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, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on March 6, 2017 (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 June 30, 2017, we provided inpatient services through 473 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.
Recent Transactions and Events
Skilled Nursing Facility Divestitures
We divested 26 skilled nursing facilities in the six months ended June 30, 2017.
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, which is included in other loss (income) on the consolidated statements of operations.
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, 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 use asset of $4.1 million, which is included in other loss (income) on the consolidated statements of operations.
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, which is included in other loss (income) on the consolidated statements of operations.
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, which is included in other loss (income) on the consolidated statements of operations.
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, which is included in other loss (income) on the consolidated statements of operations.
HUD Financings
On June 30, 2017, we completed the financings of two skilled nursing facilities with HUD insured loans. The total loan amount of the two financings was $17.5 million. Proceeds from the financings along with other cash on hand was used to partially pay down a Real Estate Bridge Loan by $18.6 million. See Note 7 – “
Long-Term Debt – Real Estate Bridge Loans”
and
“
Long-Term Debt – HUD Insured Loans.”
Dining and Nutrition Partnership
In April 2017, we entered into a strategic dining 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.
Settlement Agreement
See Note 11 – “
Commitments and Contingencies – Legal Proceedings
” for further description of the matters discussed below.
On June 9, 2017, we and 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 June 30, 2017 is $50.9 million, of which $8.0 million is recorded in accrued expenses and $42.9 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 reimbursements for skilled nursing facility services so long as we meet the reporting requirements and avoid the 2% penalty. The final rule was published in the August 4, 2017 Federal Register.
The final rule also includes revisions to the skilled nursing facility Quality Reporting Program 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 described 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 quality and improve health care. Beginning 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 beginning 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:
|
|
·
|
|
Furnish value-based incentive payments to skilled nursing facilities for services beginning October 1, 2018.
|
|
|
·
|
|
Develop a methodology for assessing performance scores.
|
|
|
·
|
|
Adopt performance standards on a quality measure that includes achievement and improvement.
|
|
|
·
|
|
Rank skilled nursing facilities based on their performance from low to high. The highest ranked facilities will receive the highest payments, and the lowest ranked 40 percent of facilities will receive payments that are less than what they otherwise would have received without the VBP Program.
|
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 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 is open for a comment period not to exceed 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 will 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 will be tested in 98 metropolitan statistical areas (MSAs) and SHFFT episodes will be tested in the current 67 MSAs participating in CJR. The SHFFT payment model will 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 will be included in the episode of care. Hospitals may share in risk and savings with other providers, including skilled nursing facilities. The provisions contained in the instructions were to become effective July 1, 2017, but the final rule extended the start date to January 1, 2018.
Requirements for 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.
|
|
|
·
|
|
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.
|
The regulations are 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 must be implemented by November 28, 2017.
|
|
|
·
|
|
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. 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 thus far.
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 with a data submission deadline of June 1, 2017. Failure to submit required data will result 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 the 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, MPAP had provided for $62 million of revenue and enhanced pre-tax income of the participating skilled nursing facilities by approximately $18 million.
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.
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.
“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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Financial Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,341,276
|
|
$
|
1,438,358
|
|
|
$
|
2,730,408
|
|
$
|
2,910,576
|
|
EBITDA
|
|
|
81,815
|
|
|
168,880
|
|
|
|
188,630
|
|
|
297,900
|
|
Adjusted EBITDAR
|
|
|
175,351
|
|
|
189,352
|
|
|
|
341,041
|
|
|
367,702
|
|
Adjusted EBITDA
|
|
|
137,117
|
|
|
152,384
|
|
|
|
266,707
|
|
|
293,418
|
|
Net loss attributable to Genesis Healthcare, Inc.
|
|
|
(65,156)
|
|
|
(22,973)
|
|
|
|
(115,917)
|
|
|
(66,012)
|
INPATIENT SEGMENT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
|
Occupancy Statistics - Inpatient
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available licensed beds in service at end of period
|
|
|
55,247
|
|
|
57,873
|
|
|
|
55,247
|
|
|
57,873
|
|
|
Available operating beds in service at end of period
|
|
|
53,265
|
|
|
56,320
|
|
|
|
53,265
|
|
|
56,320
|
|
|
Available patient days based on licensed beds
|
|
|
4,838,927
|
|
|
5,247,424
|
|
|
|
10,004,387
|
|
|
10,521,485
|
|
|
Available patient days based on operating beds
|
|
|
4,666,506
|
|
|
5,109,740
|
|
|
|
9,651,290
|
|
|
10,242,959
|
|
|
Actual patient days
|
|
|
3,959,726
|
|
|
4,373,938
|
|
|
|
8,224,551
|
|
|
8,791,285
|
|
|
Occupancy percentage - licensed beds
|
|
|
81.8
|
%
|
|
83.4
|
%
|
|
|
82.2
|
%
|
|
83.6
|
%
|
|
Occupancy percentage - operating beds
|
|
|
84.9
|
%
|
|
85.6
|
%
|
|
|
85.2
|
%
|
|
85.8
|
%
|
|
Skilled mix
|
|
|
19.9
|
%
|
|
20.2
|
%
|
|
|
20.3
|
%
|
|
20.7
|
%
|
|
Average daily census
|
|
|
43,513
|
|
|
48,065
|
|
|
|
45,440
|
|
|
48,304
|
|
|
Revenue per patient day (skilled nursing facilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare Part A
|
|
$
|
531
|
|
$
|
513
|
|
|
$
|
527
|
|
$
|
513
|
|
|
Medicare total (including Part B)
|
|
|
576
|
|
|
555
|
|
|
|
569
|
|
|
554
|
|
|
Insurance
|
|
|
463
|
|
|
464
|
|
|
|
456
|
|
|
452
|
|
|
Private and other
|
|
|
337
|
|
|
305
|
|
|
|
323
|
|
|
304
|
|
|
Medicaid
|
|
|
220
|
|
|
218
|
|
|
|
218
|
|
|
219
|
|
|
Medicaid (net of provider taxes)
|
|
|
200
|
|
|
199
|
|
|
|
198
|
|
|
200
|
|
|
Weighted average (net of provider taxes)
|
|
$
|
275
|
|
$
|
272
|
|
|
$
|
273
|
|
$
|
273
|
|
|
Patient days by payor (skilled nursing facilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
451,146
|
|
|
533,758
|
|
|
|
959,782
|
|
|
1,103,507
|
|
|
Insurance
|
|
|
295,806
|
|
|
303,005
|
|
|
|
624,418
|
|
|
615,153
|
|
|
Total skilled mix days
|
|
|
746,952
|
|
|
836,763
|
|
|
|
1,584,200
|
|
|
1,718,660
|
|
|
Private and other
|
|
|
243,491
|
|
|
299,654
|
|
|
|
522,875
|
|
|
598,406
|
|
|
Medicaid
|
|
|
2,769,451
|
|
|
2,992,530
|
|
|
|
5,713,784
|
|
|
5,968,281
|
|
|
Total Days
|
|
|
3,759,894
|
|
|
4,128,947
|
|
|
|
7,820,859
|
|
|
8,285,347
|
|
|
Patient days as a percentage of total patient days (skilled nursing facilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
12.0
|
%
|
|
12.9
|
%
|
|
|
12.3
|
%
|
|
13.3
|
%
|
|
Insurance
|
|
|
7.9
|
%
|
|
7.3
|
%
|
|
|
8.0
|
%
|
|
7.4
|
%
|
|
Skilled mix
|
|
|
19.9
|
%
|
|
20.2
|
%
|
|
|
20.3
|
%
|
|
20.7
|
%
|
|
Private and other
|
|
|
6.5
|
%
|
|
7.3
|
%
|
|
|
6.7
|
%
|
|
7.2
|
%
|
|
Medicaid
|
|
|
73.6
|
%
|
|
72.5
|
%
|
|
|
73.0
|
%
|
|
72.1
|
%
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Facilities at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
363
|
|
|
375
|
|
|
|
363
|
|
|
375
|
|
|
Owned
|
|
|
44
|
|
|
55
|
|
|
|
44
|
|
|
55
|
|
|
Joint Venture
|
|
|
5
|
|
|
5
|
|
|
|
5
|
|
|
5
|
|
|
Managed *
|
|
|
35
|
|
|
39
|
|
|
|
35
|
|
|
39
|
|
|
Total skilled nursing facilities
|
|
|
447
|
|
|
474
|
|
|
|
447
|
|
|
474
|
|
|
Total licensed beds
|
|
|
55,105
|
|
|
57,909
|
|
|
|
55,105
|
|
|
57,909
|
|
|
Assisted/Senior living facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
19
|
|
|
28
|
|
|
|
19
|
|
|
28
|
|
|
Owned
|
|
|
4
|
|
|
4
|
|
|
|
4
|
|
|
4
|
|
|
Joint Venture
|
|
|
1
|
|
|
1
|
|
|
|
1
|
|
|
1
|
|
|
Managed
|
|
|
2
|
|
|
2
|
|
|
|
2
|
|
|
2
|
|
|
Total assisted/senior living facilities
|
|
|
26
|
|
|
35
|
|
|
|
26
|
|
|
35
|
|
|
Total licensed beds
|
|
|
2,182
|
|
|
2,803
|
|
|
|
2,182
|
|
|
2,803
|
|
|
Total facilities
|
|
|
473
|
|
|
509
|
|
|
|
473
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Jointly Owned and Managed— (Unconsolidated)
|
|
|
15
|
|
|
20
|
|
|
|
15
|
|
|
20
|
|
REHABILITATION THERAPY SEGMENT**:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
|
Revenue mix %:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
38
|
%
|
|
36
|
%
|
|
|
38
|
%
|
|
36
|
%
|
|
Non-affiliated
|
|
|
62
|
%
|
|
64
|
%
|
|
|
62
|
%
|
|
64
|
%
|
|
Sites of service (at end of period)
|
|
|
1,528
|
|
|
1,627
|
|
|
|
1,528
|
|
|
1,627
|
|
|
Revenue per site
|
|
$
|
149,634
|
|
$
|
162,236
|
|
|
$
|
307,594
|
|
$
|
330,879
|
|
|
Therapist efficiency %
|
|
|
68
|
%
|
|
69
|
%
|
|
|
68
|
%
|
|
69
|
%
|
* 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 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) 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
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 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 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-controlling 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) attributable to Genesis Healthcare, Inc. as an important measure of its financial performance because it provides the most complete measure of our performance.
