of the United States Attorney's Office for the District of Georgia filed a notice of intervention in this matter in March 2016 and asserts that certain SunDance claims for therapy services did not meet Medicare requirements for reimbursement.
(13)Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash and equivalents, investments in marketable securities, accounts receivable, accounts payable and current and long-term debt.
The Company’s financial instruments, other than its accounts receivable and accounts payable, are spread across a number of large financial institutions whose credit ratings the Company monitors and believes do not currently carry a material risk of non-performance. Certain of the Company’s financial instruments contain an off-balance-sheet risk, in the form of outstanding letters of credit of $54.8 million under the Company’s letter of credit sub-facility on its Revolving Credit Facilities as of September 30, 2017. These letters of credit are principally pledged to landlords and insurance carriers as collateral. The Company is not involved in any other off-balance-sheet arrangements that have or are reasonably likely to have a material current or future impact on its financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.
Recurring Fair Value Measures
Fair value is defined as an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as shown below. An instrument’s classification within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
|
|
|
|
| Level 1 — |
| Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| Level 2 — |
| Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability. |
| Level 3 — |
| Inputs that are unobservable for the asset or liability based on the Company’s own assumptions (about the assumptions market participants would use in pricing the asset or liability). |
3433
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The tables below present the Company’s assets and liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 20172018 and December 31, 2016,2017, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
|
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|
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|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
| ||
|
| Fair Value Measurements at Reporting Date Using |
|
| Fair Value Measurements at Reporting Date Using |
| ||||||||||||||||||||
|
|
|
|
| Quoted Prices in |
|
|
| Significant |
|
|
|
|
| Quoted Prices in |
|
|
| Significant |
| ||||||
|
|
|
|
| Active Markets for |
| Significant Other |
| Unobservable |
|
|
|
|
| Active Markets for |
| Significant Other |
| Unobservable |
| ||||||
|
| September 30, |
| Identical Assets |
| Observable Inputs |
| Inputs |
|
| June 30, |
| Identical Assets |
| Observable Inputs |
| Inputs |
| ||||||||
Assets: |
| 2017 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
|
| 2018 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||||||
Cash and cash equivalents |
| $ | 50,591 |
| $ | 50,591 |
| $ | — |
| $ | — |
|
| $ | 78,932 |
| $ | 78,932 |
| $ | — |
| $ | — |
|
Restricted cash and equivalents |
|
| 16,018 |
|
| 16,018 |
|
| — |
|
| — |
|
|
| 64,140 |
|
| 64,140 |
|
| — |
|
| — |
|
Restricted investments in marketable securities |
|
| 124,358 |
|
| 124,358 |
|
| — |
|
| — |
|
|
| 132,628 |
|
| 132,628 |
|
| — |
|
| — |
|
Total |
| $ | 190,967 |
| $ | 190,967 |
| $ | — |
| $ | — |
|
| $ | 275,700 |
| $ | 275,700 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Fair Value Measurements at Reporting Date Using |
|
| Fair Value Measurements at Reporting Date Using |
| ||||||||||||||||||||
|
|
|
|
| Quoted Prices in |
|
|
|
| Significant |
|
|
|
|
| Quoted Prices in |
|
|
|
| Significant |
| ||||
|
|
|
|
| Active Markets for |
| Significant Other |
| Unobservable |
|
|
|
|
| Active Markets for |
| Significant Other |
| Unobservable |
| ||||||
|
| December 31, |
| Identical Assets |
| Observable Inputs |
| Inputs |
|
| December 31, |
| Identical Assets |
| Observable Inputs |
| Inputs |
| ||||||||
Assets: |
| 2016 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
|
| 2017 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||||||
Cash and cash equivalents |
| $ | 51,408 |
| $ | 51,408 |
| $ | — |
| $ | — |
|
| $ | 54,525 |
| $ | 54,525 |
| $ | — |
| $ | — |
|
Restricted cash and equivalents |
|
| 12,052 |
|
| 12,052 |
|
| — |
|
| — |
|
|
| 4,113 |
|
| 4,113 |
|
| — |
|
| — |
|
Restricted investments in marketable securities |
|
| 143,974 |
|
| 143,974 |
|
| — |
|
| — |
|
|
| 126,116 |
|
| 126,116 |
|
| — |
|
| — |
|
Total |
| $ | 207,434 |
| $ | 207,434 |
| $ | — |
| $ | — |
|
| $ | 184,754 |
| $ | 184,754 |
| $ | — |
| $ | — |
|
The Company places its cash and cash equivalents, restricted cash and equivalents and restricted investments in marketable securities in quality financial instruments and limits the amount invested in any one institution or in any one type of instrument. The Company has not experienced any significant losses on such investments.
Debt Instruments
The table below shows the carrying amounts and estimated fair values of the Company’s primary long-term debt instruments (in thousands):
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
|
| June 30, 2018 |
| December 31, 2017 |
| ||||||||||||||||
|
| Carrying Value |
| Fair Value |
| Carrying Value |
| Fair Value |
|
| Carrying Value |
| Fair Value |
| Carrying Value |
| Fair Value |
| ||||||||
Asset based lending facilitites |
| $ | 396,133 |
| $ | 396,133 |
| $ | — |
| $ | — |
| |||||||||||||
Revolving credit facilities |
| $ | 351,247 |
| $ | 351,247 |
| $ | 383,630 |
| $ | 383,630 |
|
|
| — |
|
| — |
|
| 303,091 |
|
| 303,091 |
|
Term loan agreement |
|
| 116,290 |
|
| 116,290 |
|
| 116,174 |
|
| 116,174 |
| |||||||||||||
Real estate bridge loans |
|
| 289,120 |
|
| 289,120 |
|
| 313,549 |
|
| 313,549 |
| |||||||||||||
Term loan agreements |
|
| 180,739 |
|
| 180,739 |
|
| 120,706 |
|
| 120,706 |
| |||||||||||||
Real estate loans |
|
| 301,005 |
|
| 301,005 |
|
| 281,039 |
|
| 281,039 |
| |||||||||||||
HUD insured loans |
|
| 261,370 |
|
| 248,185 |
|
| 241,570 |
|
| 226,983 |
|
|
| 183,542 |
|
| 182,717 |
|
| 263,827 |
|
| 250,768 |
|
Notes payable |
|
| 76,337 |
|
| 76,337 |
|
| 73,829 |
|
| 73,829 |
|
|
| 82,705 |
|
| 82,705 |
|
| 68,122 |
|
| 68,122 |
|
Mortgages and other secured debt (recourse) |
|
| 12,711 |
|
| 12,711 |
|
| 13,235 |
|
| 13,235 |
|
|
| 12,573 |
|
| 12,573 |
|
| 12,536 |
|
| 12,536 |
|
Mortgages and other secured debt (non-recourse) |
|
| 28,283 |
|
| 28,283 |
|
| 29,157 |
|
| 29,157 |
|
|
| 27,178 |
|
| 27,178 |
|
| 27,978 |
|
| 27,978 |
|
|
| $ | 1,135,358 |
| $ | 1,122,173 |
| $ | 1,171,144 |
| $ | 1,156,557 |
|
| $ | 1,183,875 |
| $ | 1,183,050 |
| $ | 1,077,299 |
| $ | 1,064,240 |
|
The fair value of debt is based upon market prices or is computed using discounted cash flow analysis, based on the Company’s estimated borrowing rate at the end of each fiscal period presented. The Company believes thatthis approach approximates the exit price notion of fair value measurement and the inputs to the pricing models qualify as Level 2 measurements.
Non-Recurring Fair Value Measures
The Company recently applied the fair value measurement principles to certain of its non-recurring nonfinancial assets in connection with an impairment test.
3534
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables presents the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis (in thousands):
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|
|
|
|
|
|
|
|
|
|
| Impairment Charges - |
|
|
|
| Impairment Charges - | ||
|
| Carrying Value |
| Nine months ended |
| Carrying Value |
| Six months ended | ||||
|
| September 30, 2017 |
| September 30, 2017 |
| June 30, 2018 |
| June 30, 2018 | ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
| $ | 3,470,946 |
| $ | 163,364 |
| $ | 3,017,243 |
| $ | 55,617 |
Goodwill |
|
| 85,642 |
|
| 351,470 |
|
| 85,642 |
|
| — |
Intangible assets, net |
|
| 147,239 |
|
| 8,576 |
|
| 131,091 |
|
| 1,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Impairment Charges - |
|
|
|
| Impairment Charges - | ||
|
| Carrying Value |
| Nine months ended |
| Carrying Value |
| Six months ended | ||||
|
| December 31, 2016 |
| September 30, 2016 |
| December 31, 2017 |
| June 30, 2017 | ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
| $ | 3,765,393 |
| $ | — |
| $ | 3,413,599 |
| $ | — |
Goodwill |
|
| 440,712 |
|
| — |
|
| 85,642 |
|
| — |
Intangible assets, net |
|
| 175,566 |
|
| — |
|
| 142,976 |
|
| — |
The fair value of tangible and intangible assets is determined using a discounted cash flow approach, which is a significant unobservable input (Level 3). The Company estimates the fair value using the income approach (which is a discounted cash flow technique). These valuation methods required management to make various assumptions, including, but not limited to, future profitability, cash flows and discount rates. The Company’s estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential.
Developing discounted future cash flows in applying the income approach requires the Company to evaluate its intermediate to longer-term strategies, including, but not limited to, estimates of revenue growth, operating margins, capital requirements, inflation and working capital management. The development of appropriate rates to discount the estimated future cash flows requires the selection of risk premiums, which can materially affect the present value of future cash flows.
The Company estimated the fair value of acquired tangible and intangible assets using discounted cash flow techniques that included an estimate of future cash flows, consistent with overall cash flow projections used to determine the purchase price paid to acquire the business, discounted at a rate of return that reflects the relative risk of the cash flows.
The Company believes the estimates and assumptions used in the valuation methods are reasonable.
(14)Related Party Transactions
Prior to the Combination on February 2, 2015, FC-GEN was wholly owned by private investors sponsored by affiliates of Formation Capital, LLC (Formation).
The Company provides rehabilitation therapy services to certain facilities owned and operated by affiliates of FC-GEN’s sponsors. These services resulted in net revenue of $35.1 million and $109.1 million in the three and nine months ended September 30, 2017, respectively, as compared to net revenue of $38.1 million and $118.6 million in the three and nine months ended September 30, 2016, respectively. The services resulted in net accounts receivable balances of $83.2 million and $79.7 million at September 30, 2017 and December 31, 2016, respectively.
36
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company contracts with FC PAC Holdings, LLC (FC PAC) to provide hospice and diagnostic services in the normal course of business. FC PAC ownership includes affiliates of Formation, some of whom are members of the Company’s board of directors (the Board). On May 1, 2016, the Company entered into preferred provider and affiliation agreements with FC PAC. Fees for these services amounted to $3.2 million and $8.9 million in the three and nine months ended September 30, 2017, respectively, as compared to $2.9 million and $9.4 million in the three and nine months ended September 30, 2016, respectively.
Effective May 1, 2016, the Company completed the sale of its hospice and home health operations to FC Compassus LLC for $72 million in cash and a $12 million interest-bearing note. Certain members of the Board indirectly beneficially hold ownership interests in FC Compassus LLC totaling less than 10% in the aggregate. The combined note and accrued interest balance of $14.1 million, net of reserves, remains outstanding at September 30, 2017.
(15)(14)Asset Impairment Charges
As discussed in Note 1 – “General Information – Going Concern Considerations,” the Company’s results of operations have been impacted severely by the persistent pressure of healthcare reforms enacted over the past decade especially in its inpatient business. The reduction and diversion of census from the skilled nursing sector has caused the Company to enact certain cost mitigation strategies to offset the loss of organic revenue. This strategy had been successful in recent years, however, this revenue compression compounded by escalating wage inflation and professional liability losses, and combined with the increased cost of capital through escalating leases and greater debt burden, has accelerated through the third quarter of 2017 resulting in triggering events to assess for conditions of impairment.
Long-Lived Assets with a Definite Useful Life
TheIn each quarter, the Company’s long-lived assets and identifiable intangible assets with a definite useful life wereare tested for impairment at the lowest levels for which there are identifiable cash flows. The Company estimated the future net undiscounted cash flows expected to be generated from the use of the long-lived assets and then compared the estimated undiscounted cash flows to the carrying amount of the long-lived assets. The cash flow period was based on the remaining useful lifelives of the primary asset in each long-lived asset group, principally a building for owned skilled nursing facilities, a favorable lease intangible asset for certain leased facilitiesin the inpatient segment and customer relationship assets in the rehabilitation therapy services segment. ForDuring the three and nine months ended SeptemberJune 30, 2018 and 2017, the Company recognized $163.4 million in impairment charges on its long-lived assets with a definite useful life. This charge is presented in long-lived asset impairments on the consolidated statements of operations.
Identifiable Intangile Assets with a Definite Useful Life
Management Contracts
The management contract asset was derived through the organization of facilities under an upper payment limit supplemental payment program in Texas that provided supplemental Medicaid payments with federal matching funds for skilled nursing facilities that were affiliated with county-owned hospital districts. Under this program, the Company acted as the manager of the facilities and shared in the supplemental payments withinpatient segment totaling $27.3 million and $0.0 million, respectively. During the county hospitals. With the expiration of the program, the remaining unamortized asset associated with the management contract was written off. For the three and ninesix months ended SeptemberJune 30, 2018 and 2017, the Company recognized $7.3 million in impairment charges on identifiable intangible assets associated with management contracts. This charge is presented in goodwillthe inpatient segment totaling $55.6 million and identifiable intangible impairments on the consolidated statements of operations.$0.0 million, respectively.
3735
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Identifiable Intangible Assets with a Definite Useful Life
Favorable Leases
Favorable lease contracts represent the estimated value of future cash outflows of operating lease contracts compared to lease rates that could be negotiated in an arms-length transaction at the time of measurement. Favorable lease contracts are amortized on a straight-line basis over the lease terms. These favorable lease contracts are measured for impairment using estimated future net undiscounted cash flows expected to be generated from the use of the leased assets compared to the carrying amount of the favorable lease. The cash flow period was based on the remaining useful lives of the asset, which for favorable lease assets is the lease term.For During the three and ninesix months ended SeptemberJune 30, 2017,2018, the Company recognized $1.2 million in impairment charges on its favorable lease intangible assets with a definite useful life.life of $1.1 million. There was no impairment charges recognized in the three and six months ended June 30, 2017. This charge is presented in goodwill and identifiable intangible asset impairments on the consolidated statements of operations.
Goodwill
Adverse changes(15)Assets Held for Sale
In the normal course of business, the Company continually evaluates the performance of its operating units, with an emphasis on selling or closing underperforming or non-strategic assets. These assets are evaluated to determine whether they qualify as assets held for sale or discontinued operations. The assets and liabilities of a disposal group classified as held for sale shall be presented separately in the operating environmentasset and related key assumptions used to determine the fair valueliability sections, respectively, of the Company’s reporting units and indefinite-lived intangible assets may result in future impairment charges for a portion or allstatement of these assets. Specifically, if the rate of growth of government and commercial revenues earned by the Company’s reporting units were to be less than projected or if healthcare reforms were to negatively impact the Company’s business, an impairment charge of a portion or all of these assets may be required. An impairment charge could have a material adverse effect on the Company’s business, financial position andin the period in which they are identified only. Assets held for sale that qualify as discontinued operations are removed from the results of continuing operations. The results of operations but would not be expected to have an impact on the Company’s cash flows or liquidity.
The Company performed its annual goodwill impairment test as of September 30, 2017 and 2016. The Company conducts the test at the reporting unit level that management has determined aligns with the Company’s segment reporting. See Note 5 – “Segment Information” for a breakdown of the Company’s goodwill by segment.
The Company measures the fair value of each reporting unit to determine whether the fair value exceeds the carrying value based upon the market capitalization including a control premium and a discounted cash flow analysis. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, perpetual growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company earnings multiples for the market-based approach. The cash flows employed in the discounted cash flow analyses are based on the Company’s internal business model for 2017current and for years beyond 2017 the growth rates used are an estimate of the future growthprior year periods, along with any cost to exit such businesses in the industryyear of discontinuation, are classified as discontinued operations in which the Company participates. The discount rates used in the discounted cash flow analyses are intended to reflect the risks inherent in the future cash flows of the reporting unit and are based on an estimated cost of capital, which was determined based on the Company’s estimated cost of capital relative to its capital structure. In addition, the market-based approach utilizes comparable company public trading values, research analyst estimates and, where available, values observed in private market transactions.
The Company performed a quantitative test for impairment of goodwill to assess the impact of changes in the regulatory and reimbursement environment. The Company compares the carrying amount of each of the reporting units to the fair value of each of the reporting units. If the carrying amount of each of its reporting units exceeds its fair value, an impairment of the goodwill is required. If not, no further testing is needed. The analysis indicated that the reporting unit carrying value exceeded the fair value of our inpatient reporting unit and accordingly an impairment was necessary. An impairment of $351.5 million, which represents the entire balance of goodwill associated with the inpatient reporting unit, was recorded in the three and nine months ended September 30, 2017. This charge was presented in goodwill and identifiable intangible impairments on the consolidated statements of operations. With respect
In the first quarter of 2018, the Company identified a disposal group of 23 skilled nursing facilities operated by the Company in the state of Texas that qualified as assets held for sale. The Company entered into a purchase and sale agreement to sell the Company’s rehabilitation therapy servicesfacilities for $120.0 million. The transaction will mark an exit from the inpatient business in Texas. Thirteen of the facilities are subject to Welltower Real Estate Loans, nine of the facilities are subject to HUD-insured loans and one facility is leased and accounted for as a financing obligation. Closing is subject to licensure and other services segments,regulatory approvals and expected to occur in the total fair value exceedsthird quarter of 2018. The disposal group does not meet the carrying value, so nocriteria as a discontinued operation. A $7.5 million asset impairment charge is required. Although these segments have encountered similar challenging operating environments that have so acutely impactedwas recognized in the Company’s inpatient segment, those challenges have not negatively impactedthree months ended June 30, 2018 in the operating resultsstatements of these segmentsoperations to reflect a decrease in the level where an impairment charge is warranted.sale price of the disposal group. See Note 14 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”
3836
GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table sets forth the major classes of assets and liabilities included as part of the disposal group (in thousands):
|
|
|
|
|
| June 30, 2018 | |
Current assets: |
|
|
|
Prepaid expenses |
| $ | 9,278 |
Long-term assets: |
|
|
|
Property and equipment, net of accumulated depreciation of $27,885 |
|
| 112,048 |
Total assets |
| $ | 121,326 |
Current liabilities: |
|
|
|
Current installments of long-term debt |
| $ | 2,110 |
Long-term liabilities: |
|
|
|
Long-term debt |
|
| 99,259 |
Financing obligations |
|
| 19,670 |
Total liabilities |
| $ | 121,039 |
(16)(16)Related Party Transactions
The Company provides rehabilitation services to certain facilities owned and operated by a customer in which certain members of the Company’s board of directors beneficially own an ownership interest. These services resulted in net revenue of $32.8 million and $65.6 million in the three and six months ended June 30, 2018, respectively, as compared to net revenue of $36.4 million and $74.0 million in the three and six months ended June 30, 2017, respectively. The services resulted in net accounts receivable balances of $36.5 million and $32.0 million at June 30, 2018 and December 31, 2017, respectively. These accounts receivable balances are net of a $55.0 million reserve recorded in 2017. The Company deemed this reserve prudent given the delays in collection on account of this related party customer. The reserve represents the judgment of management, and does not indicate a forgiveness of any amount of the outstanding accounts receivable owed by this related party customer. The Company is monitoring the financial condition of this customer and will adjust the reserve levels accordingly as new information about their outlook is available.
Effective May 1, 2016, the Company completed the sale of its hospice and home health operations to FC Compassus LLC for $72.0 million in cash and a $12.0 million interest-bearing note. Certain members of the Company’s board of directors indirectly beneficially hold ownership interests in FC Compassus LLC totaling less than 10% in the aggregate. The combined note and accrued interest balance of $17.2 million remains outstanding at June 30, 2018. On May 1, 2016, the Company entered into preferred provider and affiliation agreements with FC Compassus LLC. Fees for these services amounted to $3.4 million and $6.6 million in the three and six months ended June 30, 2018, respectively, compared to $3.0 million and $5.7 million in the three and six months ended June 30, 2017, respectively.
Certain subsidiaries of the Company have entered into a lease and a purchase option of twelve centers in New Hampshire and Florida from twelve separate limited liability companies affiliated with Next Healthcare (the Next Landlord Entities). The lease is effective June 1, 2018 and the annualized rent paid will initially be $13.0 million. The purchase option will become exercisable in the fifth lease year. Certain members of the Company’s board of directors each directly or indirectly hold an ownership interest in the Next Landlord Entities totaling less than 2.5% in the aggregate. See Note 3 – “Significant Transactions and Events – Lease Transactions and Divestitures.”
(17) Subsequent Events
Restructuring Plans
TheOn August 1, 2018, the Company and its counterparties to the Welltower Master Lease, the Sabra Master Leases, the Welltower Bridge Loans, the Term Loans and certain other loans have entered into preliminary non-binding agreements concerning a proposed long-term restructuring of these master leases and loans (the Restructuring Plans)divested five skilled nursing facilities located in an effort to strengthen significantly the capital structurevarious states. All five of the Company.
These Restructuring Plans include the proposed sale by Sabra and Welltowerskilled nursing facilities were terminated from their respective lease agreements. They generated annual revenues of certain facilities currently leased to the Company, which the Company intends to re-lease from new third-party landlords at reduced rents. The Company will also make commercially reasonable efforts to refinance or repay through asset sales, certain of its debt obligations with Welltower which, upon completion, is expected to result in a reduction in interest costs.
These Restructuring Plans, if and when fully consummated, are expected to reduce the Company’s current cash fixed charges between $80$64.7 million and $100 million annually. This levelpre-tax net loss of reduction in fixed charges is subject to the successful sale of the Welltower and Sabra facilities to new landlords, the successful re-leasing of those facilities to the Company at reduced rents, the successful refinancing and/or repayment of certain debt obligations and the receipt of additional concessions to be made by other credit parties. The Company believes the transactions under the proposed restructuring could occur during the first half of 2018, however, there can be no assurance that any such transaction under the proposed Restructuring Plans will be agreed to or completed, or that any such agreements will attain a sustainable capital structure even if the Restructuring Plans are implemented. See Part II, Item 1A, “Risk Factors.”$7.9 million.
