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EX-10.1 - EX-10.1 - Genesis Healthcare, Inc.gen-20170930ex10145b518.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 September 30, 2017.

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer  ☐

 

Accelerated filer  ☒

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

(do not check if smaller reporting company)

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 7, 2017, was:

Class A common stock, $0.001 par value – 94,100,738 shares

Class B common stock, $0.001 par value –      744,396 shares

Class C common stock, $0.001 par value – 61,561,393 shares

 

 


 

Genesis Healthcare, Inc.

 

Form 10-Q

Index

 

 

 

    

Page
Number

Part I. 

Financial Information

 

 

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

Consolidated Balance Sheets — September 30, 2017 and December 31, 2016

 

3

 

Consolidated Statements of Operations — Three and nine months ended September 30, 2017 and 2016

 

4

 

Consolidated Statements of Comprehensive Loss  — Three and nine months ended September 30, 2017 and 2016

 

5

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2017 and 2016

 

6

 

Notes to Unaudited Consolidated Financial Statements

 

7

 

 

 

 

Item 2. 

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

 

40

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

70

 

 

 

 

Item 4. 

Controls and Procedures

 

70

 

 

 

 

Part II. 

Other Information

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

71

 

 

 

 

Item 1A. 

Risk Factors

 

71

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

72

 

 

 

 

Item 3. 

Defaults Upon Senior Securities

 

72

 

 

 

 

Item 4. 

Mine Safety Disclosures

 

72

 

 

 

 

Item 5. 

Other Information

 

72

 

 

 

 

Item 6. 

Exhibits

 

73

 

 

 

 

Signatures 

 

74

 

 

 

 

 

 

 

 

 

 

 

 


 

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)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2017

 

2016

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

50,591

 

$

51,408

 

Restricted cash and investments in marketable securities

 

 

43,965

 

 

43,555

 

Accounts receivable, net of allowances for doubtful accounts of $267,321 and $218,383 at September 30, 2017 and December 31, 2016, respectively

 

 

774,052

 

 

832,109

 

Prepaid expenses

 

 

83,878

 

 

64,218

 

Other current assets

 

 

46,306

 

 

63,641

 

Assets held for sale

 

 

 —

 

 

4,056

 

Total current assets

 

 

998,792

 

 

1,058,987

 

Property and equipment, net of accumulated depreciation of $881,049 and $807,776 at September 30, 2017 and December 31, 2016, respectively

 

 

3,470,946

 

 

3,765,393

 

Restricted cash and investments in marketable securities

 

 

96,411

 

 

112,471

 

Other long-term assets

 

 

122,144

 

 

137,602

 

Deferred income taxes

 

 

5,754

 

 

6,107

 

Identifiable intangible assets, net of accumulated amortization of $84,073 and $91,155 at September 30, 2017 and December 31, 2016, respectively

 

 

147,239

 

 

175,566

 

Goodwill

 

 

85,642

 

 

440,712

 

Assets held for sale

 

 

 —

 

 

82,363

 

Total assets

 

$

4,926,928

 

$

5,779,201

 

Liabilities and Stockholders' Deficit:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

851,344

 

$

24,594

 

Capital lease obligations

 

 

949,050

 

 

1,886

 

Financing obligations

 

 

2,908,020

 

 

1,613

 

Accounts payable

 

 

241,145

 

 

258,616

 

Accrued expenses

 

 

220,376

 

 

215,457

 

Accrued compensation

 

 

163,727

 

 

181,841

 

Self-insurance reserves

 

 

168,933

 

 

172,565

 

Current portion of liabilities held for sale

 

 

 —

 

 

988

 

Total current liabilities

 

 

5,502,595

 

 

857,560

 

Long-term debt

 

 

284,014

 

 

1,146,550

 

Capital lease obligations

 

 

45,974

 

 

997,340

 

Financing obligations

 

 

8,711

 

 

2,867,534

 

Deferred income taxes

 

 

25,725

 

 

22,354

 

Self-insurance reserves

 

 

454,774

 

 

445,559

 

Liabilities held for sale

 

 

 —

 

 

69,057

 

Other long-term liabilities

 

 

133,854

 

 

103,435

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Class A common stock, (par $0.001, 1,000,000,000 shares authorized, issued and outstanding -  93,976,674 and 75,187,388 at September 30, 2017 and December 31, 2016, respectively)

 

 

94

 

 

75

 

Class B common stock, (par $0.001, 20,000,000 shares authorized, issued and outstanding - 744,396 and 15,495,019 at September 30, 2017 and December 31, 2016, respectively)

 

 

 1

 

 

16

 

Class C common stock, (par $0.001, 150,000,000 shares authorized, issued and outstanding - 61,600,511 and 63,849,380 at September 30, 2017 and December 31, 2016, respectively)

 

 

61

 

 

64

 

Additional paid-in-capital

 

 

296,378

 

 

305,358

 

Accumulated deficit

 

 

(1,285,356)

 

 

(795,615)

 

Accumulated other comprehensive loss

 

 

(134)

 

 

(221)

 

