ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share and admissions data)
Forward-Looking Statements
This
Quarterly Report and the documents that are incorporated by reference in this Quarterly Report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words such as may, believe, will,
expect, project, estimate, anticipate, plan or continue. These forward-looking statements are based on current plans and expectations and are subject to a number of risks,
uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance and achievements to differ materially from
those anticipated, include, but are not limited to:
General Business Conditions
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|
|
general economic and business conditions in the U.S., both nationwide and in the states in which we operate;
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|
increases in uninsured and/or underinsured patients due to unemployment or other conditions, higher deductibles and
co-insurance,
or other terms of health insurance coverage
resulting in higher bad debt amounts;
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|
the competitive nature of the U.S. community hospital, nursing home, and pharmacy businesses;
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|
demographic changes in areas where we operate;
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the availability of cash or borrowings to fund working capital, renovations, replacements, expansions, and capital improvements at existing healthcare and pharmacy facilities and for acquisitions and replacement of such
facilities;
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|
changes in accounting principles generally accepted in the U.S.; and
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|
|
|
fluctuations in the market value of equity securities including SunLink common shares.
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Operational Factors
|
|
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ability or inability to operate profitably in one or more segments of the healthcare business;
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the availability of, and our ability to attract and retain, sufficient qualified staff physicians, management, nurses, pharmacists, and staff personnel for our operations;
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timeliness and amount of reimbursement payments received under government programs;
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changes in interest rates under lending agreements and other indebtedness;
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the ability or inability to refinance existing indebtedness and existing or potential defaults under existing indebtedness;
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restrictions imposed by existing or future lending agreements or other indebtedness;
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the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general liability insurance;
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the efforts of insurers, healthcare providers, and others to contain healthcare costs;
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14
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the impact on hospital services of the treatment of patients in lower acuity healthcare settings, whether with drug therapy or in alternative healthcare settings, such as surgery centers or urgent care centers;
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changes in medical and other technology;
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risks of changes in estimates of self-insurance claims and reserves;
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changes in prices of materials and services utilized in our Healthcare Services and Pharmacy segments;
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changes in wages as a result of inflation or competition for physician, nursing, pharmacy, management and staff positions;
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changes in the amount and risk of collectability of accounts receivable, including deductibles and
co-pay
amounts;
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the functionality of or costs with respect to our information systems for our Healthcare Services and Pharmacy segments and our corporate office, including both software and hardware;
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the availability of and competition from alternative drugs or treatments to those provided by our Pharmacy segment; and
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the restrictions, processes, and conditions relating to our Pharmacy segment imposed by pharmacy benefit providers, drug manufacturers, and distributors.
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Liabilities, Claims, Obligations and Other Matters
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claims under leases, guarantees, disposition agreements, and other obligations relating to discontinued operations, including claims from sold or leased Facilities, retained liabilities or retained subsidiaries;
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potential adverse consequences of known and unknown government investigations;
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claims for product and environmental liabilities from continuing and discontinued operations;
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professional, general, and other claims which may be asserted against us; and
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natural disasters and weather-related events such as earthquakes, hurricanes, flooding, snow, ice and wind damage, and population evacuations affecting areas in which we operate.
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Regulation and Governmental Activity
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existing and proposed governmental budgetary constraints;
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Federal and state insurance exchanges and their rules on reimbursement terms;
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the decision by states in which we operate our remaining hospital (Mississippi) and two remaining nursing homes (Georgia and Mississippi) to not expand Medicaid;
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the regulatory environment for our businesses, including state certificate of need laws and regulations, pharmacy licensing laws and regulations, rules and judicial cases relating thereto;
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changes in the levels and terms of government (including Medicare, Medicaid and other programs) and private reimbursement for SunLinks healthcare services including the payment arrangements and terms of managed
care agreements; EHR reimbursement and indigent care reimbursements (Medicare Upper Payment Limit UPL and Disproportionate Share Hospital DSH adjustments);
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changes in or failure to comply with Federal, state or local laws and regulations affecting our Healthcare Services and Pharmacy Segments; and
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15
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|
the possible enactment of additional Federal healthcare reform laws or reform laws in states where our subsidiaries operate hospital and pharmacy Facilities (including Medicaid waivers, bundled payments, accountable
care and similar organizations, competitive bidding and other reforms).
|
Dispositions, Acquisition and Renovation Related
Matters
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the ability to dispose of underperforming Facilities and business segments;
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the availability and terms of capital to fund acquisitions, improvements, renovations or replacement Facilities; and
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|
|
competition in the market for acquisitions of hospitals, nursing homes, pharmacy Facilities, and healthcare businesses.
|
The foregoing are significant factors we think could cause our actual results to differ materially from expected results. However, there could
be additional factors besides those listed herein that also could affect SunLink in an adverse manner.