3937
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition as of the dates and for the periods presented and should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q. As used in this MD&A, the words “we,” “our,” “us” and the “Company,” and similar terms, refer collectively to Genesis Healthcare, Inc. and its wholly-owned subsidiaries, unless the context requires otherwise. This MD&A should be read in conjunction with our consolidated financial statements and related notes included in this report, as well as the financial information and MD&A contained in the our Annual Report (defined below).
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are 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 the Company’s expectations and beliefs regarding its future operations and financial performance. Historical results may not indicate future performance. Our forward-looking statements are based on current expectations and projections about future events, 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 the Company may differ materially from that expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on March 6, 201716, 2018 (the Annual Report), as well as others that are discussed in this Form 10-Q. These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, operations, liquidity and stock price. Any forward-looking statements contained herein are made only as of the date of this report. The Company disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.
Business Overview
Genesis is a healthcare services company that through its subsidiaries owns and operates skilled nursing facilities, assisted living facilities and a rehabilitation therapy business. We have an administrative services company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services. At SeptemberJune 30, 2017,2018, we provided inpatient services through 472451 skilled nursing, senior/assisted living and behavioral health centers located in 30 states. Revenues of our owned, leased and otherwise consolidated centers constitute approximately 86% of our revenues.
We also provide a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by us, as well as by contract to healthcare facilities operated by others. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 11% of our revenues.
We provide an array of other specialty medical services, including management services, physician services, staffing services, and other healthcare related services, which comprise the balance of our revenues.
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Recent Transactions and Events
Restructuring Transactions
Overview
During the six months ended June 30, 2018, we entered into a number of agreements, amendments and new financing facilities further described below (the Restructuring Transactions) in an effort to strengthen significantly our capital structure. In total, the Restructuring Transactions are estimated to reduce our annual cash fixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing our liquidity and financial flexibility.
In connection with the Restructuring Transactions, we entered into a new asset based lending facility agreement, replacing our prior revolving credit facilities (the Revolving Credit Facilities) and eliminating its forbearance agreement. Also in connection with the Restructuring Transactions, we amended the financial covenants in all of our material loan agreements and all but two of our material master leases. Financial covenants beginning in 2018 were amended to account for changes in our capital structure as a result of the Restructuring Transactions and to account for the current business climate. We received waivers from the counterparties to two of our material master leases, for which agreements to amend financial covenants were not attained, with respect to compliance with financial covenants.
The new asset based lending facility agreement and real estate loans are financed through MidCap Funding IV Trust and MidCap Financial Trust (collectively, MidCap), respectively.
Asset Based Lending Facilities
On March 6, 2018, we entered into a new asset based lending facility agreement with MidCap. The agreement provides for a $555 million asset based lending facility comprised of (a) a $325 million first lien term loan facility, (b) a $200 million first lien revolving credit facility and (c) a $30 million delayed draw term loan facility (collectively, the ABL Credit Facilities).
The ABL Credit Facilities have a five year term and proceeds were used to replace and repay in full our existing $525 million Revolving Credit Facilities scheduled to mature on February 2, 2020. The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the maturity of the Term Loan Agreements, Welltower Real Estate Loans or MidCap Real Estate Loans, in the event those agreements are not extended or refinanced. The revolving credit facility includes a swinging lockbox arrangement whereby we transfer all funds deposited within designated lockboxes to MidCap on a daily basis and then draw from the revolving credit facility as needed. In accordance with U.S. GAAP, we have presented the entire revolving credit facility borrowings balance of $83.8 million in current installments of long-term debt at June 30, 2018. Despite this classification, we expect that we will have the ability to borrow and repay on the revolving credit facility through its maturity on March 6, 2023.
Borrowings under the term loan and revolving credit facility components of the ABL Credit Facilities bear interest at a 90-day LIBOR rate (subject to a floor of 0.5%) plus an applicable margin of 6%. Borrowings under the delayed draw component bear interest at a 90-day LIBOR rate (subject to a floor of 1%) plus an applicable margin of 11%. Borrowing levels under the term loan and revolving credit facility components of the ABL Credit Facilities are limited to a borrowing base that is computed based upon the level of eligible accounts receivable.
The ABL Credit Facilities contain representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default and security interests that are customarily required for similar financings.
Term Loan Amendment
On March 6, 2018, we entered into an amendment to the term loan with affiliates of Welltower Inc. (Welltower) and Omega Healthcare Investors, Inc. (Omega) (the Term Loan Amendment) pursuant to which we borrowed an additional $40 million to be used for certain debt repayment and general corporate purposes (the 2018 Term Loan).
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The 2018 Term Loan will mature July 29, 2020 and bears interest at a rate equal to 10.0% per annum, with up to 5% per annum to be paid in kind. The Term Loan Amendment also changes the interest rate applicable to the initial loans funded on July 29, 2016 to be equal to 14% per annum, with up to 9% per annum to be paid in kind.
Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.
Welltower Master Lease Amendment
On February 21, 2018, we entered into a definitive agreement with Welltower to amend the Welltower Master Lease (the Welltower Master Lease Amendment). The Welltower Master Lease Amendment reduces our annual base rent payment by $35.0 million effective retroactively as of January 1, 2018, reduces the annual rent escalator from approximately 2.9% to 2.5% on April 1, 2018 and further reduces the annual rent escalator to 2.0% beginning January 1, 2019. In addition, the Welltower Master Lease Amendment extends the initial term of the master lease by five years to January 31, 2037 and extends the renewal term of the master lease by five years to December 31, 2048. The Welltower Master Lease Amendment also provides a potential upward rent reset, conditioned upon achievement of certain upside operating metrics, effective January 1, 2023. If triggered, the incremental rent from the rent reset is capped at $35.0 million.
Omnibus Agreement
On February 21, 2018, we entered into an Omnibus Agreement with Welltower and Omega, pursuant to which Welltower and Omega committed to provide up to $40.0 million in new term loans and amend the current term loan to, among other things, accommodate a refinancing of our existing asset based credit facility, in each case subject to certain conditions, including the completion of a restructuring of certain of our other material debt and lease obligations. See Term Loan Amendment above.
The Omnibus Agreement also provides that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50.0 million of outstanding indebtedness owed to Welltower will be written off and (b) we may request conversion of not more than $50.0 million of the outstanding balance of our Welltower real estate loans into equity. If the proposed equity conversion would result in any adverse REIT qualification, status or compliance consequences to Welltower, then the debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind interest at 2% per annum compounded quarterly, with a term of ten years commencing on the date the applicable conditions precedent to the equity conversion have been satisfied. Moreover, we agreed to support Welltower in connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating and entering into definitive new master lease agreements with third party buyers.
In connection with the Omnibus Agreement, we agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of our Class A Common Stock at an exercise price equal to $1.33 per share. Issuance of the warrant to Welltower is subject to the satisfaction of certain conditions. The warrants may be exercised at any time during the period commencing six months from the date of issuance and ending five years from the date of issuance.
Welltower Real Estate Loans Amendment
On February 21, 2018, we entered into an amendment (the Real Estate Loan Amendments) to the Welltower real estate loan (Welltower Real Estate Loans) agreements. The Real Estate Loan Amendments adjust the annual interest rate beginning February 15, 2018 to 12%, of which 7% will be paid in cash and 5% will be paid in kind. Previously, these loans carried a 10.25% cash pay interest rate that increased by 0.25% annually on January 1.
In connection with the Real Estate Loan Amendments, we agreed to make commercially reasonable efforts to secure commitments by April 1, 2018 to repay no less than $105.0 million of the Welltower Real Estate Loans. In the event we are unsuccessful securing such commitments or otherwise reducing the outstanding obligation of the Welltower Real Estate Loans, the cash pay component of the interest rate will be increased by approximately $2 million annually while the paid in kind component of the interest rate will be decreased by a corresponding amount. As of June 30, 2018, we secured repayments or commitments totaling approximately $82 million.
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Going Concern Considerations
MidCap Real Estate Loans
On March 30, 2018, we entered into two real estate loans with MidCap (MidCap Real Estate Loans) with combined available proceeds of $75.0 million, $73.0 million of which was drawn as of June 30, 2018. The accompanying unaudited financial statements haveMidCap Real Estate Loans are secured by 18 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023. The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated. The loans, which are interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%. Beginning April 1, 2019, mandatory principal payments shall commence with the balance of the loans to be repaid at maturity. Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans.
Lease Transactions and Divestitures
Sabra Divestitures
On April 1, 2018, we divested five skilled nursing facilities. All five of the skilled nursing facilities, three located in Massachusetts and two located in Kentucky, were terminated from their respective master lease agreements with Sabra Health Care REIT, Inc. (Sabra). The five skilled nursing facilities generated annual revenues of $28.5 million and pre-tax net loss of $2.9 million. On May 4, 2018, Sabra completed the sale and lease termination of one skilled nursing facility in California that had been preparedclosed in 2017. We recognized a net gain on the basis we will continue as a going concern, which contemplateswrite off of certain lease liabilities, offset by exit costs, of $0.7 million on the realization of assets and the satisfaction of liabilities in the normal course of business.
In evaluating our ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern for 12 months following the date our financial statements were issued (November 8, 2017). Management considered the recent results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due before November 8, 2018.
Our results of operations have been negatively impacted by the persistent pressure of healthcare reforms enacted in recent years. This challenging operating environment has been most acute in our inpatient segment, but also has had a detrimental effect on our rehabilitation therapy segment and its customers. In recent years, we have implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment. These strategies have been successful in recent years, however, the negative impact of continued reductions insix skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments accelerated in the third quarter of 2017. These factors caused us to be unable to comply with certain financial covenants at September 30, 2017 under the Revolving Credit Facilities, the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements and other agreements. We have received waivers from the parties to the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements at September 30, 2017. We are engaged in discussions with our counterparties to the Revolving Credit Facilities to secure a 90-day forbearance agreement through late January 2018.
Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in the major agreements and other agreements, is dependent upon, among other things, our ability to obtain a sustainable capital structure and our future performance which is subject to financial, economic, competitive, regulatory and other factors. Many of these factors are beyond our control. As currently structured, it is unlikely that we will be able to generate sufficient cash flow to cover required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties.nursing facilities.
On June 1, 2018, Sabra completed the sale and lease termination of 12 skilled nursing facilities located in Florida and New Hampshire. As a result of the sale, we will receive an annual rent credit of $12.0 million for the remainder of the lease term. We and our counterpartiescontinue to the Restructuring Plans have entered into preliminary and non-binding agreements in an effort to attainoperate these facilities under a sustainable capital structure for us.new lease with a new landlord, Next Healthcare. See Note 16 – “Subsequent EventsRelated Party Transactions..” We believe that it is in the best interest of all creditors to grant necessary waivers or reach negotiated settlements to enable us to continue asAs a going concern while we work with our counterparties to the Restructuring Plans to strengthen significantly our capital structure. However, there can be no assurance that timely and adequate waivers will be received in future periods or such settlements reached. If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not timely obtained, the defaults can cause acceleration of our financial obligations under certain of our agreements, which we may not be in a position to satisfy. Accordingly, we have classified the obligationsresult of the effected agreements as currentsale, we recognized accelerated depreciation expense of $6.0 million on the property and equipment sold and a gain on the write off of certain lease liabilities in our consolidated balance sheets as of September 30, 2017.$7.0 million.
InOn June 29, 2018, Sabra completed the eventsale and lease termination of eight skilled nursing facilities and one assisted/senior living facility located in seven different states. As a failureresult of the sale, we will receive an annual rent credit of $7.4 million for the remainder of the lease term. We continue to obtain necessaryoperate these facilities under a lease agreement with a new landlord. The new lease has a ten-year initial term, one five-year renewal option and timely waivers or otherwise achieveinitial annual rent of $7.4 million As a result of the fixed charge reductions contained insale, we recognized accelerated depreciation expense of $3.6 million on the Restructuring Plans, we may be forced to seek reorganization underproperty and equipment sold and a gain on the U.S. Bankruptcy Code. See Part II. Item 1A, “Risk Factors.”write off of certain lease liabilities of $2.9 million.
The existence of these factors raises substantial doubt about our ability to continue as a going concern.
Recent Transactions and Events
Skilled Nursing FacilitySecond Spring Divestitures
We divested or closed 28On June 1, 2018 and on June 13, 2018, Second Spring Healthcare Investments (Second Spring) completed the sale and lease termination of eight skilled nursing facilities located in Pennsylvania and four skilled nursing facilities located in New Jersey, respectively. The combined 12 skilled nursing facilities generated annual revenues of $146.2 million and pre-tax net loss of $19.3 million. As a result of the ninesale and lease termination, the Company recognized a capital lease net asset and obligation write-down of $16.8 million, a financing obligation net asset write-down of $113.3 million and a financing obligation write-down of $134.5 million. The resulting gain of $21.2 million was offset by $6.3 million of exit costs. In the three months ended SeptemberJune 30, 2017. 2018, there was accelerated depreciation expense of $5.3 million on the property and equipment sold.
Other Lease Amendments and Divestitures
For the six months ended June 30, 2018, we divested or amended the lease agreements to six other skilled nursing facilities. The lease agreement to one behavioral outpatient clinic expired on June 30, 2018. As a result of these lease amendments and divestitures, we recognized a loss for exit costs and the write off of certain lease assets of $3.3 million.
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One skilled nursing facility located in California was closedIn total for the six months ended June 30, 2018, we recorded a net gain on September 28, 2017. The skilled nursing facility remains subject to a master lease agreementtransactions and had annual revenuedivestitures of $6.9$22.2 million and pre-tax net loss of $1.6 million. We recognized a loss of $0.5 million.
One skilled nursing facility located in Colorado was divested on July 10, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $5.7 million and pre-tax net loss of $2.2 million. We recognized a loss of $0.5 million.
One skilled nursing facility located in North Carolina was divested on June 1, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $6.4 million and pre-tax net loss of $1.0 million. We recognized a loss of $0.5 million.
Eighteen skilled nursing facilities (16 owned and 2 leased) located in Kansas, Missouri, Nebraska and Iowa were divested on April 1, 2017. The 18 skilled nursing facilities had annual revenue of $110.1 million, pre-tax net loss of $10.7 million and total assets of $91.6 million. Sale proceeds of approximately $80 million, net of transaction costs, were used principally to repay the indebtedness of the skilled nursing facilities. We recognized a loss of $6.4 million. The 16 owned skilled nursing facilities qualified and were presented as assets held for sale at December 31, 2016. One of the leased skilled nursing facilities was subleased to a new operator resulting in a loss associated with a cease to use asset of $4.1 million.
One skilled nursing facility located in Tennessee was divested on April 1, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $7.4 million and pre-tax net income of $0.5 million. We recognized a loss of $0.7 million.
Four skilled nursing facilities located in Massachusetts were subject to a master lease agreement and were divested on March 14, 2017. These facilities, along with two other facilities that were divested previously and subleased to a third-party operator, were sold and terminated from the master lease resulting in an annual rent credit of $1.2 million. The master lease termination resulted in a capital lease net asset and obligation write-down of $14.9 million. The four skilled nursing facilities had annual revenue of $26.7 million and pre-tax net income of $1.2 million. We recognized a loss of $1.4 million.
Two skilled nursing facilities located in Georgia were divested on February 1, 2017 at the expiration of their respective lease terms. The two skilled nursing facilities had annual revenue of $10.6 million and pre-tax net loss of $0.4 million. We recognized a loss of $0.5 million.
Losses are presentedwhich is included in other (income) loss (income) on the consolidated statements of operations.
HUD FinancingsIndustry Trends and Recent Regulatory Governmental Actions Affecting Revenue
Centers for Medicare and Medicaid Services (CMS) Final Rules
On July 31, 2018, CMS released final payment and quality measure rules for skilled nursing facilities prospective payment services (SNF PPS) Medicare Part A fee for services. The final rules address three specific issue areas, discussed below, related to the fiscal year 2019 requirements. Additionally, the rule introduced changes in the payment and case-mix methodology for Part A skilled nursing services, which will be implemented at the beginning of fiscal year 2020 (October 1, 2019).
Skilled Nursing Facility Medicare Part A Payment Rates
The final rules establish a market basket increase of 2.4% as mandated under the Bipartisan Budget Act of 2018 effective October 1, 2018. Reimbursement for fiscal year 2019 will be based on the current payment methodology using the Resource Utilization Group, Version IV (RUG-IV) model with no significant changes in the patient classification system.
On September 30,Skilled Nursing Facility Quality MeasuresReporting Program (SNF QRP):
Current performance measures mandated for the SNF QRP for fiscal year 2019 were established in the final SNF PPS rules adopted on August 4, 2017 we completed(FY 2018 SNF PPS Rules). The final rules summarize these requirements, finalize adoption of a new measure removal factor for previously adopted SNF QRP measures, review the financings of twoquality measures currently adopted for the fiscal year 2020 SNF QRP and finalize the intention to specify new measures to be adopted no later than October 1, 2019 for the fiscal year 2022 SNF QRP. The SNF QRP applies to freestanding skilled nursing facilities, skilled nursing facilities affiliated with HUD insured loans.acute care facilities, and all non-critical access hospital swing-bed rural hospitals. Under the SNF QRP, a skilled nursing facility’s annual market basket percentage is reduced by two percentage points if the skilled nursing facility does not submit quality measure data in accordance with thresholds set by the The total loan amountImproving Medicare Post-Acute Care Transformation Act of 2014. Final fiscal year 2019 SNF PPS rules (FY 2019 SNF PPS Rules) specified that skilled nursing facilities that do not meet the SNF QRP requirements for a program year will receive a notice of non-compliance.
Skilled Nursing Facility Value-Based Purchasing Program (SNF-VBP Program)
The Protecting Access to Medicare Act of 2014, enacted on April 1, 2014, authorized a SNF-VBP Program that requires CMS to adopt a SNF-VBP Program payment adjustment for skilled nursing facilities effective October 1, 2018. The FY 2018 SNF PPS Rules provide detailed instructions for the SNF-VBP Program. The FY 2018 SNF PPS Rules adopted the Skilled Nursing Facility Readmission Measure as the skilled nursing facility 30-day all-cause readmission measure for the SNF-VBP Program. The FY 2019 SNF PPS Rules reiterate these instructions and affirm that effective October 1, 2018, skilled nursing facilities will experience a two percent withhold to fund the incentive payment pool. Simultaneously, based upon performance, skilled nursing facilities will have an opportunity to have their reimbursement rates adjusted for incentive payments based on their performance under the SNF-VBP Program.
All skilled nursing facilities will receive two scores, one for achievement and the other for improvement of their hospital readmission measure over the designated reporting period. All skilled nursing facilities will be ranked from high to low based on the higher of the three financings was $23.9 million. Proceeds fromtwo scores. The highest ranked facilities will receive the financings along with other cash on hand was used to partially pay down a Real Estate Bridge Loan by $25.1 million. See Note 8 – “Long-Term Debt – Real Estate Bridge Loans” highest payments, and“Long-Term Debt – HUD Insured Loans.” the lowest ranked facilities will receive payments that are less than what they otherwise would have received without the SNF-VBP Program.
DiningThe FY 2019 SNF PPS Rules also account for social risk factors in the SNF-VBP Program and Nutrition Partnership
In Aprilfinalizes the numerical values for the skilled nursing facility 30-day all-cause readmission measure for the fiscal year 2021 SNF-VBP Program, based on the fiscal year 2017 we entered into a strategic diningbaseline period, finalizes scoring policy for skilled nursing facilities without sufficient baseline period data, finalizes SNF-VBP Program scoring adjustment for low-volume skilled nursing facilities and nutrition partnership to further leverage our national platforms, process expertise and technology. The relationship, which is expected to be accretive to us, will provide additional liquidity, cost efficiency and enhanced operational performance.establishes an extraordinary circumstances exception policy for the SNF-VBP Program.
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Settlement Agreement
New Patient-Driven Payment Model (PDPM)
This final rule replaces the existing case-mix classification methodology, the Resource Utilization Groups, Version IV (RUG-IV) model, with a revised case-mix methodology called the Patient-Driven Payment Model (PDPM) beginning on October 1, 2019. CMS finalized the PDPM to replace the current Medicare Part A fee for service skilled nursing facility payment model, RUG IV. PDPM is a per diem payment, comprised of the sum of five payment components. Payments taper for physical therapy and occupational therapy beginning on day 20 and then every seven days of the Medicare stay. Payments taper for non-therapy ancillary services beginning on day three of the Medicare stay. There are two required minimum data set (MDS) assessments, the admission assessment and discharge assessment. There is one optional MDS assessment, the interim payment assessment. Under PDPM, physical therapists, occupational therapists and speech-language pathologists can deliver up to 25 percent of a patient’s treatment time using concurrent or group therapy modalities combined.
PDPM is expected to better account for patient characteristics by relating payment to patients' conditions and clinical needs rather than on volume-based services. The PDPM is required to be budget neutral relative to the current RUG-IV model such that aggregate Medicare outlays to skilled nursing facilities is not intended to change. The new model is designed to more accurately reflect resource utilization without incentivizing inappropriate care delivery.
See Note 12 – “Decisions Regarding Commitments and Contingencies – Legal ProceedingsSkilled Nursing Facility” for further description of the matters discussed below. Payment
On June 9, 2017, we andIn addition to setting the DOJ entered into a settlement agreement regarding four matters arising out of the activities of Skilled or Sun Healthcare prior to their operations becoming part of our operations (collectively, 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. We agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.
The settlement agreement calls for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program. The Settlement Amount has been recorded fully in accrued expenses in the consolidated balance sheets at December 31, 2016. We will remit the Settlement Amount over a period of five (5) years. The first installment was paid in June 2017. The remaining outstanding Settlement Amount at September 30, 2017 is $49.2 million, of which $9.0 million is recorded in accrued expenses and $40.2 million is recorded in other long-term liabilities.
Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue
Fiscal Year 2018 Medicare Payment Rates
On July 31, 2017, the Centers for Medicare & Medicaid Services (CMS) issued the final rule outlining fiscal year 2018 Medicare payment rates for skilled nursing facilities. The final rule uses a market basket percentage of 1.0% effective October 1, 2017 to update the federal rates, but if a skilled nursing facility fails to meet quality reporting program requirements there will be a 2.0% penalty. Thus, the increase in the federal rates may increase the amount of our reimbursementsrules for skilled nursing facility services so long as we meetusing the reporting requirementsSNF-VBP Program, CMS annually adjusts its payment rules for other acute and avoidpost-acute service providers including hospitals and home health agencies using a similar SNF-VBP Program. It is important to understand the 2% penalty. The final rule was publishedMedicare program and its reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the August 4, 2017 Federal Register.
The final rule also includes revisions to the skilled nursing facility Quality Reporting Programpast, and for the Skilled Nursing Facility Value-Based Purchasing (VBP) Program. The VBP Prgram will affect Medicare payment to skilled nursing facilities beginning in fiscal year 2019 as describedcould in the next section.
Skilled Nursing Facility Value-Based Purchasing (VBP) Program
The CMS VBP Program is one of many VBP programs that aims to reward qualityfuture, result in substantial reductions in our revenue and improve health care. Effective October 1, 2018, skilled nursing facilities will have an opportunity to receive incentive payments based on performance on the specified quality measure.
The Protecting Access to Medicare Act (PAMA) of 2014, enacted into law on April 1, 2014, authorized the VBP Program and requires CMS to adopt a VBP payment adjustment for skilled nursing facilities effective October 1, 2018. By law, the VBP Program is limited to a single readmission measure at a time.
PAMA requires CMS, among other things, to:
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CMS will withhold 2% of Medicare payments starting October 1, 2018, to fund the incentive payment pool and will then redistribute 60% of the withheld payments back to skilled nursing facilities through the VBP Program based
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upon a 30-day potentially preventable readmission measure. Failure to qualify for the incentive payment pool at levels that at least match the 2% withholding could have a significant negative impact on our consolidated financial condition and results of operations. The final rule was published in the August 4, 2017 Federal Register.
CMS Advanced Notice of Proposed Rule
On April 27, 2017, CMS issued an advanced notice of a proposed rule revising certain aspects of the existing skilled nursing facility prospective payment system (PPS) payment methodology to improve its accuracy, based on the results of the skilled nursing facility Payment Models Research project. The proposal explores the possibility of replacing the PPS’ existing case-mix classification model, the Resource Utilization Groups, Version 4, with a new model, the Resident Classification System, Version I (RCS-I). The proposal discusses options for how such a change could be implemented, as well as a number of other policy changes to consider to complement implementation of RCS-I. The rule proposal was open for a comment period that ended August 25, 2017.
Episode Payment Models (EPMs)
On January 3, 2017, CMS issued its final rule implementing three new Medicare Parts A and B episode payment models (EPMs) and implements changes to the existing comprehensive care for joint replacement (CJR) model. Under the three new EPMs, acute care hospitals in certain selected geographic areas would participate in retrospective EPMs targeting care for Medicare fee-for-service beneficiaries receiving services during acute myocardial infarction (AMI), coronary artery bypass graft (CABG), and surgical hip/femur fracture treatment (SHFFT) episodes. AMI and CABG episodes would be tested in 98 metropolitan statistical areas (MSAs) and SHFFT episodes would be tested in the current 67 MSAs participating in CJR. The SHFFT payment model would support clinicians in providing care to patients who received surgery after a hip fracture, other than hip replacement. All related care within 90 days of hospital discharge would be included in the episode of care. Hospitals would have been permitted to share in risk and savings with other providers, including skilled nursing facilities. The provisions contained in the instructions were to become effective January 1, 2018.
On August 17, 2017, CMS issued a proposed rule reducing the number of selected geographies mandated to participate in the CJR model from 67 MSAs to 34 MSAs. The proposed rule would also cancel the EPMs and the Cardiac Rehabilitation incentive payment model that were scheduled to begin on January 1, 2018.operating margins.
Requirements forof Participation
On October 4, 2016, CMS published a final rule to make major changes to improve the care and safety of residents in long-term care facilities that participate in the Medicare and Medicaid programs. The policies in this final rule are targeted at reducing unnecessary hospital readmissions and infections, improving the quality of care, and strengthening safety measures for residents in these facilities.
Changes finalized in this rule include:
· | Strengthening the rights of long-term care facility residents. |
· | Ensuring that long-term care facility staff members are properly trained on caring for residents with dementia and in preventing elder abuse. |
· | Ensuring that long-term care facilities take into consideration the health of residents when making decisions on the kinds and levels of staffing a facility needs to properly take care of its residents. |
· | Ensuring that staff members have the right skill sets and competencies to provide person-centered care to residents. The care plans developed for residents will take into consideration their goals of care and preferences. |
· | Improving care planning, including discharge planning for all residents with involvement of the facility’s interdisciplinary team and consideration of the caregiver’s capacity, giving residents information they need for follow-up after discharge, and ensuring that instructions are transmitted to any receiving facilities or services. |
44
· | Updating the long-term care facility’s infection prevention and control program, including requiring an infection prevention and control officer and an antibiotic stewardship program that includes antibiotic use protocols and a system to monitor antibiotic use. |
43
The regulations arebecame effective on November 28, 2016. CMS is implementing the regulations using a phased approach. The phases are as follows:
· | Phase 1: The regulations included in Phase 1 were implemented by November 28, 2016. |
· | Phase 2: The regulations included in Phase 2 |
· | Phase 3: The regulations included in Phase 3 must be implemented by November 28, 2019. |
Some regulatory sections are divided among more than one phase, and some of the more extensive new requirements have been placed in later phases to allow facilities time to successfully prepare to achieve compliance.
The total costs associated with implementing the new regulations is not known at this time.have been absorbed into our general operating costs. Failure to comply with the new regulations could result in exclusion from the Medicare and Medicaid programs and have an adverse impact on our business, financial condition or results of operations. We have substantially complied with the regulations imposed through the Phase 1 implementation and expect to be in substantial compliance with the Phase 2 regulations by the November 28, 2017 implementation deadline.
Improving Medicare Post-Acute Care Transformation Act (IMPACT)
In 2014, with strong support from most stakeholders, Congress enacted the Improving Medicare Post-Acute Care Transformation Act (IMPACT Act). The intent of this enactment was to improve the uniformity of data reporting across the post-acute sector and to move forward with a common assessment tool rationalizing the delivery of post-acute services.The IMPACT Act further requires that CMS develop and implement quality measures from five quality measure domains using standardized assessment data. In addition, the Act requires the development and reporting of measures pertaining to resource use, hospitalization, and discharge to the community. Through the use of standardized quality measures and standardized data, the intent of the IMPACT Act, among other obligations, is to enable interoperability and access to longitudinal information for such providers to facilitate coordinated care, improved outcomes, and overall quality comparisons.
Data collection for certain measures including pressure ulcers, falls and functional goals has been gathered quarterly beginning October 1, 2016 and was submitted prior to the June 1, 2017 deadline. Failure to submit required data would have resulted in a 2% Medicare payment penalty beginning October 1, 2017.
Texas Minimum Payment Amount Program (MPAP)
We manage the operations of 20 skilled nursing facilities in the State of Texas, which we consolidate through our controlling interests in those entities through management agreements. Those skilled nursing facilities had participated in a voluntary supplemental Medicaid payment program known as the Minimum Payment Amount Program (MPAP), which expired August 31, 2016. The purpose of MPAP funds was to continue a level of funding for participating skilled nursing facilities so that they can more readily provide quality care to Medicaid beneficiaries. While the state had been actively appealing CMS, the MPAP expired. On an annualized basis prior to its expiration, our share of MPAP had provided for $62 million of revenue and enhanced pre-tax income of the participating skilled nursing facilities by approximately $18 million. implementation.
Key Performance and Valuation Measures
In order to assess our financial performance between periods, we evaluate certain key performance and valuation measures for each of our operating segments separately for the periods presented. Results and statistics may not be comparable period-over-period due to the impact of acquisitions and dispositions, or the impact of new and lost therapy contracts.
45
The following is a glossary of terms for some of our key performance and valuation measures and non-GAAP measures:
“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 newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental performance measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, non-GAAP measures.
“Adjusted EBITDAR” is defined as EBITDAR adjusted for newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental valuation measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, non-GAAP measures.
“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.
“EBITDA” is defined as EBITDAR less lease expense. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with non-GAAP measures.
“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. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with non-GAAP measures.
“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.
44
“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.
Key performance and valuation measures for our businesses are set forth below, followed by a comparison and analysis of our financial results (in thousands):
results:
|
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| ||
|
| Three months ended September 30, |
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| Nine months ended September 30, |
| Three months ended June 30, |
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| Six months ended June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
| 2018 |
| 2017 |
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| 2018 |
| 2017 | ||||||||
Financial Results |
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Financial Results (in thousands) |
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| |||||||||||||
Net revenues |
| $ | 1,315,452 |
| $ | 1,418,994 |
|
| $ | 4,045,860 |
| $ | 4,329,570 |
| $ | 1,272,360 |
| $ | 1,341,276 |
|
| $ | 2,573,432 |
| $ | 2,730,408 |
EBITDA |
|
| (429,605) |
|
| 114,673 |
|
|
| (240,975) |
|
| 412,573 |
|
| 117,707 |
|
| 81,815 |
|
|
| 175,921 |
|
| 188,630 |
Adjusted EBITDAR |
|
| 147,788 |
|
| 172,141 |
|
|
| 488,829 |
|
| 539,842 |
|
| 163,326 |
|
| 175,351 |
|
|
| 313,943 |
|
| 341,041 |
Adjusted EBITDA |
|
| 109,118 |
|
| 136,629 |
|
|
| 375,825 |
|
| 430,046 |
|
| 131,215 |
|
| 137,117 |
|
|
| 248,761 |
|
| 266,707 |
Net loss attributable to Genesis Healthcare, Inc. |
| (373,824) |
| (20,458) |
|
|
| (489,741) |
|
| (86,470) |
|
| (39,612) |
|
| (65,156) |
|
|
| (108,150) |
|
| (115,917) |
4645
INPATIENT SEGMENT:
|
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|
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|
|
|
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|
|
|
|
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|
|
| Three months ended September 30, |
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| Nine months ended September 30, |
| Three months ended June 30, |
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| Six months ended June 30, | ||||||||||||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
|
| 2018 |
| 2017 |
| ||||||||
Occupancy Statistics - Inpatient |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available licensed beds in service at end of period |
|
| 55,005 |
|
| 58,379 |
|
|
| 55,005 |
|
| 58,379 |
|
|
| 52,303 |
|
| 55,247 |
|
|
| 52,303 |
|
| 55,247 |
|
Available operating beds in service at end of period |
|
| 52,907 |
|
| 56,444 |
|
|
| 52,907 |
|
| 56,444 |
|
|
| 50,182 |
|
| 53,265 |
|
|
| 50,182 |
|
| 53,265 |
|
Available patient days based on licensed beds |
|
| 5,058,848 |
|
| 5,325,166 |
|
|
| 15,018,709 |
|
| 15,846,651 |
|
|
| 4,759,573 |
|
| 5,027,477 |
|
|
| 9,466,843 |
|
| 10,004,387 |
|
Available patient days based on operating beds |
|
| 4,872,838 |
|
| 5,160,945 |
|
|
| 14,479,602 |
|
| 15,403,904 |
|
|
| 4,567,679 |
|
| 4,849,175 |
|
|
| 9,087,860 |
|
| 9,651,290 |
|
Actual patient days |
|
| 4,123,001 |
|
| 4,411,152 |
|
|
| 12,323,181 |
|
| 13,202,437 |
|
|
| 3,840,181 |
|
| 4,102,031 |
|
|
| 7,681,223 |
|
| 8,224,551 |
|
Occupancy percentage - licensed beds |
|
| 81.5 | % |
| 82.8 | % |
|
| 82.1 | % |
| 83.3 | % |
|
| 80.7 | % |
| 81.6 | % |
|
| 81.1 | % |
| 82.2 | % |
Occupancy percentage - operating beds |
|
| 84.6 | % |
| 85.5 | % |
|
| 85.1 | % |
| 85.7 | % |
|
| 84.1 | % |
| 84.6 | % |
|
| 84.5 | % |
| 85.2 | % |
Skilled mix |
|
| 18.7 | % |
| 19.6 | % |
|
| 19.7 | % |
| 20.4 | % |
|
| 18.9 | % |
| 19.7 | % |
|
| 19.6 | % |
| 20.3 | % |
Average daily census |
|
| 44,815 |
|
| 47,947 |
|
|
| 45,140 |
|
| 48,184 |
|
|
| 42,200 |
|
| 45,077 |
|
|
| 42,438 |
|
| 45,440 |
|
Revenue per patient day (skilled nursing facilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare Part A |
| $ | 524 |
| $ | 513 |
|
| $ | 527 |
| $ | 513 |
|
| $ | 528 |
| $ | 530 |
|
| $ | 526 |
| $ | 527 |
|
Medicare total (including Part B) |
|
| 573 |
|
| 555 |
|
|
| 571 |
|
| 554 |
| ||||||||||||||
Insurance |
|
| 457 |
|
| 458 |
|
|
| 456 |
|
| 454 |
|
|
| 461 |
|
| 461 |
|
|
| 458 |
|
| 456 |
|
Private and other |
|
| 328 |
|
| 309 |
|
|
| 325 |
|
| 306 |
|
|
| 337 |
|
| 328 |
|
|
| 335 |
|
| 323 |
|
Medicaid |
|
| 219 |
|
| 218 |
|
|
| 218 |
|
| 219 |
|
|
| 223 |
|
| 218 |
|
|
| 223 |
|
| 218 |
|
Medicaid (net of provider taxes) |
|
| 199 |
|
| 199 |
|
|
| 199 |
|
| 199 |
|
|
| 204 |
|
| 198 |
|
|
| 204 |
|
| 198 |
|
Weighted average (net of provider taxes) |
| $ | 269 |
| $ | 270 |
|
| $ | 272 |
| $ | 272 |
|
| $ | 274 |
| $ | 272 |
|
| $ | 275 |
| $ | 273 |
|
Patient days by payor (skilled nursing facilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
| 439,240 |
|
| 513,720 |
|
|
| 1,398,286 |
|
| 1,617,227 |
|
|
| 400,370 |
|
| 462,145 |
|
|
| 834,094 |
|
| 959,782 |
|
Insurance |
|
| 293,315 |
|
| 306,366 |
|
|
| 917,343 |
|
| 921,519 |
|
|
| 285,935 |
|
| 304,107 |
|
|
| 591,221 |
|
| 624,418 |
|
Total skilled mix days |
|
| 732,555 |
|
| 820,086 |
|
|
| 2,315,629 |
|
| 2,538,746 |
|
|
| 686,305 |
|
| 766,252 |
|
|
| 1,425,315 |
|
| 1,584,200 |
|
Private and other |
|
| 257,835 |
|
| 305,545 |
|
|
| 779,228 |
|
| 903,951 |
|
|
| 227,920 |
|
| 259,577 |
|
|
| 454,823 |
|
| 522,875 |
|
Medicaid |
|
| 2,924,845 |
|
| 3,063,256 |
|
|
| 8,616,866 |
|
| 9,031,537 |
|
|
| 2,726,538 |
|
| 2,872,360 |
|
|
| 5,405,661 |
|
| 5,713,784 |
|
Total Days |
|
| 3,915,235 |
|
| 4,188,887 |
|
|
| 11,711,723 |
|
| 12,474,234 |
|
|
| 3,640,763 |
|
| 3,898,189 |
|
|
| 7,285,799 |
|
| 7,820,859 |
|
Patient days as a percentage of total patient days (skilled nursing facilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
| 11.2 | % |
| 12.3 | % |
|
| 11.9 | % |
| 13.0 | % |
|
| 11.0 | % |
| 11.9 | % |
|
| 11.4 | % |
| 12.3 | % |
Insurance |
|
| 7.5 | % |
| 7.3 | % |
|
| 7.8 | % |
| 7.4 | % |
|
| 7.9 | % |
| 7.8 | % |
|
| 8.2 | % |
| 8.0 | % |
Skilled mix |
|
| 18.7 | % |
| 19.6 | % |
|
| 19.7 | % |
| 20.4 | % |
|
| 18.9 | % |
| 19.7 | % |
|
| 19.6 | % |
| 20.3 | % |
Private and other |
|
| 6.6 | % |
| 7.3 | % |
|
| 6.7 | % |
| 7.2 | % |
|
| 6.3 | % |
| 6.7 | % |
|
| 6.2 | % |
| 6.7 | % |
Medicaid |
|
| 74.7 | % |
| 73.1 | % |
|
| 73.6 | % |
| 72.4 | % |
|
| 74.8 | % |
| 73.6 | % |
|
| 74.2 | % |
| 73.0 | % |
Total |
|
| 100.0 | % |
| 100.0 | % |
|
| 100.0 | % |
| 100.0 | % |
|
| 100.0 | % |
| 100.0 | % |
|
| 100.0 | % |
| 100.0 | % |
Facilities at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased |
|
| 362 |
|
| 375 |
|
|
| 362 |
|
| 375 |
|
|
| 341 |
|
| 363 |
|
|
| 341 |
|
| 363 |
|
Owned |
|
| 44 |
|
| 60 |
|
|
| 44 |
|
| 60 |
|
|
| 44 |
|
| 44 |
|
|
| 44 |
|
| 44 |
|
Joint Venture |
|
| 5 |
|
| 5 |
|
|
| 5 |
|
| 5 |
|
|
| 5 |
|
| 5 |
|
|
| 5 |
|
| 5 |
|
Managed * |
|
| 35 |
|
| 34 |
|
|
| 35 |
|
| 34 |
|
|
| 35 |
|
| 35 |
|
|
| 35 |
|
| 35 |
|
Total skilled nursing facilities |
|
| 446 |
|
| 474 |
|
|
| 446 |
|
| 474 |
|
|
| 425 |
|
| 447 |
|
|
| 425 |
|
| 447 |
|
Total licensed beds |
|
| 54,935 |
|
| 57,896 |
|
|
| 54,935 |
|
| 57,896 |
|
|
| 52,232 |
|
| 55,105 |
|
|
| 52,232 |
|
| 55,105 |
|
Assisted/Senior living facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased |
|
| 19 |
|
| 26 |
|
|
| 19 |
|
| 26 |
|
|
| 19 |
|
| 19 |
|
|
| 19 |
|
| 19 |
|
Owned |
|
| 4 |
|
| 4 |
|
|
| 4 |
|
| 4 |
|
|
| 4 |
|
| 4 |
|
|
| 4 |
|
| 4 |
|
Joint Venture |
|
| 1 |
|
| 1 |
|
|
| 1 |
|
| 1 |
|
|
| 1 |
|
| 1 |
|
|
| 1 |
|
| 1 |
|
Managed |
|
| 2 |
|
| 2 |
|
|
| 2 |
|
| 2 |
|
|
| 2 |
|
| 2 |
|
|
| 2 |
|
| 2 |
|
Total assisted/senior living facilities |
|
| 26 |
|
| 33 |
|
|
| 26 |
|
| 33 |
|
|
| 26 |
|
| 26 |
|
|
| 26 |
|
| 26 |
|
Total licensed beds |
|
| 2,208 |
|
| 2,643 |
|
|
| 2,208 |
|
| 2,643 |
|
|
| 2,209 |
|
| 2,182 |
|
|
| 2,209 |
|
| 2,182 |
|
Total facilities |
|
| 472 |
|
| 507 |
|
|
| 472 |
|
| 507 |
|
|
| 451 |
|
| 473 |
|
|
| 451 |
|
| 473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Jointly Owned and Managed— (Unconsolidated) |
|
| 15 |
|
| 15 |
|
|
| 15 |
|
| 15 |
|
|
| 15 |
|
| 15 |
|
|
| 15 |
|
| 15 |
|
4746
REHABILITATION THERAPY SEGMENT**:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
| Three months ended June 30, |
|
| Six months ended June 30, | ||||||||||||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
|
| 2018 |
| 2017 |
| ||||||||
Revenue mix %: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated |
|
| 37 | % |
| 37 | % |
|
| 37 | % |
| 37 | % |
|
| 37 | % |
| 38 | % |
|
| 37 | % |
| 38 | % |
Non-affiliated |
|
| 63 | % |
| 63 | % |
|
| 63 | % |
| 63 | % |
|
| 63 | % |
| 62 | % |
|
| 63 | % |
| 62 | % |
Sites of service (at end of period) |
|
| 1,525 |
|
| 1,582 |
|
|
| 1,525 |
|
| 1,582 |
|
|
| 1,424 |
|
| 1,528 |
|
|
| 1,424 |
|
| 1,528 |
|
Revenue per site |
| $ | 152,956 |
| $ | 156,362 |
|
| $ | 460,360 |
| $ | 489,854 |
|
| $ | 158,619 |
| $ | 149,634 |
|
| $ | 315,914 |
| $ | 307,594 |
|
Therapist efficiency % |
|
| 66 | % |
| 67 | % |
|
| 68 | % |
| 69 | % |
|
| 68 | % |
| 68 | % |
|
| 68 | % |
| 68 | % |
* Includes 20 facilities located in Texas for which the real estate is owned by Genesis
** Excludes respiratory therapy services.
Reasons for Non-GAAP Financial Disclosure
The following discussion includes references to Adjusted EBITDAR, EBITDA and Adjusted EBITDA, which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures). A non-GAAP financial measureNon-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. 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 measures used by management and others who follow our industry to estimate the value of our company; and
allow investors to view our financial performance and condition in the same manner as our 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)loss attributable to Genesis Healthcare, Inc. We use Non-GAAP Financial Measures to assess the value of our business and the 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
48
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 value and the operating performance of the
47
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 the extent to which they 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 value and 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. These costs include our lease expense (only in the case of EBITDAR and Adjusted EBITDAR), the cost to service debt, the depreciation and amortization associated with our long-lived assets, losses (gains) on early extinguishment of debt, transaction costs, long-lived asset impairment charges, federal and state income tax expenses, the operating results of our discontinued businesses and the income or loss attributable to non-controllingnoncontrolling interests. 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)loss attributable to Genesis Healthcare, Inc. as an important measure of itsour 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 valuation and operating performance measures:
EBITDA
We believe EBITDA 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. In addition, financial covenants in our debt agreements use EBITDA as a measure of financial compliance.