Other companies may define Non-GAAP Financial Measures differently and, as a result, our Non-GAAP Financial Measures may not be directly comparable to those of other companies. Non-GAAP Financial Measures do not represent net income (loss), as defined by GAAP. Non-GAAP Financial Measures should be considered in addition to, not a substitute for, or superior to, GAAP Financial Measures.
We use the following Non-GAAP Financial Measures that we believe are useful to investors as key 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, 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) 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.
We adjust EBITDA for the following items:
|
|
·
|
|
Loss on extinguishment of debt.
We recognize losses on the extinguishment of debt when we refinance our debt prior to its original term, requiring us to write-off any unamortized deferred financing fees. We exclude the effect of losses or gains recorded on the early extinguishment of debt because we believe these gains and losses do not accurately reflect the underlying performance of our operating businesses.
|
|
|
·
|
|
Other loss (income).
We primarily use this income statement caption to capture gains and losses on the sale or disposition of assets. We exclude the effect of such gains and losses because we believe they do not accurately reflect the underlying performance of our operating businesses.
|
|
|
·
|
|
Transaction costs.
In connection with our acquisition and disposition transactions, we incur costs consisting of investment banking, legal, transaction-based compensation and other professional service costs. We exclude 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 receivership.
We exclude the non-cash costs related to a customer receivership and the related write-down of unpaid accounts receivable. We believe these costs do not accurately reflect the underlying 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.
|
|
|
·
|
|
Long-lived asset impairment charges.
We exclude non-cash long-lived asset impairment charges because we believe including them does not reflect the ongoing operating performance of our operating businesses. Additionally, such impairment charges represent accelerated depreciation expense, and depreciation expense is excluded from EBITDA.
|
|
|
·
|
|
Losses of newly acquired, constructed or divested businesses.
The acquisition and construction of new businesses is an element of our growth strategy. Many of the businesses we acquire have a history of operating losses and continue to generate operating losses in the months that follow our acquisition. Newly constructed or developed businesses also generate losses while in their start-up phase. We view these losses as both temporary and an expected component of our long-term investment in the new venture. We adjust these losses when computing Adjusted EBITDA in order to better analyze the performance of our mature ongoing business. The activities of such businesses are adjusted when computing Adjusted EBITDA until such time as a new business generates positive Adjusted EBITDA. The operating performance of new businesses is no longer adjusted when computing Adjusted EBITDA beginning in the period in which a new business generates positive Adjusted EBITDA and all periods thereafter. The divestiture of underperforming or non-strategic facilities is also an element of our business strategy. We eliminate the results of divested facilities beginning in the quarter in which they become divested. We view the losses associated with the wind-down of such divested facilities as not indicative of the performance of our ongoing operating business.
|
|
|
·
|
|
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 operating performance of our operating businesses.
|
|
|
·
|
|
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 the Company or our operating businesses.
|
|
|
(1)
|
|
Skilled Healthcare and other loss contingency expense –
We exclude the estimated settlement cost and any adjustments thereto regarding the four legal matters inherited by Genesis in the Skilled and Sun Healthcare transactions and disclosed in the commitments and contingencies footnote to our consolidated financial statements describing our material legal proceedings. In the three and six months ended June 30, 2017, we recognized no additional expense related to these matters. In the three and six months ended June 30, 2016, we recorded $13.6 million and $15.2 million, respectively, related to these matters. We believe these costs are non-recurring in nature as they will no longer be recognized following the final settlement of these matters. We do not exclude the estimated settlement costs associated with all other legal and regulatory matters arising in the normal course of business. Also, we do not believe the excluded costs reflect the underlying performance of our operating businesses.
|
|
|
(2)
|
|
Regulatory defense and related costs –
We exclude the costs of investigating and defending the matters associated with the Skilled Healthcare and other loss contingency expense as noted in footnote (1). We believe these costs are non-recurring in nature as they will no longer be recognized following the final settlement of these matters. Also, we do not believe the excluded costs reflect the underlying performance of our operating businesses.
|
|
|
(3)
|
|
Other non-recurring costs –
In the three and six months ended June 30, 2017, we recognized no other non-recurring costs. In the three and six months ended June 30, 2016, we excluded $0.1 million and $0.9 million, respectively, of costs incurred in connection with a settlement of disputed costs related to previously reported periods and a regulatory audit associated with acquired businesses and related to pre-acquisition periods. We do not believe the excluded costs are recurring or reflect the underlying performance of our operating businesses.
|
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, 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 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 June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Genesis Healthcare, Inc.
|
|
$
|
(65,156)
|
|
$
|
(22,973)
|
|
|
$
|
(115,917)
|
|
$
|
(66,012)
|
|
Adjustments to compute Adjusted EBITDAR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (income) from discontinued operations, net of taxes
|
|
|
47
|
|
|
(61)
|
|
|
|
68
|
|
|
(23)
|
|
Net loss attributable to noncontrolling interests
|
|
|
(40,394)
|
|
|
(12,985)
|
|
|
|
(73,246)
|
|
|
(40,974)
|
|
Depreciation and amortization expense
|
|
|
60,227
|
|
|
67,953
|
|
|
|
124,596
|
|
|
129,718
|
|
Interest expense
|
|
|
124,288
|
|
|
133,860
|
|
|
|
249,042
|
|
|
269,041
|
|
Income tax expense
|
|
|
2,803
|
|
|
3,086
|
|
|
|
4,087
|
|
|
6,150
|
|
Lease expense
|
|
|
38,234
|
|
|
36,968
|
|
|
|
74,334
|
|
|
74,284
|
|
Loss on extinguishment of debt
|
|
|
2,301
|
|
|
468
|
|
|
|
2,301
|
|
|
468
|
|
Other loss (income)
|
|
|
4,190
|
|
|
(42,923)
|
|
|
|
13,224
|
|
|
(42,911)
|
|
Transaction costs
|
|
|
3,781
|
|
|
4,993
|
|
|
|
6,806
|
|
|
6,747
|
|
Customer receivership
|
|
|
35,566
|
|
|
—
|
|
|
|
35,566
|
|
|
—
|
|
Severance and restructuring
|
|
|
514
|
|
|
3,800
|
|
|
|
4,694
|
|
|
6,816
|
|
Losses of newly acquired, constructed, or divested businesses
|
|
|
6,276
|
|
|
1,554
|
|
|
|
10,269
|
|
|
3,527
|
|
Stock-based compensation
|
|
|
2,480
|
|
|
1,860
|
|
|
|
4,766
|
|
|
3,719
|
|
Skilled Healthcare and other loss contingency expense (1)
|
|
|
—
|
|
|
13,566
|
|
|
|
—
|
|
|
15,192
|
|
Regulatory defense and related costs (2)
|
|
|
194
|
|
|
118
|
|
|
|
451
|
|
|
1,058
|
|
Other non-recurring costs (3)
|
|
|
—
|
|
|
68
|
|
|
|
—
|
|
|
902
|
|
Adjusted EBITDAR
|
|
$
|
175,351
|
|
$
|
189,352
|
|
|
$
|
341,041
|
|
$
|
367,702
|
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,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Genesis Healthcare, Inc.