You should read this Quarterly
Report completely and with the understanding that actual future results may be materially different from what we expect. You are cautioned not to unduly rely on forward-looking statements when evaluating the information presented in this Quarterly
Report or our other disclosures because current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of SunLink.
We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak
only as of the date of the document in which they are made or, if a date is specified, as of such date. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our
expectations or any changes in events, conditions, circumstances or information on which the forward-looking statement is based, except as required by applicable law. All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the other risk factors set forth elsewhere in this report and in our Annual Report on Form
10-K.
Business Strategy: Operations, Dispositions and Acquisitions
The business strategy of SunLink is to focus its efforts on expanding the services and improving the operations and profitability of its
existing Healthcare Services and Pharmacy businesses. The Company is investing in upgrades and improvements to certain of its Healthcare Services and Pharmacy businesses, while seeking to sell certain of its subsidiaries underperforming
assets.
The Company has used a portion of the cash proceeds from recent dispositions of assets to pay down debt and certain other
liabilities, and to repurchase common shares in tender offers completed in February and December 2017. The Company may also use existing cash, as well as any net proceeds from future dispositions, if any, to improve its existing businesses, make
acquisitions of Healthcare Services and Pharmacy businesses, prepay debts, return capital to shareholders including through potential public or private purchases of shares, and for other general corporate purposes. There is no assurance that any
further dispositions, will be authorized by the Companys Board of Directors or, if authorized, that any such transactions will be completed or, if completed, will result in net cash proceeds to the Company on a before or after tax basis.
The Company considers the disposition of business segments, facilities and operations based on a variety of factors in addition to
under-performance, including asset values, return on investments, competition from existing and potential competitors, capital improvement needs, the prevailing reimbursement environment under various Federal and state programs (e.g., Medicare and
Medicaid) and private payors, and other corporate objectives. The Company believes certain facilities in its Healthcare Services segment as well as its Pharmacy segment continue to under-perform, and the Company has engaged advisors to assist it in
evaluating the possible sale of its Pharmacy business lines.
On January 11, 2018, Carmichaels Cashway Pharmacy, Inc., a wholly
owned subsidiary of the Company, sold the assets of a retail pharmacy operation it operates for approximately $410. A pre-tax gain on the sale of the assets of approximately $188 will be reported in results for the three months ended March 31,
2018.
16
Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts
and related disclosures. We consider an accounting estimate to be critical if:
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|
|
it requires assumptions to be made that were uncertain at the time the estimate was made; and
|
|
|
|
changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition.
|
Our critical accounting estimates are more fully described in our 2017 Annual Report on Form
10-K
and
continue to include the following areas:
|
|
|
Receivables net and provision for doubtful accounts;
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|
|
Revenue recognition / Net Patient Service Revenues;
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|
|
Goodwill, intangible assets and accounting for business combinations;
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|
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Professional and general liability claims; and
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|
|
|
Accounting for income taxes
|
Financial Summary
The results of continuing operations shown in the financial summary below are for our two business segments, Healthcare Services and Pharmacy.