Adjustments to EBITDA
We adjust 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, in the case of Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA, when combined with GAAP net income (loss)loss attributable to Genesis Healthcare, Inc., 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 EBITDA provided for in the financial covenant calculations contained in our lease and debt agreements.
49
We adjust EBITDA for the following items:
· |
|
48
· | Other |
· | Transaction costs. In connection with our restructuring, acquisition and disposition transactions, we incur costs consisting of investment banking, legal, transaction-based compensation and other professional service costs. We exclude restructuring, acquisition and disposition related transaction costs expensed during the period because we believe these costs do not reflect the underlying performance of our operating businesses. |
· | Customer |
· | Long-lived asset impairments. We exclude non-cash long-lived asset impairment charges because we believe including them does not reflect the ongoing |
· | Goodwill and identifiable intangible asset impairments. We exclude non-cash goodwill and identifiable intangible asset impairment charges because we believe including them does not reflect the ongoing operating performance of our operating businesses. |
· | Severance and restructuring. We exclude severance costs from planned reduction in force initiatives associated with restructuring activities intended to adjust our cost structure in response to changes in the business environment. We believe these costs do not reflect the underlying performance of our operating businesses. We do not exclude severance costs that are not associated with such restructuring activities. |
· |
|
· | Stock-based compensation. We exclude stock-based compensation expense because it does not result in an outlay of cash and such non-cash expenses do not reflect the underlying |
50
· | Other Items. From time to time we incur costs or realize gains that we do not believe reflect the underlying performance of our operating businesses. In the current reporting period, we incurred the following expenses that we believe are non-recurring in nature and do not reflect the ongoing operating performance of our operating businesses. |
(1) |
|
| Regulatory defense and related costs – We exclude the costs of investigating and defending the inherited legal matters associated with |
49 |
|
|
Adjusted EBITDAR
We use Adjusted EBITDAR as one measure in determining the value of prospective acquisitions or divestitures. Adjusted EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare industry. In addition, financial covenants in our lease agreements use Adjusted EBITDAR as a measure of financial compliance.
The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR. See the reconciliation of net loss attributable to Genesis Healthcare, Inc. included herein.
The following table provides a reconciliation of the non-GAAP performance measurement EBITDA and Adjusted EBITDA from net loss attributable to Genesis Healthcare, Inc., the most directly comparable financial measure presented in accordance with GAAP (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, |
|
| Six months ended June 30, | ||||||||
|
| 2018 |
| 2017 |
|
| 2018 |
| 2017 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Genesis Healthcare, Inc. |
| $ | (39,612) |
| $ | (65,156) |
|
| $ | (108,150) |
| $ | (115,917) |
Adjustments to compute EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes |
|
| — |
|
| 47 |
|
|
| — |
|
| 68 |
Net loss attributable to noncontrolling interests |
|
| (23,245) |
|
| (40,394) |
|
|
| (63,380) |
|
| (73,246) |
Depreciation and amortization expense |
|
| 63,495 |
|
| 60,227 |
|
|
| 114,998 |
|
| 124,596 |
Interest expense |
|
| 117,955 |
|
| 124,288 |
|
|
| 232,992 |
|
| 249,042 |
Income tax (benefit) expense |
|
| (886) |
|
| 2,803 |
|
|
| (539) |
|
| 4,087 |
EBITDA |
| $ | 117,707 |
| $ | 81,815 |
|
|
| 175,921 |
|
| 188,630 |
Adjustments to compute Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on early extinguishment of debt |
|
| (501) |
|
| 2,301 |
|
|
| 9,785 |
|
| 2,301 |
Other (income) loss |
|
| (22,220) |
|
| 4,190 |
|
|
| (22,152) |
|
| 13,224 |
Transaction costs |
|
| 3,112 |
|
| 3,781 |
|
|
| 15,207 |
|
| 6,806 |
Customer receivership and other related charges |
|
| — |
|
| 35,566 |
|
|
| — |
|
| 35,566 |
Long-lived asset impairments |
|
| 27,257 |
|
| — |
|
|
| 55,617 |
|
| — |
Goodwill and identifiable intangible asset impairments |
|
| 1,132 |
|
| — |
|
|
| 1,132 |
|
| — |
Severance and restructuring |
|
| 3,493 |
|
| 514 |
|
|
| 6,333 |
|
| 4,694 |
(Income) losses of newly acquired, constructed, or divested businesses |
|
| (925) |
|
| 6,276 |
|
|
| 2,175 |
|
| 10,269 |
Stock-based compensation |
|
| 2,129 |
|
| 2,480 |
|
|
| 4,556 |
|
| 4,766 |
Regulatory defense and other related costs (1) |
|
| 31 |
|
| 194 |
|
|
| 187 |
|
| 451 |
Adjusted EBITDA |
| $ | 131,215 |
| $ | 137,117 |
|
| $ | 248,761 |
| $ | 266,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional lease payments not included in GAAP lease expense |
| $ | 74,564 |
| $ | 86,704 |
|
| $ | 152,496 |
| $ | 173,328 |
Total cash lease payments made pursuant to operating leases, capital leases and financing obligations |
|
| 106,675 |
|
| 124,938 |
|
|
| 217,678 |
|
| 247,662 |
5150
The following table provides a reconciliation of the non-GAAP valuation measurement Adjusted EBITDAR from net loss attributable to Genesis Healthcare, Inc., the most directly comparable financial measure presented in accordance with GAAP (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
| Three months ended June 30, |
|
| Six months ended June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
| 2018 |
| 2017 |
|
| 2018 |
| 2017 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Genesis Healthcare, Inc. |
| $ | (373,824) |
| $ | (20,458) |
|
| $ | (489,741) |
| $ | (86,470) |
| $ | (39,612) |
| $ | (65,156) |
|
| $ | (108,150) |
| $ | (115,917) |
Adjustments to compute Adjusted EBITDAR: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Loss from discontinued operations, net of taxes |
|
| 2 |
| 24 |
|
|
| 70 |
| 1 |
|
| — |
|
| 47 |
|
|
| — |
|
| 68 | ||
Net loss attributable to noncontrolling interests |
|
| (241,200) |
| (31,921) |
|
|
| (314,446) |
| (72,895) |
|
| (23,245) |
|
| (40,394) |
|
|
| (63,380) |
|
| (73,246) | ||
Depreciation and amortization expense |
|
| 59,390 |
| 61,104 |
|
|
| 183,986 |
| 190,822 |
|
| 63,495 |
|
| 60,227 |
|
|
| 114,998 |
|
| 124,596 | ||
Interest expense |
|
| 124,431 |
| 131,812 |
|
|
| 373,473 |
| 400,853 |
|
| 117,955 |
|
| 124,288 |
|
|
| 232,992 |
|
| 249,042 | ||
Income tax expense (benefit) |
|
| 1,596 |
| (25,888) |
|
|
| 5,683 |
| (19,738) | |||||||||||||||
Income tax (benefit) expense |
|
| (886) |
|
| 2,803 |
|
|
| (539) |
|
| 4,087 | |||||||||||||
Lease expense |
|
| 38,670 |
| 35,512 |
|
|
| 113,004 |
| 109,796 |
|
| 32,111 |
|
| 38,234 |
|
|
| 65,182 |
|
| 74,334 | ||
Loss on extinguishment of debt |
|
| — |
| 15,363 |
|
|
| 2,301 |
| 15,830 | |||||||||||||||
Other loss (income) |
|
| 2,379 |
| (5,173) |
|
|
| 15,602 |
| (48,084) | |||||||||||||||
(Gain) loss on early extinguishment of debt |
|
| (501) |
|
| 2,301 |
|
|
| 9,785 |
|
| 2,301 | |||||||||||||
Other (income) loss |
|
| (22,220) |
|
| 4,190 |
|
|
| (22,152) |
|
| 13,224 | |||||||||||||
Transaction costs |
|
| 1,056 |
| 3,057 |
|
|
| 7,862 |
| 9,804 |
|
| 3,112 |
|
| 3,781 |
|
|
| 15,207 |
|
| 6,806 | ||
Customer receivership |
|
| 297 |
| — |
|
|
| 35,864 |
| — | |||||||||||||||
Customer receivership and other related charges |
|
| — |
|
| 35,566 |
|
|
| — |
|
| 35,566 | |||||||||||||
Long-lived asset impairments |
|
| 163,364 |
| — |
|
|
| 163,364 |
| — |
|
| 27,257 |
|
| — |
|
|
| 55,617 |
|
| — | ||
Goodwill and identifiable intangible asset impairments |
|
| 360,046 |
| — |
|
|
| 360,046 |
| — |
|
| 1,132 |
|
| — |
|
|
| 1,132 |
|
| — | ||
Severance and restructuring |
|
| 256 |
| 1,123 |
|
|
| 4,950 |
| 7,939 |
|
| 3,493 |
|
| 514 |
|
|
| 6,333 |
|
| 4,694 | ||
Losses of newly acquired, constructed, or divested businesses |
|
| 5,320 |
| 3,594 |
|
|
| 15,589 |
| 7,121 | |||||||||||||||
(Income) losses of newly acquired, constructed, or divested businesses |
|
| (925) |
|
| 6,276 |
|
|
| 2,175 |
|
| 10,269 | |||||||||||||
Stock-based compensation |
|
| 2,440 |
| 3,090 |
|
|
| 7,206 |
| 6,809 |
|
| 2,129 |
|
| 2,480 |
|
|
| 4,556 |
|
| 4,766 | ||
Skilled Healthcare and other loss contingency expense (1) |
|
| — |
| — |
|
|
| — |
| 15,192 | |||||||||||||||
Regulatory defense and related costs (2) |
|
| 41 |
| 1,043 |
|
|
| 492 |
| 2,101 | |||||||||||||||
Other non-recurring costs (3) |
|
| 3,524 |
|
| (141) |
|
|
| 3,524 |
|
| 761 | |||||||||||||
Regulatory defense and other related costs (1) |
|
| 31 |
|
| 194 |
|
|
| 187 |
|
| 451 | |||||||||||||
Adjusted EBITDAR |
| $ | 147,788 |
| $ | 172,141 |
|
| $ | 488,829 |
| $ | 539,842 |
| $ | 163,326 |
| $ | 175,351 |
|
| $ | 313,943 |
| $ | 341,041 |
The following table provides a reconciliation of the non-GAAP performance measurement EBITDA and Adjusted EBITDA from net loss attributable to Genesis Healthcare, Inc., the most directly comparable financial measure presented in accordance with GAAP (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
|
| Nine months ended September 30, | ||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Genesis Healthcare, Inc. |
| $ | (373,824) |
| $ | (20,458) |
|
| $ | (489,741) |
| $ | (86,470) |
Adjustments to compute EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes |
|
| 2 |
|
| 24 |
|
|
| 70 |
|
| 1 |
Net loss attributable to noncontrolling interests |
|
| (241,200) |
|
| (31,921) |
|
|
| (314,446) |
|
| (72,895) |
Depreciation and amortization expense |
|
| 59,390 |
|
| 61,104 |
|
|
| 183,986 |
|
| 190,822 |
Interest expense |
|
| 124,431 |
|
| 131,812 |
|
|
| 373,473 |
|
| 400,853 |
Income tax expense (benefit) |
|
| 1,596 |
|
| (25,888) |
|
|
| 5,683 |
|
| (19,738) |
EBITDA |
| $ | (429,605) |
| $ | 114,673 |
|
|
| (240,975) |
|
| 412,573 |
Adjustments to compute Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
| — |
|
| 15,363 |
|
|
| 2,301 |
|
| 15,830 |
Other loss (income) |
|
| 2,379 |
|
| (5,173) |
|
|
| 15,602 |
|
| (48,084) |
Transaction costs |
|
| 1,056 |
|
| 3,057 |
|
|
| 7,862 |
|
| 9,804 |
Customer receivership |
|
| 297 |
|
| — |
|
|
| 35,864 |
|
| — |
Long-lived asset impairments |
|
| 163,364 |
|
| — |
|
|
| 163,364 |
|
| — |
Goodwill and identifiable intangible asset impairments |
|
| 360,046 |
|
| — |
|
|
| 360,046 |
|
| — |
Severance and restructuring |
|
| 256 |
|
| 1,123 |
|
|
| 4,950 |
|
| 7,939 |
Losses of newly acquired, constructed, or divested businesses |
|
| 5,320 |
|
| 3,594 |
|
|
| 15,589 |
|
| 7,121 |
Stock-based compensation |
|
| 2,440 |
|
| 3,090 |
|
|
| 7,206 |
|
| 6,809 |
Skilled Healthcare and other loss contingency expense (1) |
|
| — |
|
| — |
|
|
| — |
|
| 15,192 |
Regulatory defense and related costs (2) |
|
| 41 |
|
| 1,043 |
|
|
| 492 |
|
| 2,101 |
Other non-recurring costs (3) |
|
| 3,524 |
|
| (141) |
|
|
| 3,524 |
|
| 761 |
Adjusted EBITDA |
| $ | 109,118 |
| $ | 136,629 |
|
| $ | 375,825 |
| $ | 430,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional lease payments not included in GAAP lease expense |
|
| 85,396 |
|
| 88,871 |
|
|
| 258,724 |
|
| 265,781 |
52
Results of Operations
Same-store Presentation
We continue to execute on a strategic plan which includes expansion in core markets and operating segments which we believe will enhance the value of our business in the ever-changing landscape of national healthcare. We are also focused on right-sizing“right-sizing” our operations to fit that new environment and to divest of underperforming and non-strategic assets, many of which came to us as part of larger acquisitions in recent years that were necessary to achieve the net overall growth strategy.
We define our same-store inpatient operations as those skilled nursing and assisted living centers which have been operated by us, in a steady-state, for each comparable period in this Results of Operations discussion. We exclude from that definition those skilled nursing and assisted living facilities recently acquired that were not operated by us for the entire period, as well as those that were divested prior to or during the most recent period presented. In cases where we are developing new skilled nursing or assisted living centers, those operations are excluded from our same-store“same-store” inpatient operations until the revenue driven by operating patient census is stable in the comparable periods. Additionally, our inpatient business is proportionately impacted by the addition of the extra day in periods containing a leap year, as the nine months ended September 30, 2016 was. We removed the proportional estimated impact from revenue and operating expenses for presentation of same-store results.
Because it isSince the nature of our rehabilitation therapy services operations to experienceexperiences high volume of both new and terminated contracts in an annual cycle, and the scale and significance of those contracts can be very different to both the revenue and operating expenses of that business, a same-store presentation based solely on the contract or gym count isdoes not a validprovide an accurate depiction of the business. Accordingly, we do not reference same-store figures in this MD&A with regard to that business. Leap year did not have a material impact on the comparability of our rehabilitation therapy services.
The volume of services delivered in our other services businesses can also be affected by strategic transactional activity. To the extent there are businesses to be excluded to achieve same-store comparability those will be noted in the context of the Results of Operations discussion. Leap
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers and all related amendments (ASC 606). The requirements of ASC 606 were effective for us beginning January 1, 2018 and were applied using the modified retrospective method. Because prior year didperiods were not have a material impact onrestated through this methodology, the new presentation could affect the direct, same-store comparability of our other services business.
revenue and operating expense, however, there is no impact to comparability of EBITDA for all
5351
periods presented. See Note 4 – “NetRevenues and Accounts Receivable.” The impact of the adoption of ASC 606 will be noted in these Results of Operations where comparability issues exist.
Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
A summary of our unaudited results of operations for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 20162017 follows (in thousands, except percentages):
|
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|
|
|
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|
|
|
|
| Three months ended September 30, |
|
|
|
|
|
| Three months ended June 30, |
|
|
|
|
| ||||||||||||||||||
|
| 2017 |
| 2016 |
| Increase / (Decrease) |
|
| 2018 |
| 2017 |
| Increase / (Decrease) |
| ||||||||||||||||||
|
| Revenue |
| Revenue |
| Revenue |
| Revenue |
|
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|
|
|
|
| Revenue |
| Revenue |
| Revenue |
| Revenue |
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| ||||
|
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| Dollars |
| Percentage |
|
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| ||||||
Revenues: |
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing facilities |
| $ | 1,103,554 |
| 83.8 | % | $ | 1,192,498 |
| 84.0 | % | $ | (88,944) |
| (7.5) | % |
| $ | 1,065,310 |
| 83.8 | % | $ | 1,130,525 |
| 84.2 | % | $ | (65,215) |
| (5.8) | % |
Assisted/Senior living facilities |
|
| 24,185 |
| 1.8 | % |
| 29,423 |
| 2.1 | % |
| (5,238) |
| (17.8) | % |
|
| 23,742 |
| 1.9 | % |
| 24,125 |
| 1.8 | % |
| (383) |
| (1.6) | % |
Administration of third party facilities |
|
| 2,266 |
| 0.2 | % |
| 2,659 |
| 0.2 | % |
| (393) |
| (14.8) | % |
|
| 2,300 |
| 0.2 | % |
| 2,319 |
| 0.2 | % |
| (19) |
| (0.8) | % |
Elimination of administrative services |
|
| (370) |
| — | % |
| (340) |
| — | % |
| (30) |
| 8.8 | % |
|
| (743) |
| (0.1) | % |
| (385) |
| — | % |
| (358) |
| 93.0 | % |
Inpatient services, net |
|
| 1,129,635 |
| 85.8 | % |
| 1,224,240 |
| 86.3 | % |
| (94,605) |
| (7.7) | % |
|
| 1,090,609 |
| 85.8 | % |
| 1,156,584 |
| 86.2 | % |
| (65,975) |
| (5.7) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehabilitation therapy services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total therapy services |
|
| 244,471 |
| 18.6 | % |
| 261,543 |
| 18.4 | % |
| (17,072) |
| (6.5) | % |
|
| 234,674 |
| 18.4 | % |
| 242,917 |
| 18.1 | % |
| (8,243) |
| (3.4) | % |
Elimination intersegment rehabilitation therapy services |
|
| (92,573) |
| (7.0) | % |
| (101,156) |
| (7.1) | % |
| 8,583 |
| (8.5) | % |
|
| (88,887) |
| (7.0) | % |
| (94,496) |
| (7.0) | % |
| 5,609 |
| (5.9) | % |
Third party rehabilitation therapy services |
|
| 151,898 |
| 11.6 | % |
| 160,387 |
| 11.3 | % |
| (8,489) |
| (5.3) | % |
|
| 145,787 |
| 11.4 | % |
| 148,421 |
| 11.1 | % |
| (2,634) |
| (1.8) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other services |
|
| 42,901 |
| 3.3 | % |
| 40,376 |
| 2.8 | % |
| 2,525 |
| 6.3 | % |
|
| 51,345 |
| 4.0 | % |
| 44,221 |
| 3.3 | % |
| 7,124 |
| 16.1 | % |
Elimination intersegment other services |
|
| (8,982) |
| (0.7) | % |
| (6,009) |
| (0.4) | % |
| (2,973) |
| 49.5 | % |
|
| (15,381) |
| (1.2) | % |
| (7,950) |
| (0.6) | % |
| (7,431) |
| 93.5 | % |
Third party other services |
|
| 33,919 |
| 2.6 | % |
| 34,367 |
| 2.4 | % |
| (448) |
| (1.3) | % |
|
| 35,964 |
| 2.8 | % |
| 36,271 |
| 2.7 | % |
| (307) |
| (0.8) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
| $ | 1,315,452 |
| 100.0 | % | $ | 1,418,994 |
| 100.0 | % | $ | (103,542) |
| (7.3) | % |
| $ | 1,272,360 |
| 100.0 | % | $ | 1,341,276 |
| 100.0 | % | $ | (68,916) |
| (5.1) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
|
|
|
|
|
|
| Three months ended June 30, |
|
|
|
|
| |||||||||||||||||
|
| 2017 |
| 2016 |
| Increase / (Decrease) |
|
| 2018 |
| 2017 |
| Increase / (Decrease) |
| ||||||||||||||||||
|
|
|
|
| Margin |
|
|
|
| Margin |
|
|
|
|
|
|
|
|
|
| Margin |
|
|
|
| Margin |
|
|
|
|
|
|
|
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| Dollars |
| Percentage |
|
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| Dollars |
| Percentage |
| ||||||
EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient services |
| $ | (403,767) |
| (35.7) | % | $ | 158,264 |
| 12.9 | % | $ | (562,031) |
| (355.1) | % |
| $ | 124,687 |
| 11.4 | % | $ | 144,663 |
| 12.5 | % | $ | (19,976) |
| (13.8) | % |
Rehabilitation therapy services |
|
| 15,646 |
| 6.4 | % |
| 18,030 |
| 6.9 | % |
| (2,384) |
| (13.2) | % |
|
| 32,328 |
| 13.8 | % |
| (16,908) |
| (7.0) | % |
| 49,236 |
| (291.2) | % |
Other services |
|
| (310) |
| (0.7) | % |
| 1,794 |
| 4.4 | % |
| (2,104) |
| (117.3) | % |
|
| 1,036 |
| 2.0 | % |
| 214 |
| 0.5 | % |
| 822 |
| 384.1 | % |
Corporate and eliminations |
|
| (41,174) |
| — | % |
| (63,415) |
| — | % |
| 22,241 |
| (35.1) | % |
|
| (40,344) |
| — | % |
| (46,154) |
| — | % |
| 5,810 |
| (12.6) | % |
EBITDA |
| $ | (429,605) |
| (32.7) | % | $ | 114,673 |
| 8.1 | % | $ | (544,278) |
| (474.6) | % |
| $ | 117,707 |
| 9.3 | % | $ | 81,815 |
| 6.1 | % | $ | 35,892 |
| 43.9 | % |
5452
A summary of our unaudited condensed consolidating statement of operations follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three months ended September 30, 2017 |
|
| Three months ended June 30, 2018 |
| ||||||||||||||||||||||||||||||||
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
| ||||||||||||
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
| ||||||||||||
Net revenues |
| $ | 1,130,005 |
| $ | 244,471 |
| $ | 42,778 |
| $ | 123 |
| $ | (101,925) |
| $ | 1,315,452 |
|
| $ | 1,091,352 |
| $ | 234,674 |
| $ | 51,325 |
| $ | 20 |
| $ | (105,011) |
| $ | 1,272,360 |
|
Salaries, wages and benefits |
|
| 507,075 |
|
| 205,232 |
|
| 27,097 |
|
| — |
|
| — |
|
| 739,404 |
|
|
| 489,778 |
|
| 187,946 |
|
| 28,030 |
|
| — |
|
| — |
|
| 705,754 |
|
Other operating expenses |
| 442,816 |
|
| 19,455 |
|
| 15,242 |
|
| — |
|
| (101,926) |
|
| 375,587 |
|
| 439,224 |
|
| 14,400 |
|
| 21,943 |
|
| — |
|
| (105,012) |
|
| 370,555 |
| ||
General and administrative costs |
| — |
| — |
| — |
| 40,732 |
| — |
| 40,732 |
|
| — |
| — |
| — |
| 39,046 |
| — |
| 39,046 |
| ||||||||||||
Provision for losses on accounts receivable |
| 22,078 |
| 1,974 |
| 447 |
| 688 |
| — |
| 25,187 |
| |||||||||||||||||||||||||
Lease expense |
| 37,895 |
|
| (14) |
|
| 302 |
|
| 487 |
|
| — |
|
| 38,670 |
|
| 31,494 |
|
| — |
|
| 316 |
|
| 301 |
|
| — |
|
| 32,111 |
| ||
Depreciation and amortization expense |
| 51,666 |
|
| 3,497 |
|
| 167 |
|
| 4,060 |
|
| — |
|
| 59,390 |
|
| 56,750 |
|
| 3,138 |
|
| 168 |
|
| 3,439 |
|
| — |
|
| 63,495 |
| ||
Interest expense |
|
| 103,306 |
|
| 14 |
|
| 9 |
|
| 21,102 |
|
| — |
|
| 124,431 |
|
|
| 93,028 |
|
| 13 |
|
| 9 |
|
| 24,905 |
|
| — |
|
| 117,955 |
|
Gain on extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| (501) |
|
| — |
|
| (501) |
| |||||||||||||||||||
Investment income |
|
| — |
|
| — |
|
| — |
|
| (1,596) |
|
| — |
|
| (1,596) |
|
|
| — |
|
| — |
|
| — |
|
| (1,631) |
|
| — |
|
| (1,631) |
|
Other loss |
|
| 2,379 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,379 |
| |||||||||||||||||||
Other income |
|
| (22,220) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (22,220) |
| |||||||||||||||||||
Transaction costs |
|
| — |
|
| — |
|
| — |
|
| 1,056 |
|
| — |
|
| 1,056 |
|
|
| — |
|
| — |
|
| — |
|
| 3,112 |
|
| — |
|
| 3,112 |
|
Customer receivership |
|
| — |
| 297 |
| — |
| — |
| — |
| 297 |
| ||||||||||||||||||||||||
Long-lived asset impairments |
|
| 161,483 |
|
| 1,881 |
|
| — |
| — |
| — |
| 163,364 |