|
|
$
|
(65,156)
|
|
$
|
(22,973)
|
|
|
$
|
(115,917)
|
|
$
|
(66,012)
|
|
Adjustments to compute EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (income) from discontinued operations, net of taxes
|
|
|
47
|
|
|
(61)
|
|
|
|
68
|
|
|
(23)
|
|
Net loss attributable to noncontrolling interests
|
|
|
(40,394)
|
|
|
(12,985)
|
|
|
|
(73,246)
|
|
|
(40,974)
|
|
Depreciation and amortization expense
|
|
|
60,227
|
|
|
67,953
|
|
|
|
124,596
|
|
|
129,718
|
|
Interest expense
|
|
|
124,288
|
|
|
133,860
|
|
|
|
249,042
|
|
|
269,041
|
|
Income tax expense
|
|
|
2,803
|
|
|
3,086
|
|
|
|
4,087
|
|
|
6,150
|
|
EBITDA
|
|
$
|
81,815
|
|
$
|
168,880
|
|
|
|
188,630
|
|
|
297,900
|
|
Adjustments to compute Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
2,301
|
|
|
468
|
|
|
|
2,301
|
|
|
468
|
|
Other loss (income)
|
|
|
4,190
|
|
|
(42,923)
|
|
|
|
13,224
|
|
|
(42,911)
|
|
Transaction costs
|
|
|
3,781
|
|
|
4,993
|
|
|
|
6,806
|
|
|
6,747
|
|
Customer receivership
|
|
|
35,566
|
|
|
—
|
|
|
|
35,566
|
|
|
—
|
|
Severance and restructuring
|
|
|
514
|
|
|
3,800
|
|
|
|
4,694
|
|
|
6,816
|
|
Losses of newly acquired, constructed, or divested businesses
|
|
|
6,276
|
|
|
1,554
|
|
|
|
10,269
|
|
|
3,527
|
|
Stock-based compensation
|
|
|
2,480
|
|
|
1,860
|
|
|
|
4,766
|
|
|
3,719
|
|
Skilled Healthcare and other loss contingency expense (1)
|
|
|
—
|
|
|
13,566
|
|
|
|
—
|
|
|
15,192
|
|
Regulatory defense and related costs (2)
|
|
|
194
|
|
|
118
|
|
|
|
451
|
|
|
1,058
|
|
Other non-recurring costs (3)
|
|
|
—
|
|
|
68
|
|
|
|
—
|
|
|
902
|
|
Adjusted EBITDA
|
|
$
|
137,117
|
|
$
|
152,384
|
|
|
$
|
266,707
|
|
$
|
293,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional lease payments not included in GAAP lease expense
|
|
|
86,704
|
|
|
89,409
|
|
|
|
173,328
|
|
|
176,910
|
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 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 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 six months ended June 30, 2016 was. We removed the proportional estimated impact from revenue and operating expenses for presentation of same-store results.
Because it is the nature of our rehabilitation therapy services operations to experience 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 is not a valid 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 year did not have a material impact on the comparability of our other services business.
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
A summary of our unaudited results of operations for the three months ended June 30, 2017 as compared with the same period in 2016 follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase / (Decrease)
|
|
|
|
|
Revenue
|
|
Revenue
|
|
Revenue
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Dollars
|
|
Percentage
|
|
Dollars
|
|
Percentage
|
|
Dollars
|
|
Percentage
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing facilities
|
|
$
|
1,130,525
|
|
84.2
|
%
|
$
|
1,194,326
|
|
83.0
|
%
|
$
|
(63,801)
|
|
(5.3)
|
%
|
|
Assisted/Senior living facilities
|
|
|
24,125
|
|
1.8
|
%
|
|
30,431
|
|
2.1
|
%
|
|
(6,306)
|
|
(20.7)
|
%
|
|
Administration of third party facilities
|
|
|
2,319
|
|
0.2
|
%
|
|
2,870
|
|
0.2
|
%
|
|
(551)
|
|
(19.2)
|
%
|
|
Elimination of administrative services
|
|
|
(385)
|
|
—
|
%
|
|
(362)
|
|
—
|
%
|
|
(23)
|
|
6.4
|
%
|
|
Inpatient services, net
|
|
|
1,156,584
|
|
86.2
|
%
|
|
1,227,265
|
|
85.3
|
%
|
|
(70,681)
|
|
(5.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehabilitation therapy services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total therapy services
|
|
|
242,917
|
|
18.1
|
%
|
|
275,049
|
|
19.1
|
%
|
|
(32,132)
|
|
(11.7)
|
%
|
|
Elimination intersegment rehabilitation therapy services
|
|
|
(94,496)
|
|
(7.0)
|
%
|
|
(103,472)
|
|
(7.2)
|
%
|
|
8,976
|
|
(8.7)
|
%
|
|
Third party rehabilitation therapy services
|
|
|
148,421
|
|
11.1
|
%
|
|
171,577
|
|
11.9
|
%
|
|
(23,156)
|
|
(13.5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other services
|
|
|
44,221
|
|
3.3
|
%
|
|
45,334
|
|
3.2
|
%
|
|
(1,113)
|
|
(2.5)
|
%
|
|
Elimination intersegment other services
|
|
|
(7,950)
|
|
(0.6)
|
%
|
|
(5,818)
|
|
(0.4)
|
%
|
|
(2,132)
|
|
36.6
|
%
|
|
Third party other services
|
|
|
36,271
|
|
2.7
|
%
|
|
39,516
|
|
2.8
|
%
|
|
(3,245)
|
|
(8.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,341,276
|
|
100.0
|
%
|
$
|
1,438,358
|
|
100.0
|
%
|
$
|
(97,082)
|
|
(6.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase / (Decrease)
|
|
|
|
|
|
|
|
Margin
|
|
|
|
|
Margin
|
|
|
|
|
|
|
|
|
|
Dollars
|
|
Percentage
|
|
Dollars
|
|
Percentage
|
|
Dollars
|
|
Percentage
|
|
|
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient services
|
|
$
|
148,853
|
|
12.9
|
%
|
$
|
166,071
|
|
13.5
|
%
|
$
|
(17,218)
|
|
(10.4)
|
%
|
|
Rehabilitation therapy services
|
|
|
18,658
|
|
7.7
|
%
|
|
21,015
|
|
7.6
|
%
|
|
(2,357)
|
|
(11.2)
|
%
|
|
Other services
|
|
|
214
|
|
0.5
|
%
|
|
2,138
|
|
4.7
|
%
|
|
(1,924)
|
|
(90.0)
|
%
|
|
Corporate and eliminations
|
|
|
(85,910)
|
|
—
|
%
|
|
(20,344)
|
|
—
|
%
|
|
(65,566)
|
|
322.3
|
%
|
|
EBITDA
|
|
$
|
81,815
|
|
6.1
|
%
|
$
|
168,880
|
|
11.7
|
%
|
$
|
(87,065)
|
|
(51.6)
|
%
|
A summary of our unaudited condensed consolidating statement of operations follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2017
|
|
|
|
|
|
|
|
Rehabilitation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient
|
|
Therapy
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
Services
|
|
Services
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
1,156,969
|
|
$
|
242,917
|
|
$
|
44,144
|
|
$
|
77
|
|
$
|
(102,831)
|
|
$
|
1,341,276
|
|
|
Salaries, wages and benefits
|
|
|
508,509
|
|
|
201,944
|
|
|
28,949
|
|
|
—
|
|
|
—
|
|
|
739,402
|
|
|
Other operating expenses
|
|
|
442,031
|
|
|
18,628
|
|
|
14,467
|
|
|
—
|
|
|
(102,831)
|
|
|
372,295
|
|
|
General and administrative costs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,187
|
|
|
—
|
|
|
41,187
|
|
|
Provision for losses on accounts receivable
|
|
|
20,127
|
|
|
3,680
|
|
|
214
|
|
|
(36)
|
|
|
—
|
|
|
23,985
|
|
|
Lease expense
|
|
|
37,449
|
|
|
7
|
|
|
300
|
|
|
478
|
|
|
—
|
|
|
38,234
|
|
|
Depreciation and amortization expense
|
|
|
51,837
|
|
|
3,866
|
|
|
172
|
|
|
4,352
|
|
|
—
|
|
|
60,227
|
|
|
Interest expense
|
|
|
103,325
|
|
|
14
|
|
|
10
|
|
|
20,939
|
|
|
—
|
|
|
124,288
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,301
|
|
|
—
|
|
|
2,301
|
|
|
Investment income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,392)
|
|
|
—
|
|
|
(1,392)
|
|
|
Other loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,190
|
|
|
—
|
|
|
4,190
|
|
|
Transaction costs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,781
|
|
|
—
|
|
|
3,781
|
|
|
Customer receivership
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,566
|
|
|
—
|
|
|
35,566
|
|
|
Equity in net (income) loss of unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(563)
|
|
|
475
|
|
|
(88)
|
|
|
(Loss) income before income tax benefit
|
|
|
(6,309)
|
|
|
14,778
|
|
|
32
|
|
|
(110,726)
|
|
|
(475)
|
|
|
(102,700)
|
|
|
Income tax expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,803
|
|
|
—
|
|
|
2,803
|
|
|
(Loss) income from continuing operations
|
|
$
|
(6,309)
|
|
$
|
14,778
|
|
$
|
32
|
|
$
|
(113,529)
|
|
$
|
(475)
|
|
$
|
(105,503)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
|
|
|
|
|
|
|
Rehabilitation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient
|
|
Therapy
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
Services
|
|
Services