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|
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|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
% Change
|
|
|
2017
|
|
|
2016
|
|
|
% Change
|
|
Net Revenues - Healthcare Services
|
|
$
|
5,722
|
|
|
$
|
5,848
|
|
|
|
-2.2
|
%
|
|
$
|
11,376
|
|
|
$
|
11,553
|
|
|
|
-1.5
|
%
|
Net Revenues - Pharmacy
|
|
|
8,156
|
|
|
|
8,407
|
|
|
|
-3.0
|
%
|
|
|
15,865
|
|
|
|
15,748
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
13,878
|
|
|
|
14,255
|
|
|
|
-2.6
|
%
|
|
|
27,241
|
|
|
|
27,301
|
|
|
|
-0.2
|
%
|
Costs and expenses
|
|
|
(13,958
|
)
|
|
|
(14,227
|
)
|
|
|
-1.9
|
%
|
|
|
(27,420
|
)
|
|
|
(28,226
|
)
|
|
|
-2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
(80
|
)
|
|
|
28
|
|
|
|
NA
|
|
|
|
(179
|
)
|
|
|
(925
|
)
|
|
|
NA
|
|
Interest expense - net
|
|
|
(119
|
)
|
|
|
(157
|
)
|
|
|
-24.2
|
%
|
|
|
(246
|
)
|
|
|
(378
|
)
|
|
|
-34.9
|
%
|
Loss on extinguishment of debt
|
|
|
(238
|
)
|
|
|
(289
|
)
|
|
|
-17.6
|
%
|
|
|
(238
|
)
|
|
|
(243
|
)
|
|
|
-2.1
|
%
|
Gain on economic damages claim, net
|
|
|
944
|
|
|
|
0
|
|
|
|
NA
|
|
|
|
944
|
|
|
|
0
|
|
|
|
NA
|
|
Gain (Loss) on sale of assets
|
|
|
(4
|
)
|
|
|
2,995
|
|
|
|
-100.1
|
%
|
|
|
(2
|
)
|
|
|
3,017
|
|
|
|
-100.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes
|
|
$
|
503
|
|
|
$
|
2,577
|
|
|
|
-80.5
|
%
|
|
$
|
279
|
|
|
$
|
1,471
|
|
|
|
-81.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare Facilities Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital and Nursing Home Admissions
|
|
|
156
|
|
|
|
124
|
|
|
|
25.8
|
%
|
|
|
322
|
|
|
|
245
|
|
|
|
31.4
|
%
|
Hospital and Nursing Patient Days
|
|
|
14,128
|
|
|
|
15,273
|
|
|
|
-7.5
|
%
|
|
|
28,873
|
|
|
|
30,707
|
|
|
|
-6.0
|
%
|
17
Results of Operations
Healthcare Services Segment Net Revenues
The following table sets forth the percentage of net patient revenues from major payors for the Healthcare Services segment for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
40.6
|
%
|
|
|
39.2
|
%
|
|
|
40.3
|
%
|
|
|
37.4
|
%
|
Medicaid
|
|
|
35.7
|
%
|
|
|
40.4
|
%
|
|
|
36.5
|
%
|
|
|
41.9
|
%
|
Managed Care Insurance & Other
|
|
|
19.1
|
%
|
|
|
17.9
|
%
|
|
|
19.4
|
%
|
|
|
18.4
|
%
|
Self-pay
|
|
|
4.6
|
%
|
|
|
2.5
|
%
|
|
|
3.8
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Healthcare Services segment in the current year is composed of two nursing homes, one hospital, a subsidiary which
provides information technology (IT) services to outside customers and SunLink subsidiaries, two leased medical office buildings, and unimproved land at three locations. Healthcare Services net revenues decreased $126, or 2%, for the
three months ended December 31, 2017 compared to the prior year period. Decreased nursing home Medicaid revenues, partially offset by increased physician clinic and nursing home Medicare revenues, resulted in the decreased net revenues.
Healthcare Services net revenues decreased $177, or 1%, for the six months ended December 31, 2017 compared to the prior year period. Decreased nursing home Medicaid revenues, partially offset by increased physician clinic and nursing home
Medicare revenues, resulted in the decreased net revenues. There were $264 prior years Medicare positive cost report settlements for the three and six months ended December 31, 2017 and $347 for the three and six months ended
December 31, 2016.
Pharmacy Segment Net Revenues
Pharmacy segment net revenues for the three months ended December 31, 2017 decreased $251, or 3%, from the three months ended
December 31, 2016. The decrease was a result of an 8% decrease in Durable Medical Equipment (DME) net revenues offset by a 2% increase in Retail Pharmacy net revenues. Pharmacy segment net revenues for the six months ended
December 31, 2017 increased $117, or 1%, from the six months ended December 31, 2016. The increase was a result of a 6% increase in Durable Medical Equipment (DME) net revenues partially offset by a 1% decrease in Retail
Pharmacy net revenues and a 1% decrease in Institutional Pharmacy net revenues. DME net revenues increased primarily due to increased Medicare reimbursement realized from the implementation of the provisions of the 21
st
Century Cures Act
.
