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EX-10.1 - EX-10.1 - Genesis Healthcare, Inc.gen-20160331ex10113a4c4.htm
EX-31.1 - EX-31.1 - Genesis Healthcare, Inc.gen-20160331ex311a41a08.htm
EX-32 - EX-32 - Genesis Healthcare, Inc.gen-20160331xex32.htm
EX-10.4 - EX-10.4 - Genesis Healthcare, Inc.gen-20160331ex104c01465.htm
EX-10.2 - EX-10.2 - Genesis Healthcare, Inc.gen-20160331ex1029304ff.htm
EX-10.3 - EX-10.3 - Genesis Healthcare, Inc.gen-20160331ex1037244d4.htm
EX-31.2 - EX-31.2 - Genesis Healthcare, Inc.gen-20160331ex312776c7f.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2016.

 

OR

 

 

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to             .

 

Commission file number: 001-33459

 


 

Genesis Healthcare, Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

 

Delaware

 

20-3934755

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

101 East State Street

 

 

Kennett Square, Pennsylvania

 

19348

(Address of principal executive offices)

 

(Zip Code)

 

(610) 444-6350

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer  

 

Accelerated filer  

 

 

 

Non-accelerated filer  

 

Smaller reporting company  

(do not check if smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on May 9, 2016, was:

Class A common stock, $0.001 par value – 73,593,732 shares

 

Class B common stock, $0.001 par value – 15,511,603 shares

 

Class C common stock, $0.001 par value – 64,449,380 shares

 

 


 

Genesis Healthcare, Inc.

 

Form 10-Q

Index

 

 

    

    

Page
Number

Part I. 

Financial Information

 

 

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

Consolidated Balance Sheets — March 31, 2016 and December 31, 2015

 

3

 

Consolidated Statements of Operations — Three months ended March 31, 2016 and 2015

 

4

 

Consolidated Statements of Comprehensive Loss  — Three months ended March 31, 2016 and 2015

 

5

 

Consolidated Statements of Cash Flows — Three months ended March 31, 2016 and 2015

 

6

 

Notes to Unaudited Consolidated Financial Statements

 

7

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

50

 

 

 

 

Item 4. 

Controls and Procedures

 

51

 

 

 

 

Part II. 

Other Information

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

52

 

 

 

 

Item 1A. 

Risk Factors

 

52

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

53

 

 

 

 

Item 3. 

Defaults Upon Senior Securities

 

53

 

 

 

 

Item 4. 

Mine Safety Disclosures

 

53

 

 

 

 

Item 5. 

Other Information

 

53

 

 

 

 

Item 6. 

Exhibits

 

53

 

 

 

 

Signatures 

 

55

 

 

 

 

Exhibit Index 

 

56

 

 

 

 

 


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2016

 

2015

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,204

 

$

61,543

 

Restricted cash and investments in marketable securities

 

 

52,917

 

 

52,917

 

Accounts receivable, net of allowances for doubtful accounts of $204,296 and $189,739 at March 31, 2016 and December 31, 2015, respectively

 

 

821,199

 

 

789,387

 

Prepaid expenses

 

 

89,447

 

 

58,622

 

Other current assets

 

 

64,204

 

 

49,024

 

Total current assets

 

 

1,079,971

 

 

1,011,493

 

Property and equipment, net of accumulated depreciation of $693,086 and $638,768 at March 31, 2016 and December 31, 2015, respectively

 

 

3,981,879

 

 

4,085,247

 

Restricted cash and investments in marketable securities

 

 

137,934

 

 

145,210

 

Other long-term assets

 

 

125,666

 

 

130,869

 

Deferred income taxes

 

 

6,485

 

 

7,144

 

Identifiable intangible assets, net of accumulated amortization of $73,458 and $66,570 at March 31, 2016 and December 31, 2015, respectively

 

 

203,080

 

 

209,967

 

Goodwill

 

 

470,735

 

 

470,019

 

Total assets

 

$

6,005,750

 

$

6,059,949

 

Liabilities and Stockholders' Deficit:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

8,113

 

$

12,477

 

Capital lease obligations

 

 

1,847

 

 

1,842

 

Financing obligations

 

 

1,230

 

 

989

 

Accounts payable

 

 

224,850

 

 

233,801

 

Accrued expenses

 

 

194,791

 

 

197,741

 

Accrued compensation

 

 

246,828

 

 

185,054

 

Self-insurance reserves

 

 

166,761

 

 

166,761

 

Total current liabilities

 

 

844,420

 

 

798,665

 

Long-term debt

 

 

1,105,022

 

 

1,186,159

 

Capital lease obligations

 

 

1,056,884

 

 

1,053,816

 

Financing obligations

 

 

3,091,366

 

 

3,064,077

 

Deferred income taxes

 

 

18,696

 

 

14,939

 

Self-insurance reserves

 

 

443,816

 

 

428,569

 

Other long-term liabilities

 

 

133,769

 

 

133,111

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding - 73,593,732 at March 31, 2016 and December 31, 2015)

 

 

74

 

 

74

 

Class B common stock, (par  $0.001, 20,000,000 shares authorized, issued and outstanding - 15,511,603 at March 31, 2016 and December 31, 2015)

 

 

16

 

 

16

 

Class C common stock, (par  $0.001, 150,000,000 shares authorized, issued and outstanding - 64,449,380 at March 31, 2016 and December 31, 2015)

 

 

64

 

 

64

 

Additional paid-in-capital

 

 

296,948

 

 

295,359

 

Accumulated deficit

 

 

(774,641)

 

 

(731,602)

 

Accumulated other comprehensive income (loss)

 

 

272

 

 

(218)

 

Total stockholders’ deficit before noncontrolling interests

 

 

(477,267)

 

 

(436,307)

 

Noncontrolling interests

 

 

(210,956)

 

 

(183,080)

 

Total stockholders' deficit

 

 

(688,223)

 

 

(619,387)

 

Total liabilities and stockholders’ deficit

 

$

6,005,750

 

$

6,059,949

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

3


 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2016

    

2015

    

Net revenues

 

$

1,472,218

 

$

1,343,001

 

Salaries, wages and benefits

 

 

867,717

 

 

790,733

 

Other operating expenses

 

 

361,097

 

 

312,561

 

General and administrative costs

 

 

48,427

 

 

41,533

 

Provision for losses on accounts receivable

 

 

26,493

 

 

23,396

 

Lease expense

 

 

37,316

 

 

36,419

 

Depreciation and amortization expense

 

 

61,765

 

 

59,933

 

Interest expense

 

 

135,181

 

 

121,313

 

Loss on early extinguishment of debt

 

 

 —

 

 

3,234

 

Investment income

 

 

(481)

 

 

(416)

 

Other loss (income) 

 

 

12

 

 

(7,611)

 

Transaction costs

 

 

1,754

 

 

86,069

 

Skilled Healthcare and other loss contingency expense

 

 

1,626

 

 

 —

 

Equity in net income of unconsolidated affiliates

 

 

(763)

 

 

(153)

 

Loss before income tax expense (benefit)

 

 

(67,926)

 

 

(124,010)

 

Income tax expense (benefit)

 

 

3,064

 

 

(5,648)

 

Loss from continuing operations

 

 

(70,990)

 

 

(118,362)

 

(Loss) income from discontinued operations, net of taxes

 

 

(38)

 

 

112

 

Net loss

 

 

(71,028)

 

 

(118,250)

 

Less net loss attributable to noncontrolling interests

 

 

27,989

 

 

5,684

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(43,039)

 

$

(112,566)

 

Loss per common share:

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

Weighted-average shares outstanding for basic and diluted loss from continuing operations per share

 

 

89,198

 

 

75,234

 

Basic and diluted net loss per common share:

 

 

 

 

 

 

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(0.48)

 

$

(1.50)

 

(Loss) income from discontinued operations, net of taxes

 

 

(0.00)

 

 

0.00

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(0.48)

 

$

(1.50)

 

 

See accompanying notes to unaudited consolidated financial statements.

4


 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2016

    

2015

    

Net loss

 

$

(71,028)

 

$

(118,250)

 

Net unrealized gain on marketable securities, net of tax

 

 

844

 

 

572

 

Comprehensive loss

 

 

(70,184)

 

 

(117,678)

 

Less: comprehensive loss attributable to noncontrolling interests

 

 

27,635

 

 

5,382

 

Comprehensive loss attributable to Genesis Healthcare, Inc.

 

$

(42,549)

 

$

(112,296)

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

5


 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2016

    

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(71,028)

 

$

(118,250)

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Non-cash interest and leasing arrangements, net

 

 

24,989

 

 

23,413

 

Other non-cash charges and gains, net

 

 

12

 

 

(7,587)

 

Share based compensation

 

 

1,590

 

 

25,373

 

Depreciation and amortization

 

 

61,765

 

 

60,077

 

Provision for losses on accounts receivable

 

 

26,493

 

 

23,392

 

Equity in net income of unconsolidated affiliates

 

 

(763)

 

 

(153)

 

Provision (benefit) for deferred taxes

 

 

4,415

 

 

(9,493)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(60,866)

 

 

(43,860)

 

Accounts payable and other accrued expenses and other

 

 

37,839

 

 

44,606

 

Net cash provided by (used in) operating activities

 

 

24,446

 

 

(2,482)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(26,243)

 

 

(16,721)

 

Purchases of marketable securities

 

 

(13,922)

 

 

(15,319)

 

Proceeds on maturity or sale of marketable securities

 

 

13,465

 

 

10,158

 

Net change in restricted cash and equivalents

 

 

8,578

 

 

(361)

 

Sale of investment in joint venture

 

 

1,010

 

 

26,358

 

Purchases of inpatient assets, net of cash acquired

 

 

(778)

 

 

 —

 

Sales of inpatient assets

 

 

76,373

 

 

1,263

 

Other, net

 

 

(366)

 

 

912

 

Net cash provided by investing activities

 

 

58,117

 

 

6,290

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

224,000

 

 

146,500

 

Repayments under revolving credit facility

 

 

(254,000)

 

 

(151,000)

 

Proceeds from issuance of long-term debt

 

 

67,872

 

 

360,000

 

Proceeds from tenant improvement draws under lease arrangements

 

 

499

 

 

95

 

Repayment of long-term debt

 

 

(127,717)

 

 

(330,627)

 

Debt issuance costs

 

 

(2,316)

 

 

(17,776)

 

Distributions to noncontrolling interests and stockholders

 

 

(240)

 

 

(2,840)

 

Net cash (used in) provided by financing activities

 

 

(91,902)

 

 

4,352

 

Net (decrease) increase in cash and cash equivalents

 

 

(9,339)

 

 

8,160

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

 

61,543

 

 

87,548

 

End of period

 

$

52,204

 

$

95,708

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

111,456

 

$

94,948

 

Net taxes (refunded) paid

 

 

(14,180)

 

 

5,917

 

Non-cash financing activities:

 

 

 

 

 

 

 

Financing obligations

 

$

3,861

 

$

3,682

 

Assumption of long-term debt

 

 

 —

 

 

326,610

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

6


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(1)General Information

 

Description of Business

 

Genesis Healthcare, Inc. is a healthcare services company that through its subsidiaries (collectively, the Company) owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business.  The Company has an administrative services company that provides a full complement of administrative and consultative services that allows its affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. The Company provides inpatient services through 512 skilled nursing, assisted/senior living and behavioral health centers located in 34 states.  Revenues of the Company’s owned, leased and otherwise consolidated centers constitute approximately 84% of its revenues.

 

The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy.  These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others.  After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 12% of the Company’s revenues.

 

The Company provides an array of other specialty medical services, including management services, physician services, staffing services, hospice and home health services, and other healthcare related services, which comprise the balance of the Company’s revenues.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).  In the opinion of management, the consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

 

The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The Company presents noncontrolling interests within the stockholders’ deficit section of its consolidated balance sheets. The Company presents the amount of net loss attributable to Genesis Healthcare, Inc. and net loss (income) attributable to noncontrolling interests in its consolidated statements of operations.

 

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that “most significantly impact” the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's composition of variable interest entities was not material at March 31, 2016.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by U.S. GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2015 filed with the U.S. Securities and Exchange Commission (the SEC) on Form 10-K on March 14, 2016.

 

7


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Certain prior year amounts have been reclassified to conform to current period presentation, the effect of which was not material. Upon adoption of new accounting guidance, debt issuance costs have been presented as a direct deduction from long-term debt rather than as an other long-term asset in all periods presented.

 

The Company’s financial position at March 31, 2016 includes the impact of certain significant transactions and events, as disclosed within Note 3 – “Significant Transactions and Events.”

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (the FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers, (ASU 2014-09) which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is not permitted. The Company is still evaluating the effect, if any, ASU 2014-09 will have on the Company’s consolidated financial condition and results of operations.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern, (ASU 2014-15) requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide disclosures in certain circumstances.  ASU 2014-15 is effective for annual and interim periods ending after December 31, 2016.  The Company is still evaluating the effect, if any, ASU 2014-15 will have on its consolidated financial condition and results of operations.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, (ASU 2016-01), which is intended to improve the recognition and measurement of financial instruments. The new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company is still evaluating the effect, if any, ASU 2016-01 will have on its consolidated financial condition and results of operations.

 

In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is still evaluating the impact on its results of operations and does not expect the adoption of this standard to have an impact on liquidity.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, (ASU 2016-09), which is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including:

8


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted.  The Company is still evaluating the effect, if any, ASU 2016-09 will have on its consolidated financial condition and results of operations.

 

(2)Certain Significant Risks and Uncertainties

 

Revenue Sources

 

The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy and other services.  The Company’s inpatient services segment derives approximately 79% of its revenue from Medicare and various state Medicaid programs.  The following table depicts the Company’s inpatient services segment revenue by source for the three months ended March 31, 2016 and 2015.

 

 

 

 

 

 

Three months ended March 31, 

 

 

2016

    

2015

 

Medicare

26

%  

28

%  

Medicaid

53

%  

51

%  

Insurance

11

%  

11

%  

Private and other

10

%  

10

%  

Total

100

%  

100

%  

 

The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of inpatient facilities, the mix of patients and the rates of reimbursement among payors.  Likewise, payment for ancillary medical services, including services provided by the Company’s rehabilitation therapy services business, varies based upon the type of payor and payment methodologies.  Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect the Company’s profitability.

 

It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or other governmental initiatives on the Company’s business and the business of the customers served by the Company’s rehabilitation therapy business.  The potential impact of reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, is uncertain at this time.  Also, initiatives among managed care payors, conveners and referring acute care hospital systems to reduce lengths of stay and avoidable hospital admissions and to divert referrals to home health or other community-based care settings could have an adverse impact on the Company’s business. Accordingly, there can be no assurance that the impact of any future healthcare legislation, regulation or actions by participants in the health care continuum will not adversely affect the Company’s business.  There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs.  The Company’s financial condition and results of operations are and will continue to be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

 

Laws and regulations governing the Medicare and Medicaid programs, and the Company’s business generally, are complex and are often subject to a number of ambiguities in their application and interpretation. The Company believes that it is in substantial compliance with all applicable laws and regulations.  However, from time to time the Company and its affiliates are subject to pending or threatened lawsuits and investigations involving allegations of potential wrongdoing, some of which may be material or involve significant costs to resolve and/or defend against, or may lead to other adverse effects on the Company and its affiliates including, but not limited to, fines, penalties and exclusion from

9


 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

participation in the Medicare and/or Medicaid programs.  The Company’s business is subject to a number of other known and unknown risks and uncertainties, which are discussed in Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the SEC on March 14, 2016.

 

(3)   Significant Transactions and Events

 

The Combination with Skilled

 

On August 18, 2014, Skilled Healthcare Group, Inc., a Delaware corporation (Skilled) entered into a Purchase and Contribution Agreement with FC-GEN Operations Investment, LLC (FC-GEN) pursuant to which the businesses and operations of FC-GEN and Skilled were combined (the Combination). On February 2, 2015, the Combination was completed.