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
1,227,627
|
|
$
|
275,049
|
|
$
|
45,220
|
|
$
|
114
|
|
$
|
(109,652)
|
|
$
|
1,438,358
|
|
|
Salaries, wages and benefits
|
|
|
572,676
|
|
|
229,533
|
|
|
30,484
|
|
|
—
|
|
|
—
|
|
|
832,693
|
|
|
Other operating expenses
|
|
|
428,550
|
|
|
19,683
|
|
|
11,580
|
|
|
—
|
|
|
(109,652)
|
|
|
350,161
|
|
|
General and administrative costs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,026
|
|
|
—
|
|
|
45,026
|
|
|
Provision for losses on accounts receivable
|
|
|
24,324
|
|
|
4,795
|
|
|
608
|
|
|
(46)
|
|
|
—
|
|
|
29,681
|
|
|
Lease expense
|
|
|
36,006
|
|
|
23
|
|
|
410
|
|
|
529
|
|
|
—
|
|
|
36,968
|
|
|
Depreciation and amortization expense
|
|
|
60,056
|
|
|
3,074
|
|
|
328
|
|
|
4,495
|
|
|
—
|
|
|
67,953
|
|
|
Interest expense
|
|
|
110,057
|
|
|
15
|
|
|
4
|
|
|
23,784
|
|
|
—
|
|
|
133,860
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
468
|
|
|
—
|
|
|
468
|
|
|
Investment income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(658)
|
|
|
—
|
|
|
(658)
|
|
|
Other income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42,923)
|
|
|
—
|
|
|
(42,923)
|
|
|
Transaction costs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,993
|
|
|
—
|
|
|
4,993
|
|
|
Skilled Healthcare and other loss contingency expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,566
|
|
|
—
|
|
|
13,566
|
|
|
Equity in net (income) loss of unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,174)
|
|
|
677
|
|
|
(497)
|
|
|
(Loss) income before income tax benefit
|
|
|
(4,042)
|
|
|
17,926
|
|
|
1,806
|
|
|
(47,946)
|
|
|
(677)
|
|
|
(32,933)
|
|
|
Income tax expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,086
|
|
|
—
|
|
|
3,086
|
|
|
(Loss) income from continuing operations
|
|
$
|
(4,042)
|
|
$
|
17,926
|
|
$
|
1,806
|
|
$
|
(51,032)
|
|
$
|
(677)
|
|
$
|
(36,019)
|
|
Net Revenues
Net revenues for the three months ended June 30, 2017 decreased by $97.1 million, or 6.7%, as compared with the three months ended June 30, 2016.
Inpatient Services
– Revenue decreased $70.7 million, or 5.8%, in the three months ended June 30, 2017 as compared with the same period in 2016. On a same-store basis, excluding the impact of leap year, 39 divested underperforming facilities and the acquisition or development of nine additional facilities on comparability, inpatient services revenue declined $35.3 million, or 3.0%. The three months ended June 30, 2016 included $16.0 million of additional revenue attributed to the Texas MPAP program. The remaining same-store decrease of $19.3 million, or 1.7%, 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 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.
For an expanded discussion regarding the factors influencing our census decline, see Item 1,
“Business – Recent 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 $23.2 million, or 13.5% comparing the three months ended June 30, 2017 with the same period in 2016. Of that decrease, $18.6 million is due to lost contract business, offset by $6.0 million attributed to new contracts and price increases to certain existing customers. The remaining decrease of $10.6 million is principally due to reduced volume of services provided existing customers due to the reduction in lengths of stay and skilled patient populations impacting the entire industry.
Other Services
– Other services revenue decreased $3.2 million, or 8.2% in the three months ended June 30, 2017 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, other services revenue increased $4.0 million or 9.9%. This remaining increase was principally attributed to new business growth in our staffing services and physician services business lines.
EBITDA
EBITDA for the three months ended June 30, 2017 decreased by $87.1 million, or 51.6% when compared with the same period in 2016. The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead.
Inpatient Services
– EBITDA decreased in the three months ended June 30, 2017 as compared with the same period in 2016, by $17.2 million, or 10.4%. On a same store basis, the inpatient EBITDA decreased $15.4 million. Of that same-store decline, our self-insurance programs resulted in a reduction of $8.0 million EBITDA in the three months ended June 30, 2017 as compared with the same period in 2016. While our self-insurance programs in 2017 are performing within expected ranges, the 2016 period included some more favorable development, principally in our workers compensation deductible programs. Improved accounts receivable collections performance resulted in a reduction in the provision for losses on accounts receivable of $2.6 million and a corresponding increase of EBITDA in the three months ended June 30, 2017 as compared with the same period in 2016. The comparably higher levels of provision for accounts receivable in the three months ended June 30, 2016 were principally due to resource allocation to integration activities related to acquisitions completed in 2015 as well as the relative condition of the acquired accounts receivables. The remaining $10.0 million decrease in EBITDA of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “Net Revenues.”
Rehabilitation Therapy Services
– EBITDA of the rehabilitation therapy segment decreased by $2.4 million or 11.2% comparing the three months ended June 30, 2017 with the same period in 2016. Lost therapy contracts exceeded new contracts by $2.6 million. Startup costs of our operations in China for the three months ended June 30, 2017 exceeded those in the comparable period in 2016 by $2.7 million. The remaining increase of EBITDA of $2.9 million is principally attributed to overhead cost reductions, favorable average costs of labor and pricing increases, partially offset by therapist efficiency which declined to 68% in the three months ended June 30, 2017 compared with 69% in the comparable period in the prior year.
Currently, we operate through affiliates in China a total of twelve locations comprised of the three rehabilitation clinics in Guangzhou, Shanghai and Hong Kong, a rehabilitation facility, and inpatient and outpatient rehabilitation services in seven hospital joint ventures and one nursing home. Startup and development costs of these Chinese ventures are expected to exceed revenues in fiscal 2017.
Other Services
— EBITDA decreased $1.9 million in the three months ended June 30, 2017 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 $0.7 million, principally attributed to the physician services business.
Corporate and Eliminations
— EBITDA decreased $65.6 million in the three months ended June 30, 2017 as compared with the same period in 2016. 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 $69.7 million of the net decrease in EBITDA. Corporate overhead costs decreased $3.8 million, or 8.5%, in the three months ended June 30, 2017 as compared with the same period in 2016. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining increase in EBITDA of $0.3 million is primarily the result of incremental investment earnings and improved earnings from our unconsolidated affiliates.
Other 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 loss recognized for the three months ended June 30, 2017 was a net $4.2 million, attributable primarily to the transition of a leased skilled nursing facility in Kansas to a new operator. Other income for the same period in 2016 was principally the recognized gain on the sale of hospice and homecare operations effective May 1, 2016.
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 June 30, 2017 and 2016 were $3.8 million and $5.0 million, respectively.