The Company expects that the increased revenues from the 21
st
Century Cures Act will not continue in material amounts
this fiscal year. The average net revenue per Retail Pharmacy sales order decreased 5% in the current year despite a 5% increase in script volume due to decreased reimbursement from government and insurance insurances. Institutional Pharmacy script
volume decreased 5% in the current year.
Healthcare Services Segment Cost and Expenses
Costs and expenses for our Healthcare Services Segment, including depreciation and amortization, were $5,661 and $5,424 for the three months
ended December 31, 2017 and 2016, respectively. Costs and expenses for our Healthcare Services segment, including depreciation and amortization, were $11,372 and $11,261 for the six months ended December 31, 2017 and 2016, respectively.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and Expenses
|
|
|
|
as a % of Net Revenues
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Salaries, wages and benefits
|
|
|
68.5
|
%
|
|
|
63.8
|
%
|
|
|
68.0
|
%
|
|
|
63.9
|
%
|
Supplies
|
|
|
8.0
|
%
|
|
|
8.9
|
%
|
|
|
7.5
|
%
|
|
|
8.8
|
%
|
Purchased services
|
|
|
6.7
|
%
|
|
|
4.8
|
%
|
|
|
6.7
|
%
|
|
|
5.5
|
%
|
Other operating expenses
|
|
|
11.9
|
%
|
|
|
11.5
|
%
|
|
|
14.1
|
%
|
|
|
15.2
|
%
|
Rent and lease expense
|
|
|
1.0
|
%
|
|
|
0.6
|
%
|
|
|
1.0
|
%
|
|
|
0.7
|
%
|
Depreciation and amortization expense
|
|
|
2.8
|
%
|
|
|
3.2
|
%
|
|
|
2.8
|
%
|
|
|
3.4
|
%
|
Salaries, wages and benefits increased as a percent of net revenue for the three and six months ended
December 31, 2017 due to increased employee medical claims when compared to same period last year. Supplies and Other operating expenses decreased this year because last years expenses included expenses related to a hospital that ceased
operations in June 2016. Purchased services expense increased for the three and six months ended December 31, 2017, as compared to the same period last year due to increased legal expenses. Depreciation and amortization expense decreased $37
and $68 for the three and six months ended December 31, 2017, as compared to the same period last year as a result of the sale of a medical office building last year.
Pharmacy Segment Cost and Expenses
Cost and expenses for our Pharmacy segment, including depreciation and amortization, were $7,927 and $8,402 for the three months ended
December 31, 2017 and 2016, respectively. Cost and expenses for our Pharmacy segment, including depreciation and amortization, were $15,213 and $15,935 for the six months ended December 31, 2017 and 2016, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and Expenses
|
|
|
|
as a % of Net Revenues
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of goods sold
|
|
|
62.4
|
%
|
|
|
64.6
|
%
|
|
|
60.2
|
%
|
|
|
63.9
|
%
|
Salaries, wages and benefits
|
|
|
21.8
|
%
|
|
|
22.4
|
%
|
|
|
22.1
|
%
|
|
|
23.8
|
%
|
Provision for bad debts
|
|
|
1.1
|
%
|
|
|
1.5
|
%
|
|
|
1.3
|
%
|
|
|
1.4
|
%
|
Supplies
|
|
|
0.4
|
%
|
|
|
0.4
|
%
|
|
|
0.4
|
%
|
|
|
0.4
|
%
|
Purchased services
|
|
|
3.3
|
%
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
3.8
|
%
|
Other operating expenses
|
|
|
3.7
|
%
|
|
|
3.4
|
%
|
|
|
3.0
|
%
|
|
|
3.6
|
%
|
Rent and lease expense
|
|
|
1.1
|
%
|
|
|
0.9
|
%
|
|
|
1.0
|
%
|
|
|
1.0
|
%
|
Depreciation and amortization expense
|
|
|
3.4
|
%
|
|
|
3.2
|
%
|
|
|
3.5
|
%
|
|
|
3.3
|
%
|
Cost of goods sold as a percent of net revenues decreased in the three and six month period ended
December 31, 2017 as compared to the comparable period of the prior year due to changes in sales product mix and increased discounts from their venders. Salaries, wages and benefits as a percent of net revenues decreased in the three and six
month period ended December 31, 2017 as compared to the comparable period of the prior year due to a reduction in labor force which began last fiscal year. Provision for bad debts decreased for the three months ended December 31, 2017 as
compared to last year due to the decrease in DME net revenues.