 

Pro forma information

 

The acquired business contributed net revenues of $152.7 million and net loss of $5.3 million to the Company for the period from February 1, 2015 to March 31, 2015. The unaudited pro forma net effect of the Combination assuming the acquisition occurred as of January 1, 2015 is as follows (in thousands, except per share amounts):

 

 

 

 

 

 

 

Pro forma

 

 

 

three months ended

 

 

 

March 31, 2015

 

    

Revenues

$

1,414,289

 

 

Loss attributable to Genesis Healthcare, Inc.

 

(16,317)

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

Basic

$

(0.18)

 

 

Diluted

$

(0.19)

 

 

 

The unaudited pro forma financial data have been derived by combining the historical financial results of the Company and the operations acquired in the Combination for the periods presented. The unaudited results of operations includes transaction and financing costs totaling $84.7 million incurred by both the Company and Skilled in connection with the Combination. These costs have been eliminated from the results of operations for the three months ended March 31, 2015 for purposes of the pro forma financial presentation.

 

Sale of Kansas ALFs

 

On January 1, 2016, the Company sold 18 Kansas assisted/senior living facilities acquired in the Combination for $67.0 million.  Of the proceeds received, $54.2 million were used to pay down partially the Real Estate Bridge Loans.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

Sale of Hospice and Home Health

 

On March 9, 2016, the Company announced that it had signed an agreement with FC Compassus LLC, a nationwide network of community-based hospice and palliative care programs, to sell its hospice and home health operations for $84 million. Through the asset purchase agreement, the Company retained certain liabilities.  See Note 11 – “Commitments and Contingencies – Legal Proceedings - Creekside Hospice Litigation.”  Certain members of the Company’s board of directors indirectly beneficially hold ownership interests in FC Compassus LLC totaling less than 10% in the aggregate.

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Effective May 1, 2016, the Company completed the sale and received $72 million in cash and a $12 million short-term note.  The cash proceeds were used to pay down partially the Company’s Term Loan Facility.  See Note 7 – “Long-Term Debt – Term Loan Facility.”

 

HUD Insured Loans

 

On March 31, 2016, the Company closed on the HUD insured financing of ten skilled nursing facilities acquired in the Combination for $67.9 million.  On April 28, 2016, the Company closed on the HUD insured financing of three additional skilled nursing facilities acquired in the Combination for $9.2 million.  The $77.1 million in total proceeds from the financings were used to pay down partially the Real Estate Bridge Loans.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

(4)Earnings (Loss) Per Share

 

The Company has three classes of common stock.  Classes A and B are identical in economic and voting interests.  Class C has a 1:1 voting ratio with the other two classes, representing the voting interests of the approximate 42% noncontrolling interest of the legacy FC-GEN owners. Class C common stock is a participating security; however, it shares in a de minimis economic interest and is therefore excluded from the denominator of the basic earnings (loss) per share (EPS) calculation.

 

Basic EPS was computed by dividing net loss by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing loss plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding shares after giving effect to all potential dilutive common stock, including options, warrants, common stock subject to repurchase and convertible preferred stock, if any.

 

The computations of basic and diluted EPS are consistent with any potentially dilutive adjustments to the numerator or denominator being anti-dilutive and therefore excluded from the dilutive calculation. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per common share follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

  

2016

  

2015

  

Numerator:

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(70,990)

 

$

(118,362)

 

Less: Net loss attributable to noncontrolling interests

 

 

(27,989)

 

 

(5,684)

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(43,001)

 

$

(112,678)

 

(Loss) income from discontinued operations, net of taxes

 

 

(38)

 

 

112

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(43,039)

 

$

(112,566)

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares outstanding for basic and diluted net loss per share

 

 

89,198

 

 

75,234

 

Basic and diluted net loss per common share:

 

 

 

 

 

 

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(0.48)

 

$

(1.50)

 

(Loss) income from discontinued operations, net of taxes

 

 

(0.00)

 

 

0.00

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(0.48)

 

$

(1.50)

 

 

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Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following were excluded from net loss attributable to Genesis Healthcare, Inc. and the weighted-average diluted shares computation for the three months ended March 31, 2016 and 2015, as their inclusion would have been anti-dilutive (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2016

  

2015

 

 

 

Net loss

 

 

 

Net loss

 

 

 

 

 

attributable to

 

 

 

attributable to

 

 

 

 

 

Genesis

 

Antidilutive

 

Genesis

 

Antidilutive

 

 

    

Healthcare, Inc.

 

shares

 

Healthcare, Inc.

 

shares

 

Exchange of restricted stock units of noncontrolling interests

 

$

(24,002)

 

64,461

 

$

(4,217)

 

41,534

    

Employee and director unvested restricted stock units

 

 

 —

 

(1,868)

 

 

 —

 

 —

 

 

Because the Company is in a net loss position for the three months ended March 31, 2016, the combined impact of the assumed conversion of the approximate 42% noncontrolling interest to common stock and the related tax implications are anti-dilutive to EPS.  As of March 31, 2016 and 2015, there were 64,449,380 units attributed to the noncontrolling interests outstanding.  In addition to the outstanding units attributed to the noncontrolling interests, the conversion of all of those units will result in the issuance of an incremental 11,222 Class A common stock.  On June 3, 2015, the shareholders approved the 2015 Omnibus Equity Incentive Plan, which authorized the grant of 4,116,870 restricted stock units to employees and 178,218 restricted stock units to non-employee directors. On October 26, 2015, an additional 653,130 restricted stock units were granted to employees. There were no grants in the three months ended March 31, 2016.  Because the Company is in a net loss position for the three months ended March 31, 2016, the combined impact of the grants under the 2015 Omnibus Equity Incentive Plan to common stock and the related tax implications are anti-dilutive to EPS. 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(5)Segment Information

 

The Company has three reportable operating segments: (i) inpatient services; (ii) rehabilitation therapy services; and (iii) other services. For additional information on these reportable segments see Note 1 – “General Information – Description of Business.”

 

A summary of the Company’s segmented revenues follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

 

 

 

 

 

2016

 

2015

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

 

 

(in thousands, except percentages)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

1,208,433

 

82.0

%  

$

1,104,990

 

82.3

%  

$

103,443

 

9.4

%

Assisted/Senior living facilities

 

 

30,919

 

2.1

%  

 

33,657

 

2.5

%  

 

(2,738)

 

(8.1)

%

Administration of third party facilities

 

 

3,079

 

0.2

%  

 

2,671

 

0.2

%  

 

408

 

15.3

%

Elimination of administrative services

 

 

(375)

 

 —

%  

 

(501)

 

 —

%  

 

126

 

(25.1)

%

Inpatient services, net

 

 

1,242,056

 

84.3

%  

 

1,140,817

 

84.9

%  

 

101,239

 

8.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

285,112

 

19.4

%  

 

263,051

 

19.6

%  

 

22,061

 

8.4

%

Elimination intersegment rehabilitation therapy services

 

 

(106,432)

 

(7.2)

%  

 

(105,906)

 

(7.9)

%  

 

(526)

 

0.5

%

Third party rehabilitation therapy services

 

 

178,680

 

12.2

%  

 

157,145

 

11.7

%  

 

21,535

 

13.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

56,626

 

3.8

%  

 

52,546

 

3.9

%  

 

4,080

 

7.8

%

Elimination intersegment other services

 

 

(5,144)

 

(0.3)

%  

 

(7,507)

 

(0.6)

%  

 

2,363

 

(31.5)

%

Third party other services

 

 

51,482

 

3.5

%  

 

45,039

 

3.4

%  

 

6,443

 

14.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,472,218

 

100.0

%  

$

1,343,001

 

100.0

%  

$

129,217

 

9.6

%

 

13


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

A summary of the Company’s unaudited condensed consolidated statement of operations follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2016

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

1,242,431

 

$

285,112

 

$

56,524

 

$

102

 

$

(111,951)

 

$

1,472,218

 

Salaries, wages and benefits

 

 

588,902

 

 

240,436

 

 

38,379

 

 

 —

 

 

 —

 

 

867,717

 

Other operating expenses

 

 

438,699

 

 

20,341

 

 

14,008

 

 

 —

 

 

(111,951)

 

 

361,097

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

48,427

 

 

 —

 

 

48,427

 

Provision for losses on accounts receivable

 

 

23,345

 

 

2,648

 

 

546

 

 

(46)

 

 

 —

 

 

26,493

 

Lease expense

 

 

36,296

 

 

24

 

 

530

 

 

466

 

 

 —

 

 

37,316

 

Depreciation and amortization expense

 

 

53,839

 

 

3,120

 

 

314

 

 

4,492

 

 

 —

 

 

61,765

 

Interest expense

 

 

108,989

 

 

14

 

 

16

 

 

26,162

 

 

 —

 

 

135,181

 

Investment income

 

 

(458)

 

 

 —

 

 

 —

 

 

(23)

 

 

 —

 

 

(481)

 

Other loss

 

 

12

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

1,754

 

 

 —

 

 

1,754

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

1,626

 

 

 —

 

 

1,626

 

Equity in net (income) loss of unconsolidated affiliates

 

 

(476)

 

 

 —

 

 

 —

 

 

(636)

 

 

349

 

 

(763)

 

(Loss) income before income tax expense

 

 

(6,717)

 

 

18,529

 

 

2,731

 

 

(82,120)

 

 

(349)

 

 

(67,926)

 

Income tax (benefit) expense

 

 

(2,162)

 

 

 —

 

 

 —

 

 

5,226

 

 

 —

 

 

3,064

 

(Loss) income from continuing operations

 

$

(4,555)

 

$

18,529

 

$

2,731

 

$

(87,346)

 

$

(349)

 

$

(70,990)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2015

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

1,141,318

 

$

263,051

 

$

52,336

 

$

210

 

$

(113,914)

 

$

1,343,001

 

Salaries, wages and benefits

 

 

542,692

 

 

214,797

 

 

33,244

 

 

 —

 

 

 —

 

 

790,733

 

Other operating expenses

 

 

396,542

 

 

15,399

 

 

14,533

 

 

 —

 

 

(113,913)

 

 

312,561

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

41,533

 

 

 —

 

 

41,533

 

Provision for losses on accounts receivable

 

 

19,073

 

 

3,827

 

 

541

 

 

(45)

 

 

 —

 

 

23,396

 

Lease expense

 

 

35,528

 

 

41

 

 

459

 

 

391

 

 

 —

 

 

36,419

 

Depreciation and amortization expense

 

 

48,225

 

 

2,867

 

 

362

 

 

8,479

 

 

 —

 

 

59,933

 

Interest expense

 

 

103,654

 

 

1

 

 

10

 

 

17,771

 

 

(123)

 

 

121,313

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

3,234

 

 

 —

 

 

3,234

 

Investment income

 

 

(358)

 

 

 —

 

 

 —

 

 

(181)

 

 

123

 

 

(416)

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

(7,611)

 

 

 —

 

 

(7,611)

 

Transaction costs

 

 

371

 

 

 —

 

 

 —

 

 

85,698

 

 

 —

 

 

86,069

 

Equity in net (income) loss of unconsolidated affiliates

 

 

(309)

 

 

 —

 

 

 —

 

 

(220)

 

 

376

 

 

(153)

 

(Loss) income before income tax benefit

 

 

(4,100)

 

 

26,119

 

 

3,187

 

 

(148,839)

 

 

(377)

 

 

(124,010)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(5,648)

 

 

 —

 

 

(5,648)

 

(Loss) income from continuing operations

 

$

(4,100)

 

$

26,119

 

$

3,187

 

$

(143,191)

 

$

(377)

 

$

(118,362)

 

 

14


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table presents the segment assets as of March 31, 2016 compared to December 31, 2015 (in thousands):   

 

 

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

Inpatient services

 

$

5,342,821

 

$

5,437,518

 

Rehabilitation services

 

 

452,814

 

 

442,969

 

Other services

 

 

93,197

 

 

91,775

 

Corporate and eliminations

 

 

116,918

 

 

87,687

 

Total assets

 

$

6,005,750

 

$

6,059,949

 

 

The following table presents segment goodwill as of March 31, 2016 compared to December 31, 2015 (in thousands):   

 

 

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

Inpatient services

 

$

357,649

 

$

357,649

 

Rehabilitation services

 

 

73,814

 

 

73,098

 

Other services

 

 

39,272

 

 

39,272

 

Total goodwill

 

$

470,735

 

$

470,019

 

 

 

 

 

(6)Property and Equipment

 

Property and equipment consisted of the following as of March 31, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

Land, buildings and improvements

 

$

649,581

 

$

714,766

 

Capital lease land, buildings and improvements

 

 

905,855

 

 

903,977

 

Financing obligation land, buildings and improvements

 

 

2,654,835

 

 

2,644,307

 

Equipment, furniture and fixtures

 

 

438,366

 

 

436,300

 

Construction in progress

 

 

26,328

 

 

24,665

 

Gross property and equipment

 

 

4,674,965

 

 

4,724,015

 

Less: accumulated depreciation

 

 

(693,086)

 

 

(638,768)

 

Net property and equipment

 

$

3,981,879

 

$

4,085,247

 

 

 

 

 

 

 

 

 

 

 

 

 

15


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(7)Long-Term Debt

 

Long-term debt at March 31, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2016

 

2015

 

Revolving credit facilities, net of debt issuance costs of $9,626 at March 31, 2016 and $10,254 at December 31, 2015

 

$

323,374

 

$

352,746

 

Term loan facility, net of original issue discount of $6,500 at March 31, 2016 and $7,475 at December 31, 2015, and net of debt issuance costs of $8,808 at March 31, 2016 and $10,129 at December 31, 2015

 

 

210,134

 

 

210,842

 

Real estate bridge loans, net of debt issuance costs of $7,628 at March 31, 2016 and $9,567 at December 31, 2015

 

 

364,433

 

 

484,533

 

HUD insured loans, net of debt issuance costs of $3,646 at March 31, 2016 and $1,395 at December 31, 2015

 

 

171,379

 

 

106,250

 

Mortgages and other secured debt (recourse)

 

 

13,770

 

 

13,934

 

Mortgages and other secured debt (non-recourse), net of debt issuance costs of $165 at March 31, 2016 and $176 at December 31, 2015

 

 

30,045

 

 

30,331

 

 

 

 

1,113,135

 

 

1,198,636

 

Less:  Current installments of long-term debt

 

 

(8,113)

 

 

(12,477)

 

Long-term debt

 

$

1,105,022

 

$

1,186,159

 

 

Revolving Credit Facilities

 

The Company’s revolving credit facilities (the Revolving Credit Facilities) consist of a senior secured, asset-based revolving credit facility of up to $550 million under three separate tranches:  Tranche A-1, Tranche A-2 and FILO Tranche.  Interest accrues at a per annum rate equal to either (x) a base rate (calculated as the highest of the (i) prime rate, (ii) the federal funds rate plus 3.00%, or (iii) LIBOR plus the excess of the applicable margin between LIBOR loans and base rate loans) plus an applicable margin or (y) LIBOR plus an applicable margin.  The applicable margin is based on the level of commitments for all three tranches, and in regards to LIBOR loans (i) for Tranche A-1 ranges from 3.25% to 2.75%; (ii) for Tranche A-2 ranges from 3.00% to 2.50%; and (iii) for FILO Tranche is 5.00%.  The Revolving Credit Facilities mature on February 2, 2020, provided that if the Term Loan Facility (defined below), the Skilled Real Estate Bridge Loan (defined below) or the Revera Real Estate Bridge Loan (defined below) is not refinanced with longer term debt or their terms not extended prior to their extension option maturities of December 4, 2017, August 27, 2017 and May 29, 2018, respectively, the Revolving Credit Facilities will mature 90 days prior to such maturity date, as applicable.  Borrowing levels under the Revolving Credit Facilities are limited to a borrowing base that is computed based upon the level of the Company’s eligible accounts receivable, as defined.  In addition to paying interest on the outstanding principal borrowed under the Revolving Credit Facilities, the Company is required to pay a commitment fee to the lenders for any unutilized commitments.  The commitment fee rate ranges from 0.375% per annum to 0.50% depending upon the level of unused commitment.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Borrowings and interest rates under the three tranches were as follows at March 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Weighted

 

 

 

 

 

 

Average

 

Revolving credit facility

 

Borrowings

 

Interest

 

FILO tranche

 

$

25,000

 

5.87

%

Tranche A-1

 

 

233,000

 

3.94

%

Tranche A-2

 

 

75,000

 

3.62

%

 

 

$

333,000

 

4.01

%

 

As of March 31, 2016, the Company had a total borrowing base capacity of $544.1 million with outstanding borrowings under the Revolving Credit Facilities of $333.0 million and $68.2 million of drawn letters of credit securing insurance and lease obligations, leaving the Company with approximately $142.9 million of available borrowing capacity under the Revolving Credit Facilities.