|
|
| 27,257 |
|
| — |
|
| — |
| — |
| — |
| 27,257 |
| ||||||
Goodwill and identifiable intangible asset impairments |
|
| 360,046 |
|
| — |
|
| — |
| — |
| — |
| 360,046 |
|
|
| 1,132 |
|
| — |
|
| — |
| — |
| — |
| 1,132 |
| ||||||
Equity in net (income) loss of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| (571) |
|
| 502 |
|
| (69) |
|
|
| — |
|
| — |
|
| — |
|
| (352) |
|
| 390 |
|
| 38 |
|
(Loss) income before income tax benefit |
|
| (558,739) |
|
| 12,135 |
|
| (486) |
|
| (65,835) |
|
| (501) |
|
| (613,426) |
|
|
| (25,091) |
|
| 29,177 |
|
| 859 |
|
| (68,299) |
|
| (389) |
|
| (63,743) |
|
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| 1,596 |
|
| — |
|
| 1,596 |
| |||||||||||||||||||
Income tax benefit |
|
| — |
|
| — |
|
| — |
|
| (886) |
|
| — |
|
| (886) |
| |||||||||||||||||||
(Loss) income from continuing operations |
| $ | (558,739) |
| $ | 12,135 |
| $ | (486) |
| $ | (67,431) |
| $ | (501) |
| $ | (615,022) |
|
| $ | (25,091) |
| $ | 29,177 |
| $ | 859 |
| $ | (67,413) |
| $ | (389) |
| $ | (62,857) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Three months ended September 30, 2016 |
|
| Three months ended June 30, 2017 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
| ||||||||||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
| ||||||||||||
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
| ||||||||||||
Net revenues |
| $ | 1,224,580 |
| $ | 261,543 |
| $ | 40,226 |
| $ | 150 |
| $ | (107,505) |
| $ | 1,418,994 |
|
| $ | 1,156,969 |
| $ | 242,917 |
| $ | 44,144 |
| $ | 77 |
| $ | (102,831) |
| $ | 1,341,276 |
|
Salaries, wages and benefits |
|
| 586,654 |
|
| 219,864 |
|
| 27,896 |
|
| — |
|
| — |
|
| 834,414 |
|
|
| 508,509 |
|
| 201,944 |
|
| 28,949 |
|
| — |
|
| — |
|
| 739,402 |
|
Other operating expenses |
| 428,820 |
|
| 18,903 |
|
| 10,610 |
|
| — |
|
| (107,505) |
|
| 350,828 |
|
| 462,158 |
|
| 22,308 |
|
| 14,681 |
|
| — |
|
| (102,831) |
|
| 396,316 |
| ||
General and administrative costs |
| — |
| — |
| — |
| 46,545 |
| — |
| 46,545 |
|
| — |
| — |
| — |
| 41,151 |
| — |
| 41,151 |
| ||||||||||||
Provision for losses on accounts receivable |
| 21,088 |
| 4,722 |
| (161) |
| (47) |
| — |
| 25,602 |
| |||||||||||||||||||||||||
Lease expense |
| 34,745 |
|
| 24 |
|
| 269 |
|
| 474 |
|
| — |
|
| 35,512 |
|
| 37,449 |
|
| 7 |
|
| 300 |
|
| 478 |
|
| — |
|
| 38,234 |
| ||
Depreciation and amortization expense |
| 53,313 |
|
| 2,943 |
|
| 163 |
|
| 4,685 |
|
| — |
|
| 61,104 |
|
| 51,837 |
|
| 3,866 |
|
| 172 |
|
| 4,352 |
|
| — |
|
| 60,227 |
| ||
Interest expense |
|
| 109,339 |
|
| 14 |
|
| 10 |
|
| 22,449 |
|
| — |
|
| 131,812 |
|
|
| 103,325 |
|
| 14 |
|
| 10 |
|
| 20,939 |
|
| — |
|
| 124,288 |
|
Loss on extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 15,363 |
|
| — |
|
| 15,363 |
|
|
| — |
|
| — |
|
| — |
|
| 2,301 |
|
| — |
|
| 2,301 |
|
Investment income |
|
| — |
|
| — |
|
| — |
|
| (934) |
|
| — |
|
| (934) |
|
|
| — |
|
| — |
|
| — |
|
| (1,392) |
|
| — |
|
| (1,392) |
|
Other income |
|
| (4,991) |
|
| — |
|
| (182) |
|
| — |
|
| — |
|
| (5,173) |
| |||||||||||||||||||
Other loss |
|
| 4,190 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,190 |
| |||||||||||||||||||
Transaction costs |
|
| — |
|
| — |
|
| — |
|
| 3,057 |
|
| — |
|
| 3,057 |
|
|
| — |
|
| — |
|
| — |
|
| 3,781 |
|
| — |
|
| 3,781 |
|
Customer receivership and other related charges |
|
| — |
| 35,566 |
| — |
| — |
| — |
| 35,566 |
| ||||||||||||||||||||||||
Equity in net (income) loss of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| (1,608) |
|
| 715 |
|
| (893) |
|
|
| — |
|
| — |
|
| — |
|
| (563) |
|
| 475 |
|
| (88) |
|
(Loss) income before income tax benefit |
|
| (4,388) |
|
| 15,073 |
|
| 1,621 |
|
| (89,834) |
|
| (715) |
|
| (78,243) |
| |||||||||||||||||||
Income tax benefit |
|
| — |
|
| — |
|
| — |
|
| (25,888) |
|
| — |
|
| (25,888) |
| |||||||||||||||||||
(Loss) income before income tax expense |
|
| (10,499) |
|
| (20,788) |
|
| 32 |
|
| (70,970) |
|
| (475) |
|
| (102,700) |
| |||||||||||||||||||
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| 2,803 |
|
| — |
|
| 2,803 |
| |||||||||||||||||||
(Loss) income from continuing operations |
| $ | (4,388) |
| $ | 15,073 |
| $ | 1,621 |
| $ | (63,946) |
| $ | (715) |
| $ | (52,355) |
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| $ | (10,499) |
| $ | (20,788) |
| $ | 32 |
| $ | (73,773) |
| $ | (475) |
| $ | (105,503) |
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Net Revenues
Net revenues for the three months ended SeptemberJune 30, 20172018 decreased by $103.5$68.9 million, or 7.3%5.1%, as compared with the three months ended SeptemberJune 30, 2016.2017.
Inpatient Services – Revenue decreased $94.6$66.0 million, or 7.7%5.7%, in the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. On a same-store basis, excluding the impact of 3824 divested underperforming facilities and the acquisition or development of ninetwo additional facilities on comparability, and the $19.0 million revenue reduction for the adoption of ASC 606, inpatient services revenue declined $53.8$21.0 million, or 4.6%1.9%. There was $28.2 million less incremental revenue pertaining to the Texas MPAP program in the three months ended September 30, 2017 as compared with the same period in 2016. The remainingThis same-store decrease of $25.6 million, or 2.2%, is principally due to a decline in the occupancy and skilled mix of legacy Genesis inpatient facilities, partially offset by increased payment rates. We attribute the decline in occupancy and skilled mix principally to the impact of healthcare reforms resulting in lower lengths of stay among our skilled patient
55
population and lower admissions caused by initiatives among acute care providers, managed care payers and conveners to divert certain skilled nursing referrals to home health or other community based care settings.
53
For an expanded discussion regarding the factors influencing our census decline, see Item 1, ““Business – Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue” in our annual reportAnnual Report on formForm 10-K filed with the SEC, as well as ““Key Performance and Valuation Measures”Measures” in this MD&A for quantification of the census trends and revenue per patient day.
Rehabilitation Therapy Services – Revenue decreased $8.5$2.6 million, or 5.3%1.8% comparing the three months ended SeptemberJune 30, 20172018 with the same period in 2016.2017. Of that decrease, $19.2$22.5 million is due to lost contract business, offset by $14.1$18.8 million attributed to new contracts and price increases to certain existing customers.contracts. The adoption of ASC 606 resulted in a reduction of revenue of $2.9 million. The remaining decreaseincrease of $3.3$4.0 million is principally due to higher rates to existing contract customers and increased Medicare Part B rates, partially offset by reduced volume of services provided to existing customers due to the reduction in lengths of stay and skilled patient populations impacting the entire industry.customers.
Other Services – Other services revenueRevenue decreased $0.4$0.3 million, or 1.3%0.8% in the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. Our other services revenue, comprised mainly of our physician services and staffing services businesses, was relatively flat with increased service revenue in the physician service business offset by some regional reduction in volumes of our staffing services business.
EBITDA
EBITDA for the three months ended SeptemberJune 30, 2017 decreased2018 increased by $544.3 million.$35.9 million, or 43.9%, as compared with the three months ended June 30, 2017. Excluding the impact of (gain) loss on extinguishment of debt, other (income) loss, (income), transaction costs, customer receivership charges, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA decreased $30.4$1.2 million, or 23.8%0.9% when compared with the same period in 2016.2017. The adoption of ASC 606 did not affect comparability of EBITDA or EBITDA as adjusted among the periods presented. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.
Inpatient Services – EBITDA decreased inby $20.0 million, or 13.8% for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016, by $562.0 million.2017. Excluding the impact of other (income) loss, (income), long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA as adjusted decreased $33.1$18.0 million, or 21.6%.12.1% when compared with the same period in 2017. On a same store basis, the inpatient services EBITDA as adjusted decreased $30.0 million, or 20.3%. This$19.1 million. Of that same-store decline, is net of an $8.0 million reduction in our self-insurance program expenseprograms resulted in an increase of $8.9 million EBITDA as adjusted in the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. While our self-insurance programs are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies and within normal claims reporting patterns of our same-store operations, we still see acceleration ofare also seeing reduced pressures in particular in our general and professional liability claims activity, weexperience. We believe this is due to the combination of tort reforms in key states that have seen marked improvementshad historically high rates of claims volume and severity as well as a recognition by the plaintiffs firms that this industry cannot sustain the level of claims historically brought by them. Reductions in the performance of our workers’salaries, wages and benefits, beyond those related to self-insured workers compensation and health benefit programs relativebenefits, are principally attributed to the same periodtransition from in-house to fully outsourced dietary support functions in 2016. Asthe second fiscal quarter of 2017. That transition resulted in a shift of a commensurate amount of cost to purchased services expense in other operating expenses. This reduction in salaries is partially offset with nursing wage inflation which increased 3.3% in the three months ended June 30, 2018 as compared with the same period in 2016,2017. On a same-store basis, lease expense for the three months ended SeptemberJune 30, 2017 has $8.1 million less incremental EBITDA attributed to the Texas MPAP program due to that programs expiration in August 2016. Accounts receivable collections performance continues to be strong, however,2018 as compared with the three months ended September 30, 2016, which reflected particularly strong collections,same period in 2017 decreased $4.2 million. This reduction is principally due to the three months ended September 30, 2017 had an incremental provisionbenefit of $2.0 million.one-quarter of the Sabra rent reduction, offset by the non-cash straight-line adjustments to those operating leases. See “Restructuring Transactions – Sabra Master Leases” in this MD&A. The remaining $27.9$32.2 million decrease in EBITDA, as adjusted, of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “Net Revenues,” and accelerating nursing wage inflation. Nursing wage inflation increased 3.9% in the three months ended September 30, 2017 as compared with the same period in 2016, and is up 1.8% over the immediately preceding three months ended June 30, 2017.previously discussed.
Rehabilitation Therapy Services – EBITDA of the rehabilitation therapy segment decreasedincreased by $2.4 million. On an adjusted basis, excluding the impact of customer receivership charges and long-lived asset impairments, Adjusted EBITDA decreased $0.2$49.2 million, or 1.1% comparing291.2%, for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016. Lost2017. Excluding the impact of other loss and customer receivership and other related charges EBITDA as adjusted increased $13.7 million, or 73.3% when compared with the same period in 2017. New therapy contracts and net pricing increases exceeded newlost contracts by $0.6$2.2 million. Startup costslosses of our operations in China for the three therapy months ended SeptemberJune 30, 2017 exceeded those in2018 decreased $2.1 million as compared with the comparablesame period in 2016 by $0.4 million.2017. The remaining increase of EBITDA as adjusted of $0.8$9.4 million is principally attributed to overhead cost reductions, favorable average costs of labor and favorable pricingrate increases, partially offset by therapist efficiency which declined to 66.3%68.2% in the three months ended SeptemberJune 30, 20172018 compared with 67.5%68.0% in the comparable period in the prior year.
54
Currently, we operate through affiliates in China a total of twelve13 locations comprised of the threefour rehabilitation clinics in Guangzhou, Shanghai and Hong Kong, a rehabilitation facility, and inpatient and outpatient rehabilitation
56
services in sevenfive hospital joint ventures and onethree nursing home.homes. Startup and development costs of these Chinese ventures are expected to exceed revenues infor the remainder of fiscal 2017.2018.
Other Services — EBITDA decreased $2.1increased $0.8 million, inor 384.1%, for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. This decreaseincrease was principally driven by increased information technology costsproductivity in our physician services business to expand our accountable care organization participation and value based programing compliance.business.
Corporate and Eliminations — EBITDA increased $22.2$5.8 million, inor 12.6%, for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. EBITDA of our corporate function includes other income, charges, gains or losses associated with transactions that in our chief operating decision maker’s view are outside of the scope of our reportable segments. These other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $17.4$3.5 million of the net increase in EBITDA. Corporate overhead costs decreased $5.0$2.1 million, or 10.8%5.1%, in the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining decreaseincrease in EBITDA of $0.2 million is primarily the result of a reductionan increase in investment earnings from our unconsolidated affiliates accounted for on the equity method.
Loss on early extinguishment of debt – On March 6, 2018, we entered into a new asset based lending facility agreement, qualifying as equity investments.an extinguishment of the previous revolving credit facility. An overaccrual of fees associated with the extinguishment was reversed in the three months ended June 30, 2018. See Note 3 – “Significant Transactions and Events – Restructuring Transactions” and Note 8 – “Long-term Debt.”
Other (income) loss (income) — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets. Other (income) loss for the three months ended June 30, 2018 principally represents non-cash gains on leases exited or modified in the period. Other loss recognized for the three months ended SeptemberJune 30, 2017 was a net $2.4$4.2 million, attributable primarily to the transitionnon-cash exit costs of three leased skilled nursing facilities to new operators and closure of one skilled nursing facilityleases exited in that period. Other income was a net $5.2 million for the same period in 2016, which was principally the recognized gain on the sale of two assisted living facilities in that period.
Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the three months ended SeptemberJune 30, 2018 and 2017 and 2016 were $1.1$3.1 million and $3.1$3.8 million, respectively.
Asset ImpairmentsLong-lived asset impairments — In the three months ended SeptemberJune 30, 20172018 we recognized impairments of long-lived assetsproperty and goodwill and identifiable intangible assetsequipment of $163.4 million and $360.0 million, respectively.$27.3 million. For more information about the conditions of the business which contributed to these impairments, see “Going Concern ConsiderationsIndustry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Industry TrendsFinancial Condition and Liquidity Considerations” in this MD&A, as well as Note 1 – “General Information – Going Concern Considerations” and Note 1514 – “Asset Impairment Charges.Charges - Long-Lived Assets with a Definite Useful Life.”
Goodwill and identifiable intangible asset impairments — In the three months ended June 30, 2018 we recognized impairments of identifiable intangible favorable lease assets of $1.1 million. For more information about the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 14 – “Asset Impairment Charges -Identifiable Intangible Assets with a Definite Useful Life.”
Other Expense
The following discussion applies to the consolidated expense categories between consolidated EBITDA and (loss) income from continuing operations of all reportable segments, other services, corporate and eliminations in our consolidating statement of operations for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017.
Depreciation and amortization — Each of our reportable segments, other services and corporate overhead have depreciating property, plant and equipment, including depreciation on leased properties accounted for as capital leases or as a financing
55
obligation. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. Depreciation and amortization expense decreased $1.7increased $3.3 million in the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016, principally due to divestiture activity.2017. On a same storesame-store basis, depreciation and amortization increased $0.5decreased $2.7 million in the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. The three months ended June 30, 2017 included $2.2 million of amortization expense related to intangible management contracts of third party operations in Texas. Those contracts became impaired during third quarter 2017 when the Texas MPAP program failed to be renewed, resulting in $0 amortization expense in the three months ended June 30, 2018. The remaining decrease of $0.5 million is principally due to the classification of assets held for sale, which did not depreciate in the current period, the impact of reduced carrying values of recently impaired assets, and partially offset by the impact of recent lease amendments in the inpatient services segment.
Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our Revolving Credit Facilities, Term Loan Facility, Real Estate Bridge Loans and mortgagedebt instruments, as well as the
57
expense associated with leases accounted for as capital leases or financing obligations. Interest expense decreased $7.4$6.3 million in the three months ended SeptemberJune 30, 20172018 as compared with the same period 2017. On a same store basis, interest expense is down $5.6 million in the three months ended June 30, 2018 as compared with the same period in the prior year. On a same store basis, interest expense decreased $6.0 million in the three months ended September 30, 2017 as compared with the same period in 2016. Of that decrease, $0.4 million is due to a reduction in cash interest resulting from the reduced borrowings under the Term Loan Facility through application of proceeds from asset sales and Real Estate Bridge Loans refinanced with lower rate HUD guaranteed mortgage debt. The remaining $5.6 million2017. That decrease is principally attributed to non-cash accountingthe net impact of the Restructuring Transactions, which lowered the debt service payments required under the Welltower Master Lease Amendment, which is accounted for as a financing obligation, and resulted in a lower effective interest rate. That reduction in financing lease transactions completed overinterest is partially offset by the past twelve months.increased cost of our revolving credit facilities. See “Restructuring Transactions” in this MD&A.
Income tax expense — For the three months ended SeptemberJune 30, 2017,2018, we recorded an income tax expensebenefit of $1.6$0.9 million from continuing operations representing an effective tax rate of (0.3)%1.4% compared to an income tax benefitexpense of $25.9$2.8 million from continuing operations, representing an effective tax rate of 33.1%(2.7)% for the same period in 2016.2017. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve. Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets. As of SeptemberJune 30, 2017,2018, we have determined that the valuation allowance is still necessary.
Net Loss Attributable to Genesis Healthcare, Inc.
The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the three months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017.
Loss (income) from discontinued operations — Prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disposals of Components of an Entity (ASU 2014-08), we routinely classified reporting units exited, closed or otherwise disposed as discontinued operations. ASU 2014-08 changed the criteria to qualify such transactions for discontinued operations treatment, making it hard to reach that conclusion. Therefore, since 2014, none of our more recently exited, closed or otherwise disposed assets have been classified as discontinued operations. The activity reported as discontinued operations in the three months ended September 30, 2017 and the same period in 2016 was de minimis, associated with exit, closure and disposal activities of reporting units identified as discontinued operations prior to adoption of ASU 2014-08.
Net loss attributable to noncontrolling interests — Following the closing of the Combination,On February 2, 2015, FC-GEN combined with Skilled Healthcare Group, Inc. and the combined results of Skilled and FC-GEN were consolidated with approximately 42%42.0% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity. The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares. Since the Combination,combination, there have been conversions of 2.84.8 million Class C common stock, leaving a remaining direct noncontrolling economic interest of 39.4%36.8%. For the three months ended SeptemberJune 30, 2018 and 2017, and 2016,a loss of $241.8$23.8 million and $32.8$40.9 million, respectively, has been attributed to the Class C common stock.