Operating Profit and Loss
The Company reported an operating loss of $80 for the three months ended December 31, 2017 compared to operating profit of $28 for the
three months ended December 31, 2016. The operating loss for the three months ended December 31, 2017 compared to the operating profit for the prior years three month period resulted from the 3% decrease in net revenues.
19
The Company reported an operating loss of $179 for the six months ended December 31, 2017 compared to operating loss of $925 for the six months ended December 31, 2016. The operating
loss last year included expenses related to a hospital that ceased operations in June 2016.
Gain on economic damages claim
The Pharmacy Segment subsidiary asserted claims for economic damages in connection with the Deepwater Horizon Settlement Program related to the event which
occurred in 2010. In January 2018, these claims were settled and payments of approximately $944 (net of costs and attorneys fees) were received. The net settlements are recognized as a gain in the Condensed Consolidated Statements of
Operations and Comprehensive Earnings (Loss) for the three and six months ended December 31, 2017 and as of December 31, 2017, the net settlements of $944 are included in Prepaid expense and other assets on the December 31, 2017
Condensed Consolidated Balance Sheets.
Interest Expense
Interest expense was $119 and $157 for the three months ended December 31, 2017 and 2016, and $246 and $378 for the six months ended
December 31, 2017 and 2016, respectively. The decrease in interest expense resulted from lower debt outstanding in the current fiscal year, primarily because as debt was reduced $3,985 last fiscal year with no additional debt undertaken.
Income Taxes
Income tax benefit
of $296 ($296 federal tax benefit and $0 state tax expense) and income tax benefit of $372 ($399 federal tax benefit and $27 state tax expense) was recorded for continuing operations for the three months ended December 31, 2017 and 2016,
respectively. Income tax benefit of $296 ($296 federal tax benefit and $0 state tax expense) and income tax benefit of $228 ($189 federal tax benefit and $39 state tax benefit) was recorded for continuing operations for the six months ended
December 31, 2017 and 2016, respectively.
In accordance with the Financial Accounting Standards Board Accounting Standards
Codification (ASC) 740, we evaluate our deferred taxes quarterly to determine if adjustments to our valuation allowance are required based on the consideration of available positive and negative evidence using a more likely than
not standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future results of operations, the duration of applicable statuary
carryforward periods and conditions of the healthcare industry. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related temporary differences in
the financial basis and the tax basis of the assets become deductible. The value of our deferred tax assets will depend on applicable income tax rates.
The Tax Cut and Jobs Act (TCJA) was enacted on December 22, 2017. Under ASC 740, the impact of changes in tax law must be
recorded in the financial statements in the reporting period that included the date of enactment. However, the SEC and the FASB both recognize that the magnitude of this law change will require extensive analysis and calculations to conform to the
new provisions. The SEC issued Staff Accounting Bulletin (SAB) on December 22, 2017. SAB 118 provides registrants with guidance on when and how to report the impact of the law change when not all necessary information is available.