 

Term Loan Facility

 

The five-year term loan facility (Term Loan Facility) is secured by a first priority lien on the membership interests in the Company and on substantially all of the Company’s and its subsidiaries’ assets other than collateral held on a first priority basis by the Revolving Credit Facilities lender.  Borrowings under the Term Loan Facility bear interest at a rate per annum equal to the applicable margin plus, at the Company’s option, either (x) LIBOR or (y) a base rate determined by reference to the highest of (i) the lender defined prime rate, (ii) the federal funds rate effective plus one half of one percent and (iii) LIBOR described in subclause (x) plus 1.0%.  LIBOR based loans are subject to an interest rate floor of 1.5% and base rate loans are subject to a floor of 2.5%.  The Term Loan Facility matures on the earliest of (i) December 4, 2017 and (ii) 90-days prior to the maturity of the Skilled Real Estate Bridge Loan, including extensions.  As of March 31, 2016, the Term Loan Facility had an outstanding principal balance of $225.4 million.  Base rate borrowings under the Term Loan Facility bore interest of approximately 11.0% at March 31, 2016.  One-month LIBOR borrowings under the Term Loan Facility bore interest of approximately 10.0% at March 31, 2016.

 

Principal payments for the three months ended March 31, 2016 were $3.0 million.  The Term Loan Facility amortizes at a rate of 5% per annum.  The lenders have the right to elect ratable principal payments or defer principal recoupment until the end of the term. In connection with the sale of the Company’s hospice and home health business effective May 1, 2016, the Company used the $72 million in cash proceeds to pay down partially the Company’s Term Loan Facility.  See Note 3 – “Significant Transactions and Events Sale of Hospice and Home Health.”

 

Real Estate Bridge Loans

 

In connection with the Combination on February 2, 2015, the Company entered into a $360.0 million real estate bridge loan (the Skilled Real Estate Bridge Loan), which is secured by a mortgage lien on the real property of 67 facilities and a second lien on certain receivables of the operators of such facilities.  The Skilled Real Estate Bridge Loan is subject to a 24-month term with two extension options of 90-days each and accrues interest at a rate equal to LIBOR, plus 6.75%, plus an additional margin that ranges up to 7.00% based on the aggregate number of days the Skilled Real Estate Bridge Loan is outstanding.  The interest rate is also subject to a LIBOR interest rate floor of 0.5%.  The Skilled Real Estate Bridge Loan bore interest of 10.75% at March 31, 2016.  The Skilled Real Estate Bridge Loan is subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale and / or refinance of the underlying facilities such net proceeds are required to be used to repay the outstanding principal balance of the Skilled Real Estate Bridge Loan.   The proceeds of the Skilled Real Estate Bridge Loan were used to repay Skilled’s first lien senior secured term loan, repay Skilled’s mortgage loans and asset based revolving credit facility with MidCap Financial with excess proceeds used to fund direct costs of the Combination with the Company.  The Skilled Real Estate Bridge Loan has an outstanding principal balance of $238.0 million at March 31, 2016.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

In connection with the acquisition of 19 skilled nursing facilities on December 1, 2015 from Revera Assisted Living, Inc. (Revera), the Company entered into a $134.1 million real estate bridge loan (the Revera Real Estate Bridge Loan and, together with the Skilled Real Estate Bridge Loan, the Real Estate Bridge Loans), which is secured by a mortgage lien on the real property of 15 facilities and a second lien on certain receivables of the operators of such facilities.  The Revera Real Estate Bridge Loan is subject to a 24-month term with two extension options of 90-days each and accrues interest at a rate equal to LIBOR, plus 6.75%, plus an additional margin that ranges up to 7.00% based on the aggregate number of days the Revera Real Estate Bridge Loan is outstanding, plus 0.25% multiplied by the result of dividing the number of percentage points by which the loan-to-value ratio, defined as the ratio, expressed as a percentage, of (i) the outstanding principal balance to (ii) the total appraised value of the facilities as of the closing date, exceeds 75% by five.  The interest rate is also subject to a LIBOR interest rate floor of 0.5%.  The Revera Real Estate Bridge Loan bore interest of 8.00% at March 31, 2016.  The Revera Real Estate Bridge Loan is subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale and / or refinance of the underlying facilities such net proceeds are required to be used to repay the outstanding principal balance of the Revera Real Estate Bridge Loan.  The proceeds of the Revera Real Estate Bridge Loan were used to finance the acquisition of 15 Revera facilities.  The Revera Real Estate Bridge Loan has an outstanding principal balance of $134.1 million at March 31, 2016.

 

HUD Insured Loans

 

As of March 31, 2016, the Company has 21 skilled nursing facility loans insured by the U.S. Department of Housing and Urban Development (HUD). The HUD insured loans have an original amortization term of 30 to 35 years. As of March 31, 2016, the Company has HUD insured loans with a combined aggregate principal balance of $175.0 million, including a $14.4 million debt premium on 10 skilled nursing facility loans established in purchase accounting in connection with the Combination.

 

These loans have an average remaining term of 32 years with fixed interest rates ranging from 3.4% to 4.6% and a weighted average interest rate of 3.9%. Depending on the mortgage agreement, prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required. Any further HUD insured loans will require additional HUD approval.

 

All HUD insured loans are non-recourse loans to the Company. All loans are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of March 31, 2016, the Company has total escrow reserve funds of $9.8 million with the loan servicer that are reported within prepaid expenses.

 

Other Debt

 

Mortgages and other secured debt (recourse). The Company carries mortgage loans and notes payable on certain of its corporate office buildings and other acquired assets.  The loans are secured by the underlying real property and have fixed or variable rates of interest ranging from 1.9% to 6.0% at March 31, 2016, with maturity dates ranging from 2018 to 2020. 

 

Mortgages and other secured debt (non-recourse). Loans are carried by certain of the Company’s consolidated joint ventures.  The loans consist principally of revenue bonds and secured bank loans.  Loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest ranging from 2.5% to 22.2% at March 31, 2016, with maturity dates ranging from 2018 to 2034.  Loans are labeled non-recourse” because neither the Company nor any of its wholly owned subsidiaries is obligated to perform under the respective loan agreements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Debt Covenants

 

The Revolving Credit Facilities, the Term Loan Facility, the Skilled Real Estate Bridge Loan and the Revera Real Estate Bridge Loan (collectively, the Credit Facilities) each contain a number of restrictive covenants that, among other things, impose operating and financial restrictions on the Company and its subsidiaries.  The Credit Facilities also require the Company to meet defined financial covenants, including interest coverage ratio, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio, all as defined in the applicable agreements.  The Credit Facilities also contain other customary covenants and events of default and cross default.  At March 31, 2016, the Company was in compliance with its covenants.

 

The Company’s ability to maintain compliance with its debt covenants depends in part on management’s ability to increase revenue and control costs.  Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is likely that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly debt covenant compliance requirements in the near term. Should the Company fail to comply with its debt covenants at a future measurement date, it would be in default under certain of its existing credit agreements. 

 

As of March 31, 2016, considering the combination of scheduled debt maturities or accelerated maturity features in other debt agreements, the Company has $581.1 million in debt obligations due in the next two years. The liquidity and financial condition of the Company will be adversely impacted in the event these obligations cannot be extended or refinanced prior to their scheduled or accelerated maturity dates.

 

The maturity of total debt of $1,113.1 million at March 31, 2016 is as follows (in thousands):

 

 

 

 

 

 

Twelve months ended March 31, 

 

 

 

2017

 

$

8,113

2018

 

 

572,979

2019

 

 

22,421

2020

 

 

335,052

2021

 

 

5,421

Thereafter

 

 

169,149

Total debt maturity

 

$

1,113,135

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(8)Leases and Lease Commitments

 

The Company leases certain facilities under capital and operating leases.  Future minimum payments for the next five years and thereafter under such leases at March 31, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Twelve months ended March 31, 

    

Capital Leases

    

Operating Leases

 

2017

 

$

94,211

 

$

141,560

 

2018

 

 

99,539

 

 

137,281

 

2019

 

 

97,592

 

 

133,700

 

2020

 

 

100,048

 

 

131,589

 

2021

 

 

102,501

 

 

123,480

 

Thereafter

 

 

3,342,845

 

 

239,590

 

Total future minimum lease payments

 

 

3,836,736

 

$

907,200

 

Less amount representing interest

 

 

(2,778,005)

 

 

 

 

Capital lease obligation

 

 

1,058,731

 

 

 

 

Less current portion

 

 

(1,847)

 

 

 

 

Long-term capital lease obligation

 

$

1,056,884

 

 

 

 

 

Capital Lease Obligations

 

The capital lease obligations represent the present value of minimum lease payments under such capital lease and cease use arrangements and bear imputed interest at rates ranging from 3.5% to 12.8% at March 31, 2016, and mature at dates ranging from 2016 to 2047.

 

Deferred Lease Balances

 

At March 31, 2016 and December 31, 2015, the Company had $52.6 million and $54.7 million, respectively, of favorable leases net of accumulated amortization, included in identifiable intangible assets, and $33.9 million and $35.5 million, respectively, of unfavorable leases net of accumulated amortization included in other long-term liabilities on the consolidated balance sheet.  Favorable and unfavorable lease assets and liabilities arise through the acquisition of leases in place that requires those contracts be recorded at their then fair value.  The fair value of a lease is determined through a comparison of the actual rental rate with rental rates prevalent for similar assets in similar markets.  A favorable lease asset to the Company represents a rental stream that is below market, and conversely an unfavorable lease is one with cost above market rates.  These assets and liabilities amortize as lease expense over the remaining term of the respective leases on a straight-line basis.  At March 31, 2016 and December 31, 2015, the Company had $28.3 million and $27.3 million, respectively, of deferred straight-line rent balances included in other long-term liabilities on the consolidated balance sheet.

 

Lease Covenants

Certain lease agreements contain a number of restrictive covenants that, among other things and subject to certain exceptions, impose operating and financial restrictions on the Company and its subsidiaries.  These leases also require the Company to meet defined financial covenants, including a minimum level of consolidated liquidity, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage.  At March 31, 2016, the Company was in compliance with its covenants under its lease arrangements.

The Company’s ability to maintain compliance with its lease covenants depends in part on management’s ability to increase revenue and control costs.  Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

performance may not generate sufficient operating results to maintain compliance with its quarterly lease covenant compliance requirements. Should the Company fail to comply with its lease covenants at a future measurement date, it would be in default under certain of its existing lease agreements.

 

(9)Financing Obligation

 

Future minimum payments for the next five years and thereafter under leases classified as financing obligations at March 31, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

Twelve months ended March 31, 

    

    

 

 

2017

 

$

277,805

 

2018

 

 

285,744

 

2019

 

 

293,908

 

2020

 

 

302,310

 

2021

 

 

310,945

 

Thereafter

 

 

9,841,789

 

Total future minimum lease payments

 

 

11,312,501

 

Less amount representing interest

 

 

(8,219,905)

 

Financing obligations

 

$

3,092,596

 

Less current portion

 

 

(1,230)

 

Long-term financing obligations

 

$

3,091,366

 

 

 

 

(10)Income Taxes

 

The Company effectively owns 58% of FC-GEN, an entity taxed as a partnership for U.S. income tax purposes.  This is the Company’s only source of taxable income.  FC-GEN is subject to income taxes in several U.S. state and local jurisdictions.  The income taxes assessed by these jurisdictions are included in the Company’s tax provision, but at its 58% ownership of FC-GEN.

 

For the three months ended March 31, 2016, the Company recorded an income tax expense of $3.1 million from continuing operations, representing an effective tax rate of (4.5)%, compared to an income tax benefit of $5.6 million from continuing operations, representing an effective tax rate of 4.6%, for the same period in 2015.

 

The decrease in the effective tax rate is attributable to the full valuation allowance against the Company’s deferred tax assets, excluding the Company’s deferred tax asset on its Bermuda captive insurance company’s discounted unpaid loss reserve.  On December 31, 2015, in assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard, management determined that the Company would not realize its deferred tax assets and established a valuation allowance against the deferred tax assets.  As of March 31, 2016, management has determined that the valuation allowance is still necessary.

 

Beginning with the fourth quarter of 2014, the Company initiated rehabilitation therapy services within the People’s Republic of China.  In this quarter ended March 31, 2016, the Company initiated rehabilitation therapy services within Hong Kong.  At March 31, 2016, these business operations remain in their respective startup stage.  Management does not anticipate these operations will generate taxable income in the near term.  The operations currently do not have a material effect on the Company’s effective tax rate.

 

Exchange Rights and Tax Receivable Agreement

 

Following the Combination, the owners of FC-GEN will have the right to exchange their membership interests in FC-GEN for shares of Class A Common Stock of the Company or cash, at the Company’s option.  As a result of such

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

exchanges, the Company’s membership interest in FC-GEN will increase and its purchase price will be reflected in its share of the tax basis of FC-GEN’s tangible and intangible assets.  Any resulting increases in tax basis are likely to increase tax depreciation and amortization deductions and, therefore, reduce the amount of income tax the Company would otherwise be required to pay in the future.  Any such increase would also decrease gain (or increase loss) on future dispositions of the affected assets.  There have been no exchanges for the quarters ended March 31, 2016 and 2015, respectively.

 

Concurrent with the Combination, the Company entered into a tax receivable agreement (TRA) with the owners of FC-GEN.  The agreement provides for the payment by the Company to the owners of FC-GEN of 90% of the cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of (i) the increases in tax basis attributable to the owners of FC-GEN and (ii) tax benefits related to imputed interest deemed to be paid by the Company as a result of the TRA.  Under the TRA, the benefits deemed realized by the Company as a result of the increase in tax basis attributable to the owners of FC-GEN generally will be computed by comparing the actual income tax liability of the Company to the amount of such taxes that the Company would have been required to pay had there been no such increase in tax basis.

 

Estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis and deductions, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including:

 

·

the timing of exchanges—for instance, the increase in any tax deductions will vary depending on the fair value of the depreciable or amortizable assets of FC-GEN and its subsidiaries at the time of each exchange, which fair value may fluctuate over time;

 

·

the price of shares of Company Class A Common Stock at the time of the exchange—the increase in any tax deductions, and the tax basis increase in other assets of FC-GEN and its subsidiaries is directly proportional to the price of shares of Company Class A Common Stock at the time of the exchange;

 

·

the amount and timing of the Company’s income—the Company is required to pay 90% of the deemed benefits as and when deemed realized. If FC-GEN does not have taxable income, the Company is generally not required (absent a change of control or circumstances requiring an early termination payment) to make payments under the TRA for that taxable year because no benefit will have been actually realized.  However, any tax benefits that do not result in realized benefits in a given tax year likely will generate tax attributes that may be utilized to generate benefits in previous or future tax years. The utilization of such tax attributes will result in payments under the TRA; and

 

·

future tax rates of jurisdictions in which the Company has tax liability.

 

The TRA also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, FC-GEN (or its successor’s) obligations under the TRA would be based on certain assumptions defined in the TRA. As a result of these assumptions, FC-GEN could be required to make payments under the TRA that are greater or less than the specified percentage of the actual benefits realized by the Company that are subject to the TRA.  In addition, if FC-GEN elects to terminate the TRA early, it would be required to make an early termination payment, which upfront payment may be made significantly in advance of the anticipated future tax benefits.