Skilled Healthcare and other loss contingency expense
— For the three months ended June 30, 2016, we accrued $13.6 million for contingent liabilities. There was no change in the estimated settlement value of that contingent liability in the three months ended June 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 11 – “
Commitments and Contingencies – Legal Proceedings
.”
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 three months ended June 30, 2017, representing the outstanding accounts receivable balance from this customer.
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 June 30, 2017 as compared with the same period in 2016.
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 $7.7 million in the three months ended June 30, 2017 as compared with the same period in 2016, principally due to divestiture activity. On a same store basis, depreciation and amortization increased $1.7 million in the three months ended June 30, 2017 as compared with the same period in 2016.
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 mortgage instruments, as well as the expense associated with leases accounted for as capital leases or financing obligations. Interest expense decreased $9.6 million in the three months ended June 30, 2017 as compared with the same period in the prior year. On a same store basis, interest expense decreased $7.8 million in the three months ended June 30, 2017 as compared with the same period in 2016. Of that decrease, $0.5 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 $7.3 million decrease is principally attributed to non-cash accounting for lease transactions completed over the past twelve months.
Income tax expense
— For the three months ended June 30, 2017, we recorded an income tax expense of $2.8 million from continuing operations representing an effective tax rate of (2.7)% compared to an income tax expense of $3.1 million from continuing operations, representing an effective tax rate of (9.4)% for the same period in 2016. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on its 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 June 30, 2017, 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 June 30, 2017 as compared with the same period in 2016.
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 June 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, the combined results of Skilled and FC-GEN were consolidated with approximately 42% 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, there have been conversions of 2.6 million Class C common stock, leaving a remaining direct noncontrolling economic interest of 39.5%. For the three months ended June 30, 2017 and 2016, loss of $40.9 million and $13.7 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 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 June 30, 2017 and 2016, income of $0.6 million and $0.7 million, respectively, has been attributed to these unaffiliated third parties.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
A summary of our unaudited results of operations for the six months ended June 30, 2017 as compared with the same period in 2016 follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase / (Decrease)
|
|
|
|
|
Revenue
|
|
Revenue
|
|
Revenue
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Dollars
|
|
Percentage
|
|
Dollars
|
|
Percentage
|
|
Dollars
|
|
Percentage
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing facilities
|
|
$
|
2,300,450
|
|
84.1
|
%
|
$
|
2,402,759
|
|
82.5
|
%
|
$
|
(102,309)
|
|
(4.3)
|
%
|
|
Assisted/Senior living facilities
|
|
|
48,077
|
|
1.8
|
%
|
|
61,350
|
|
2.1
|
%
|
|
(13,273)
|
|
(21.6)
|
%
|
|
Administration of third party facilities
|
|
|
4,752
|
|
0.2
|
%
|
|
5,949
|
|
0.2
|
%
|
|
(1,197)
|
|
(20.1)
|
%
|
|
Elimination of administrative services
|
|
|
(769)
|
|
—
|
%
|
|
(737)
|
|
—
|
%
|
|
(32)
|
|
4.3
|
%
|
|
Inpatient services, net
|
|
|
2,352,510
|
|
86.1
|
%
|
|
2,469,321
|
|
84.8
|
%
|
|
(116,811)
|
|
(4.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehabilitation therapy services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total therapy services
|
|
|
499,134
|
|
18.3
|
%
|
|
560,161
|
|
19.3
|
%
|
|
(61,027)
|
|
(10.9)
|
%
|
|
Elimination intersegment rehabilitation therapy services
|
|
|
(195,026)
|
|
(7.1)
|
%
|
|
(209,904)
|
|
(7.2)
|
%
|
|
14,878
|
|
(7.1)
|
%
|
|
Third party rehabilitation therapy services
|
|
|
304,108
|
|
11.2
|
%
|
|
350,257
|
|
12.1
|
%
|
|
(46,149)
|
|
(13.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other services
|
|
|
90,267
|
|
3.3
|
%
|
|
101,960
|
|
3.5
|
%
|
|
(11,693)
|
|
(11.5)
|
%
|
|
Elimination intersegment other services
|
|
|
(16,477)
|
|
(0.6)
|
%
|
|
(10,962)
|
|
(0.4)
|
%
|
|
(5,515)
|
|
50.3
|
%
|
|
Third party other services
|
|
|
73,790
|
|
2.7
|
%
|
|
90,998
|
|
3.1
|
%
|
|
(17,208)
|
|
(18.9)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,730,408
|
|
100.0
|
%
|
$
|
2,910,576
|
|
100.0
|
%
|
$
|
(180,168)
|
|
(6.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase / (Decrease)
|
|
|
|
|
|
|
|
Margin
|
|
|
|
|
Margin
|
|
|
|
|
|
|
|
|
|
Dollars
|
|
Percentage
|
|
Dollars
|
|
Percentage
|
|
Dollars
|
|
Percentage
|
|
|
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient services
|
|
$
|
289,579
|
|
12.3
|
%
|
$
|
321,260
|
|
13.0
|
%
|
$
|
(31,681)
|
|
(9.9)
|
%
|
|
Rehabilitation therapy services
|
|
|
40,779
|
|
8.2
|
%
|
|
42,678
|
|
7.6
|
%
|
|
(1,899)
|
|
(4.4)
|
%
|
|
Other services
|
|
|
315
|
|
0.3
|
%
|
|
5,199
|
|
5.1
|
%
|
|
(4,884)
|
|
(93.9)
|
%
|
|
Corporate and eliminations
|
|
|
(142,043)
|
|
—
|
%
|
|
(71,237)
|
|
—
|
%
|
|
(70,806)
|
|
99.4
|
%
|
|
EBITDA
|
|
$
|
188,630
|
|
6.9
|
%
|
$
|
297,900
|
|
10.2
|
%
|
$
|
(109,270)
|
|
(36.7)
|
%
|
A summary of our unaudited condensed consolidating statement of operations follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2017
|
|
|
|
|
|
|
|
Rehabilitation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient
|
|
Therapy
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
Services
|
|
Services
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
2,353,279
|
|
$
|
499,134
|
|
$
|
89,940
|
|
$
|
327
|
|
$
|
(212,272)
|
|
$
|
2,730,408
|
|
|
Salaries, wages and benefits
|
|
|
1,089,932
|
|
|
414,696
|
|
|
59,268
|
|
|
—
|
|
|
—
|
|
|
1,563,896
|
|
|
Other operating expenses
|
|
|
860,632
|
|
|
36,978
|
|
|
29,214
|
|
|
—
|
|
|
(212,272)
|
|
|
714,552
|
|
|
General and administrative costs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86,309
|
|
|
—
|
|
|
86,309
|
|
|
Provision for losses on accounts receivable
|
|
|
40,370
|
|
|
6,667
|
|
|
548
|
|
|
(72)
|
|
|
—
|
|
|
47,513
|
|
|
Lease expense
|
|
|
72,766
|
|
|
14
|
|
|
595
|
|
|
959
|
|
|
—
|
|
|
74,334
|
|
|
Depreciation and amortization expense
|
|
|
107,817
|
|
|
7,613
|
|
|
339
|
|
|
8,827
|
|
|
—
|
|
|
124,596
|
|
|
Interest expense
|
|
|
206,642
|
|
|
28
|
|
|
19
|
|
|
42,353
|
|
|
—
|
|
|
249,042
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,301
|
|
|
—
|
|
|
2,301
|
|
|
Investment income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,501)
|
|
|
—
|
|
|
(2,501)
|
|
|
Other loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,224
|
|
|
—
|
|
|
13,224
|
|
|
Transaction costs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,806
|
|
|
—
|
|
|
6,806
|
|
|
Customer receivership
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,566
|
|
|
—
|
|
|
35,566
|
|
|
Equity in net (income) loss of unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,131)
|
|
|
909
|
|
|
(222)
|
|
|
(Loss) income before income tax benefit
|
|
|
(24,880)
|
|
|
33,138
|
|
|
(43)
|
|
|
(192,314)
|
|
|
(909)
|
|
|
(185,008)
|
|
|
Income tax expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,087
|
|
|
—
|
|
|
4,087
|
|
|
(Loss) income from continuing operations
|
|
$
|
(24,880)
|
|
$
|
33,138
|
|
$
|
(43)
|
|
$
|
(196,401)
|
|
$
|
(909)
|
|
$
|
(189,095)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
|
|
|
|
|
|
Rehabilitation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient
|
|
Therapy
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
Services
|
|
Services
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
2,470,058
|
|
$
|
560,161
|
|
$
|
101,744
|
|
$
|
216
|
|
$
|
(221,603)
|
|
$
|
2,910,576
|
|
|
Salaries, wages and benefits
|
|
|
1,161,578
|
|
|
469,969
|
|
|
68,863
|
|
|
—
|
|
|
—
|
|
|
1,700,410
|
|
|
Other operating expenses
|
|
|
867,249
|
|
|
40,024
|
|
|
25,588
|
|
|
—
|
|
|
(221,603)
|
|
|
711,258
|
|
|
General and administrative costs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
93,453
|
|
|
—
|
|
|
93,453
|
|
|
Provision for losses on accounts receivable
|
|
|
47,669
|
|
|
7,443
|
|
|
1,154
|
|
|
(92)
|
|
|
—
|
|
|
56,174
|
|
|
Lease expense
|
|
|
72,302
|
|
|
47
|
|
|
940
|
|
|
995
|
|
|
—
|
|
|
74,284
|
|
|
Depreciation and amortization expense
|
|
|
113,895
|
|
|
6,194
|
|
|
642
|
|
|
8,987
|
|
|
—
|
|
|
129,718
|
|
|
Interest expense
|
|
|
219,046
|
|
|
29
|
|
|
20
|
|
|
49,946
|
|
|
—
|
|
|
269,041
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
468
|
|
|
—
|
|
|
468
|
|
|
Investment income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,139)
|
|
|
—
|
|
|
(1,139)
|
|
|
Other income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42,911)
|
|
|
—
|
|
|
(42,911)
|
|
|
Transaction costs
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,747
|
|
|
—
|
|
|
6,747
|
|
|
Skilled Healthcare and other loss contingency expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,192
|
|
|
—
|
|
|
15,192
|
|
|
Equity in net (income) loss of unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,286)
|
|
|
1,026
|
|
|
(1,260)
|
|
|
(Loss) income before income tax expense
|
|
|
(11,681)
|
|
|
36,455
|
|
|
4,537
|
|
|
(129,144)
|
|
|
(1,026)
|
|
|
(100,859)
|
|
|
Income tax expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,150
|
|
|
—
|
|
|
6,150
|
|
|
(Loss) income from continuing operations
|
|
$
|
(11,681)
|
|
$
|
36,455
|
|
$
|
4,537
|
|
$
|
(135,294)
|
|
$
|
(1,026)
|
|
$
|
(107,009)
|
|
Net Revenues
Net revenues for the six months ended June 30, 2017 decreased by $180.2 million, or 6.2%, as compared with the six months ended June 30, 2016.