In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any VIEsvariable interest entities (VIEs) where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs. For the three months ended SeptemberJune 30, 20172018 and 2016,2017, income of $0.6$0.5 million and $0.9$0.6 million, respectively, has been attributed to these unaffiliated third parties.
5856
NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017
A summary of our unaudited results of operations for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 20162017 follows (in thousands, except percentages):
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Revenues: |
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Inpatient services: |
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Skilled nursing facilities |
| $ | 3,404,181 |
| 84.0 | % | $ | 3,595,258 |
| 82.9 | % | $ | (191,077) |
| (5.3) | % |
| $ | 2,160,612 |
| 83.9 | % | $ | 2,300,450 |
| 84.1 | % | $ | (139,838) |
| (6.1) | % |
Assisted/Senior living facilities |
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| 72,262 |
| 1.8 | % |
| 90,772 |
| 2.1 | % |
| (18,510) |
| (20.4) | % |
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| 47,246 |
| 1.8 | % |
| 48,077 |
| 1.8 | % |
| (831) |
| (1.7) | % |
Administration of third party facilities |
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| 6,841 |
| 0.2 | % |
| 8,608 |
| 0.2 | % |
| (1,767) |
| (20.5) | % |
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| 4,552 |
| 0.2 | % |
| 4,752 |
| 0.2 | % |
| (200) |
| (4.2) | % |
Elimination of administrative services |
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| (1,139) |
| — | % |
| (1,077) |
| — | % |
| (62) |
| 5.8 | % |
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| (1,470) |
| — | % |
| (769) |
| — | % |
| (701) |
| 91.2 | % |
Inpatient services, net |
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| 3,482,145 |
| 86.0 | % |
| 3,693,561 |
| 85.2 | % |
| (211,416) |
| (5.7) | % |
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| 2,210,940 |
| 85.9 | % |
| 2,352,510 |
| 86.1 | % |
| (141,570) |
| (6.0) | % |
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Rehabilitation therapy services: |
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Total therapy services |
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| 743,605 |
| 18.4 | % |
| 821,704 |
| 19.1 | % |
| (78,099) |
| (9.5) | % |
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| 471,251 |
| 18.3 | % |
| 499,134 |
| 18.3 | % |
| (27,883) |
| (5.6) | % |
Elimination intersegment rehabilitation therapy services |
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| (287,599) |
| (7.1) | % |
| (311,060) |
| (7.2) | % |
| 23,461 |
| (7.5) | % |
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| (181,633) |
| (7.1) | % |
| (195,026) |
| (7.1) | % |
| 13,393 |
| (6.9) | % |
Third party rehabilitation therapy services |
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| 456,006 |
| 11.3 | % |
| 510,644 |
| 11.9 | % |
| (54,638) |
| (10.7) | % |
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| 289,618 |
| 11.2 | % |
| 304,108 |
| 11.2 | % |
| (14,490) |
| (4.8) | % |
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Other services: |
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Total other services |
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| 133,168 |
| 3.3 | % |
| 142,336 |
| 3.3 | % |
| (9,168) |
| (6.4) | % |
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| 99,853 |
| 3.9 | % |
| 90,267 |
| 3.3 | % |
| 9,586 |
| 10.6 | % |
Elimination intersegment other services |
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| (25,459) |
| (0.6) | % |
| (16,971) |
| (0.4) | % |
| (8,488) |
| 50.0 | % |
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| (26,979) |
| (1.0) | % |
| (16,477) |
| (0.6) | % |
| (10,502) |
| 63.7 | % |
Third party other services |
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| 107,709 |
| 2.7 | % |
| 125,365 |
| 2.9 | % |
| (17,656) |
| (14.1) | % |
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| 72,874 |
| 2.9 | % |
| 73,790 |
| 2.7 | % |
| (916) |
| (1.2) | % |
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Net revenues |
| $ | 4,045,860 |
| 100.0 | % | $ | 4,329,570 |
| 100.0 | % | $ | (283,710) |
| (6.6) | % |
| $ | 2,573,432 |
| 100.0 | % | $ | 2,730,408 |
| 100.0 | % | $ | (156,976) |
| (5.7) | % |
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EBITDA: |
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Inpatient services |
| $ | (126,921) |
| (3.6) | % | $ | 478,652 |
| 13.0 | % | $ | (605,573) |
| (126.5) | % |
| $ | 222,130 |
| 10.0 | % | $ | 276,847 |
| 11.8 | % | $ | (54,717) |
| (19.8) | % |
Rehabilitation therapy services |
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| 20,126 |
| 2.7 | % |
| 60,708 |
| 7.4 | % |
| (40,582) |
| (66.8) | % |
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| 54,658 |
| 11.6 | % |
| 4,481 |
| 0.9 | % |
| 50,177 |
| 1,119.8 | % |
Other services |
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| 5 |
| 0.0 | % |
| 50,776 |
| 35.7 | % |
| (50,771) |
| (100.0) | % |
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| 1,183 |
| 1.2 | % |
| 315 |
| 0.3 | % |
| 868 |
| 275.6 | % |
Corporate and eliminations |
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| (134,185) |
| — | % |
| (177,563) |
| — | % |
| 43,378 |
| (24.4) | % |
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| (102,050) |
| — | % |
| (93,013) |
| — | % |
| (9,037) |
| 9.7 | % |
EBITDA |
| $ | (240,975) |
| (6.0) | % | $ | 412,573 |
| 9.5 | % | $ | (653,548) |
| (158.4) | % |
| $ | 175,921 |
| 6.8 | % | $ | 188,630 |
| 6.9 | % | $ | (12,709) |
| (6.7) | % |
5957
A summary of our unaudited condensed consolidating statement of operations follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Nine months ended September 30, 2017 |
|
| Six months ended June 30, 2018 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
| |||||||||||
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
| ||||||||||||
Net revenues |
| $ | 3,483,284 |
| $ | 743,605 |
| $ | 132,718 |
| $ | 450 |
| $ | (314,197) |
| $ | 4,045,860 |
|
| $ | 2,212,410 |
| $ | 471,251 |
| $ | 99,800 |
| $ | 53 |
| $ | (210,082) |
| $ | 2,573,432 |
|
Salaries, wages and benefits |
|
| 1,597,007 |
|
| 619,928 |
|
| 86,365 |
|
| — |
|
| — |
|
| 2,303,300 |
|
|
| 996,808 |
|
| 387,777 |
|
| 56,939 |
|
| — |
|
| — |
|
| 1,441,524 |
|
Other operating expenses |
| 1,303,448 |
|
| 56,433 |
|
| 44,456 |
|
| — |
|
| (314,198) |
|
| 1,090,139 |
|
| 895,025 |
|
| 28,816 |
|
| 40,957 |
|
| — |
|
| (210,083) |
|
| 754,715 |
| ||
General and administrative costs |
| — |
| — |
| — |
| 127,041 |
| — |
| 127,041 |
|
| — |
| — |
| — |
|
| 78,921 |
| — |
| 78,921 |
| |||||||||||
Provision for losses on accounts receivable |
| 62,448 |
| 8,641 |
| 995 |
| 616 |
| — |
| 72,700 |
| |||||||||||||||||||||||||
Lease expense |
| 110,661 |
|
| — |
|
| 897 |
|
| 1,446 |
|
| — |
|
| 113,004 |
|
| 63,928 |
|
| — |
|
| 643 |
|
| 611 |
|
| — |
|
| 65,182 |
| ||
Depreciation and amortization expense |
| 159,483 |
|
| 11,110 |
|
| 506 |
|
| 12,887 |
|
| — |
|
| 183,986 |
|
| 101,080 |
|
| 6,332 |
|
| 337 |
|
| 7,249 |
|
| — |
|
| 114,998 |
| ||
Interest expense |
|
| 309,948 |
|
| 42 |
|
| 28 |
|
| 63,455 |
|
| — |
|
| 373,473 |
|
|
| 186,647 |
|
| 27 |
|
| 18 |
|
| 46,300 |
|
| — |
|
| 232,992 |
|
Loss on extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 2,301 |
|
| — |
|
| 2,301 |
| |||||||||||||||||||
Loss on early extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 9,785 |
|
| — |
|
| 9,785 |
| |||||||||||||||||||
Investment income |
|
| — |
|
| — |
|
| — |
|
| (4,097) |
|
| — |
|
| (4,097) |
|
|
| — |
|
| — |
|
| — |
|
| (2,678) |
|
| — |
|
| (2,678) |
|
Other loss |
|
| 15,112 |
|
| 732 |
|
| — |
|
| (242) |
|
| — |
|
| 15,602 |
| |||||||||||||||||||
Other (income) loss |
|
| (22,230) |
|
| — |
|
| 78 |
|
| — |
|
| — |
|
| (22,152) |
| |||||||||||||||||||
Transaction costs |
|
| — |
|
| — |
|
| — |
|
| 7,862 |
|
| — |
|
| 7,862 |
|
|
| — |
|
| — |
|
| — |
|
| 15,207 |
|
| — |
|
| 15,207 |
|
Customer receivership |
|
| — |
| 35,864 |
| — |
| — |
| — |
| 35,864 |
| ||||||||||||||||||||||||
Long-lived asset impairments |
|
| 161,483 |
| 1,881 |
| — |
| — |
| — |
| 163,364 |
|
|
| 55,617 |
| — |
| — |
|
| — |
| — |
| 55,617 |
| |||||||||
Goodwill and identifiable intangible asset impairments |
|
| 360,046 |
| — |
| — |
| — |
| — |
| 360,046 |
|
|
| 1,132 |
| — |
| — |
|
| — |
| — |
| 1,132 |
| |||||||||
Equity in net (income) loss of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| (1,702) |
|
| 1,411 |
|
| (291) |
|
|
| — |
|
| — |
|
| — |
|
| (506) |
|
| 764 |
|
| 258 |
|
(Loss) income before income tax benefit |
|
| (596,352) |
|
| 8,974 |
|
| (529) |
|
| (209,117) |
|
| (1,410) |
|
| (798,434) |
|
|
| (65,597) |
|
| 48,299 |
|
| 828 |
|
| (154,836) |
|
| (763) |
|
| (172,069) |
|
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| 5,683 |
|
| — |
|
| 5,683 |
| |||||||||||||||||||
Income tax benefit |
|
| — |
|
| — |
|
| — |
|
| (539) |
|
| — |
|
| (539) |
| |||||||||||||||||||
(Loss) income from continuing operations |
| $ | (596,352) |
| $ | 8,974 |
| $ | (529) |
| $ | (214,800) |
| $ | (1,410) |
| $ | (804,117) |
|
| $ | (65,597) |
| $ | 48,299 |
| $ | 828 |
| $ | (154,297) |
| $ | (763) |
| $ | (171,530) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Nine months ended September 30, 2016 |
|
| Six months ended June 30, 2017 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
|
|
|
|
| Rehabilitation |
|
|
|
|
|
|
|
|
| ||||||||||
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
|
| Inpatient |
| Therapy |
| Other |
|
|
|
|
|
|
| ||||||||||||
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
|
| Services |
| Services |
| Services |
| Corporate |
| Eliminations |
| Consolidated |
| ||||||||||||
Net revenues |
| $ | 3,694,638 |
| $ | 821,704 |
| $ | 141,970 |
| $ | 366 |
| $ | (329,108) |
| $ | 4,329,570 |
|
| $ | 2,353,279 |
| $ | 499,134 |
| $ | 89,940 |
| $ | 327 |
| $ | (212,272) |
| $ | 2,730,408 |
|
Salaries, wages and benefits |
|
| 1,748,232 |
|
| 689,833 |
|
| 96,759 |
|
| — |
|
| — |
|
| 2,534,824 |
|
|
| 1,089,932 |
|
| 414,696 |
|
| 59,268 |
|
| — |
|
| — |
|
| 1,563,896 |
|
Other operating expenses |
| 1,296,069 |
|
| 58,927 |
|
| 36,198 |
|
| — |
|
| (329,108) |
|
| 1,062,086 |
|
|
| 901,002 |
|
| 43,645 |
|
| 29,762 |
|
| — |
|
| (212,272) |
|
| 762,137 |
| |
General and administrative costs |
| — |
| — |
| — |
| 139,999 |
| — |
| 139,999 |
|
|
| — |
| — |
| — |
| 86,237 |
| — |
| 86,237 |
| |||||||||||
Provision for losses on accounts receivable |
| 68,757 |
| 12,165 |
| 993 |
| (139) |
| — |
| 81,776 |
| |||||||||||||||||||||||||
Lease expense |
| 107,047 |
|
| 71 |
|
| 1,209 |
|
| 1,469 |
|
| — |
|
| 109,796 |
|
|
| 72,766 |
|
| 14 |
|
| 595 |
|
| 959 |
|
| — |
|
| 74,334 |
| |
Depreciation and amortization expense |
| 167,208 |
|
| 9,137 |
|
| 805 |
|
| 13,672 |
|
| — |
|
| 190,822 |
|
|
| 107,817 |
|
| 7,613 |
|
| 339 |
|
| 8,827 |
|
| — |
|
| 124,596 |
| |
Interest expense |
|
| 328,385 |
|
| 43 |
|
| 30 |
|
| 72,395 |
|
| — |
|
| 400,853 |
|
|
| 206,642 |
|
| 28 |
|
| 19 |
|
| 42,353 |
|
| — |
|
| 249,042 |
|
Loss on extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 15,830 |
|
| — |
|
| 15,830 |
| |||||||||||||||||||
Loss on early extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 2,301 |
|
| — |
|
| 2,301 |
| |||||||||||||||||||
Investment income |
|
| — |
|
| — |
|
| — |
|
| (2,073) |
|
| — |
|
| (2,073) |
|
|
| — |
|
| — |
|
| — |
|
| (2,501) |
|
| — |
|
| (2,501) |
|
Other income |
|
| (4,119) |
|
| — |
|
| (43,965) |
|
| — |
|
| — |
|
| (48,084) |
| |||||||||||||||||||
Other loss (income) |
|
| 12,732 |
|
| 732 |
|
| — |
|
| (240) |
|
| — |
|
| 13,224 |
| |||||||||||||||||||
Transaction costs |
|
| — |
|
| — |
|
| — |
|
| 9,804 |
|
| — |
|
| 9,804 |
|
|
| — |
|
| — |
|
| — |
|
| 6,806 |
|
| — |
|
| 6,806 |
|
Skilled Healthcare and other loss contingency expense |
|
| — |
| — |
| — |
| 15,192 |
| — |
| 15,192 |
| ||||||||||||||||||||||||
Customer receivership and other related charges |
|
| — |
| 35,566 |
| — |
| — |
| — |
| 35,566 |
| ||||||||||||||||||||||||
Equity in net (income) loss of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| (3,894) |
|
| 1,741 |
|
| (2,153) |
|
|
| — |
|
| — |
|
| — |
|
| (1,131) |
|
| 909 |
|
| (222) |
|
(Loss) income before income tax expense |
|
| (16,941) |
|
| 51,528 |
|
| 49,941 |
|
| (261,889) |
|
| (1,741) |
|
| (179,102) |
| |||||||||||||||||||
Income tax benefit |
|
| — |
|
| — |
|
| — |
|
| (19,738) |
|
| — |
|
| (19,738) |
| |||||||||||||||||||
(Loss) income from continuing operations |
| $ | (16,941) |
| $ | 51,528 |
| $ | 49,941 |
| $ | (242,151) |
| $ | (1,741) |
| $ | (159,364) |
| |||||||||||||||||||
Loss before income tax expense |
|
| (37,612) |
|
| (3,160) |
|
| (43) |
|
| (143,284) |
|
| (909) |
|
| (185,008) |
| |||||||||||||||||||
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| 4,087 |
|
| — |
|
| 4,087 |
| |||||||||||||||||||
Loss from continuing operations |
| $ | (37,612) |
| $ | (3,160) |
| $ | (43) |
| $ | (147,371) |
| $ | (909) |
| $ | (189,095) |
|
Net Revenues
Net revenues for the ninesix months ended SeptemberJune 30, 20172018 decreased by $283.7$157.0 million, or 6.6%5.7%, as compared with the ninesix months ended SeptemberJune 30, 2016.2017.
Inpatient Services – Revenue decreased $211.4$141.6 million, or 5.7%6.0%, in the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. On a same-store basis, excluding the impact of leap year, 4149 divested underperforming facilities and the acquisition or development of tentwo additional facilities on comparability, and the $40.3 million revenue reduction for the adoption of ASC 606, inpatient services revenue declined $121.2$22.0 million, or 3.5%1.0%. There was $53.0 million less incremental revenue pertaining to the Texas MPAP program in the nine months ended September 30, 2017 as compared with the same period in 2016. The remainingThis same-store decrease of $68.2 million, or 2.0%, is principally due to a decline in the occupancy and skilled mix of legacy Genesis inpatient facilities, partially offset by increased payment rates. We attribute the decline in occupancy
60
and skilled mix principally to the impact of healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payers and conveners to divert certain skilled nursing referrals to home health or other community based care settings.
58
For an expanded discussion regarding the factors influencing our census decline, see Item 1, “Business – Recent Legislative, Regulatory and other Governmental Actions Affecting Revenue” in our Annual Report on Form 10-K filed with the SEC, as well as “Key Performance and Valuation Measures” in this MD&A for quantification of the census trends and revenue per patient day.
Rehabilitation Therapy Services – Revenue decreased $54.6$14.5 million, or 10.7%4.8% comparing the ninesix months ended SeptemberJune 30, 20172018 with the same period in 2016.2017. Of that decrease, $60.1$48.9 million is due to lost contract business, offset by $27.2$39.6 million attributed to new contracts. The adoption of ASC 606 resulted in a reduction of revenue of $6.2 million. The remaining decreaseincrease of $21.7$1.0 million is principally due to higher rates to existing contract customers and increased Medicare Part B rates, partially offset by reduced volume of services provided to existing customers due to the reduction in lengths of stay and skilled patient populations impacting the entire industry, and partially offset with price increases to certain existing customers.
Other Services – Other services revenueRevenue decreased $17.7$0.9 million, or 14.1%1.2% in the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016. On a same-store basis, after eliminating the impact of selling the hospice and homecare businesses on May 1, 2016,2017. Our other services revenue, comprised mainly of our physician services and staffing services businesses, was relatively flat with increased $3.6 million or 3.4%. This remaining increase was principally attributed to newservice revenue in the physician service business growthoffset by some regional reduction in volumes of our staffing services business.
EBITDA
EBITDA for the ninesix months ended SeptemberJune 30, 20172018 decreased by $653.5 million.$12.7 million, or 6.7%, as compared with the six months ended June 30, 2017. Excluding the impact of (gain) loss on extinguishment of debt, other (income) loss, (income), transaction costs , customer receivership and related charges, long-lived asset impairments and goodwill and identifiable intangible asset impairments, and Skilled Healthcare and other loss contingency expense, EBITDA decreased $61.3$11.0 million, or 15.1%4.5% when compared with the same period in 2016.2017. The adoption of ASC 606 did not affect comparability of EBITDA or EBITDA as adjusted among the periods presented. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.
Inpatient Services – EBITDA decreased inby $54.7 million, or 19.8% for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016, by $605.6 million.2017. Excluding the impact of other loss, (income), long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA as adjusted decreased $64.8$32.9 million, or 13.7%11.4% when compared with the same period in 2016.2017. On a same store basis, the inpatient EBITDA as adjusted decreased $56.2$14.1 million. Of that same-store decline, our self-insurance programs resulted in a reductionan increase of $5.3$19.1 million EBITDA as adjusted in the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. While our self-insurance programs in 2017 are performing as anticipated with reduced volumes related to the implementation of our portfolio optimization strategies and within expected ranges, the 2016 period included more favorable development, principallynormal claims reporting patterns of our same-store operations, we are also seeing reduced pressures in particular in our general and professional liability claims experience. We believe this is due to the combination of tort reforms in key states that have had historically high rates of claims volume and severity as well as a recognition by the plaintiffs firms that this industry cannot sustain the level of claims historically brought by them. Reductions in salaries, wages and benefits, beyond those related to self-insured workers compensation deductible programs. Improved accounts receivable collections performanceand health benefits, are principally attributed to the transition from in-house to fully outsourced dietary support functions in the second fiscal quarter of 2017. That transition resulted in a reductionshift of a commensurate amount of cost to purchased services expense in other operating expenses. On a same-store basis, lease expense for the provision for losses on accounts receivable of $2.6 million and a corresponding increase of EBITDA in the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016. The comparably higher levels of provision for accounts receivable in the nine months ended September 30, 2016 were2017 decreased $5.4 million. This reduction is principally due to resource allocation to integration activities related to acquisitions completed in 2015 as well as the relative conditionbenefit of two quarters of the acquired accounts receivables. As compared withSabra rent reduction, offset by the same periodnon-cash straight-line adjustments to those operating leases. See “Restructuring Transactions – Sabra Master Leases” in 2016, the nine months ended September 30, 2017 has $15.3 million less incremental EBITDA attributed to the Texas MPAP program due to that programs expiration in August 2016.this MD&A. The remaining $38.2$57.4 million decrease in EBITDA, as adjusted, of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “Net Revenues,.” and accelerating nursing wage inflation. Nursing wage inflation increased 2.9% inwas relatively flat comparing the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017.
Rehabilitation Therapy Services – EBITDA ofincreased by $50.2 million, or 1,119.8%, for the rehabilitation therapy segment decreased by $40.6 million comparing the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. Excluding the impact of other loss (income), customer receivership and other related charges, and long-lived asset impairments, EBITDA decreased $2.1as adjusted increased $13.9 million, or 3.5%34.0% when compared with the same period in 2016. Lost2017. New therapy contracts and service fees exceeded newlost contracts by $4.8$0.5 million. Startup costslosses of our operations in China for the ninesix months ended SeptemberJune 30, 2017 exceeded those in2018 decreased $3.2 million as compared with the comparablesame period in 2016 by $4.1 million.2017. The remaining increase of EBITDA as adjusted of $6.8$10.2 million is principally attributed to overhead cost reductions, favorable average costs of labor and rate increases, partially offset by contraction of services to existing customers referenced above in “Net Revenues”, higher average costs of labor and by therapist efficiency which declined to 67.9% in the six months ended June 30, 2018 compared with 68.0% in the comparable period in the prior year.