 

Payments generally are due under the TRA within a specified period of time following the filing of FC-GEN’s U.S. federal and state income tax return for the taxable year with respect to which the payment obligation arises.  Payments under the TRA generally will be based on the tax reporting positions that FC-GEN will determine.  Although FC-GEN does not expect the Internal Revenue Service (IRS) to challenge the Company’s tax reporting positions, FC-GEN will not be reimbursed for any overpayments previously made under the TRA, but any overpayments will reduce future

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

payments.  As a result, in certain circumstances, payments could be made under the TRA in excess of the benefits that FC-GEN actually realizes in respect of the tax attributes subject to the TRA.

 

The term of the TRA generally will continue until all applicable tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA and make an early termination payment.

 

In certain circumstances (such as certain changes in control, the election of the Company to exercise its right to terminate the agreement and make an early termination payment or an IRS challenge to a tax basis increase) it is possible that cash payments under the TRA may exceed actual cash savings.

 

(11)Commitments and Contingencies

 

Loss Reserves For Certain Self-Insured Programs

 

General and Professional Liability and Workers’ Compensation

 

The Company self-insures for certain insurable risks, including general and professional liabilities and workers’ compensation liabilities through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary among states in which the Company operates, including wholly owned captive insurance subsidiaries, to provide for potential liabilities for general and professional liability claims and workers’ compensation claims. Policies are typically written for a duration of twelve months and are measured on a “claims made” basis. Regarding workers’ compensation, the Company self-insures to its deductible and purchases statutorily required insurance coverage in excess of its deductible. There is a risk that amounts funded by the Company’s self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments. This liability includes an estimate of the development of reported losses and losses incurred but not reported. Provisions for changes in insurance reserves are made in the period of the related coverage. The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.

 

The Company’s management employs its judgment and periodic independent actuarial analysis in determining the adequacy of certain self-insured workers’ compensation and general and professional liability obligations recorded as liabilities in the Company’s financial statements. The Company evaluates the adequacy of its self-insurance reserves on a semi-annual basis or more often when it is aware of changes to its incurred loss patterns that could impact the accuracy of those reserves. The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. The foundation for most of these methods is the Company’s actual historical reported and/or paid loss data. Any adjustments resulting therefrom are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

 

The Company utilizes third-party administrators (TPAs) to process claims and to provide it with the data utilized in its assessments of reserve adequacy. The TPAs are under the oversight of the Company’s in-house risk management and legal functions. These functions ensure that the claims are properly administered so that the historical data is reliable for estimation purposes. Case reserves, which are approved by the Company’s legal and risk management departments, are determined based on an estimate of the ultimate settlement and/or ultimate loss exposure of individual claims.

 

The reserves for loss for workers’ compensation risks are discounted based on actuarial estimates of claim payment patterns using a discount rate of approximately 1% for each policy period presented. The discount rate for the current policy year is 0.97%. The discount rates are based upon the risk-free rate for the appropriate duration for the respective policy year. The removal of discounting would have resulted in an increased reserve for workers’ compensation risks of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

$8.8 million and $8.6 million as of March 31, 2016 and December 31, 2015, respectively. The reserves for general and professional liability are recorded on an undiscounted basis.

 

For the three months ended March 31, 2016 and 2015, the provision for general and professional liability risk totaled $34.9 million and $26.2 million, respectively.  The reserves for general and professional liability were $381.7 million and $371.6 million as of March 31, 2016 and December 31, 2015, respectively.

 

For the three months ended March 31, 2016 and 2015, the provision for workers’ compensation risk totaled $18.1 million and $18.0 million, respectively.  The reserves for workers’ compensation risks were $228.9 million and $223.7 million as of March 31, 2016 and December 31, 2015, respectively.

 

Health Insurance

 

The Company offers employees an option to participate in self-insured health plans.  Health insurance claims are paid as they are submitted to the plans’ administrators.  The Company maintains an accrual for claims that have been incurred but not yet reported to the plans’ administrators and therefore have not yet been paid.  The liability for the self-insured health plan is recorded in accrued compensation in the consolidated balance sheets.  Although management believes that the amounts provided in the Company’s consolidated financial statements are adequate and reasonable, there can be no assurances that the ultimate liability for such self-insured risks will not exceed management’s estimates.

 

Legal Proceedings

 

The Company and certain of its subsidiaries are involved in various litigation and regulatory investigations arising in the ordinary course of business. While there can be no assurance, based on the Company’s evaluation of information currently available, with the exception of the specific matters noted below, management does not believe the results of such litigation and regulatory investigations would have a material adverse effect on the results of operations, financial position or cash flows of the Company. However, the Company’s assessment of materiality may be affected by limited information (particularly in the early stages of government investigations). Accordingly, the Company’s assessment of materiality may change in the future based upon availability of discovery and further developments in the proceedings at issue. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.

 

From time to time the Company may enter into confidential discussions regarding the potential settlement of pending investigations or litigation. There are a variety of factors that influence the Company’s decisions to settle and the amount it may choose to pay, including the strength of the Company’s case, developments in the investigation or litigation, the behavior of other interested parties, the demand on management time and the possible distraction of the Company’s employees associated with the case and/or the possibility that the Company may be subject to an injunction or other equitable remedy. The settlement of any pending investigation, litigation or other proceedings could require the Company to make substantial settlement payments and result in its incurring substantial costs.

 

Creekside Hospice Litigation

 

On August 2, 2013, the United States Attorney for the District of Nevada and the Civil Division of the U.S. Department of Justice (the DOJ) informed the Company that its Civil Division was investigating Skilled, as well as its subsidiary, Creekside Hospice II, LLC, for possible violations of federal and state healthcare fraud and abuse laws and regulations (the Creekside Hospice Litigation). Those laws could have included the federal False Claims Act (FCA) and the Nevada False Claims Act (NFCA). The FCA provides for civil and administrative fines and penalties, plus treble damages. The NFCA provides for similar fines and penalties, including treble damages. Violations of those federal or state laws could also subject the Company and/or its subsidiaries to exclusion from participation in the Medicare and Medicaid programs. Any damages, fines, penalties, other sanctions and costs that the Company may incur as a result of

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(UNAUDITED)

 

any federal or state suit could be significant and could have a material and adverse effect on its results of operations and financial condition.

 

On or about August 6, 2014, in relation to the investigation the DOJ filed a notice of intervention in two pending qui tam proceedings filed by private party relators under the FCA and the NFCA and advised that it intends to take over the actions. The DOJ filed its complaint in intervention on November 25, 2014, against Creekside, Skilled Healthcare Group, Inc., and Skilled Healthcare, LLC, asserting, among other things, that certain claims for hospice services provided by Creekside in the time period 2010 to 2013 did not meet Medicare requirements for reimbursement and are in violation of the civil False Claims Act.  The DOJ is pursuing False Claims Act and federal common law claims remedies in an unspecified amount, with a request to treble provable damages and impose penalties per proved false claim in the amount ranging from $5,500 to $11,000 per claim, as applicable.

 

The Company has had discussions with the DOJ regarding this matter and the Therapy Matters Investigation (defined below), the Staffing Matters Investigation (defined below) and the SunDance Part B Therapy Matter (defined below).  While the Company denies the allegations and will vigorously defend this action, including any portion of the action that the private party relators may continue to pursue, the Company has accrued a combined $39.1 million as a contingent liability in connection with those four matters. However, it could ultimately cost more than that amount to settle or otherwise resolve the matter(s), including to satisfy any judgment that might be rendered against the Company or Creekside Hospice if the litigation defense were ultimately unsuccessful.  

 

Therapy Matters Investigation

 

In February 2015, representatives of the DOJ informed the Company that they are investigating and may pursue legal action against the Company and certain of its subsidiaries including Hallmark Rehabilitation GP, LLC for alleged violations of the federal and state healthcare fraud and abuse laws and regulations related to the provision of therapy services at certain Skilled facilities from 2005 through 2013 (the Therapy Matters Investigation). These laws could include the FCA and similar state laws. As noted above, the FCA provides for civil and administrative fines and penalties, including civil fines ranging from $5,500 to $11,000 per claim plus treble damages. Applicable state laws provide for similar penalties. Violations of these federal or state laws could also subject the Company and/or its subsidiaries to exclusion from participation in the Medicare and Medicaid programs. Any damages, fines, penalties, other sanctions and costs that the Company may incur as a result of any federal and/or state suit could be significant and could have a material and adverse effect on its results of operations and financial condition. As noted above, the Company has had discussions with the DOJ regarding this matter, the Creekside Hospice Litigation, the Staffing Matters Investigation and the SunDance Part B Therapy Matter.  The Company has accrued a combined $39.1 million as a contingent liability in connection with those four matters.  However, it could ultimately cost more than that amount to settle or otherwise resolve the matter(s), including to satisfy any judgment that might be rendered against the Company if legal proceedings are commenced. At this time, the Company cannot predict what additional effect, if any, the investigation or any potential claims arising under applicable federal or state laws and regulations could have on the Company. While the Company will continue to cooperate with the government’s investigation of the matter, the Company intends to vigorously defend against any legal action that may be brought in the matter. 

 

Staffing Matters Investigation

 

On February 10, 2015, the DOJ informed the Company that it intends to pursue legal action against the Company and certain of its subsidiaries related to staffing and certain quality of care allegations related to the issues adjudicated against the Company and those subsidiaries in a previously disclosed class action lawsuit that Skilled settled in 2010 (the Staffing Matters Investigation). The laws under which the DOJ could seek to pursue legal action could include the FCA and similar state laws. As noted above, violations of the FCA or similar state laws and regulations could subject the Company and/or its subsidiaries to severe monetary and other penalties and remedies. Any damages, fines, penalties, other sanctions and costs that the Company may incur as a result of any federal or state suit could be significant and

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Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

could have a material and adverse effect on its results of operations and financial condition. As noted above, the Company has had discussions with the DOJ regarding this matter, the Creekside Hospice Litigation, the Therapy Matters Investigation, and the SunDance Part B Therapy Matter.  The Company has accrued a combined $39.1 million as a contingent liability in connection with those four matters.  However, it could ultimately cost more than that amount to settle or otherwise resolve the matter(s), including to satisfy any judgment that might be rendered against the Company if legal proceedings are commenced.   At this time, the Company cannot predict what additional effect, if any, the investigation or any potential claims arising under applicable federal or state laws and regulations could have on the Company. While the Company will continue to cooperate with the government's evaluation of the matter, the Company intends to vigorously defend against any legal action that may be brought in the matter.

 

SunDance Part B Therapy Matter

 

SunDance Rehabilitation Corp. (SunDance) operates an outpatient agency licensed to provide Medicare Part B therapy services at assisted/senior living facilities in Georgia and is a party to a qui tam proceeding that was filed by a private party relator under the FCA.  No SunDance agencies outside of Georgia are part of the qui tam proceeding. The Civil Division of the United States Attorney's Office for the District of Georgia has recently filed a notice of intervention in this matter.  It is believed that when filed, the complaint in intervention may assert, among other things, that certain claims for therapy services provided by SunDance to certain Georgia facilities from the time period 2008 to 2012 did not meet Medicare requirements for reimbursement and are in violation of the FCA.  As noted above, the Company has had discussions with the DOJ regarding this matter, the Creekside Hospice Litigation, the Therapy Matters Investigation, and the Staffing Matters Investigation.  While the Company denies the allegations and will vigorously defend this action, including any portion of the action that the private party relators may continue to pursue, the Company has accrued a combined $39.l million as a contingent liability in connection with those four matters. However, it could ultimately cost more than that amount to settle or otherwise resolve the matter(s), including to satisfy any judgment that might be rendered against the Company or SunDance if the litigation defense were ultimately unsuccessful.

 

(12)Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash and equivalents, restricted cash, trade accounts receivable, investments in marketable securities, accounts payable, short and long-term debt and derivative financial instruments.

 

The Company’s  financial instruments, other than its trade accounts receivable and accounts payable, are spread across a number of large financial institutions whose credit ratings the Company monitors and believes do not currently carry a material risk of non-performance.  Certain of the Company’s financial instruments, including its interest rate cap arrangements, contain an off-balance-sheet risk.

 

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Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recurring Fair Value Measures 

 

Fair value is defined as an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date).  The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as shown below.  An instrument’s classification within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

 

 

 

 

 

Level 1 —

 

Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 —

 

Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.

 

Level 3 —

 

Inputs that are unobservable for the asset or liability based on the Company’s own assumptions (about the assumptions market participants would use in pricing the asset or liability).

 

The tables below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

    

 

 

    

Quoted Prices in

 

 

 

 

Significant

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

March 31, 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Assets:

 

2016

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

52,204

 

$

52,204

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

25,120

 

 

25,120

 

 

 —

 

 

 —

 

Restricted investments in marketable securities

 

 

165,731

 

 

165,731

 

 

 —

 

 

 —

 

Total

 

$

243,055

 

$

243,055

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

    

 

 

    

Quoted Prices in

 

 

 

 

Significant

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

December 31,

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Assets:

 

2015

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

61,543

 

$

61,543

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

34,370

 

 

34,370

 

 

 —

 

 

 —

 

Restricted investments in marketable securities

 

 

163,757

 

 

163,757

 

 

 —

 

 

 —

 

Total

 

$

259,670

 

$

259,670

 

$

 —

 

$

 —

 

 

The Company places its cash and equivalents and restricted investments in marketable securities in quality financial instruments and limits the amount invested in any one institution or in any one type of instrument.  The Company has not experienced any significant losses on such investments.

 

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Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Debt Instruments 

 

The table below shows the carrying amounts and estimated fair values of the Company’s primary long-term debt instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

 

Revolving credit facilities

 

$

323,374

 

$

323,374

 

$

352,746

 

$

352,746

 

Term loan facility

 

 

210,134

 

 

203,370

 

 

210,842

 

 

210,271

 

Real estate bridge loans

 

 

364,433

 

 

364,433

 

 

484,533

 

 

484,533

 

HUD insured loans

 

 

171,379

 

 

167,837

 

 

106,250

 

 

106,250

 

Mortgages and other secured debt (recourse)

 

 

13,770

 

 

13,770

 

 

13,934

 

 

13,934

 

Mortgages and other secured debt (non-recourse)

 

 

30,045

 

 

30,045

 

 

30,331

 

 

30,331

 

 

 

$

1,113,135

 

$

1,102,829

 

$

1,198,636

 

$

1,198,065

 

 

The fair value of debt is based upon market prices or is computed using discounted cash flow analysis, based on the Company’s estimated borrowing rate at the end of each fiscal period presented.  The Company believes that the inputs to the pricing models qualify as Level 2 measurements. 

 

Non-Recurring Fair Value Measures 

 

The Company recently applied the fair value measurement principles to certain of its non-recurring nonfinancial assets in connection with an impairment test.

 

The following table presents the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Impairment Charges -

 

 

 

Carrying Value

 

Three months ended 

 

 

 

March 31, 2016

 

March 31, 2016

 

Assets:

 

 

 

 

 

 

 

Property and equipment, net

 

$

3,981,879

 

$

 —

 

Goodwill

 

 

470,735

 

 

 —

 

Intangible assets

 

 

203,080

 

 

 —

 

 

 

 

 

 

 

 

 

 

    

 

    

    

Impairment Charges -

 

 

 

Carrying Value

 

Three months ended 

 

 

 

December 31, 2015

 

March 31, 2015

 

Assets:

 

 

 

 

 

 

 

Property and equipment, net

 

$

4,085,247

 

$

 —

 

Goodwill

 

 

470,019

 

 

 —

 

Intangible assets

 

 

209,967

 

 

 —

 

 

The fair value of tangible and intangible assets is determined using a discounted cash flow approach, which is a significant unobservable input (Level 3).  The Company estimates the fair value using the income approach (which is a discounted cash flow technique).  These valuation methods required management to make various assumptions, including, but not limited to, future profitability, cash flows and discount rates.  The Company’s estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential.

 

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Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Developing discounted future cash flows in applying the income approach requires the Company to evaluate its intermediate to longer-term strategies, including, but not limited to, estimates of revenue growth, operating margins, capital requirements, inflation and working capital management.  The development of appropriate rates to discount the estimated future cash flows requires the selection of risk premiums, which can materially impact the present value of future cash flows. 