Inpatient Services
– Revenue decreased $116.8 million, or 4.7%, in the six months ended June 30, 2017 as compared with the same period in 2016. On a same-store basis, excluding the impact of leap year, 39 divested underperforming facilities and the acquisition or development of ten additional facilities on comparability, inpatient services revenue declined $68.8 million, or 3.0%. The six months ended June 30, 2016 included $31.6 million of additional revenue attributed to the Texas MPAP program. The remaining same-store decrease of $37.2 million, or 1.6%, 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 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.
For an expanded discussion regarding the factors influencing our census decline, see Item 1, “
Business – Recent 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 $46.1 million, or 13.2% comparing the six months ended June 30, 2017 with the same period in 2016. Of that decrease, $34.7 million is due to lost contract business, offset by $11.8 million attributed to new contracts and price increases to certain existing customers. The remaining decrease of $23.2 million is principally due to reduced volume of services provided to existing customers due to the reduction in lengths of stay and skilled patient populations impacting the entire industry.
Other Services
– Other services revenue decreased $17.2 million, or 18.9% in the six months ended June 30, 2017 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, other services revenue increased $9.5 million or 11.8%. This remaining increase was principally attributed to new business growth in our staffing services and physician services business lines.
EBITDA
EBITDA for the six months ended June 30, 2017 decreased by $109.3 million, or 36.7% when compared with the same period in 2016. The contributing factors for this net increase are described in our discussion below of segment results and corporate overhead.
Inpatient Services
– EBITDA decreased in the six months ended June 30, 2017 as compared with the same period in 2016, by $31.7 million, or 9.9%. On a same store basis, the inpatient EBITDA decreased $26.2 million. Of that same-store decline, our self-insurance programs resulted in a reduction of $10.5 million EBITDA in the six months ended June 30, 2017 as compared with the same period in 2016. While our self-insurance programs in 2017 are performing within expected ranges, the 2016 period included more favorable development, principally in our workers compensation deductible programs. Improved accounts receivable collections performance resulted in a reduction in the provision for losses on accounts receivable of $4.4 million and a corresponding increase of EBITDA in the six months ended June 30, 2017 as compared with the same period in 2016. The comparably higher levels of provision for accounts receivable in the six months ended June 30, 2016 were principally due to resource allocation to integration activities related to acquisitions completed in 2015 as well as the relative condition of the acquired accounts receivables. Texas MPAP contributed $9.2 million of EBITDA in the six months ended June 30, 2016. The remaining $10.9 million decrease in EBITDA of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “Net Revenues.”
Rehabilitation Therapy Services
– EBITDA of the rehabilitation therapy segment decreased by $1.9 million or 4.4% comparing the six months ended June 30, 2017 with the same period in 2016. Lost therapy contracts exceeded new contracts by $3.9 million. Startup costs of our operations in China for the six months ended June 30, 2017 exceeded those in the comparable period in 2016 by $3.7 million. The remaining increase of EBITDA of $5.7 million is principally attributed to overhead cost reductions, favorable average costs of labor and pricing increases, partially offset by therapist efficiency which declined to 68% in the six months ended June 30, 2017 compared with 69% in the comparable period in the prior year.
Currently, we operate through affiliates in China a total of twelve locations comprised of the three rehabilitation clinics in Guangzhou, Shanghai and Hong Kong, a rehabilitation facility, and inpatient and outpatient rehabilitation services in seven hospital joint ventures and one nursing home. Startup and development costs of these Chinese ventures are expected to exceed revenues in fiscal 2017.
Other Services
— EBITDA decreased $4.9 million in the six months ended June 30, 2017 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 $2.0 million, principally attributed to the physician services business.
Corporate and Eliminations
— EBITDA decreased $70.8 million in the six months ended June 30, 2017 as compared with the same period in 2016. 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 $78.4 million of the net decrease in EBITDA. Corporate overhead costs decreased $7.1 million, or 7.7%, in the six months ended June 30, 2017 as compared with the same period in 2016. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining increase in EBITDA of $0.3 million is primarily the result of incremental investment earnings and improved earnings from our unconsolidated affiliates.
Other 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 loss recognized for the six months ended June 30, 2017 was a net $13.2 million, attributable to the sale of 26 skilled nursing facilities. Other income for the same period in 2016 was principally the recognized gain on the sale of hospice and homecare operations effective May 1, 2016.
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 six months ended June 30, 2017 and 2016 were $6.8 million and $6.7 million, respectively.
Skilled Healthcare and other loss contingency expense
— For the six months ended June 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 six months ended June 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 11 – “
Commitments and Contingencies – Legal Proceedings
.”
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 six months ended June 30, 2017, representing the outstanding accounts receivable balance from this customer.
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 six months ended June 30, 2017 as compared with the same period in 2016.
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 $5.1 million in the six months ended June 30, 2017 as compared with the same period in 2016, principally due to divestiture activity. On a same store basis, depreciation and amortization increased $1.5 million in the six months ended June 30, 2017 as compared with the same period in 2016.
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 mortgage instruments, as well as the
expense associated with leases accounted for as capital leases or financing obligations. Interest expense decreased $20.0 million in the six months ended June 30, 2017 as compared with the same period in the prior year. On a same store basis, interest expense is down $17.5 million in the six months ended June 30, 2016 as compared with the same period in 2016. Of that decrease, $1.2 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 $16.3 million decrease is principally attributed to non-cash accounting for lease transactions completed over the past twelve months.
Income tax expense
— For the six months ended June 30, 2017, we recorded an income tax expense of $4.1 million from continuing operations representing an effective tax rate of (2.2)% compared to an income tax expense of $6.2 million from continuing operations, representing an effective tax rate of (6.1)% for the same period in 2016. There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on its 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 June 30, 2017, 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 six months ended June 30, 2017 as compared with the same period in 2016.