6159
reductions, favorable average costs of labor and pricing increases, partially offset by therapist efficiency which declined to 67.5% in the nine months ended September 30, 2017 compared with 68.7% in the comparable period in the prior year.
Currently, we operate through affiliates in China a total of twelve13 locations comprised of the threefour rehabilitation clinics in Guangzhou, Shanghai and Hong Kong, a rehabilitation facility, and inpatient and outpatient rehabilitation services in sevenfive hospital joint ventures and onethree nursing home.homes. Startup and development costs of these Chinese ventures are expected to exceed revenues infor the remainder of fiscal 2017.2018.
Other Services — EBITDA decreased $50.8increased $0.9 million infor the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016. On a same-store basis, excluding the impact of the sale of the hospice and home health business effective May 1, 2016, EBITDA decreased $3.8 million,2017. This improvement was principally driven by increased information technology costsproductivity in our physician services business to expand our accountable care organization participation and value based programing complianceservice business.
Corporate and Eliminations — EBITDA increased $43.4decreased $9.0 million, inor 9.7%, for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. EBITDA of our corporate function includes other income, charges, gains or losses associated with transactions that in our chief operating decision maker’s view are outside of the scope of our reportable segments. These other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $30.9$19.6 million of the net increasedecrease in EBITDA. Corporate overhead costs decreased $12.3$7.3 million, or 8.7%8.5%, in the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining increasedecrease in EBITDA of $0.2 million is primarily the result of incremental investment income, partially offset with a reduction in investment earnings from our unconsolidated affiliates accounted for on the equity method.
(Gain) loss on early extinguishment of debt – On March 6, 2018, we entered into a new asset based lending facility agreement, qualifying as an extinguishment of the previous revolving credit facility, and resulting in the write-off of $9.8 million of deferred financing fees related to the previous revolving credit facility. See Note 3 – “Significant Transactions and Events – Restructuring Transactions” and Note 8 – “Long-term Debt.”
Other (income) loss (income) — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets. Other income, net, of $22.2 million for the six months ended June 30, 2018 principally represents non-cash gains on leases exited or modified in the period. Other loss recognized for the ninethree months ended SeptemberJune 30, 2017 was a net $15.6of $13.2 million, is principally attributable to the non-cash exit or salecosts of 28 skilled nursing and assisted facilities over the course of 2017. Other income for the same periodleases exited in 2016 was principally the recognized gain of $44.0 million on the sale of hospice and homecare operations effective May 1, 2016 and net gain of $4.1 million on sale of two skilled nursing and two assisted living facilities over the course of 2016.that period.
Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the ninesix months ended SeptemberJune 30, 2018 and 2017 and 2016 were $7.9$15.2 million and $9.8$6.8 million, respectively.
Customer receivership – In July 2017, a significant customer of our rehabilitation services business filed for receivership. This customer operated 65 skilled nursing facilities in six states at the time of the filing. While we are assessing our options relative to this customer’s accounts, both the accumulated accounts receivable owing and future revenue prospects, we have recorded a $35.6 million non-cash impairment charge in the nine months ended September 30, 2017, representing the outstanding accounts receivable balance from this customer. Additionally, in September 2017, we became aware of separate customer operating a single nursing center in West Virginia sought protection through a receivership filing. We recorded a $0.3 million charge in the nine months ended September 30, 2017, representing the outstanding accounts receivable balance from this customer.
Asset ImpairmentsLong-lived asset impairments — In the ninesix months ended SeptemberJune 30, 20172018 we recognized impairments of long-lived assetsproperty and goodwill and identifiable intangible assetsequipment of $163.4 million and $360.0 million, respectively.$55.6 million. For more information about the conditions of the business which contributed to these impairments, see “Going Concern ConsiderationsIndustry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Industry TrendsFinancial Condition and Liquidity Considerations” in this MD&A, as well as Note 1 – “General Information – Going Concern Considerations” and Note 1514 – “Asset Impairment Charges.Charges - Long-Lived Assets with a Definite Useful Life.”
Goodwill and identifiable intangible asset impairments — In the six months ended June 30, 2018 we recognized impairments of identifiable intangible favorable lease assets of $1.1 million. For more information about the conditions of the business which contributed to these impairments, see “Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue” and “Financial Condition and Liquidity Considerations” in this MD&A, as well as Note 14 – “Asset Impairment Charges -Identifiable Intangible Assets with a Definite Useful Life.”
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Skilled Healthcare and other loss contingency expense — For the nine months ended September 30, 2016, we accrued $15.2 million for contingent liabilities. There was no change in the estimated settlement value of that contingent liability in the nine months ended September 30, 2017. As previously disclosed, the 2016 accrual pertains to the agreement in principle reached with the DOJ in July 2016 and finalized in June 2017. See Note 12 – “Commitments and Contingencies – Legal Proceedings.”
Other Expense
The following discussion applies to the consolidated expense categories between consolidated EBITDA and (loss) income from continuing operations of all reportable segments, other services, corporate and eliminations in our consolidating statement of operations for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017.
Depreciation and amortization — Each of our reportable segments, other services and corporate overhead have depreciating property, plant and equipment, including depreciation on leased properties accounted for as capital leases or as a financing obligation. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets. Depreciation and amortization expense decreased $6.8$9.6 million in the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016, principally due to divestiture activity.2017. On a same storesame-store basis, depreciation and amortization increased $1.7decreased $11.1 million in the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017 The six months ended June 30, 2017 included $4.4 million of amortization expense related to intangible management contracts of third party operations in Texas. Those contracts became impaired during third quarter 2017 when the Texas MPAP program failed to be renewed, resulting in $0 amortization expense in the six months ended June 30, 2018. Depreciation and amortization expense in the six months ended June 30, 2018 decreased by $3.6 million for the combined impact of impairments of property and equipment and reassessed useful lives of certain long-lived assets. The remaining decrease of $7.1 million is principally due to divestiture activity in the inpatient services segment.
Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our Revolving Credit Facilities, Term Loan Facility, Real Estate Bridge Loans and mortgagedebt instruments, as well as the expense associated with leases accounted for as capital leases or financing obligations. Interest expense decreased $27.4$16.1 million in the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in the prior year.2017. On a same store basis, interest expense is down $23.6$16.1 million in the ninesix months ended SeptemberJune 30, 20162018 as compared with the same period in 2016. Of that decrease, $1.6 million is due to a reduction in cash interest resulting from the reduced borrowings under the Term Loan Facility through application of proceeds from asset sales and Real Estate Bridge Loans refinanced with lower rate HUD guaranteed mortgage debt. The remaining $22.0 million2017. That decrease is principally attributed to non-cash accountingthe net impact of the Restructuring Transactions, which lowered the debt service payments required under the Welltower Master Lease Amendment, which is accounted for lease transactions completed over the past twelve months.as a financing obligation, and resulted in a lower effective interest rate. See “Restructuring Transactions” in this MD&A.
Income tax expense — For the ninesix months ended SeptemberJune 30, 2017,2018, we recorded an income tax expensebenefit of $5.7$0.5 million from continuing operations representing an effective tax rate of (0.7)%0.3% compared to an income tax benefitexpense of $19.7$4.1 million from continuing operations, representing an effective tax rate of 11.0%(2.2)% for the same period in 2016.2017. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve. Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets. As of SeptemberJune 30, 2017,2018, we have determined that the valuation allowance is still necessary.
Net Loss Attributable to Genesis Healthcare, Inc.
The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the ninesix months ended SeptemberJune 30, 20172018 as compared with the same period in 2016.2017.
Loss from discontinued operations — Prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disposals of Components of an Entity (ASU 2014-08), we routinely classified reporting units exited, closed or otherwise disposed as discontinued operations. ASU 2014-08 changed the criteria to qualify such transactions for discontinued operations treatment, making it hard to reach that conclusion. Therefore, since 2014, none of our more recently exited, closed or otherwise disposed assets have been classified as discontinued operations. The activity reported as discontinued operations in the nine months ended September 30, 2017 and the same period in 2016 was de
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minimis, associated with exit, closure and disposal activities of reporting units identified as discontinued operations prior to adoption of ASU 2014-08.
Net loss attributable to noncontrolling interests — Following the closing of the Combination,On February 2, 2015, FC-GEN combined with Skilled Healthcare Group, Inc. and the combined results of Skilled and FC-GEN were consolidated with approximately 42%42.0% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity. The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares. Since the Combination,combination, there have been conversions of 2.84.8 million Class C common stock, leaving a remaining direct noncontrolling economic interest of 39.4%36.8%. For the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016,a loss of $316.1$64.4 million and $75.1$74.3 million, respectively, has been attributed to the Class C common stock.
In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any VIEsvariable interest entities (VIEs) where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to
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receive a majority of the entity's residual returns, or both. We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, income of $1.6$1.0 million and $2.2$1.1 million, respectively, has been attributed to these unaffiliated third parties.
Liquidity and Capital Resources
Cash Flow and Liquidity
The following table presents selected data from our consolidated statements of cash flows (in thousands):
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| Nine months ended September 30, |
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| 2017 |
| 2016 |
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Net cash provided by operating activities |
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| $ | 67,358 |
| $ | 35,302 |
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| $ | 11,469 |
| $ | 69,127 |
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Net cash provided by investing activities |
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| 49,400 |
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| 962 |
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Net cash used in financing activities |
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| (117,575) |
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| (43,967) |
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Net decrease in cash and cash equivalents |
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| (817) |
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| (7,703) |
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Net cash (used in) provided by investing activities |
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| (35,082) |
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| 43,736 |
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Net cash provided by (used in) financing activities |
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| 108,047 |
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| (98,261) |
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Net increase in cash, cash equivalents and restricted cash and equivalents |
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| 84,434 |
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| 14,602 |
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Beginning of period |
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| 51,408 |
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| 61,543 |
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| 58,638 |
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| 63,460 |
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End of period |
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| $ | 50,591 |
| $ | 53,840 |
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| $ | 143,072 |
| $ | 78,062 |
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Net cash provided by operating activities in the ninesix months ended SeptemberJune 30, 2017 increased $32.12018 decreased $57.7 million compared with the same period in 2016.2017. The increasedecrease in cash provided by operations is principally due to improved collections of inpatient account receivablean increase in trade payable disbursements in the ninesix months ended SeptemberJune 30, 20172018 as compared withto the same period in 2016, partially offset by timing of disbursements. The ninesix months ended SeptemberJune 30, 2017 was negatively impacted by2017. The Restructuring Transactions executed in the early retirementfirst quarter of workers’ compensation reserves2018, as well as the acceleration of $25.8 million.payments for self-insurance programs, resulted in significant paydown of trade payables that had accumulated through December 31, 2017.
Net cash provided byused in investing activities in the ninesix months ended SeptemberJune 30, 20172018 was $49.4$35.1 million compared to net cash provided by investing activities of $1.0$43.7 million in the six months ended June 30, 2017. There were no asset sales in the six months ended June 30, 2018 compared to $79.6 million of asset sales in the same period in 2016. There were proceeds from the asset sales in the nine months ended September 30, 2017 of $79.3 million principally from the sale of 18 skilled nursing facilities located in Kansas, Missouri, Nebraska and Iowa, as compared with the same period in 2016, which included the receipt of $149.4 million in asset sales consisting primarily of $72.0 million, $67.0 million, $9.4 million and $1.9 million for the sale of our hospice and home care business, 18 assisted living facilities in Kansas, an office building in Albuquerque, New Mexico and a closed skilled nursing facility in Missouri, respectively. There were no asset acquisitions in the nine months ended September 30, 2017 compared to a use of investing cash flow of $108.3 million related to the purchase of skilled nursing facilities, which include the acquisition of 11 skilled nursing facilities in Pennsylvania, North Carolina, Maryland, New Jersey and Vermont for $106.8 million, for the same period in the prior year.2017. Routine capital expenditures for the ninesix months ended SeptemberJune 30, 20172018 decreased by $22.3$6.7 million as compared with the same period in the prior year. The remaining incremental use of cash from investing activities of $12.1 million in the nine
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six months ended SeptemberJune 30, 20172018 as compared withto the same period in 2016 is principallythe prior year of $5.9 million was due primarily to the change in restricted cashpurchases exceeding sales and equivalents in our captive insurance companies, offset by net purchases inmaturities of marketable securities.
Net cash used inprovided by financing activities was $117.6 million in the ninesix months ended SeptemberJune 30, 20172018 was $108.0 million compared to a use of $44.0 million in the same period in 2016. The net increase in cash used in financing activities of $73.6$98.3 million in the six months ended June 30, 2017. The net increase in cash provided by financing activities of $206.3 million is principally attributed to debt borrowings exceeding debt repayments in the ninesix months ended SeptemberJune 30, 20172018 as compared to the same period in 2016.2017. In the ninesix months ended SeptemberJune 30, 2018, we had proceeds from the issuance of debt of $562.4 million, which includes $438.0 million from the ABL Credit Facilities, $73.0 million from the MidCap Real Estate Loans, $40.0 million from the 2018 Term Loan and $10.9 million from the refinancing of a bridge loan with a HUD insured loan. In the six months ended June 30, 2017, we had a net decreasereceived $17.5 million in repayment activity underproceeds from HUD insured financing on two skilled nursing facilities. Repayment of long-term debt in the Revolving Credit Facilities of $101.4six months ended June 30, 2018 was $457.4 million as compared with $184.0to $99.4 million of reduced Revolving Credit Facilities borrowings in the same period of the prior year. The increase in 2016.cash used was due primarily to $363.2 million in the retirement of our prior Revolving Credit Facilities, $69.8 million in the paydown of Welltower Real Estate Loans and $9.9 million in the payoff of a bridge loan with the proceeds from a HUD-insured refinancing. In the ninesix months ended SeptemberJune 30, 2017, we used $72.1 million of the proceeds from the sale of 18 skilled nursing facilities located in Kansas, Missouri, Nebraska and Iowa and the aforementioned $17.5 million in HUD proceeds to repay indebtedness. In the nine months ended September 30, 2017, weThe remaining increase in cash used $23.9 million in proceeds from HUD insured financing on three skilled nursing facilities to repay Real Estate Bridge Loan indebtedness. In the nine months ended September 30, 2016, we used $54.2 million of the proceeds from the sale of 18 assisted living facilities in Kansas and $72.0 million from the sale of our hospice and home care business to repay long-term debt.debt of $4.7 million relates to an increase in routine debt payments. In the ninesix months ended SeptemberJune 30, 2016,2018, we usedhad net borrowings under the proceedsrevolving credit facilities of $90.9$20.8 million as compared with $19.3 million of newly issued mortgage debt to purchase skilled nursing facilities. Innet repayments under the nine months ended September 30, 2016, we used $143.2 million of proceeds from HUD insured financing on 21 skilled nursingrevolving credit facilities to repay $143.2 million of Real Estate Bridge Loan indebtedness. In the nine months ended September 30, 2016, we used $120.0 million of proceeds from the Term Loans to assist in repayment of the remaining $153.4 million balance of the retired term loan facility. The remaining net reduction in the use of cash of $12.4 million in the nine months ended September 30, 2017 compared with the same period in 2016 is principally due to scheduled debt repayments,2017. In the six months ended June 30, 2018, we paid debt issuance costs distributionsof $16.7 million, which includes $13.6 million in fees for the ABL Credit Facilities and $2.9 million in fees for the MidCap Real Estate Loans, compared to noncontrolling interests and proceeds from$2.7 million in debt issuance costs paid in the same period in 2017. In the six months ended June 30, 2017, we received $6.1 million in tenant improvement drawsallowances from landlords. The remaining increase in net cash used in financing activities of $0.6 million is due primarily to debt settlement costs in the 2017 period exceeding similar financing activities in the 2016 period.six months ended June 30, 2018.
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Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our RevolvingABL Credit Facilities.
The objectives of our capital planning strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allows us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment. Maintaining adequate liquidity is a function of our results of operations, unrestricted cash and cash equivalents and our available borrowing capacity.
At SeptemberJune 30, 2017,2018, we had cash and cash equivalents of $50.6$78.9 million and available borrowings under our RevolvingABL Credit Facilities of $41.9 million, after taking into account $54.8 million of letters of credit drawn against our Revolving Credit Facilities.$55.6 million. During the ninesix months ended SeptemberJune 30, 2017,2018, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities. We expect that
Restructuring Transactions
Overview
During the quarter ended June 30, 2018, we entered into a number of agreements, amendments and new financing facilities further described below in an effort to strengthen significantly our capital structure. In total, the Restructuring Transactions are estimated to reduce our annual cash balances, available borrowings underfixed charges by approximately $62.0 million beginning in 2018 and provided $70.0 million of additional cash and borrowing availability, increasing our revolving credit facilitiesliquidity and expected cash flow from operations will be insufficient to meetfinancial flexibility.
In connection with the Restructuring Transactions, we entered into a new asset based lending facility agreement, replacing our prior Revolving Credit Facilities and eliminating its forbearance agreement. Also in connection with the Restructuring Transactions, we amended the financial covenants in all of our fixed obligations. Becausematerial loan agreements and all but two of these factors and our current financial condition we are seekingmaterial master leases. Financial covenants beginning in 2018 were amended to preserve cash and execute onaccount for changes in our capital structure as a result of the Restructuring Plans with our key credit parties. In connection with these Restructuring Plans,Transactions and to account for the current business climate. We received waivers from the counterparties to two of our material master leases, for which agreements to amend financial covenants were not attained, with respect to compliance with financial covenants.
Asset Based Lending Facilities
On March 6, 2018, we entered into a new asset based lending facility agreement with MidCap. The agreement provides for a $555 million asset based lending facility comprised of (a) a $325 million first lien term loan facility, (b) a $200 million first lien revolving credit facility and (c) a $30 million delayed draw term loan facility.
The ABL Credit Facilities have a five-year term and proceeds were used to replace and repay in full our existing $525 million Revolving Credit Facilities scheduled to mature on February 2, 2020. The ABL Credit Facilities include a springing maturity clause that would accelerate its maturity 90 days prior to the Welltower Bridge Loans,maturity of the Term Loan Agreements, Welltower Real Estate Loans and certain other loans have agreed to defer all principal and interest payments through February 15, 2018.
If we are unable to generate sufficient funds to meet our obligations, we may be required to refinance, restructure or otherwise amend some or all of such obligations, divest assets or raise additional equity. There is no assurance that such activities can be accomplished or, if accomplished, would raise sufficient funds to meet these obligations.
Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants containedMidCap Real Estate Loans, in the majorevent those agreements are not extended or refinanced. The revolving credit facility includes a swinging lockbox arrangement whereby we transfer all funds deposited within designated lockboxes to MidCap on a daily basis and other agreements, is dependent upon, among other things, our ability to develop or attain a sustainable capital structure and our future performance which is subject to financial, economic, competitive, regulatory and other factors. Manythen draw from the revolving credit facility as needed. In accordance with U.S. GAAP, we have presented the entire revolving credit facility borrowings balance of these factors are beyond our control.
As currently structured, it is unlikely$83.8 million in current installments of long-term debt at June 30, 2018. Despite this classification, we expect that we will be ablehave the ability to generate sufficient cash flowborrow and repay on the revolving credit facility through its maturity on March 6, 2023.
Borrowings under the term loan and revolving credit facility components of the ABL Credit Facilities bear interest at a 90-day LIBOR rate (subject to covera floor of 0.5%) plus an applicable margin of 6%. Borrowings under the delayed draw component bear interest at a 90-day LIBOR rate (subject to a floor of 1%) plus an applicable margin of 11%. Borrowing levels under the term loan and revolving credit facility components of the ABL Credit Facilities are limited to a borrowing base that is computed based upon the level of eligible accounts receivable.
The ABL Credit Facilities contain representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default and security interests that are customarily required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties.for similar financings.
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We and our counterpartiesTerm Loan Amendment
On March 6, 2018, we entered into an amendment to the Restructuring Plans haveterm loan with affiliates of Welltower and Omega (the Term Loan Amendment) pursuant to which we borrowed an additional $40 million to be used for certain debt repayment and general corporate purposes (the 2018 Term Loan).
The 2018 Term Loan will mature July 29, 2020 and bears interest at a rate equal to 10.0% per annum, with up to 5% per annum to be paid in kind. The Term Loan Amendment also changes the interest rate applicable to the initial loans funded on July 29, 2016 to be equal to 14% per annum, with up to 9% per annum to be paid in kind.
Among other things, the Term Loan Amendment eliminates any principal amortization payments on any of the loans prior to maturity and modifies the financial covenants beginning in 2018.
Welltower Master Lease Amendment
On February 21, 2018, we entered into preliminarya definitive agreement with Welltower to amend the Welltower Master Lease (the Welltower Master Lease Amendment). The Welltower Master Lease Amendment reduces our annual base rent payment by $35 million effective retroactively as of January 1, 2018, reduces the annual rent escalator from approximately 2.9% to 2.5% on April 1, 2018 and non-binding agreementsfurther reduces the annual rent escalator to 2.0% beginning January 1, 2019. In addition, the Welltower Master Lease Amendment extends the initial term of the master lease by five years to January 31, 2037 and extends the renewal term of the master lease by five years to December 31, 2048. The Welltower Master Lease Amendment also provides a potential upward rent reset, conditioned upon achievement of certain upside operating metrics, effective January 1, 2023. If triggered, the incremental rent from the rent reset is capped at $35 million.
Omnibus Agreement
On February 21, 2018, we entered into an Omnibus Agreement with Welltower and Omega, pursuant to which Welltower and Omega committed to provide up to $40 million in an effortnew term loans and amend the current term loan to, attainamong other things, accommodate a sustainable capital structure for us. We believe that it is in the best interest of all creditors to grant necessary waivers or reach negotiated settlements to enable us to continue as a going concern while we work with our counterparties to the Restructuring Plans to strengthen significantly our capital structure. However, there can be no assurance that such waivers will be received in future periods or such settlements reached. If future defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained, the defaults can cause accelerationrefinancing of our financial obligations underexisting asset based credit facility, in each case subject to certain conditions, including the completion of a restructuring of certain of our agreements, whichother material debt and lease obligations. See Term Loan Amendment above.