At December 31, 2017, consistent with the above processes, we evaluated the need for a valuation against our deferred tax assets and
determined that it was more likely than not that only our federal alternative minimum tax
20
(AMT) tax credits of $296 would be realized. The AMT credit represents a provisional amount that will be finalized upon the filing of the Companys federal income tax return for
the year ended June 30, 2017. The filing of this return will occur prior to the Companys fiscal year end which is within the measurement period. Under TCJA, AMT tax credits will now become refundable in conjunction with the repeal of the
corporate AMT. For tax years beginning after December 31, 2017 and before January 1, 2022, the AMT credit is refundable in an amount equal to 50% (100% for the 2021 tax year) of the excess of the credit for the tax year over the amount of
the credit allowable for the year against regular tax liability. This results in the Company receiving its entire AMT credit of $296 as a refund no later than fiscal 2022 and as such a valuation allowance is no longer needed for the AMT credit
carryforward. However, in accordance with ASC 740, we recognized a valuation allowance of $7,921 against all other net deferred tax asset items at December 31, 2017. We conducted our evaluation by considering available positive and negative
evidence to determine our ability to realize our deferred tax assets. In our evaluation, we gave more significant weight to evidence that was objective in nature as compared to subjective evidence. Also, more significant weight was given to evidence
that directly related to our current financial performance as compared to less current evidence and future plans.
The principal negative
evidence that led us to determine at December 31, 2017 that $7,921of the net deferred tax assets resulting from
non-AMT
credit carryforwards should have full valuation allowances was the three-year
cumulative
pre-tax
loss as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare Services Segment businesses operate.
For Federal income tax purposes, at December 31, 2017, the Company had approximately $12,700 of estimated net operating loss
carry-forwards available for use in future years subject to the limitations of the provisions of Internal Revenue Code Section 382. These net operating loss carryforwards expire in 2025, With the enactment of TCJA; Federal net operating loss
carryforwards generated in taxable years ending after December 31, 2017 now have no expiration date.
Gain on Sale of Assets
In December 2016, a subsidiary sold a medical office building complex, comprised of land and three buildings in Ellijay, GA (Ellijay
MOB) for $4,900. A gain of $2,819 was reported on the sale.
Earnings (Loss) from Continuing Operations before Income Tax
Earnings from continuing operations before income tax was $503 for the three months ended December 31, 2017 compared to earnings from
continuing operations before income tax of $2,577 for the three months ended December 31, 2016. Earnings from continuing operations before income tax was $279 for the six months ended December 31, 2017 compared to earnings from continuing
operations before income tax of $1,471 for the six months ended December 31, 2016. The decreased earnings from continuing operations this year results from the
non-recurrence
of the gain on the sale of
assets last year.
Earnings (Loss) After Taxes
Earnings from continuing operations were $799 (or $0.09 per fully diluted share) for the three months ended December 31, 2017 compared to
earnings from continuing operations of $2,949 (or $0.31 per fully diluted share) for the three months ended December 31, 2016. Earnings from continuing operations were $575 (or $0.06 per fully diluted share) for the six months ended
December 31, 2017 compared to earnings from continuing operations of $1,699 (or $0.18 per fully diluted share) for the six months ended December 31, 2016.
Net earnings for the three months ended December 31, 2017 was $726 (or $0.08 fully diluted share) compared to net earnings of $3,098
($0.32 earnings per fully diluted share) for the three months ended December 31, 2016. Net earnings for the six months ended December 31, 2017 was $449 (or $0.05 fully diluted share) compared to net earnings of $6,121 ($0.65 earnings per
fully diluted share) for the six months ended December 31, 2016. Net earnings last year included $4,422 of earnings from discontinued operations which resulted from the gain on the sale of a hospital in August 2016.
21
Adjusted earnings before income taxes, interest, depreciation and amortization
Earnings before income taxes, interest, depreciation and amortization (EBITDA) represent the sum of income before income taxes,
interest, depreciation and amortization. We understand that certain industry analysts and investors generally consider EBITDA to be one measure of the liquidity of a company, and it is presented to assist analysts and investors in analyzing the
ability of a company to generate cash, service debt and meet capital requirements. We believe increased EBITDA is an indicator of improved ability to service debt and to satisfy capital requirements. EBITDA, however, is not a measure of financial
performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to net income as a measure of operating performance or to cash liquidity. Because EBITDA is not a measure
determined in accordance with accounting principles generally accepted in the United States of America and is thus susceptible to varying calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other
corporations. Where we adjust EBITDA for
non-cash
charges, we refer to such measurement as Adjusted EBITDA, which we report on a Company wide basis.