 

The Company estimated the fair value of acquired tangible and intangible assets using discounted cash flow techniques that included an estimate of future cash flows, consistent with overall cash flow projections used to determine the purchase price paid to acquire the business, discounted at a rate of return that reflects the relative risk of the cash flows.

 

The Company believes the estimates and assumptions used in the valuation methods are reasonable.

 

 

 

 

 

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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 condensed 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, 2015, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on March 14, 2016 (the Annual Report), as well as others that are discussed in this Form 10-Q, including in Part II, Item 1A, “Risk Factors.” 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, hospices, home health providers 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.  We provide inpatient services through 512 skilled nursing, senior/assisted living and behavioral health centers located in 34 states.  Revenues of our owned, leased and otherwise consolidated centers constitute approximately 84% 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 12% of our revenues.

 

We provide an array of other specialty medical services, including management services, physician services, staffing services, hospice and home health services, and other healthcare related services, which comprise the balance of our revenues.

30


 

 

Recent Transactions

 

The Combination with Skilled

 

On August 18, 2014, Skilled Healthcare Group, Inc., a Delaware corporation (Skilled) entered into a Purchase and Contribution Agreement with FC-GEN Operations Investment, LLC (FC-GEN) pursuant to which the businesses and operations of FC-GEN and Skilled were combined (the Combination). On February 2, 2015, the Combination was completed.

 

Sale of Kansas ALFs

 

On January 1, 2016, we sold 18 Kansas assisted/senior living facilities acquired in the Combination for $67.0 million.  .  Of the proceeds received, $54.2 million were used to pay down partially the Real Estate Bridge Loans.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

Sale of Hospice and Home Health

 

On March 9, 2016, we announced that we had signed an agreement with FC Compassus LLC, a nationwide network of community-based hospice and palliative care programs, to sell its hospice and home health operations for $84 million. Through the asset purchase agreement, we retained certain liabilities.  See Note 11 – “Commitments and Contingencies – Legal Proceedings - Creekside Hospice Litigation.”  Certain members of our board of directors indirectly beneficially hold ownership interests in FC Compassus LLC totaling less than 10% in the aggregate.

 

Effective May 1, 2016, we completed the sale and received $72 million in cash and a $12 million short-term note.  The cash proceeds were used to pay down partially our Term Loan Facility.  See Note 7 – “Long-Term Debt – Term Loan Facility.”

 

HUD Insured Loans

 

On March 31, 2016, we closed on the HUD insured financing of ten skilled nursing facilities acquired in the Combination for $67.9 million.  On April 28, 2016, we closed on the HUD insured financing of three additional skilled nursing facilities acquired in the Combination for $9.2 million.  The $77.1 million in total proceeds from the financings were used to pay down partially the Real Estate Bridge Loans.  See Note 7 – “Long-Term Debt – Real Estate Bridge Loans.”

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (the FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers, (ASU 2014-09) which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is not permitted. We are still evaluating the effect, if any, ASU 2014-09 will have on our consolidated financial condition and results of operations.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern, (ASU 2014-15) requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide disclosures in certain circumstances.  ASU 2014-15 is effective for annual and interim periods ending after December 31, 2016.  We are still evaluating the effect, if any, ASU 2014-15 will have on our consolidated financial condition and results of operations.

 

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In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, (ASU 2016-01), which is intended to improve the recognition and measurement of financial instruments. The new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. We are still evaluating the effect, if any, ASU 2016-01 will have on our consolidated financial condition and results of operations.

 

In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The adoption of this standard is expected to have a material impact on our financial position. We are still evaluating the impact on our results of operations and does not expect the adoption of this standard to have an impact on liquidity.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, (ASU 2016-09), which is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted.  We are still evaluating the effect, if any, ASU 2016-09 will have on our consolidated financial condition and results of operations.

 

Industry Trends

 

Healthcare Reform Initiatives

 

Many provisions within the Patient Protection and Affordable Care Act of 2010 (PPACA) have had an impact, or could in the future impact, our business. The expansive potential impact of the PPACA is discussed in Item 1, “Business” and Item 1A, “Risk Factors” in our Annual Report and in Part II, “Other Information”, Item 1A, “Risk Factors” in this Form 10-Q.

 

We believe we are transforming our business and operations for success in a post-healthcare reform environment.  As healthcare reform continues to be implemented, we believe post-acute healthcare providers who provide quality diversified care, have density and strong reputations in local markets, have good relationships with acute care hospitals and payors and operate with scale will have a competitive advantage in an episodic payment environment.  We believe our previously described organic and strategic growth strategies should position us to become a valuable partner to acute care hospitals and managed care organizations that are seeking to increase care coordination, reduce lengths of stay and hospital readmissions, more effectively manage healthcare costs and develop new care delivery and payment models.

 

As the industry and its regulators engage in this new environment, we are positioning ourselves to adapt to changes that are ultimately made to the delivery system:

 

·

Medicare Shared Savings Program (MSSP) – Effective January 1, 2016, we entered Genesis Physician Services (GPS), our physician services subsidiary, into the MSSP.  While beneficiary attribution is retrospective, preliminary data show that we are managing approximately 15,000 Medicare fee for service beneficiaries with

32


 

annualized Medicare spending of more than $800 million. While these numbers are subject to modification and will not be reconciled by the Centers for Medicare and Medicaid Services (CMS) until mid-2017, we have received sufficient benchmark data to measure and monitor performance in this program beginning in the third quarter of this year. The gain share track requires us to save at least approximately three percent of the total Medicare spend under management in order to share in up to 50 percent of the savings with CMS predicated upon achieving certain quality initiatives.  Once the savings hurdle has been reached, Genesis begins sharing based on the first dollar of savings.

 

·

Bundled Payments for Care Improvement (BPCI) – Participation success is determined retrospectively given the lack of available historical data around the bundles, however, we have received two quarterly reconciliations in early 2016 representing the second and third fiscal quarters of 2015.  The reconciliations for the second quarter of 2015 and the results for three centers were not significant.  The reconciliation for the third quarter of 2015 represented 13 facilities and netted a positive $0.5 million.  We expect to receive the reconciliation from the fourth quarter of 2015 in July 2016 and believe we will continue to see positive outcomes for that quarter.

 

·

Comprehensive Care for Joint Replacement (CJR) – On April 1, 2016, the CJR Program went into effect in 67 metropolitan statistical areas (MSAs) throughout the country. We have approximately 100 facilities in roughly 22 of those MSAs.  While the program was recently enacted, we have already experienced a significant decline from this class of DRGs from recent years primarily due to the proliferation of Accountable Care Organizations (ACOs) and the BPCI program resulting from the PPACA.  For the 2009-2012 period compared to the average number of CJR cases coming to our facilities in key states in 2014, we have already experienced a 29% decrease in applicable CJR type admissions.  There were several states that saw slight increases, but many averaged decreases between 13% - 65%.  Moreover, in studying our 32 facilities in the model 3 BPCI program from 2009-2012 compared to 2015, we have observed a decrease of nearly 16% in total CJR type admissions. 

 

·

Vitality to You – We continue to make great progress with our new Vitality to You service offering that extends our rehabilitation therapy services into the community.  Vitality to You now cares for approximately 1,615 patients per day, growing 47% since February 2015.

 

Key Financial Performance Indicators

 

In order to assess our financial performance between periods, we evaluate certain key performance indicators for each of our operating segments separately for the periods presented.  Results and statistics presented in the Key Performance Indicators 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 indicators 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 (1) the conversion to cash basis leases (2) newly acquired or constructed businesses with start-up losses and (3) other adjustments. 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 (1) the conversion to cash basis leases (2) newly acquired or constructed businesses with start-up losses and (3) other adjustments. 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.

33


 

 

“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 before depreciation and amortization expense, interest expense, lease expense, loss (gain) on extinguishment of debt, other (income) loss, transaction costs, long-lived asset impairment, Skilled Healthcare and other loss contingency expense, income tax expense (benefit) and loss from discontinued operations, net of taxes. 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, 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 indicators for our businesses are set forth below, followed by a comparison and analysis of our financial results:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

    

2016

 

2015

 

    

 

 

(In thousands)

 

 

Financial Results

 

 

 

 

 

 

 

 

Net revenues

 

$

1,472,218

 

$

1,343,001

 

 

EBITDAR

 

 

169,728

 

 

175,347

 

 

EBITDA

 

 

132,412

 

 

138,928

 

 

Adjusted EBITDAR

 

 

178,351

 

 

177,803

 

 

Adjusted EBITDA

 

 

53,534

 

 

60,425

 

 

 

34


 

INPATIENT SEGMENT:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

 

2016

 

2015

 

    

Occupancy Statistics - Inpatient

 

 

 

 

 

 

 

 

Available licensed beds in service at end of period

 

 

57,908

 

 

56,672

 

 

Available operating beds in service at end of period

 

 

56,446

 

 

54,890

 

 

Available patient days based on licensed beds

 

 

5,274,061

 

 

4,776,173

 

 

Available patient days based on operating beds

 

 

5,133,219

 

 

4,628,881

 

 

Actual patient days

 

 

4,417,347

 

 

4,088,847

 

 

Occupancy percentage - licensed beds

 

 

83.8

%

 

85.6

%

 

Occupancy percentage - operating beds

 

 

86.1

%

 

88.3

%

 

Skilled mix

 

 

21.2

%

 

22.9

%

 

Average daily census

 

 

48,542

 

 

45,432

 

 

 

 

 

 

 

 

 

 

 

Revenue per patient day (skilled nursing facilities)

 

 

 

 

 

 

 

 

Medicare Part A

 

$

513

 

$

500

 

 

Medicare total (including Part B)

 

 

552

 

 

533

 

 

Insurance

 

 

441

 

 

438

 

 

Private and other

 

 

303

 

 

314

 

 

Medicaid

 

 

219

 

 

215

 

 

Medicaid (net of provider taxes)

 

 

200

 

 

194

 

 

Weighted average (net of provider taxes)

 

$

274

 

$

273

 

 

 

 

 

 

 

 

 

 

 

Patient days by payor (skilled nursing facilities)

 

 

 

 

 

 

 

 

Medicare

 

 

569,749

 

 

579,898

 

 

Insurance

 

 

312,148

 

 

287,759

 

 

Total skilled mix days

 

 

881,897

 

 

867,657

 

 

Private and other

 

 

298,752

 

 

286,586

 

 

Medicaid

 

 

2,975,751

 

 

2,646,502

 

 

Total Days

 

 

4,156,400

 

 

3,800,745

 

 

 

 

 

 

 

 

 

 

 

Patient days as a percentage of total patient days (skilled nursing facilities)

 

 

 

 

 

 

 

 

Medicare

 

 

13.7

%

 

15.3

%

 

Insurance

 

 

7.5

%

 

7.6

%

 

Skilled mix

 

 

21.2

%

 

22.9

%

 

Private and other

 

 

7.2

%

 

7.5

%

 

Medicaid

 

 

71.6

%

 

69.6

%

 

Total

 

 

100.0

%

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Facilities at end of period

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

 

 

 

 

 

 

 

Leased

 

 

381

 

 

382

 

 

Owned

 

 

49

 

 

32

 

 

Joint Venture

 

 

5

 

 

5

 

 

Managed *

 

 

40

 

 

36

 

 

Total skilled nursing facilities

 

 

475

 

 

455

 

 

Total licensed beds

 

 

57,904

 

 

55,365

 

 

 

 

 

 

 

 

 

 

 

Assisted/Senior living facilities:

 

 

 

 

 

 

 

 

Leased

 

 

30

 

 

29

 

 

Owned

 

 

4

 

 

22

 

 

Joint Venture

 

 

1

 

 

1

 

 

Managed

 

 

2

 

 

4

 

 

Total assisted/senior living facilities

 

 

37

 

 

56

 

 

Total licensed beds

 

 

3,001

 

 

3,952

 

 

Total facilities

 

 

512

 

 

511

 

 

 

 

 

 

 

 

 

 

 

Total Jointly Owned and Managed— (Unconsolidated)

 

 

21

 

 

18

 

 

 


* Includes 20 facilities located in Texas for which the real estate is owned by Genesis

35


 

REHABILITATION THERAPY SEGMENT:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

    

2016

    

2015

 

    

Revenue mix %:

 

 

 

 

 

 

 

 

Company-operated

 

 

36

%  

 

39

%

 

Non-affiliated

 

 

64

%  

 

61

%

 

Sites of service (at end of period)

 

 

1,634

 

 

1,569

 

 

Revenue per site

 

$

166,499

 

$

168,751

 

 

Therapist efficiency %

 

 

70

%  

 

69

%

 

 

Reasons for Non-GAAP Financial Disclosure

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We use Non-GAAP Financial Measures primarily as performance measures and believe that the GAAP financial measure most directly comparable to them is net income (loss). We use Non-GAAP Financial Measures as measures to assess the relative performance of our operating businesses, as well as the employees responsible for operating such businesses. Non-GAAP Financial Measures are useful in this regard because they do not include such costs as interest expense, income taxes and depreciation and amortization expense which may vary from business unit to business unit depending upon such factors as the method used to finance the original purchase of the business unit or the tax law in the state in which a business unit operates. By excluding such factors when measuring financial performance, many of which

36


 

are outside of the control of the employees responsible for operating our business units, we are better able to evaluate the operating performance of the business unit and the employees responsible for business unit performance. Consequently, we use these Non-GAAP Financial Measures to determine the extent to which our employees have met performance goals, and therefore may or may not be eligible for incentive compensation awards.

 

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

 

Although we use Non-GAAP Financial Measures as financial measures to assess the performance of our business, the use of these Non-GAAP Financial Measures is limited because they do not consider certain material costs necessary to operate the business. 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 attributed 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) 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.

 

37


 

The following tables provide reconciliations to EBITDAR, Adjusted EBITDAR, EBITDA and Adjusted EBITDA from net income (loss) the most directly comparable financial measure presented in accordance with GAAP:

 

GENESIS HEALTHCARE, INC.

RECONCILIATION OF NET (LOSS) INCOME TO EBITDA, EBITDAR, ADJUSTED EBITDA AND ADJUSTED EBITDAR

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

Adjustments

 

As adjusted

 

 

  

 

 

  

 

 

  

Newly acquired

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

or constructed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

businesses with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

start-up losses

 

 

 

 

 

 

 

 

 

Three months

 

Conversion to

 

and newly

 

 

 

 

Three months

 

 

 

ended March 31, 

 

cash basis

 

divested

 

Other

 

ended March 31, 

 

 

 

2016

 

leases (a)

 

facilities (b)

 

adjustments (c)

 

2016

 

Net revenues

 

$

1,472,218

 

$

 —

 

$

(10,544)

 

$

 —

 

$

1,461,674

 

Salaries, wages and benefits

 

 

867,717

 

 

 —

 

 

(5,854)

 

 

(2,130)

 

 

859,733

 

Other operating expenses

 

 

361,097

 

 

 —

 

 

(6,388)

 

 

(1,367)

 

 

353,342

 

General and administrative costs

 

 

48,427

 

 

 —

 

 

 —

 

 

(2,746)

 

 

45,681

 

Provision for losses on accounts receivable

 

 

26,493

 

 

 —

 

 

(276)

 

 

(407)

 

 

25,810

 

Lease expense

 

 

37,316

 

 

89,273

 

 

(1,772)

 

 

 —

 

 

124,817

 

Depreciation and amortization expense

 

 

61,765

 

 

(34,408)

 

 

(252)

 

 

 —

 

 

27,105

 

Interest expense

 

 

135,181

 

 

(105,526)

 

 

 —

 

 

 —

 

 

29,655

 

Investment income

 

 

(481)

 

 

 —

 

 

1

 

 

 —

 

 

(480)

 

Other loss

 

 

12

 

 

 —

 

 

 —

 

 

(12)

 

 

 —

 

Transaction costs

 

 

1,754

 

 

 —

 

 

 —

 

 

(1,754)

 

 

 —

 

Skilled Healthcare and other loss contingency expense

 

 

1,626

 

 

 —

 

 

 —

 

 

(1,626)

 

 

 —

 

Equity in net income of unconsolidated affiliates

 

 

(763)

 

 

 —

 

 

 —

 

 

 —

 

 

(763)

 

(Loss) income before income tax benefit

 

$

(67,926)

 

$

50,661

 

$

3,997

 

$

10,042

 

$

(3,226)

 

Income tax expense (benefit)

 

 

3,064

 

 

11,759

 

 

928

 

 

2,331

 

 

18,082

 

(Loss) income from continuing operations

 

$

(70,990)

 

$

38,902

 

$

3,069

 

$

7,711

 

$

(21,308)

 

Loss from discontinued operations, net of taxes

 

 

38

 

 

(205)

 

 

 —

 

 

 —

 

 

(167)

 

Net (loss) income attributable to noncontrolling interests

 

 

(27,989)

 

 

21,262

 

 

1,678

 

 

4,215

 

 

(834)

 

Net (loss) income attributable to Genesis Healthcare, Inc.