The Omnibus Agreement also provides that upon satisfying certain conditions, including raising new capital that is used to pay down certain indebtedness owed to Welltower and Omega, (a) $50 million of outstanding indebtedness owed to Welltower will be written off and (b) we may request conversion of not more than $50 million of the outstanding balance of our Welltower real estate loans into equity. If the proposed equity conversion would result in any adverse REIT qualification, status or compliance consequences to Welltower, then the debt that would otherwise be converted to equity shall instead be converted into a loan incurring paid in kind interest at 2% per annum compounded quarterly, with a positionterm of ten years commencing on the date the applicable conditions precedent to satisfy.the equity conversion have been satisfied. Moreover, we agreed to support Welltower in connection with the sale of certain of Welltower’s interests in facilities covered by the Welltower Master Lease, including negotiating and entering into definitive new master lease agreements with third party buyers.
In connection with the eventOmnibus Agreement, we agreed to issue warrants to Welltower and Omega to purchase 900,000 shares and 600,000 shares, respectively, of a failureour Class A Common Stock at an exercise price equal to obtain necessary waivers or otherwise achieve$1.33 per share. Issuance of the fixed charge reductions contained inwarrant to Welltower is subject to the Restructuring Plans, wesatisfaction of certain conditions. The warrants may be forced to seek reorganization underexercised at any time during the U.S. Bankruptcy Code. The existenceperiod commencing six months from the date of these factors raises substantial doubt about our ability to continue as a going concern.issuance and ending five years from the date of issuance.
Financing Activities
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Welltower Real Estate Loans Amendment
During the nine months ended September 30, 2017,On February 21, 2018, we completed three mortgage refinancings through HUD totaling $23.9 million. Since the Combination, we have repaid or refinanced $238.0 million ofentered into an amendment (the Real Estate Bridge Loans with $292.8 million remaining outstanding at September 30, 2017.Loan Amendments) to the Welltower real estate loan (Welltower Real Estate Loans) agreements. The Real Estate Loan Amendments adjust the annual interest rate beginning February 15, 2018 to 12%, of which 7% will be paid in cash and 5% will be paid in kind. Previously, these loans carried a 10.25% cash pay interest rate that increased by 0.25% annually on January 1.
In connection with the Real Estate Loan Amendments, we agreed to make commercially reasonable efforts to secure commitments by April 1, 2018 to repay no less than $105.0 million of the Welltower Real Estate Loans. In the event we are unsuccessful securing such commitments or otherwise reducing the outstanding obligation of the Welltower Real Estate Loans, the cash pay component of the interest rate will be increased by approximately $2.0 million annually while the paid in kind component of the interest rate will be decreased by a corresponding amount. As of June 30, 2018, we secured repayments or commitments totaling approximately $82 million.
MidCap Real Estate Loans
On March 30, 2018, we entered into the MidCap Real Estate Loans which have combined available proceeds of $75.0 million, $73.0 million of which was drawn as of June 30, 2018. The MidCap Real Estate Loans are secured by 18 skilled nursing facilities and are subject to a five-year term maturing on March 30, 2023. The maturity of the MidCap Real Estate Loans will accelerate in the event the ABL Credit Facilities are repaid in full and terminated. The loans, which are interest only in the first year, are subject to an annual interest rate equal to LIBOR (subject to a floor of 1.5%) plus an applicable margin of 5.85%. Beginning April 1, 2019, mandatory principal payments shall commence with the balance of the loans to be repaid at maturity. Proceeds from the MidCap Real Estate Loans were used to repay partially the Welltower Real Estate Loans.
Sabra Master Leases
In 2017, we entered into a strategic diningdefinitive agreement with Sabra resulting in permanent and nutrition partnershipunconditional annual cash rent savings of $19 million, which became effective January 1, 2018. Sabra continues to further leveragepursue and we continue to support Sabra’s previously announced sale of our national platforms, process expertiseleased assets. At the closing of such sales, we expect to enter into lease agreements with new landlords for a majority of the assets currently leased with Sabra. For the six months ended June 30, 2018, we have terminated the Sabra lease agreement of 20 skilled nursing facilities and technology. The relationship, which is expectedone assisted/senior living facility but continue to be accretive to us, will provide additional liquidity, cost efficiencyoperate these facilities under new lease arrangements with different landlords. For the six months ended June 30, 2018, we have terminated the Sabra lease agreement and enhanced operational performance.fully divested of six skilled nursing facilities.
Other Financing Activities
HUD Insured Refinancings
During the six months ended June 30, 2018, we completed one mortgage refinancing through HUD totaling $10.9 million and retired fully a real estate loan of $9.9 million.
Divestiture of Non-Strategic Facilities
Consistent with our strategy to divest assets in non-strategic markets, we have exited the inpatient operations of 3020 skilled nursing facilities in 10five states, including:
· | The closure of one skilled nursing facility located in |
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· | The sale of |
· | The lease expiration of one skilled nursing facility located in California on |
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· | The sale and lease termination of |
· | The lease expiration of one behavioral outpatient clinic located in California on July 1, 2018. A loss was recognized totaling $0.2 million. |
· | The sale and lease termination of |
| · | The sale and lease termination of one skilled nursing facility located in Pennsylvania on August 1, 2018 that was subject to a master lease agreement with Second Spring. |
· | The sale and lease termination of one skilled nursing facility located in Texas on August 1, 2018. |
Financial Covenants
The RevolvingABL Credit Facilities, the Term Loan Agreement and the Welltower BridgeReal Estate Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio a springing minimum fixed charge coverage ratio tied to minimum liquidity and maximum capital expenditures. At SeptemberJune 30, 2017,2018, we were not in compliance with certainall of the financial covenants contained in the Credit Facilities. We received waivers from the counterparties to the Term Loan Agreement and the Welltower Bridge Loans for any and all breaches of financial or other covenants as of September 30, 2017. We are engaged in discussions with our counterparties to the Revolving Credit Facilities to secure a 90-day forbearance agreement through late January 2018.
We have master lease agreements with Welltower, Sabra Omega and Second SpringOmega (collectively, the Master Lease Agreements). Our Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity. At SeptemberJune 30, 2017,2018, we were not in compliance with the covenants contained in the Master Lease Agreements. We received waivers from the counterparties to the Master Lease Agreements for any and all breaches of financial and other covenants as of September 30, 2017.
We have a master lease agreement with CBYWSecond Spring involving 52 of our facilities. We did not meet a financial covenant contained in this master lease agreement at June 30, 2018. We received a waiver for this covenant breach.
We have a master lease agreement with Cindat Best Years Welltower JV LLC involving 28 of our facilities. We did not meet certain financial covenants contained in this master lease agreement at SeptemberJune 30, 2017.2018. We received a waiver for this covenant breach through October 24, 2019.breach.
At SeptemberJune 30, 2017,2018, we did not meet certain financial covenants contained in threeseven leases related to 2645 of our facilities.facilities, which are not included in the Restructuring Transactions. We are and expect to continue to be current in the timely payment of our obligations under such leases. These leases do not have cross default provisions, nor do they trigger cross default provisions in any of our other loan or lease agreements. We will continue to work with the related credit parties to amend such leases and the related financial covenants. We do not believe the breach of such financial covenants has a material adverse impact on us at SeptemberJune 30, 2017.2018.
We believe thatOur ability to maintain compliance with our covenants depends in part on management’s ability to increase revenue and control costs. Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with our quarterly covenant compliance requirements. Should we fail to comply with our covenants at a future measurement date, we would, absent necessary and timely waivers and/or amendments, be in the best interests of all creditors to grant necessary waivers or reach negotiated settlements to enable us to execute and complete the Restructuring Plans in order to establish a sustainable capital structure.
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However, there can be no assurance that such waivers will be received in future periods or such settlements will be reached. If the defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained, the defaults can cause acceleration of our financial obligationsdefault under certain of our agreements, which weexisting credit agreements. To the extent any cross-default provisions may not be in a position to satisfy.
There can be no assurances that any of these efforts will prove successful. Inapply, the event of a failure to obtain necessary waivers or otherwise achieve a restructuring ofdefault would have an even more significant impact on our financial obligations, we may be forced to seek reorganization under the U.S. Bankruptcy Code.position.
Concentration of Credit Risk
We are exposed to the credit risk of our third-party customers, many of whom are in similar lines of business as us and are exposed to the same systemic industry risks of operations, as we, resulting in a concentration of risk. These include organizations that utilize our rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in regulatory and systemic industry conditions.
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Management assesses its exposure to loss on accounts at the customer level. The greatest concentration of risk exists in our rehabilitation services business where we have over 200 distinct customers, many being chain operators with more than one location. The four largest customers of our rehabilitation services business comprise $62.1 million, approximately 67%54%, of the net outstanding contract receivables in that business.the rehabilitation services business at June 30, 2018. One customer, which is a related party of ours, comprises $36.5 million, approximately 32%, of the net outstanding contract receivables in the rehabilitation services business at June 30, 2018. An adverse event impacting the solvency of any one or several of these large customers resulting in their insolvency or other economic distress would have a material impact on us. See discussion of customer receivership in Results of Operations.
Our business is subject to a number of other knownFinancial Condition and unknown risks and uncertainties, which are discussed in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the SEC on March 6, 2017, and in our Quarterly Reports on Form 10-Q, including the risk factors discussed herein in Part II. Item 1A.
Going ConcernLiquidity Considerations
The accompanying unauditedconsolidated financial statements have been prepared on the basis we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
In evaluating our ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern for 12 months following the date our financial statements were issued (November 8, 2017)(August 9, 2018). Management considered the recent results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due before November 8, 2018.August 9, 2019. Based upon such considerations, management determined that we are able to continue as a going concern for 12 months following the date of issuance of these financial statements (August 9, 2018).
Our results of operations have been negatively impacted by the persistent pressure of healthcare reforms enacted in recent years. This challenging operating environment has been most acute in our inpatient segment, but also has had a detrimental effect on our rehabilitation therapy segment and its customers. In recent years, we have implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment. These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments accelerated in 2017.
In response to these issues, we entered into a number of agreements, amendments and new financing facilities described under Restructuring Transactions above. In total, these agreements and amendments are estimated to reduce our annual cash fixed charges by approximately $62.0 million beginning in 2018. The new financing agreements provided $70.0 million of additional cash and borrowing availability, increasing our liquidity and financial flexibility. In connection with the third quarter of 2017. These factors caused us to be unable to complyRestructuring Transactions, we entered into the ABL Credit Facilities agreement, replacing our prior Revolving Credit Facilities. Also in connection with certainthe Restructuring Transactions, we amended the financial covenants at September 30, 2017 underin all of our material loan agreements and all but two of our material master leases. Financial covenants beginning in 2018 were amended to account for changes in our capital structure as a result of the Revolving Credit Facilities,Restructuring Transactions and to account for the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements and other agreements.current business climate. We have received waivers from the partiescounterparties to two of our material master leases, for which agreements to amend financial covenants were not attained, with respect to compliance with financial covenants.
Risk and Uncertainties
Should we fail to comply with our debt and lease covenants at a future measurement date, we could, absent necessary and timely waivers and/or amendments, be in default under certain of our existing debt and lease agreements. To the extent any cross-default provisions may apply, the default could have an even more significant impact on our financial position.
Although we are in compliance and project to be in compliance with our material debt and lease covenants, the ongoing uncertainty related to the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements at September 30, 2017. We are engagedimpact of healthcare reform initiatives may have an adverse impact on our ability to remain in discussionscompliance with our counterpartiescovenants. Such uncertainty includes, changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Revolving Credit FacilitiesPatient Protection and Affordable Care Act of 2010 currently being considered in Congress, among others.
There can be no assurance that the confluence of these and other factors will not impede our ability to secure a 90-day forbearance agreement through late January 2018.
meet our debt and lease covenants in the future.
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Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in the major agreements and other agreements, is dependent upon, among other things, our ability to obtain a sustainable capital structure and our future performance which is subject to financial, economic, competitive, regulatory and other factors. Many of these factors are beyond our control. As currently structured, it is unlikely that we will be able to generate sufficient cash flow to cover required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties.
We and our counterparties to the Restructuring Plans have entered into preliminary and non-binding agreements in an effort to attain a sustainable capital structure for us. See Note 16 – “Subsequent Events.” We believe that it is in the best interest of all creditors to grant necessary waivers or reach negotiated settlements to enable the us to continue as a going concern while we work with our counterparties to the Restructuring Plans to strengthen significantly our capital structure. However, there can be no assurance that timely and adequate waivers will be received in future periods or such settlements reached. If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not timely obtained, the defaults can cause acceleration of our financial obligations under certain of our agreements, which we may not be in a position to satisfy. Accordingly, we have classified the obligations of the effected agreements as current liabilities in our consolidated balance sheets as of September 30, 2017.
In the event of a failure to obtain necessary and timely waivers or otherwise achieve the fixed charge reductions contained in the Restructuring Plans, we may be forced to seek reorganization under the U.S. Bankruptcy Code. See Part II. Item 1A, “Risk Factors.”
The existence of these factors raises substantial doubt about our ability to continue as a going concern.
Off Balance Sheet Arrangements
We had outstanding letters of credit of $54.8 million under our letter of credit sub-facility on our Revolving Credit Facilities as of September 30, 2017. These letters of credit are principally pledged to landlords and insurance carriers as collateral. We are not involved in any other off-balance-sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations
The following table sets forth our contractual obligations, including principal and interest, but excluding non-cash amortization of discounts or premiums and debt issuance costs established on these instruments, as of SeptemberJune 30, 20172018 (in thousands).
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| More than |
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| More than |
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| Total |
| 1 Yr. |
| 2-3 Yrs. |
| 4-5 Yrs. |
| 5 Yrs. |
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| Total |
| 1 Yr. |
| 2-3 Yrs. |
| 4-5 Yrs. |
| 5 Yrs. |
| ||||||||||
Revolving credit facilities |
| $ | 403,811 |
| $ | 18,262 |
| $ | 385,549 |
| $ | — |
| $ | — |
| ||||||||||||||||
Term loan agreement |
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| 169,093 |
|
| 17,772 |
|
| 151,321 |
|
| — |
|
| — |
| ||||||||||||||||
Real estate bridge loans |
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| 422,936 |
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| 29,747 |
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| 70,844 |
|
| 322,345 |
|
| — |
| ||||||||||||||||
Asset based lending facilities |
| $ | 539,694 |
| $ | 111,296 |
| $ | 55,010 |
| $ | 373,388 |
| $ | — |
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Term loan agreements |
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| 221,620 |
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| 8,876 |
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| 212,744 |
|
| — |
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| — |
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Real estate loans |
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| 410,610 |
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| 23,355 |
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| 50,174 |
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| 337,081 |
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| — |
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HUD insured loans |
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| 412,774 |
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| 13,510 |
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| 27,072 |
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| 27,072 |
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| 345,120 |
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| 427,078 |
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| 14,270 |
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| 28,540 |
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| 28,540 |
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| 355,728 |
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Notes payable |
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| 106,632 |
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| 2,410 |
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| 5,300 |
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| 98,922 |
|
| — |
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|
| 105,861 |
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| 10,249 |
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| 78,628 |
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| 16,984 |
|
| — |
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Mortgages and other secured debt (recourse) |
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| 13,235 |
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| 11,131 |
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| 2,104 |
|
| — |
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| — |
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| 12,799 |
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| 10,846 |
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| 1,953 |
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| — |
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| — |
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Mortgages and other secured debt (non-recourse) |
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| 31,459 |
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| 13,169 |
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| 2,617 |
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| 2,617 |
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| 13,056 |
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|
| 24,035 |
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| 2,511 |
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| 4,923 |
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| 4,527 |
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| 12,074 |
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Financing obligations |
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| 9,361,408 |
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| 275,150 |
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| 569,031 |
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| 587,641 |
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| 7,929,586 |
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| 7,931,428 |
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| 234,780 |
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| 483,389 |
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| 487,007 |
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| 6,726,252 |
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Capital lease obligations |
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| 3,434,760 |
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| 90,425 |
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| 185,786 |
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| 191,316 |
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| 2,967,233 |
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| 3,863,996 |
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| 91,414 |
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| 181,912 |
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| 189,910 |
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| 3,400,760 |
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Operating lease obligations |
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| 897,076 |
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| 142,646 |
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| 279,107 |
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| 247,586 |
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| 227,737 |
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| 953,430 |
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| 121,271 |
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| 239,895 |
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| 191,376 |
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| 400,888 |
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| $ | 15,253,184 |
| $ | 614,222 |
| $ | 1,678,731 |
| $ | 1,477,499 |
| $ | 11,482,732 |
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| $ | 14,490,551 |
| $ | 628,868 |
| $ | 1,337,168 |
| $ | 1,628,813 |
| $ | 10,895,702 |
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The contractual obligations table has been prepared assuming we will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of the consolidated financial statements. However, for the reasons described in Note 1 – “General Information – Going Concern Considerations,” $4.7 billion, related to several of our contractual obligations with the stated maturities as summarized above are classified as a current liability at September
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30, 2017. These obligation include: the Revolving Credit Facilities, the Term Loan Agreement, the Welltower Bridge Loans, Notes Payable and certain lease arrangements subject to capital lease or financing obligations. While obligations under the operating leases are not included on the balance sheet, approximately $617.8 million will become due and payable, if defaulted upon.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates. To the extent these interest rates increase, our interest expense will increase, which will make our interest payments and funding other fixed costs more expensive, and our available cash flow may be adversely affected. We routinely monitor risks associated with fluctuations in interest rates and consider the use of derivative financial instruments to hedge these exposures. We do not enter into derivative financial instruments for trading or speculative purposes nor do we enter into energy or commodity contracts.
Interest Rate Exposure—Interest Rate Risk Management
Our Term Loan Facility,ABL Credit Facilities and MidCap Real Estate Bridge Loans and Revolving Credit Facilities expose us to variability in interest payments due to changes in interest rates. As of SeptemberJune 30, 2017,2018, there is no derivative financial instrument in place to limit that exposure.
A 1% increase in the applicable interest rate on our variable-rate debt would result in an approximately $5.1$5.0 million increase in our annual interest expense.
Our investments in marketable securities as of SeptemberJune 30, 20172018 consisted of investment grade government and corporate debt securities and money market funds that have maturities of five years or less. These investments expose us to investment income risk, which is affected by changes in the general level of U.S. and international interest rates and securities markets risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Interest rates are near historic lows, with a risk of interest rates increasing before our current investments mature. While we have the ability and intent to hold our investments to maturity today, rising interest rates could impact our ability to liquidate our investments for a profit and could adversely affect the cost of replacing those investments at the time of maturity with investment of similar return and risk profile. Despite the complex nature of exposure to the securities markets, given the low risk profile, we do not believe a 1% increase in interest rates alone would have a material impact on our net investment income returns.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.
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Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
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We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of end of the period covered by this report, the disclosure controls and procedures were effective at that reasonable assurance level.
Changes in Internal Control Over Financial Reporting
Management determined that there were no changes in our internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
For information regarding certain pending legal proceedings to which we are a party or our property is subject, see Note 12 — “Commitments and Contingencies—Legal Proceedings,” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.
Except for the addition of the risk factor included in Part II. Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017 and the risk factors added below, thereThere have been no material changes or additions to the risk factors previously disclosed in Part I, Item 1A, “ “RiskRisk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 20162017, which was filed with the SEC on March 6, 2017.16, 2018.
We have entered into preliminary non-binding agreements with certain of our credit parties concerning a proposed long-term restructuring of certain master leases and loans (the Restructuring Plans) in an effort to develop a sustainable capital structure for us. However, there can be no assurance that the conditions necessary to achieve the fixed charge reductions contemplated in the Restructuring Plans will be met. If such fixed charge reductions are not realized, it would have a material adverse effect on our liquidity and financial condition.
Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in our leases and loans is dependent upon, among other things, our ability to attain a sustainable capital structure. We are in the process of executing on the Restructuring Plans with certain of our credit parties in an effort to attain a sustainable capital structure. However, there can be no assurance that the conditions necessary for us to realize a reduction in our annual fixed charges will be met. These conditions include the successful sale of assets leased to us by certain of our landlords to new landlords, the successful re-leasing of these assets to us by new landlords at reduced rents, the successful refinancing and / or repayment of current debt obligations to certain lenders and the receipt of additional concessions to be made by other credit parties. Many of these conditions are beyond our control. If we and our counterparties to the Restructuring Plans are unsuccessful, it is unlikely that we will be able to generate sufficient cash flow to cover required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties under our current capital structure. Further, there can be no assurance that we will enter into binding agreements with certain of our credit parties under the proposed Restructuring Plans, and there can be no assurance that such agreements will attain a sustainable capital structure even if the Restructuring Plans are successfully implemented. In the event of such failure to attain the fixed charge reductions contemplated in the Restructuring Plans, we may be forced to seek reorganization under the U.S. Bankruptcy Code.
We are presently operating under waivers of certain of our financial agreements and are engaged in discussions with the counterparties to the Revolving Credit Facilities to secure a 90-day forbearance agreement through late January
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2018. There can be no assurance such waivers will be received in future periods, or whether a forbearance agreement will be executed by us and the counterparties to the Revolving Credit Facilities. In the event future waivers or forbearance agreements are not extended and our creditors accelerate our loan and lease obligations, it would have a material adverse effect on our liquidity and financial condition.
At September 30, 2017, we did not meet certain of the financial covenants contained under a number of our significant loan and lease agreements. Although we have received waivers and expect to enter into forbearance agreements with our counterparties to these agreements related to our breach of financial covenants at September 30, 2017, there can be no assurance such waivers and/or forbearance agreements will be received in future periods. If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not obtained, the defaults can cause acceleration of our financial obligations, which we may not be in a position to satisfy. In the event this occurs and we are unable to satisfy an acceleration of our financial obligations, we may be forced to seek reorganization under the U.S. Bankruptcy Code.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
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(a)Exhibits.
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101.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
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* | Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended
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7370
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 thereunto duly authorized.
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| GENESIS HEALTHCARE, INC. | |
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Date: |
| By | /S/ GEORGE V. HAGER, JR. |
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| George V. Hager, Jr. |
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| Chief Executive Officer |
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Date: |
| By | /S/ THOMAS DIVITTORIO |
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| Thomas DiVittorio |
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| Chief Financial Officer |
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| (Principal Financial Officer and Authorized Signatory) |
7471