Non-cash
adjustments in Adjusted EBITDA are not intended to be identified or characterized in any respect as
non-recurring,
infrequent or unusual, if we believe such charge is reasonably likely to recur
within two years, or if there was a similar charge (or gain) within the prior two years. Where we report Adjusted EBITDA, we typically also report Healthcare Services segment Adjusted EBITDA and Pharmacy segment Adjusted EBITDA which is the EBITDA
for the applicable segments without any allocation of corporate overhead, which we report as a separate line item, without gains on sales of businesses and without any allocation of the
non-cash
adjustments,
which we also report as a separate line item in Adjusted EBITDA. Net cash used in operations for the three and six months ended December 31, 2017 and 2016, respectively, is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Healthcare Services Adjusted EBITDA
|
|
$
|
221
|
|
|
$
|
622
|
|
|
$
|
322
|
|
|
$
|
679
|
|
Pharmacy Adjusted EBITDA
|
|
|
507
|
|
|
|
272
|
|
|
|
1,200
|
|
|
|
334
|
|
Corporate overhead costs
|
|
|
(369
|
)
|
|
|
(400
|
)
|
|
|
(833
|
)
|
|
|
(1,028
|
)
|
Taxes and interest expense
|
|
|
177
|
|
|
|
215
|
|
|
|
50
|
|
|
|
(150
|
)
|
Other
non-cash
expenses and net change in operating assets
and liabilities
|
|
|
(504
|
)
|
|
|
(1,433
|
)
|
|
|
(474
|
)
|
|
|
(3,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operations
|
|
$
|
32
|
|
|
$
|
(724
|
)
|
|
$
|
265
|
|
|
$
|
(3,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Overview
Our primary source of
liquidity is unrestricted cash on hand of $2,959 at December 31, 2017. Currently, the Companys ability to raise capital (debt or equity) in the public or private markets on what it considers acceptable terms is uncertain. We nevertheless
periodically seek options to obtain financing for the liquidity needs of the Company or individual subsidiaries. The Company and its subsidiaries currently are funding working capital needs primarily from cash on hand and from the sale of assets.
See Subsidiary Loans below.
Subject to the risks and uncertainties discussed herein, we believe we have adequate financing
and liquidity to support our current level of operations through the next twelve months.
Subsidiary Loans
Trace RDA Loan
Southern Health Corporation of Houston, Inc. (Trace) a wholly owned subsidiary of the Company,
closed on a $9,975 Mortgage Loan Agreement (Trace RDA Loan) with a bank, dated as of July 5, 2012. The Trace RDA Loan has a term of 15 years with level monthly payments of principal and interest until repaid. On December 26,
2017, the Fifth Amendment to Loan Agreement, Modification of Note and Waiver (Modification) was entered into by Trace and the bank. Under the Modification, Trace made a $3,548 prepayment on the Trace RDA Loan. The monthly principal
payments on the RDA Loan were reduced to $39 per month, the interest rate was reduced to the prime rate (as published in the Wall Street Journal) plus 1% with a floor of 5.5%, (5.5% at December 31, 2017) and certain loan covenants were
modified. The Modification also included a waiver of covenant violations for the quarters ended June 30 and September 30, 2017. Trace was in compliance with the amended financial covenants at December 31, 2017. In connection with the
modification and prepayment, an existing deposit of $1,000 in a blocked, interest bearing account with the lender was released. The Trace RDA Loan is collateralized by real estate and equipment of Trace in Houston, MS, and is partially guaranteed
under the U.S. Department of Agriculture, Rural Development Business and Industry Program.
22
The Trace RDA Loan contains various terms and conditions, including financial restrictions and
limitations, and affirmative and negative covenants. The covenants include financial covenants measured on a quarterly basis which require Trace to comply with a ratio of current assets to current liabilities, debt service coverage, fixed charge
ratio, and funded debt to EBITDA, all as defined in the Trace RDA Loan. The ability of Trace to continue to make the required debt service payments under the Trace RDA Loan depends on, among other things, its ability to generate sufficient cash,
including from operating activities and asset sales. If Trace is unable to generate sufficient cash to meet debt service payments on the Trace RDA Loan, including in the event the lender were to declare an event of default and accelerate the
maturity of the indebtedness, such failure could have material adverse effects on the Company. The Trace RDA Loan is guaranteed by the Company and one subsidiary.