 

$

(43,039)

 

$

17,845

 

$

1,391

 

$

3,496

 

$

(20,307)

 

Depreciation and amortization expense

 

 

61,765

 

 

(34,408)

 

 

(252)

 

 

 —

 

 

27,105

 

Interest expense

 

 

135,181

 

 

(105,526)

 

 

 —

 

 

 —

 

 

29,655

 

Other loss

 

 

12

 

 

 —

 

 

 —

 

 

(12)

 

 

 —

 

Transaction costs

 

 

1,754

 

 

 —

 

 

 —

 

 

(1,754)

 

 

 —

 

Skilled Healthcare and other loss contingency expense

 

 

1,626

 

 

 —

 

 

 —

 

 

(1,626)

 

 

 —

 

Income tax expense (benefit)

 

 

3,064

 

 

11,759

 

 

928

 

 

2,331

 

 

18,082

 

Loss from discontinued operations, net of taxes

 

 

38

 

 

(205)

 

 

 —

 

 

 —

 

 

(167)

 

Net (loss) income attributable to noncontrolling interests

 

 

(27,989)

 

 

21,262

 

 

1,678

 

 

4,215

 

 

(834)

 

EBITDA / Adjusted EBITDA

 

$

132,412

 

$

(89,273)

 

$

3,745

 

$

6,650

 

$

53,534

 

Lease expense

 

 

37,316

 

 

89,273

 

 

(1,772)

 

 

 —

 

 

124,817

 

EBITDAR / Adjusted EBITDAR

 

$

169,728

 

$

 —

 

$

1,973

 

$

6,650

 

$

178,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for diluted (loss) income from continuing operations per share (d)

 

 

89,198

 

 

 

 

 

 

 

 

 

 

 

153,671

 

Diluted net (loss) income from continuing operations per share (e)

 

$

(0.48)

 

 

 

 

 

 

 

 

 

 

$

(0.13)

 

 

38


 

GENESIS HEALTHCARE, INC.

RECONCILIATION OF NET (LOSS) INCOME TO EBITDA, EBITDAR, ADJUSTED EBITDA AND ADJUSTED EBITDAR

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

Adjustments

 

As adjusted

 

 

  

 

 

  

 

 

  

Newly acquired

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

or constructed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

businesses with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

start-up losses

 

 

 

 

 

 

 

 

 

Three months

 

Conversion to

 

and newly

 

 

 

 

Three months

 

 

 

ended March 31, 

 

cash basis

 

divested

 

Other

 

ended March 31, 

 

 

 

2015

 

leases (a)

 

facilities (b)

 

adjustments (c)

 

2015

 

Net revenues

 

$

1,343,001

 

$

 —

 

$

(12,383)

 

$

620

 

$

1,331,238

 

Salaries, wages and benefits

 

 

790,733

 

 

 —

 

 

(7,066)

 

 

 —

 

 

783,667

 

Other operating expenses

 

 

312,561

 

 

 —

 

 

(5,470)

 

 

 —

 

 

307,091

 

General and administrative costs

 

 

41,533

 

 

 —

 

 

 —

 

 

(1,683)

 

 

39,850

 

Provision for losses on accounts receivable

 

 

23,396

 

 

 —

 

 

 —

 

 

 —

 

 

23,396

 

Lease expense

 

 

36,419

 

 

83,908

 

 

(2,949)

 

 

 —

 

 

117,378

 

Depreciation and amortization expense

 

 

59,933

 

 

(33,592)

 

 

(1,244)

 

 

 —

 

 

25,097

 

Interest expense

 

 

121,313

 

 

(102,334)

 

 

(32)

 

 

 —

 

 

18,947

 

Loss on extinguishment of debt

 

 

3,234

 

 

 —

 

 

 —

 

 

(3,234)

 

 

 —

 

Investment income

 

 

(416)

 

 

 —

 

 

 —

 

 

 —

 

 

(416)

 

Other (income) loss

 

 

(7,611)

 

 

 —

 

 

 —

 

 

7,611

 

 

 —

 

Transaction costs

 

 

86,069

 

 

 —

 

 

 —

 

 

(86,069)

 

 

 —

 

Equity in net income of unconsolidated affiliates

 

 

(153)

 

 

 —

 

 

 —

 

 

 —

 

 

(153)

 

(Loss) income before income tax benefit

 

$

(124,010)

 

$

52,018

 

$

4,378

 

$

83,995

 

$

16,381

 

Income tax (benefit) expense

 

 

(5,648)

 

 

12,074

 

 

1,016

 

 

19,497

 

 

26,939

 

(Loss) income from continuing operations

 

$

(118,362)

 

$

39,944

 

$

3,362

 

$

64,498

 

$

(10,558)

 

Loss (income) from discontinued operations, net of taxes

 

 

(112)

 

 

460

 

 

 —

 

 

 —

 

 

348

 

Net loss attributable to noncontrolling interests

 

 

(5,684)

 

 

14,555

 

 

1,225

 

 

23,502

 

 

33,598

 

Net (loss) income attributable to Genesis Healthcare, Inc.

 

$

(112,566)

 

$

24,929

 

$

2,137

 

$

40,996

 

$

(44,504)

 

Depreciation and amortization expense

 

 

59,933

 

 

(33,592)

 

 

(1,244)

 

 

 —

 

 

25,097

 

Interest expense

 

 

121,313

 

 

(102,334)

 

 

(32)

 

 

 —

 

 

18,947

 

Loss on extinguishment of debt

 

 

3,234

 

 

 —

 

 

 —

 

 

(3,234)

 

 

 —

 

Other (income) loss

 

 

(7,611)

 

 

 —

 

 

 —

 

 

7,611

 

 

 —

 

Transaction costs

 

 

86,069

 

 

 —

 

 

 —

 

 

(86,069)

 

 

 —

 

Income tax (benefit) expense

 

 

(5,648)

 

 

12,074

 

 

1,016

 

 

19,497

 

 

26,939

 

Loss (income) from discontinued operations, net of taxes

 

 

(112)

 

 

460

 

 

 —

 

 

 —

 

 

348

 

Net loss attributable to noncontrolling interests

 

 

(5,684)

 

 

14,555

 

 

1,225

 

 

23,502

 

 

33,598

 

EBITDA / Adjusted EBITDA

 

$

138,928

 

$

(83,908)

 

$

3,102

 

$

2,303

 

$

60,425

 

Lease expense

 

 

36,419

 

 

83,908

 

 

(2,949)

 

 

 —

 

 

117,378

 

EBITDAR / Adjusted EBITDAR

 

$

175,347

 

$

 —

 

$

153

 

$

2,303

 

$

177,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for diluted (loss) income from continuing operations per share (d)

 

 

75,234

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net (loss) income from continuing operations per share (e)

 

$

(1.50)

 

 

 

 

 

 

 

 

 

 

 

Not calculated

 

 


(a)

Our leases are classified as either operating leases, capital leases or financing obligations pursuant to applicable guidance under U.S. GAAP.   We view the primary provisions and economics of these leases, regardless of their accounting treatment, as being nearly identical.  Virtually all of our leases are structured with triple net terms, have fixed annual rent escalators and have long-term initial maturities with renewal options.  Accordingly, in connection with our evaluation of our financial performance, we reclassify all of our leases to operating lease treatment and reflect lease expense on a cash basis.  This approach allows us to better understand the relationship in each reporting period of our operating performance, as measured by EBITDAR and Adjusted EBITDAR, to the cash basis obligations to our landlords in that reporting period, regardless of the lease accounting treatment.  This presentation and approach is also consistent with the financial reporting and covenant compliance requirements contained in

39


 

all of our major lease and loan agreements.  The following table summarizes the reclassification adjustments necessary to present all leases as operating leases on a cash basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

    

2016

    

2015

 

    

 

 

(in thousands)

 

 

Lease expense:

 

 

 

 

 

 

 

 

Cash rent - capital leases

 

$

23,301

 

$

22,925

 

 

Cash rent - financing obligations

 

 

67,297

 

 

62,770

 

 

Non-cash - operating lease arrangements

 

 

(1,325)

 

 

(1,787)

 

 

Lease expense adjustments

 

$

89,273

 

$

83,908

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense:

 

 

 

 

 

 

 

 

Capital lease accounting

 

$

(8,981)

 

$

(8,779)

 

 

Financing obligation accounting

 

 

(25,427)

 

 

(24,813)

 

 

Depreciation and amortization expense adjustments

 

$

(34,408)

 

$

(33,592)

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

Capital lease accounting

 

$

(26,378)

 

$

(25,486)

 

 

Financing obligation accounting

 

 

(79,148)

 

 

(76,848)

 

 

Interest expense adjustments

 

$

(105,526)

 

$

(102,334)

 

 

 

 

 

 

 

 

 

 

 

Total pre-tax lease accounting adjustments

 

$

(50,661)

 

$

(52,018)

 

 

 


(b)

The acquisition and construction of new businesses has become an important 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 EBITDAR and Adjusted EBITDA in order to better evaluate the performance of our core business.  The activities of such businesses are adjusted when computing Adjusted EBITDAR and 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 EBITDAR and 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 has also become an important element of our earnings optimization 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 non-recurring and not indicative of the performance of our core business.

 

40


 

(c)

Other adjustments represent costs or gains associated with transactions or events that we do not believe are reflective of our core recurring operating business.  Other adjustments also include the effect of expensing non-cash stock-based compensation related to restricted stock units.  The following items were realized in the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

    

2016

    

2015

 

    

 

 

(in thousands)

 

 

Severance and restructuring (1)

 

$

3,016

 

$

1,658

 

 

Regulatory defense and related costs (2)

 

 

940

 

 

645

 

 

Other non-recurring costs (3)

 

 

834

 

 

 —

 

 

Transaction costs (4)

 

 

1,754

 

 

86,069

 

 

Skilled Healthcare and other loss contingency expense (5)

 

 

1,626

 

 

 —

 

 

Loss on early extinguishment of debt

 

 

 —

 

 

3,234

 

 

Other loss (income) (6)

 

 

12

 

 

(7,611)

 

 

Stock based compensation (7)

 

 

1,860

 

 

 —

 

 

Tax benefit from total adjustments

 

 

(2,331)

 

 

(19,497)

 

 

Total other adjustments

 

$

7,711

 

$

64,498

 

 

 


(1)  We incurred costs related to the termination, severance and restructuring of certain components of the our business.

(2)  We incurred legal defense and other related costs in connection with certain matters in dispute or under appeal with regulatory agencies.

(3)  We incurred other miscellaneous expenses we do not believe are reflective of our core recurring operating business.

(4)  We incurred costs associated with transactions including the combination with Skilled Healthcare Group, Inc., the Revera acquisition and other transactions.

(5)  We recognized a loss contingency expense in the three months ended March 31, 2016 associated with the SunDance Part B Therapy matter.

(6)  We realized net gains and losses on the sale of certain assets in the three months ended March 31, 2016 and 2015.

(7)  We incurred non-cash stock-based compensation related to restricted stock units.

(d)

Assumes 153.7 million diluted weighted average common shares outstanding and common stock equivalents on a fully exchanged basis.

(e)

Pro forma adjusted income from continuing operations per share assumes a calculated tax rate of 40%, and is computed as follows:  Pro forma adjusted income before income taxes x (1 - 40% tax rate) / diluted weighted average shares on a fully exchanged basis.

 

41


 

Results of Operations

 

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

 

A summary of our unaudited results of operations for the three months ended March 31, 2016 as compared with the same period in 2015 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

 

 

 

 

2016

 

2015

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

 

 

(in thousands, except percentages)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

1,208,433

 

82.0

%  

$

1,104,990

 

82.3

%  

$

103,443

 

9.4

%

Assisted/Senior living facilities

 

 

30,919

 

2.1

%  

 

33,657

 

2.5

%  

 

(2,738)

 

(8.1)

%

Administration of third party facilities

 

 

3,079

 

0.2

%  

 

2,671

 

0.2

%  

 

408

 

15.3

%

Elimination of administrative services

 

 

(375)

 

 —

%  

 

(501)

 

 —

%  

 

126

 

(25.1)

%

Inpatient services, net

 

 

1,242,056

 

84.3

%  

 

1,140,817

 

84.9

%  

 

101,239

 

8.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

285,112

 

19.4

%  

 

263,051

 

19.6

%  

 

22,061

 

8.4

%

Elimination intersegment rehabilitation therapy services

 

 

(106,432)

 

(7.2)

%  

 

(105,906)

 

(7.9)

%  

 

(526)

 

0.5

%

Third party rehabilitation therapy services

 

 

178,680

 

12.2

%  

 

157,145

 

11.7

%  

 

21,535

 

13.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

56,626

 

3.8

%  

 

52,546

 

3.9

%  

 

4,080

 

7.8

%

Elimination intersegment other services

 

 

(5,144)

 

(0.3)

%  

 

(7,507)

 

(0.6)

%  

 

2,363

 

(31.5)

%

Third party other services

 

 

51,482

 

3.5

%  

 

45,039

 

3.4

%  

 

6,443

 

14.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,472,218

 

100.0

%  

$

1,343,001

 

100.0

%  

$

129,217

 

9.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

 

 

 

 

 

2016

 

2015

 

Increase / (Decrease)

 

 

    

 

 

    

Margin

    

 

 

    

Margin

    

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

 

 

(in thousands, except percentages)

EBITDAR:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services

 

$

192,419

 

15.5

%  

$

183,678

 

16.1

%  

$

8,741

 

4.8

%

Rehabilitation therapy services

 

 

21,687

 

7.6

%  

 

29,028

 

11.0

%  

 

(7,341)

 

(25.3)

%

Other services

 

 

3,591

 

6.3

%  

 

4,018

 

7.6

%  

 

(427)

 

(10.6)

%

Corporate and eliminations

 

 

(47,969)

 

 —

%  

 

(41,377)

 

 —

%  

 

(6,592)

 

15.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDAR

 

$

169,728

 

11.5

%  

$

175,347

 

13.1

%  

$

(5,619)

 

(3.2)

%

 

42


 

A summary of our unaudited condensed consolidating statement of operations follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 2016

 

 

    

 

 

    

Rehabilitation

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Inpatient

 

Therapy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

Services

 

Other Services

 

Corporate

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

1,242,431

 

$

285,112

 

$

56,524

 

$

102

 

$

(111,951)

 

$

1,472,218

 

Salaries, wages and benefits

 

 

588,902

 

 

240,436

 

 

38,379

 

 

 —

 

 

 —

 

 

867,717

 

Other operating expenses

 

 

438,699

 

 

20,341

 

 

14,008

 

 

 —

 

 

(111,951)

 

 

361,097

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

48,427

 

 

 —

 

 

48,427

 

Provision for losses on accounts receivable

 

 

23,345

 

 

2,648

 

 

546

 

 

(46)

 

 

 —

 

 

26,493

 

Lease expense

 

 

36,296

 

 

24

 

 

530

 

 

466

 

 

 —

 

 

37,316

 

Depreciation and amortization expense

 

 

53,839

 

 

3,120

 

 

314

 

 

4,492

 

 

 —

 