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 six months ended June 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, the combined results of Skilled and FC-GEN were consolidated with approximately 42% 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, there have been conversions of 2.6 million Class C common stock, leaving a remaining direct noncontrolling economic interest of 39.5%. For the six months ended June 30, 2017 and 2016, loss of $74.4 million and $42.3 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 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 six months ended June 30, 2017 and 2016, income of $1.1 million and $1.3 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
|
Net cash provided by operating activities
|
|
|
$
|
69,127
|
|
$
|
23,515
|
|
|
Net cash provided by by investing activities
|
|
|
|
42,471
|
|
|
38,824
|
|
|
Net cash used in financing activities
|
|
|
|
(98,261)
|
|
|
(77,204)
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
13,337
|
|
|
(14,865)
|
|
|
Beginning of period
|
|
|
|
51,408
|
|
|
61,543
|
|
|
End of period
|
|
|
$
|
64,745
|
|
$
|
46,678
|
|
Net cash provided by operating activities in the six months ended June 30, 2017 increased $45.6 million compared with the same period in 2016. The increase in cash provided by operations is principally due to improved collections of inpatient account receivable in the six months ended June 30, 2017 as compared with the same period in 2016, partially offset by timing of disbursements.
Net cash provided by investing activities in the six months ended June 30, 2017 was $42.5 million, compared to net cash provided of $38.8 million in the same period in 2016. There were proceeds from the asset sales in the six months ended June 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 $72.0 million, $67.0 million and $9.4 million for the sale of our hospice and home care business, 18 assisted living facilities in Kansas and an office building in Albuquerque, New Mexico, respectively. There were no asset acquisitions in the six months ended June 30, 2017 compared to a use of investing cash flow of $69.5 million related to the purchase of skilled nursing facilities for the same period in the prior year. Routine capital expenditures for the six months ended June 30, 2017 decreased by $14.1 million as compared with the same period in the prior year. The remaining incremental use of cash from investing activities of $10.9 million in the six months ended June 30, 2017 as compared with the same period in 2016 is principally due to the reduction of net proceeds on maturities or sales on marketable securities in our captive insurance companies.
Net cash used in financing activities was $98.3 million in the six months ended June 30, 2017 compared to a use of $77.2 million in the same period in 2016. The net increase in cash used in financing activities of $21.1 million is principally attributed to debt repayments exceeding debt borrowings in the six months ended June 30, 2017 as compared to the same period in 2016. In the six months ended June 30, 2017, we had a net increase in repayment activity under the Revolving Credit Facilities of $19.3 million as compared with $8.0 million of incremental Revolving Credit Facilities borrowings in the same period in 2016. In the six months ended June 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 to repay indebtedness. In the six months ended June 30, 2017, we used $17.5 million in proceeds from HUD insured financing on two skilled nursing facilities to repay Real Estate Bridge Loan indebtedness. In the six months ended June 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. In the six months ended June 30, 2016, we used the proceeds of $53.9 million of newly issued mortgage debt to purchase skilled nursing facilities. In the six months ended June 30, 2016, we used $129.1 million of proceeds from HUD insured financing on 18 skilled nursing facilities to repay Real Estate Bridge Loan indebtedness. The remaining net reduction in the use of cash of $6.0 million in the six months ended June 30, 2017 compared with the same period in 2016 is principally due to scheduled debt repayments, debt issuance costs, distributions to noncontrolling interests and proceeds from tenant improvement draws in the 2017 period exceeding similar financing activities in the 2016 period.
Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our Revolving 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 June 30, 2017, we had cash and cash equivalents of $64.7 million and available borrowings under our Revolving Credit Facilities of $44.0 million, after taking into account $55.4 million of letters of credit drawn against our Revolving Credit Facilities. During the six months ended June 30, 2017, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities and we believe we will continue to meet those needs for at least the subsequent twelve-month period.
Financing Activities
We are progressing on our near-term capital strengthening priorities to refinance our Real Estate Bridge Loans with lower cost and longer maturity HUD insured loans or other permanent financing and to reduce our overall indebtedness through a combination of non-strategic asset sale proceeds and free cash flow.
During the six months ended June 30, 2017, we completed two mortgage refinancings through HUD totaling $17.5 million. Since the Combination, we have repaid or refinanced $231.4 million of Real Estate Bridge Loans with $299.4 million remaining outstanding at June 30, 2017.
In April 2017, we entered into a strategic dining 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.
Divestiture of Non-Strategic Facilities
Consistent with our strategy to divest assets in non-strategic markets, we have exited the inpatient operations of 27 skilled nursing facilities in nine states, including:
|
|
·
|
|
The sale of one skilled nursing facility located in Colorado on July 10, 2017 that was subject to a master lease agreement with Sabra as noted in
Lease Amendments
below.
|
|
|
·
|
|
The sale of one skilled nursing facility located in North Carolina 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. A loss was recognized totaling $0.5 million.
|
|
|
·
|
|
The sale of 18 skilled nursing facilities (16 owned and 2 leased) in the states of Kansas, Missouri, Nebraska and Iowa on April 1, 2017. The transaction marks an exit from the inpatient business in these states. The 18 facilities generated annual revenue of $110.1 million, pre-tax net loss of $10.7 million and had total assets of $91.6 million. Sale proceeds of $80 million, net of transaction costs, was principally used to repay indebtedness of the skilled nursing facilities. A loss was recognized totaling $6.4 million. One of the leased skilled nursing facilities was subleased to a new operator resulting in a loss associated with a cease use asset of $4.1 million.
|
|
|
·
|
|
The sale of four skilled nursing facilities located in Massachusetts that were subject to a master lease agreement and 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.
A loss was recognized totaling $1.4 million.
|
|
|
·
|
|
The sale of one skilled nursing facility located in Tennessee on April 1, 2017 that was subject to a master lease agreement with Sabra as noted in
Lease Amendments
below.
A loss was recognized totaling $0.7 million.
|
|
|
·
|
|
The sale of two skilled nursing facilities located in Georgia on February 1, 2017 at the expiration of their respective lease terms.
A loss was recognized totaling $0.5 million.
|
We expect to divest an additional 10 underperforming assets or assets in non-strategic markets through early calendar 2018.
Lease Amendments
On July 29, 2016, we entered into a memorandum of understanding with Sabra, later amended on February 20, 2017, outlining the terms of a restructuring to our master lease agreements. The significant features of the restructuring include (i) the application of a 7.5% credit against current rent from the proceeds of certain asset sales with any residual rent related to assets sold continuing to be paid by us through our current terms, which expire in 2020 and 2021; (ii) the reallocation of rents among certain of the master leases in order to establish market based lease coverages, with any excess rent above market lease coverage scheduled to expire in 2020 and 2021; and (iii) extensions of two to four years to the termination dates of certain master leases, which after 2020 and 2021 are estimated to be more reflective of market-based lease coverages. Based upon the estimated sale proceeds of certain assets and the excess rent associated with the rent reallocation, we project the annual rent reduction by 2021 to be between $11 million and $13 million. On April 1, 2017, the master lease agreements were amended to reflect the features noted above.
Financial Covenants
The Revolving Credit Facilities, the Term Loan Agreement and the Welltower Bridge 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 June 30, 2017, we are in compliance with all covenants contained in the Credit Facilities.
We have master lease agreements with Welltower, Sabra, Omega and Second Spring (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 June 30, 2017, we are in compliance with all covenants contained in the Master Lease Agreements.
At June 30, 2017, we have a master lease agreement with CBYW involving 28 of our facilities. We did not meet certain financial covenants contained in this master lease agreement at June 30, 2017. We received a waiver for this covenant breach through August 9, 2018. We continue to work with CBYW to amend this lease and the related financial covenants.
At June 30, 2017, we did not meet certain financial covenants contained in three leases related to 26 of our facilities. 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 at June 30, 2017 will have a material adverse impact on us.
Although we are in compliance and project to be in compliance with the covenants contained in our material debt and lease agreements through August 9, 2018, at a minimum, the ongoing uncertainty related to the impact of healthcare reform initiatives may have an adverse impact on our ability to remain in compliance with our covenants. Such uncertainty includes changes in reimbursement patterns, patient admission patterns, bundled payment arrangements, as well as potential changes to the Affordable Care Act 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 meet our debt and lease covenants in the future. Management has considered these factors and has devised certain strategies that could be implemented to address the ramifications of these uncertainties. Such strategies include, but are not limited to, cost containment measures and possible divestitures of less profitable facilities. Failure to maintain compliance with financial covenants contained in our Credit Facilities or Master Lease Agreements or a failure to obtain timely and
effective waivers with respect to a breach of such financial covenants could have a material adverse effect on our liquidity and financial condition.
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.