Contractual Obligations, Commitments and Contingencies
Contractual obligations, commitments and contingencies related to outstanding debt,
non-cancelable
operating leases and interest on outstanding debt from continuing operations at December 31, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
due in:
|
|
Long-Term
Debt
|
|
|
Operating
Leases
|
|
|
Interest on
Outstanding
Debt
|
|
1 year
|
|
$
|
263
|
|
|
$
|
554
|
|
|
$
|
168
|
|
2 years
|
|
|
300
|
|
|
|
349
|
|
|
|
152
|
|
3 years
|
|
|
317
|
|
|
|
293
|
|
|
|
133
|
|
4 years
|
|
|
336
|
|
|
|
111
|
|
|
|
113
|
|
5+ years
|
|
|
2,203
|
|
|
|
13
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,419
|
|
|
$
|
1,320
|
|
|
$
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017, we had outstanding long-term debt of $3,419 of which $3,417 was incurred under the
Trace RDA Loan and $2 was related to other debt.
On September 8, 2017, the Georgia Survey agency of the Georgia Department of
Community Health (DCH) conducted a Complaint Investigation survey to determine whether our nursing home in Ellijay, Georgia was in compliance with federal program requirements for nursing homes participating in Medicare and/or Medicaid
programs. As a result of this survey, the nursing home received from the DCH a notice of deficiencies which were identified as posing an immediate jeopardy to resident health and safety and which had to be corrected immediately. DCH also notified
the nursing home of its intent to recommend civil monetary penalties. In response to the survey findings, the nursing home adopted a succession of plans to remedy the matters identified. On November 6, 2017, DCH advised the nursing home that
its latest plan of correction was accepted and on November 20, 2017, DCH advised the nursing home that it was in substantial compliance with its long-term care requirements; however the nursing home anticipates further surveys to evaluate its
implementation of the plans of correction. A Civil Money Penalty (CMP) was imposed by the Department of Health & Human Services Centers for Medicare and Medicaid Services on January 4, 2018 which resulted in $170 expensed
in the six months ended December 31, 2017. The CMP was paid January 18, 2018.
On January 11, 2018, Carmichaels Cashway
Pharmacy, Inc., a wholly owned subsidiary of the Company, sold the assets of a retail pharmacy operation it operates for approximately $410. A pre-tax gain on the sale of the assets of approximately $188 will be reported in results for the three
months ended March 31, 2018.
Discontinued Operations
Chestatee Hospital
On August 19, 2016, Southern Health Corporation of Dahlonega, Inc., (Chestatee), a
wholly owned subsidiary of the Company, sold substantially all of the assets and certain liabilities of Chestatee Regional Hospital in Dahlonega, Georgia through an asset purchase agreement for $15,000 subject to adjustment for the book value of
certain assets and certain liabilities assumed at the sale date. The
pre-tax
gain on sale of $7,246 is subject to adjustment for various purchase price adjustments. Chestatee retained certain liabilities,
including for employee related liabilities and certain Medicare and Medicaid liabilities, relating to the period it owned and operated the hospital. A portion of the net proceeds were used for the repayment of debt.
Other Sold Hospitals
Subsidiaries of the Company have sold substantially all of the assets of three hospitals
(Other Sold Hospitals) during the period July 2, 2012 to December 31, 2014. The loss before income taxes of the Other Sold Hospitals results primarily from negative prior year Medicare and Medicaid cost report settlements.
23
Life Sciences and Engineering Segment
SunLink retained a defined benefit
retirement plan which covered substantially all of the employees of this segment when the segment was sold in fiscal 1998. Effective February 28, 1997, the plan was amended to freeze participant benefits and close the plan to new participants.
Related Party Transactions
A
director of the Company is a member of a law firm which provides services to SunLink. The Company expensed an aggregate of $125 and $175 for legal services to this law firm in the three months ended December 31, 2017 and 2016, respectively. The
Company expensed an aggregate of $190 and $372 for legal services to this law firm in the six months ended December 31, 2017 and 2016, respectively. Included in the Companys condensed consolidated balance sheets at December 31, 2017
and June 30, 2017 is $116 and $38, respectively, of amounts payable to this law firm.