 

61,765

 

Interest expense

 

 

108,989

 

 

14

 

 

16

 

 

26,162

 

 

 —

 

 

135,181

 

Investment income

 

 

(458)

 

 

 —

 

 

 —

 

 

(23)

 

 

 —

 

 

(481)

 

Other loss

 

 

12

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

1,754

 

 

 —

 

 

1,754

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

1,626

 

 

 —

 

 

1,626

 

Equity in net (income) loss of unconsolidated affiliates

 

 

(476)

 

 

 —

 

 

 —

 

 

(636)

 

 

349

 

 

(763)

 

(Loss) income before income tax expense

 

 

(6,717)

 

 

18,529

 

 

2,731

 

 

(82,120)

 

 

(349)

 

 

(67,926)

 

Income tax (benefit) expense

 

 

(2,162)

 

 

 —

 

 

 —

 

 

5,226

 

 

 —

 

 

3,064

 

(Loss) income from continuing operations

 

$

(4,555)

 

$

18,529

 

$

2,731

 

$

(87,346)

 

$

(349)

 

$

(70,990)

 

 

 

43


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 2015

 

 

    

 

 

    

Rehabilitation

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Inpatient

 

Therapy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

Services

 

Other Services

 

Corporate

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Net revenues

 

$

1,141,318

 

$

263,051

 

$

52,336

 

$

210

 

$

(113,914)

 

$

1,343,001

 

Salaries, wages and benefits

 

 

542,692

 

 

214,797

 

 

33,244

 

 

 —

 

 

 —

 

 

790,733

 

Other operating expenses

 

 

396,542

 

 

15,399

 

 

14,533

 

 

 —

 

 

(113,913)

 

 

312,561

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

41,533

 

 

 —

 

 

41,533

 

Provision for losses on accounts receivable

 

 

19,073

 

 

3,827

 

 

541

 

 

(45)

 

 

 —

 

 

23,396

 

Lease expense

 

 

35,528

 

 

41

 

 

459

 

 

391

 

 

 —

 

 

36,419

 

Depreciation and amortization expense

 

 

48,225

 

 

2,867

 

 

362

 

 

8,479

 

 

 —

 

 

59,933

 

Interest expense

 

 

103,654

 

 

1

 

 

10

 

 

17,771

 

 

(123)

 

 

121,313

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

3,234

 

 

 —

 

 

3,234

 

Investment income

 

 

(358)

 

 

 —

 

 

 —

 

 

(181)

 

 

123

 

 

(416)

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

(7,611)

 

 

 —

 

 

(7,611)

 

Transaction costs

 

 

371

 

 

 —

 

 

 —

 

 

85,698

 

 

 —

 

 

86,069

 

Equity in net (income) loss of unconsolidated affiliates

 

 

(309)

 

 

 —

 

 

 —

 

 

(220)

 

 

376

 

 

(153)

 

(Loss) income before income tax benefit

 

 

(4,100)

 

 

26,119

 

 

3,187

 

 

(148,839)

 

 

(377)

 

 

(124,010)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(5,648)

 

 

 —

 

 

(5,648)

 

(Loss) income from continuing operations

 

$

(4,100)

 

$

26,119

 

$

3,187

 

$

(143,191)

 

$

(377)

 

$

(118,362)

 

 

Prior to February 1, 2015, our results of operations exclude the revenue and expenses of Skilled’s businesses.  For comparability, those revenue and expense variances attributed solely to the Combination of Skilled’s businesses with ours, commencing on February 1, 2015, will be identified in the discussion of the results of operations.  References to “legacy” businesses identify those businesses operating as either Skilled or Genesis, respectively, prior to the Combination.

 

On December 1, 2015, we acquired 15 skilled nursing facilities and entered into management agreements to manage five skilled nursing facilities from Revera Assisted Living, Inc. (Revera) for $206.0 million, financed through a $134.1 million bridge loan (Acquisition from Revera).  Prior to December 1, 2015, our results of operations exclude the revenue and expenses of the acquired Revera businesses.  For comparability, those revenue and expense variances attributed solely to the Acquisition from Revera, commencing on December 1, 2015, will be identified in the discussion of the results of operations. 

 

Other, less significant transactions which impact comparability are identified as acquired or under development for businesses which are growing period over period, or as divested for those businesses that we have closed or otherwise exited period over period. 

 

Net Revenues

 

Net revenues for the three months ended March 31, 2016 as compared with the three months ended March 31, 2015 increased by $129.2 million.  Of that increase, Skilled’s businesses contributed $61.9 million and the addition of Revera contributed $59.4 million.  The remaining increase of $7.9 million or 0.7% is primarily attributed to growth in our rehabilitation services business. 

 

Inpatient Services – Revenue increased $101.2 million, or 8.9%, in the three months ended March 31, 2016 as compared with the same period in 2015. Of this growth, $55.1 million is due to the Combination, $56.8 million is due to the Acquisition from Revera and $16.5 million is due to the acquisition or development of seven facilities, offset by

44


 

$18.8 million of revenue attributed to the divestiture of 26 underperforming facilities, including 18 assisted living facilities in Kansas sold January 1, 2016.  The remaining decrease of $8.4 million, or 0.7%, is due to a decline in the occupancy of legacy Genesis inpatient facilities, partially offset by increased payment rates.  We attribute the decline in census principally to the pressures of healthcare reforms largely driven by the requirements under the PPACA.

 

Rehabilitation Therapy Services – Revenue increased $21.5 million, or 13.7% comparing the three months ended March 31, 2016 with the same period in 2015.  The Combination and Acquisition from Revera combined to contribute $5.3 million of the revenue growth, while the legacy Genesis rehabilitation therapy services business revenue increased another $16.2 million, driven by new therapy contract revenue exceeding lost business contract revenue and partially offset with market pricing adjustments with intercompany contracts with Genesis skilled nursing facilities.

 

Other Services – Other services revenue increased $6.4 million, or 14.3% in the three months ended March 31, 2016 as compared with the same period in 2015. Of this increase, the Combination contributed $4.1 million through the hospice and home health businesses.  The remaining increase of $2.3 million or 5.1% was principally attributed to new business growth in our staffing services business line.

 

EBITDAR

 

EBITDAR for the three months ended March 31, 2016 decreased by $5.6 million, or 3.2% when compared with the same period in 2015.  Skilled’s businesses contributed $7.5 million to EBITDAR and the Acquisition from Revera contributed $6.8 million, each after an estimated overhead allocation of 2.5% of their respective revenues.  The remaining decrease of approximately $19.9 million or 11.4% is described further in our discussion below of segment results and corporate overhead. 

 

Inpatient Services – EBITDAR increased in the three months ended March 31, 2016 as compared with the same period in 2015, by $8.7 million, or 4.8%.  Of the increase, $6.7 million is attributed to the Combination, $7.3 million is due to the Acquisition from Revera, $3.1 million is due to the acquisition or development of seven facilities, and partially offset by $3.2 million for the losses attributed to the divestiture or closure of 26 underperforming facilities, including 18 assisted living facilities in Kansas sold January 1, 2016.  The remaining $5.2 million decrease is principally due to an increased level of provision for general and professional liability claims in the three months ended March 31, 2016.  The benefit of continued realization of cost reductions which we began implementing in early 2015 served to largely offset the decline in occupancy of legacy Genesis inpatient facilities in the three months ended March 31, 2016.

 

Rehabilitation Therapy Services – EBITDAR of the rehabilitation therapy segment decreased by $7.3 million or 25.3% comparing the three months ended March 31, 2016 with the same period in 2015.  The Combination and Acquisition from Revera contributed $2.1 million and $0.9 million, respectively, while the EBITDAR of the legacy Genesis rehabilitation therapy business EBITDAR for the three months ended March 31, 2016 decreased $10.3 million from the same period in 2015.  Market pricing adjustments and restructured respiratory therapy service delivery to our Genesis skilled nursing centers resulted in $7.7 million of the rehabilitation therapy services EBITDAR reduction and are included in the cost reductions noted in the Inpatient Services discussion above.  The remaining decrease of $2.6 million is principally due to the escalating startup costs of our China operations.  New therapy contracts exceeded lost therapy contracts and Therapist Efficiency improved from 69% to 70% in the three months ended March 31, 2016 compared with the same period in 2015.   

 

Other Services – EBITDAR decreased $0.4 million in the three months ended March 31, 2016 as compared with the same period in 2015.  The Combination contributed $0.2 million, principally through the addition of hospice and home health businesses offset by a $0.6 million decrease principally attributed to the staffing services businesses and the physician services business. 

 

Corporate and Eliminations — Corporate overhead costs increased $6.6 million, or 15.9%, in the three months ended March 31, 2016 as compared with the same period in 2015. This increase was largely due to the added overhead costs of Skilled and operating as a public company for the entire period.

 

45


 

Other Expense

 

The following discussion applies to the consolidated expense categories between consolidated EBITDAR 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 March 31, 2016 as compared with the same period in 2015. 

 

Lease expense — Lease expense represents the cash rents and non-cash adjustments required to account for operating leases. We have operating leases in each reportable segment, other services and corporate overhead, but the inpatient services business incurs the greatest proportion of this expense for those skilled nursing and assisted living facilities leases accounted for as operating leases.  Lease expense increased $0.9 million in the three months ended March 31, 2016 as compared with the same period in the prior year.  Of that increase, $2.1 million resulted from the Combination and $0.4 million resulted from one new operating lease, with the remaining decrease of $1.6 million principally due to our efforts to divest underperforming leased facilities.

 

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.  The majority of the $1.8 million increase in depreciation and amortization in the three months ended March 31, 2016 compared with the same period in the prior year is attributed to the Combination, the Acquisition from Revera and other acquisition and construction activities in 2015.

 

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 increased $13.9 million in the three months ended March 31, 2016 as compared with the same period in the prior year.  Of this increase, $3.4 million and $4.5 million are attributed to the debt assumed or issued in the Combination and Acquisition from Revera, respectively.  The remaining $6.0 million increase is primarily attributable to growth in interest pertaining to existing lease obligations and obligations incurred in connection with newly acquired or constructed facilities.

 

Skilled Healthcare and other loss contingency expense — For the three months ended March 31, 2016, we accrued $1.6 million for contingent liabilities.  We are engaged in discussions with representatives of the Department of Justice in an effort to reach mutually acceptable resolution of two investigations involving therapy matters and staffing matters and hospice litigation related to Skilled’s business prior to the Combination.  Additionally, we have one therapy matter under investigation relating to Sun Healthcare’s Sundance Therapy business prior to our acquisition of those businesses in 2012.  Discussions have progressed to a point where we believe it is appropriate to recognize an estimated loss contingency reserve relative to these matters.  Recognition of the loss contingency reserve is not an admission of liability or fault by us or any of our subsidiaries.  Because these discussions are ongoing, there can be no certainty about the timing or likelihood of a definitive resolution.  As these discussions proceed and additional information becomes available, the amount of the estimated loss contingency reserve may need to be increased or decreased to reflect this new information.  See Note 11 – “Commitments and Contingencies – Legal Proceedings.”

 

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 March 31, 2016 and 2015 were $1.8 million and $86.1 million, respectively, and of the amount in the 2015 period, the Combination contributed $84.7 million.

 

Income tax expense (benefit) — For the three months ended March 31, 2016, we recorded an income tax expense of $3.1 million from continuing operations representing an effective tax rate of (4.5)% compared to an income tax benefit of $5.6 million from continuing operations, representing an effective tax rate of 4.6% for the same period in 2015.  The 9.1% decrease in the effective tax rate is attributable to the full valuation allowance against our deferred tax assets, excluding the deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve.  On

46


 

December 31, 2015, in assessing the requirement for, and amount of, a valuation allowance in accordance with the “more likely than not” standard, we determined that we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets.  As of March 31, 2016, we have determined that the valuation allowance is still necessary.

 

Liquidity and Capital Resources

 

Our available cash is held in accounts at third-party financial institutions. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurances that access to our invested cash or cash equivalents will not be impacted by adverse conditions in the financial markets.

 

The following table presents selected data from our consolidated statements of cash flows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

    

2016

    

2015

    

 

Net cash provided by (used in) operating activities

 

$

24,446

 

$

(2,482)

 

 

Net cash provided by investing activities

 

 

58,117

 

 

6,290

 

 

Net cash (used in) provided by financing activities

 

 

(91,902)

 

 

4,352

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(9,339)

 

 

8,160

 

 

Beginning of period

 

 

61,543

 

 

87,548

 

 

End of period

 

$

52,204

 

$

95,708

 

 

 

Net cash provided by operating activities in the three months ended March 31, 2016 of $24.4 million was unfavorably impacted by funded transaction costs of approximately $1.8 million.  Adjusted for transaction costs, net cash provided by operating activities in the three months ended March 31, 2016 would have been approximately $26.2 million.  Net cash used in operating activities in the three months ended March 31, 2015 of $2.5 million was unfavorably impacted by funded transaction costs of approximately $29.5 million.  Adjusted for funded transaction costs, net cash provided by operating activities in the three months ended March 31, 2015 would have been $27.0 million.  The cash provided by operating activities before funded transaction costs in the 2016 period as compared to the 2015 period was relatively flat, with incremental growth of accounts receivable balances from the Acquisition from Revera and new rehabilitation services contracts through the three months ended March 31, 2016 being principally offset with the timing of payments for payroll and other accrued expenses.

 

Net cash provided by investing activities in the three months ended March 31, 2016 was $58.1 million, compared to a source of cash of $6.3 million in the three months ended March 31, 2015. The three months ended March 31, 2016, as compared with the same period in 2015, included the receipt of $67 million and $9.4 million for the sale of 18 assisted living facilities in Kansas and an office building in Albuquerque, New Mexico, respectively.  The three months ended March 31, 2015 included the receipt of $26.4 million of asset and investment in joint venture sale proceeds.  Routine capital expenditures for the three months ended March 31, 2016 exceeded the same period in the prior year by $9.5 million.  The remaining incremental source of cash from investing activities of $11.3 million in the three months ended March 31, 2016 as compared with the same period in 2015 is principally due to growth in invested premiums of our captive insurance companies. 

 

Net cash used in financing activities was $91.9 million in the three months ended March 31, 2016 compared to a source of $4.4 million in the three months ended March 31, 2015.  The net increase in cash used in financing activities of $96.3 million is principally attributed to debt extinguishments in the 2016 period exceeding proceeds of new borrowing activities.  In the three months ended March 31, 2016 we had net reduction of borrowings under the Revolving Credit Facilities of $30.0 million as compared with a $4.5 million reduction in the same period in 2015.  In the three months ended March 31, 2016 we refinanced 10 skilled nursing facilities with $67.9 million of HUD insured loans and used the proceeds to pay down partially the Real Estate Bridge Loans.  In the same period we used $54.2 million of the proceeds from the sale of 18 assisted living facilities in Kansas to also pay down partially the Real Estate Bridge Loans.  In the three months ended March 31, 2015 we used proceeds from the Skilled Real Estate Bridge Loan to repay $326.6 million of indebtedness assumed in the Combination and other transaction costs.  The remaining net source of cash of $16.8

47


 

million in the three months ended March 31, 2016 as compared to the same period in 2015 is principally due to the debt issuance costs in the 2015 period related to the Combination exceeding the debt issuance costs in the 2016 period related to the HUD financing activities.

 

Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility.

 

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 unrestricted cash and cash equivalents and our available borrowing capacity.

 

At March 31, 2016, we had cash and cash equivalents of $52.2 million and available borrowings under our revolving credit facilities of $142.9 million, after taking into account $68.2 million of letters of credit drawn against our revolving credit facilities. During the three months ended March 31, 2016, 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.

 

As of March 31, 2016, we have debt obligations that, as a result of scheduled maturity dates or maturity date acceleration features, have $581.1 million in debt obligations due in the next two years.  If we are unable to extend (or refinance, as applicable) any of our maturing credit facilities prior to their scheduled maturity or accelerated maturity dates, there could be a material and adverse impact on our liquidity and financial condition. In addition, even if we are able to extend or refinance our maturing debt credit facilities, the terms of the new financing may be less favorable to us than the terms of the existing financing.