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 ten largest customers of our rehabilitation services business comprise approximately 80% of the outstanding receivables in that business. 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 known 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.
Going Concern Considerations
The accompanying unaudited 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 ( August 9, 2017 ). Management considered our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due before August 9, 2018.
In our assessment of our financial condition and liquidity as of June 30, 2017 and through the 12 month anniversary of the filing of this Quarterly Report on Form 10-Q, our debt and lease covenant compliance were considered. Our ability to maintain compliance with our debt and lease covenants depends in part on factors outside the control of management. Should we fail to comply with our debt covenants at a future measurement date, we could, absent necessary and timely waivers and/or amendments, be in default under certain of its existing agreements. To the extent any cross-default provisions may apply, the default could have an even more significant impact on our financial position. See Note 7 –
“Long-term Debt – Debt Covenants”
and Note 8 –
“Leases and Lease Commitments – Lease Covenants.”
Off Balance Sheet Arrangements
We had outstanding letters of credit of $55.4 million under our letter of credit sub-facility on our Revolving Credit Facilities as of June 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 June 30, 2017 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
Total
|
|
1 Yr.
|
|
2-3 Yrs.
|
|
4-5 Yrs.
|
|
5 Yrs.
|
|
|
Revolving credit facilities
|
|
$
|
421,363
|
|
$
|
24,950
|
|
$
|
396,413
|
|
$
|
—
|
|
$
|
—
|
|
|
Term loan agreement
|
|
|
171,435
|
|
|
17,579
|
|
|
37,550
|
|
|
116,306
|
|
|
—
|
|
|
Real estate bridge loans
|
|
|
440,000
|
|
|
30,238
|
|
|
72,009
|
|
|
337,753
|
|
|
—
|
|
|
HUD insured loans
|
|
|
405,138
|
|
|
13,147
|
|
|
26,451
|
|
|
26,451
|
|
|
339,089
|
|
|
Notes payable
|
|
|
107,211
|
|
|
2,373
|
|
|
5,217
|
|
|
99,621
|
|
|
—
|
|
|
Mortgages and other secured debt (recourse)
|
|
|
13,493
|
|
|
1,107
|
|
|
11,285
|
|
|
1,101
|
|
|
—
|
|
|
Mortgages and other secured debt (non-recourse)
|
|
|
32,039
|
|
|
13,422
|
|
|
2,617
|
|
|
2,617
|
|
|
13,383
|
|
|
Financing obligations
|
|
|
9,412,856
|
|
|
273,340
|
|
|
564,934
|
|
|
585,022
|
|
|
7,989,560
|
|
|
Capital lease obligations
|
|
|
3,461,459
|
|
|
90,977
|
|
|
186,898
|
|
|
191,668
|
|
|
2,991,916
|
|
|
Operating lease obligations
|
|
|
923,918
|
|
|
142,049
|
|
|
278,351
|
|
|
253,990
|
|
|
249,528
|
|
|
|
|
$
|
15,388,912
|
|
$
|
609,182
|
|
$
|
1,581,725
|
|
$
|
1,614,529
|
|
$
|
11,583,476
|
|
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, Real Estate Bridge Loans and Revolving Credit Facilities expose us to variability in interest payments due to changes in interest rates. As of June 30, 2017, 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 $5.3 million increase in our annual interest expense.
Our investments in marketable securities as of June 30, 2017 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.
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.
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.
Part II. Other Information
Item 1.
Legal Proceedings
For information regarding certain pending legal proceedings to which we are a party or our property is subject, see Note 11
—
“
Commitments and Contingencies—Legal Proceedings
,” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.
Item 1A.
Risk Factors
Except as set forth below, there have been no material changes or additions to the risk factors previously disclosed in Part I, Item 1A,
“Risk Factors,”
of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on March 6, 2017.
We are exposed to the credit and non-payment risk of our contracted customer relationships, including as a result from bankruptcy, receivership, liquidation, reorganization or insolvency, especially during times of systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets, which could result in material losses.
Deterioration in the financial condition of our customer relationships due to systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets may result in a reduction in services provided, an inability to collect receivables and payment delays or losses due to a customer’s bankruptcy, receivership, liquidation, reorganization or insolvency. Such actions could result in our customers seeking to cancel or renegotiate the terms of current agreements
or renewals, and failure to meet contractual obligations. Although our bad debt experience has been historically low, our inability to collect receivables may increase the amounts of our expense against our bad debt reserve, decreasing profitability and liquidity.
We provide rehabilitation therapy services and other healthcare related services to numerous customers of varying size and significance on unsecured credit, with terms that vary depending upon the customer’s credit history, solvency and credit limits, as well as prevailing terms with customers having similar characteristics. Despite an initial credit assessment, customers deemed creditworthy may experience an undetected decline in their financial condition while contracting with us. Our rehabilitation therapy services segment, in particular, has several significant contracts with national skilled nursing home chains that increases our exposure to potential material losses. Even when existing contract customers exhibit factors indicating negative credit trends, it can be costly to implement measures to reduce our exposure to those customers. Challenging systemic industry pressures, economic conditions, regulatory uncertainty and tight credit markets may impair the ability of our customers to pay for services that have been provided by us, and as a result, our reserves for doubtful accounts and write-off of accounts receivable could increase. Our exposure to credit risks may increase if such unpaid balances serve as collateral under our Revolving Credit Facilities and we have drawn funds thereunder. If one or more of these customers delay payments or default on credit extended to them, it could adversely impact our business, financial condition, operating results and liquidity.
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.
Item 5.
Other Information
As previously reported in the proxy statement for our 2017 Annual Meeting of Stockholders (the 2017 Meeting), the Board recommended that stockholders vote, on an advisory (non-binding) basis, in favor of annual future “say-on-pay” votes. Say-on-pay votes are periodic advisory (non-binding) stockholder votes to approve the compensation paid to our named executive officers. At the 2017 Meeting, a majority of the shares cast on the matter voted in favor of an annual frequency for say-on-pay votes, and these results were timely reported in our Current Report on Form 8-K, filed with the SEC on June 12, 2017.
The Board has considered the appropriate frequency of future say-on-pay votes. Among other factors, the Board considered the voting results at the 2017 Meeting with respect to the non-binding advisory vote regarding the frequency of future say-on-pay votes. The Board has determined that future say-on-pay votes will be submitted to our stockholders on an annual basis until the next required non-binding advisory vote on the frequency of say-on-pay votes. We are required to hold advisory votes on the frequency of say-on-pay votes at least every six calendar years.
Item 6.
Exhibits
(a)
Exhibits
.
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
Amendment No. 7 dated as of May 5, 2017 to that certain Third Amended and Restated Credit Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and Healthcare Financial Solutions, LLC, as administrative agent.
|
|
10.2
|
Amendment No. 2 dated as of May 5, 2017 to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent.
|
|
10.3
|
Amendment No. 1 dated May 5, 2017 to Twentieth Amended and Restated Master Lease Agreement, dated January 31, 2017, between FC-GEN Real Estate, LLC and Genesis Operations LLC.
|
|
31.1
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32*
|
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
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
|
________________
|
|
|
|
*
|
Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
GENESIS HEALTHCARE, INC.
|
|
|
|
|
|
Date:
|
August 9, 2017
|
By
|
/S/ GEORGE V. HAGER, JR.
|
|
|
|
|
George V. Hager, Jr.
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
Date:
|
August 9, 2017
|
By
|
/S/ THOMAS DIVITTORIO
|
|
|
|
|
Thomas DiVittorio
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
(Principal Financial Officer and Authorized Signatory)
|
EXHIBIT INDEX
|
|
|
|
|
|
|
10.1
|
Amendment No. 7 dated as of May 5, 2017 to that certain Third Amended and Restated Credit Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, certain other borrower entities as set forth therein, certain financial institutions from time to time party thereto, and Healthcare Financial Solutions, LLC, as administrative agent.
|
|
10.2
|
Amendment No. 2 dated as of May 5, 2017 to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent.
|
|
10.3
|
Amendment No. 1 dated May 5, 2017 to Twentieth Amended and Restated Master Lease Agreement, dated January 31, 2017, between FC-GEN Real Estate, LLC and Genesis Operations LLC.
|
|
31.1
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32*
|
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
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
|
________________
|
|
|
|
*
|
Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended
|
Genesis Healthcare (NYSE:GEN)
Historical Stock Chart
From Mar 2024 to Apr 2024
Genesis Healthcare (NYSE:GEN)
Historical Stock Chart
From Apr 2023 to Apr 2024