Financing Activities

 

We are progressing on our near-term capital strengthening priorities to refinance our Real Estate Bridge Loans with lower cost 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 first quarter of 2016, we closed on 10 HUD insured loans totaling $67.9 million and closed an additional three HUD insured loans totaling $9.2 million subsequent to March 31, 2016.  Since the Combination, we have repaid or refinanced $131.3 million of Real Estate Bridge Loans with $362.8 million remaining outstanding. We expect to continue to seek refinancing opportunities for the Real Estate Bridge Loans with lower cost HUD insured loans or other permanent financing between now and the end of 2016.

 

In March 2016, we closed on the sale lease back of a corporate office building, generating $9.4 million of proceeds, which were used to pay down partially our Revolving Credit Facility debt.

 

Effective May 1, 2016, we completed the sale of our hospice and home health operations.  The operations were sold for $84 million, consisting of cash consideration of $72 million and a $12 million short-term note.  We used the cash proceeds to repay partially our Term Loan Facility maturing in December of 2017.  

 

Financial Covenants

 

The Revolving Credit Facilities, the Term Loan, the Skilled Real Estate Bridge Loan and the Revera Real Estate Bridge Loan (collectively, the Credit Facilities) each contain a number of restrictive covenants that, among other things, impose operating and financial restrictions on us.  The Credit Facilities also require us to meet defined financial covenants, including interest coverage ratio, a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio, all as defined in the applicable agreements.  The Credit Facilities also contain other customary covenants and events of default.  At March 31, 2016, we were in compliance with our debt covenants.  See Note 7 – “Long-Term Debt.”

48


 

 

Certain of our lease agreements contain a number of restrictive covenants that, among other things and subject to certain exceptions, impose operating and financial restrictions on us.  These leases also require us to meet defined financial covenants, including a minimum level of consolidated liquidity, a maximum consolidated net leverage ratio, and a minimum consolidated fixed charge coverage.  At March 31, 2016, we were in compliance with our lease covenants. See Note 8 – “Leases and Lease Commitments.”

 

The level of our funded indebtedness and the current operating environment has presented challenges as they relate to our ability to comply with the covenants in the agreements governing our indebtedness and leasing arrangements. At March 31, 2016, we were in compliance with all of our financial covenants under our debt and lease agreements. However, we anticipate that we are likely to breach certain financial covenants in future periods, which would require us to seek a waiver or amendment from our lenders and/or landlords. If we are unable to reach an agreement with our creditors or find acceptable alternative financing, it will lead to an event of default under the Credit Facilities and certain of our lease agreements.

 

We are actively engaged in discussions with new credit parties in an effort to refinance the Term Loan Facility maturing in December of 2017. We expect to use a combination of non-strategic asset sale proceeds, available borrowings under our revolving credit facility and an expected newly issued term loan currently being marketed.  We believe a successful refinancing of the Term Loan Facility will enable us to renegotiate financial covenants with our other lenders and landlords.  There can be no assurances that our efforts will be successful or that we will remain compliant with all financial covenants prior to completion of these efforts.

Off Balance Sheet Arrangements

 

We had outstanding letters of credit of $68.2 million under our letter of credit sub-facility on our revolving credit facilities as of March 31, 2016.  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 March 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

    

 

    

    

 

    

More than

 

 

 

Total

 

1 Yr.

 

2-3 Yrs.

 

4-5 Yrs.

 

5 Yrs.

 

Revolving credit facilities

 

$

384,188

 

$

13,353

 

$

26,707

 

$

344,128

 

$

 —

 

Term loan facility

 

 

261,531

 

 

34,575

 

 

226,956

 

 

 —

 

 

 —

 

Real estate bridge loans

 

 

428,066

 

 

41,735

 

 

386,331

 

 

 —

 

 

 —

 

HUD insured loans

 

 

281,550

 

 

8,532

 

 

17,621

 

 

17,621

 

 

237,776

 

Mortgages and other secured debt (recourse)

 

 

14,674

 

 

1,059

 

 

11,631

 

 

1,984

 

 

 —

 

Mortgages and other secured debt (non-recourse)

 

 

33,523

 

 

1,795

 

 

14,491

 

 

2,617

 

 

14,620

 

Financing obligations

 

 

11,312,501

 

 

277,805

 

 

579,652

 

 

613,255

 

 

9,841,789

 

Capital lease obligations

 

 

3,836,736

 

 

94,211

 

 

197,131

 

 

202,549

 

 

3,342,845

 

Operating lease obligations

 

 

907,200

 

 

141,560

 

 

270,981

 

 

255,069

 

 

239,590

 

 

 

$

17,459,969

 

$

614,625

 

$

1,731,501

 

$

1,437,223

 

$

13,676,620

 

 

 

 

49


 

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, Skilled Real Estate Bridge Loan, Revera Real Estate Bridge Loan and Revolving Credit Facilities expose us to variability in interest payments due to changes in interest rates.  As of March 31, 2016, there is no derivative financial instrument in place to limit that exposure.

 

The table below presents the principal amounts, weighted-average interest rates and fair values by year of expected maturity to evaluate Genesis’ expected cash flows and sensitivity to interest rate changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve months ended March 31, 

 

 

    

2017

    

2018

    

2019

    

2020

    

2021

    

Thereafter

    

Total

  

Fair Value

 

Fixed-rate debt

 

$

3,474

 

$

3,701

 

$

3,789

 

$

4,534

 

$

4,967

 

$

158,970

 

$

179,435

 

$

190,299

 

Average interest rate (1)

 

 

3.9

%  

 

3.9

%  

 

3.9

%  

 

3.8

%  

 

2.9

%  

 

3.8

%  

 

 

 

 

 

 

Variable-rate debt (2)

 

$

13,394

 

$

585,927

 

$

21,554

 

$

 —

 

$

333,000

 

$

 —

 

$

953,875

 

$

947,112

 

Average interest rate (1)

 

 

9.5

%  

 

9.6

%  

 

3.2

%  

 

 —

%  

 

3.8

%  

 

 —

%  

 

 

 

 

 

 

 


(1)

Based on one month LIBOR of 0.44% on March 31, 2016.

(2)

Excludes unamortized original issue discounts, debt premiums and debt issuance costs which amortize through interest expense on a non-cash basis over the life of the instrument.

 

The Revolving Credit Facilities consist of a senior secured, asset-based revolving credit facility of up to $550 million under three separate tranches:  Tranche A-1, Tranche A-2 and FILO Tranche.  Interest accrues at a per annum rate equal to either (x) a base rate (calculated as the highest of the (i) prime rate, (ii) the federal funds rate plus 3.00%, or (iii) LIBOR plus the excess of the applicable margin between LIBOR loans and base rate loans) plus an applicable margin or (y) LIBOR plus an applicable margin.  The applicable margin is based on the level of commitments for all three tranches, and in regards to LIBOR loans (i) for Tranche A-1 ranges from 3.25% to 2.75%; (ii) for Tranche A-2 ranges from 3.00% to 2.50%; and (iii) for FILO Tranche is 5.00%. The applicable margin with respect to base rate borrowings for Tranche A-1, Tranche A-2 and FILO were 2.25%, 2.00%, and 4.00%, respectively, at March 31, 2016. The applicable margin with respect to LIBOR borrowings for Tranche A-1, Tranche A-2 and FILO were 3.00%, 3.00%, and 5.00%, respectively, at March 31, 2016.

 

Borrowings under the Term Loan Facility bear interest at a rate per annum equal to the applicable margin plus, at our option, either (1) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowings, or (2) a base rate determined by reference to the highest of (a) the lender defined prime rate, (b) the federal funds rate effective plus one half of one percent and (c) LIBOR described in sub clause (1) plus 1.0%. LIBOR based loans are subject to an interest rate floor of 1.5% and base rate loans are subject to a floor of 2.5%. The applicable margin with respect to LIBOR borrowings was 8.5% at March 31, 2016.

 

Borrowings under the Skilled Real Estate Bridge Loan bear interest at a rate per annum equal to the sum of (1) LIBOR, defined as greater of (a) 0.50% per annum or (b) the one-month duration LIBOR for an amount comparable to loan amount according to a lender approved reference bank, (2) the applicable margin and (3) 675 basis points (BPS).  The applicable margin escalates every 90 days after the initial 149 days of the two year term.  The margin ranges from 0 BPS to 650 BPS in the initial term, 675 and up to 700 BPS if a second renewal term is opted for.  The applicable interest rate on this loan was 10.75% as of March 31, 2016.

50


 

 

Borrowings under the Revera Real Estate Bridge Loan bear interest at a rate per annum equal to the sum of (1) LIBOR, defined as the greater of (a) 0.50% per annum or (b) the one-month duration LIBOR for an amount comparable to the loan amount according to a lender-approved reference bank, (2) the applicable margin, (3) 675 BPS and (4) 25 BPS multiplied by the result of dividing the number of percentage points by which the loan-to-value ratio, defined as the ratio, expressed as a percentage, of (i) the outstanding principal balance to (ii) the total appraised value of the facilities as of the closing date, exceeds 75% by five.  The applicable margin escalates every 90 days after the initial 149 days of the two year term.  The margin ranges from 0 BPS to 650 BPS in the initial term and 675 to 700 BPS if a second renewal term is opted for.  The applicable interest rate on this loan was 8.00% as of March 31, 2016.

 

A 1% increase in the applicable interest rate on our variable-rate debt would result in an approximately $9.5 million increase in our annual interest expense.

 

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. Based on that evaluation, management concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2016 because of the outstanding material weakness in our internal control over financial reporting as discussed in more detail in our Form 10-K for the year ended December 31, 2015 under Part II, Item 9A. Management has begun implementation of the remediation plan described in our 10-K for the year ended December 31, 2015 and updated below to address this material weakness and is monitoring that implementation.

 

During the three months ended March 31, 2016, we continued to review the design of our controls, make adjustments and continued implementing controls to alleviate the noted control deficiencies. As part of the remediation process, we engaged a third party specialist to assess the segregation of duties control weakness and to assist in the design of the control remediation.  While significant progress was made to enhance our internal control over financial reporting relating to the previously reported material weaknesses, we are still in the process of implementing and testing these processes and procedures and additional time is required to complete implementation and to assess and ensure the sustainability of these procedures over a meaningful period of time.  We are unable at this time to estimate when the remediation effort will be completed. 

 

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.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred during the quarter covered that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

51


 

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

 

With the exception of the revision to an existing risk factor below, there have been no material changes to the risk factors disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 14, 2016.

 

Reforms to the U.S. healthcare system have imposed new requirements upon us.

PPACA and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act) included sweeping changes to how healthcare is paid for and furnished in the U.S. It has imposed new obligations on skilled nursing facilities, requiring them to disclose information regarding ownership, expenditures and certain other information. Moreover, the law requires skilled nursing facilities to submit electronically verifiable data on direct care staffing. CMS rules implementing these reporting requirements are in development with a target implementation date of July 1, 2016.

To address potential fraud and abuse in federal healthcare programs, including Medicare and Medicaid, PPACA includes provider screening and enhanced oversight periods for new providers and suppliers, as well as enhanced penalties for submitting false claims. It also provides funding for enhanced anti-fraud activities. PPACA imposes an enrollment moratoria in elevated risk areas by requiring providers and suppliers to establish compliance programs. PPACA also provides the federal government with expanded authority to suspend payment if a provider is investigated for allegations or issues of fraud. PPACA provides that Medicare and Medicaid payments may be suspended pending a “credible investigation of fraud,” unless the Secretary of Health and Human Services determines that good cause exists not to suspend payments. To the extent the Secretary applies this suspension of payments provision to one of our affiliated facilities for allegations of fraud, such a suspension could adversely affect our results of operations.

PPACA gave authority to the U.S. Department of Health and Human Services (HHS) to establish, test and evaluate alternative payment methodologies for Medicare services. Various payment and services models have been developed by the Centers for Medicare and Medicaid Innovations. Current models provide incentives for providers to coordinate patient care across the continuum and to be jointly accountable for an entire episode of care centered around a hospitalization.

PPACA attempts to improve the healthcare delivery system through incentives to enhance quality, improve beneficiary outcomes and increase value of care. One of these key delivery system reforms is the encouragement of ACOs. ACOs will facilitate coordination and cooperation among providers to improve the quality of care for Medicare beneficiaries and reduce unnecessary costs. Participating ACOs that meet specified quality performance standards will be eligible to receive a share of any savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a sufficient percentage below their specified benchmark amount. Quality performance standards will include measures in such categories as clinical processes and outcomes of care, patient experience and utilization of services.  Initiatives by managed care payors, conveners and referring acute care hospital systems to reduce lengths of stay and avoidable hospital readmissions and to divert referrals to home health or other community based care settings may have an adverse impact on our census and length of stays.  It is not currently possible to project if the impact of these initiatives will be temporary or permanent.

In addition, PPACA required HHS to develop a plan to implement a value-based purchasing program for Medicare payments to skilled nursing facilities. HHS delivered a report to Congress outlining its plans for implementing this value-based purchasing program. Based in part on the findings of the demonstration project, Congress, as part of the

52


 

Protecting Access to Medicare Act, enacted legislation directing CMS to implement a value-based purchasing requirement for skilled nursing facilities to be effective in 2018. Under this legislation, HHS is required to develop by October 1, 2016 measures and performance standards regarding preventable hospital readmissions from skilled nursing facilities.  Beginning October 1, 2018, HHS will withhold 2% of Medicare payments from all skilled nursing facilities and distribute this pool of payment to skilled nursing facilities as incentive payments for preventing readmissions to hospitals.  Measurement requirements were published in final fiscal year 2016 skilled nursing facility PPS rules released in late August 2015.  In addition to the requirements that are being implemented, legislation is pending in Congress to broaden the value-based purchasing requirements featuring a payment withholding designed to fund the program across all post-acute services.  We are unable to determine the degree to which our participation in innovative “pay for value” programs with other providers of service will affect our financial results versus traditional business models for the long-term care industry.

The provisions of PPACA discussed above are examples of some federal health reform provisions that we believe may have a material impact on the long-term care industry and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of PPACA. It is possible that these and other provisions of PPACA may be interpreted, clarified, or applied to our affiliated facilities or operating subsidiaries in a way that could have a material adverse impact on our results of operations.

We currently cannot predict what effect these changes will have on our business, including the demand for our services or the amount of reimbursement available for those services. However, it is possible these new laws may reduce reimbursement and adversely affect our business.

 

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

 

None.

 

Item 6. Exhibits

 

(a)Exhibits.

 

 

 

 

Number

 

Description

 

 

 

 

10.1

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and Daniel A. Hirschfeld

10.2

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and JoAnne Reifsnyder

10.3

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and Robert A. Reitz

53


 

10.4

Second Amended and Restated Revolving Credit Agreement, dated as of March 31, 2016, among certain borrower entities set forth therein, certain guarantor entities set forth therein, certain lender entities set forth therein, and Healthcare Financial Solutions, LLC, as administrative agent and collateral agent, regarding HUD centers

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

54


 

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:

May 10, 2016

By

/S/    GEORGE V. HAGER, JR.

 

 

 

George V. Hager, Jr.

 

 

 

Chief Executive Officer

 

 

 

 

Date:

May 10, 2016

By

/S/    THOMAS DIVITTORIO

 

 

 

Thomas DiVittorio

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer and Authorized Signatory)

 

55


 

EXHIBIT INDEX

 

 

 

 

Number

 

Description

 

 

 

 

10.1

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and Daniel A. Hirschfeld

10.2

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and JoAnne Reifsnyder

10.3

Employment Agreement dated as of February 2, 2015 by and between Genesis Administrative Services, LLC and Robert A. Reitz

10.4

Second Amended and Restated Revolving Credit Agreement, dated as of March 31, 2016, among certain borrower entities set forth therein, certain guarantor entities set forth therein, certain lender entities set forth therein, and Healthcare Financial Solutions, LLC, as administrative agent and collateral agent, regarding HUD centers

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

 

 

 

 

 

 

 

 

 

56