Total stockholders’ deficit before noncontrolling interests

 

 

(988,956)

 

 

(490,323)

 

Noncontrolling interests

 

 

(539,763)

 

 

(239,865)

 

Total stockholders' deficit

 

 

(1,528,719)

 

 

(730,188)

 

Total liabilities and stockholders’ deficit

 

$

4,926,928

 

$

5,779,201

 

 

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 September 30, 

 

Nine months ended September 30, 

 

    

2017

    

2016

    

2017

    

2016

Net revenues

 

$

1,315,452

 

$

1,418,994

 

$

4,045,860

 

$

4,329,570

Salaries, wages and benefits

 

 

739,404

 

 

834,414

 

 

2,303,300

 

 

2,534,824

Other operating expenses

 

 

375,587

 

 

350,828

 

 

1,090,139

 

 

1,062,086

General and administrative costs

 

 

40,732

 

 

46,545

 

 

127,041

 

 

139,999

Provision for losses on accounts receivable

 

 

25,187

 

 

25,602

 

 

72,700

 

 

81,776

Lease expense

 

 

38,670

 

 

35,512

 

 

113,004

 

 

109,796

Depreciation and amortization expense

 

 

59,390

 

 

61,104

 

 

183,986

 

 

190,822

Interest expense

 

 

124,431

 

 

131,812

 

 

373,473

 

 

400,853

Loss on early extinguishment of debt

 

 

 —

 

 

15,363

 

 

2,301

 

 

15,830

Investment income

 

 

(1,596)

 

 

(934)

 

 

(4,097)

 

 

(2,073)

Other loss (income)

 

 

2,379

 

 

(5,173)

 

 

15,602

 

 

(48,084)

Transaction costs

 

 

1,056

 

 

3,057

 

 

7,862

 

 

9,804

Customer receivership

 

 

297

 

 

 —

 

 

35,864

 

 

 —

Long-lived asset impairments

 

 

163,364

 

 

 —

 

 

163,364

 

 

 —

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

360,046

 

 

 —

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

15,192

Equity in net income of unconsolidated affiliates

 

 

(69)

 

 

(893)

 

 

(291)

 

 

(2,153)

Loss before income tax expense (benefit)

 

 

(613,426)

 

 

(78,243)

 

 

(798,434)

 

 

(179,102)

Income tax expense (benefit)

 

 

1,596

 

 

(25,888)

 

 

5,683

 

 

(19,738)

Loss from continuing operations

 

 

(615,022)

 

 

(52,355)

 

 

(804,117)

 

 

(159,364)

Loss from discontinued operations, net of taxes

 

 

(2)

 

 

(24)

 

 

(70)

 

 

(1)

Net loss

 

 

(615,024)

 

 

(52,379)

 

 

(804,187)

 

 

(159,365)

Less net loss attributable to noncontrolling interests

 

 

241,200

 

 

31,921

 

 

314,446

 

 

72,895

Net loss attributable to Genesis Healthcare, Inc.

 

$

(373,824)

 

$

(20,458)

 

$

(489,741)

 

$

(86,470)

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

94,940

 

 

90,226

 

 

93,376

 

 

89,617

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(3.94)

 

$

(0.23)

 

$

(5.24)

 

$

(0.96)

Loss from discontinued operations, net of taxes

 

 

(0.00)

 

 

(0.00)

 

 

(0.00)

 

 

(0.00)

Net loss attributable to Genesis Healthcare, Inc.

 

$

(3.94)

 

$

(0.23)

 

$

(5.24)

 

$

(0.96)

 

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 September 30, 

 

Nine months ended September 30, 

 

    

2017

    

2016

    

2017

    

2016

Net loss

 

$

(615,024)

 

$

(52,379)

 

$

(804,187)

 

$

(159,365)

Net unrealized gain (loss) on marketable securities, net of tax

 

 

134

 

 

(298)

 

 

160

 

 

730

Comprehensive loss

 

 

(614,890)

 

 

(52,677)

 

 

(804,027)

 

 

(158,635)

Less: comprehensive loss attributable to noncontrolling interests

 

 

241,147

 

 

31,921

 

 

314,373

 

 

72,464

Comprehensive loss attributable to Genesis Healthcare, Inc.

 

$

(373,743)

 

$

(20,756)

 

$

(489,654)

 

$

(86,171)

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

5


 

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(804,187)

 

$

(159,365)

 

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

 

 

 

 

 

 

 

Non-cash interest and leasing arrangements, net

 

 

51,049

 

 

70,228

 

Other non-cash charges and gains, net

 

 

15,602

 

 

(48,084)

 

Share based compensation

 

 

7,206

 

 

6,759

 

Depreciation and amortization

 

 

183,986

 

 

190,822

 

Provision for losses on accounts receivable

 

 

72,700

 

 

81,776

 

Equity in net income of unconsolidated affiliates

 

 

(291)

 

 

(2,153)

 

Provision for deferred taxes

 

 

3,658

 

 

(21,957)

 

Customer receivership

 

 

35,864

 

 

 —

 

Long-lived asset impairments

 

 

163,364

 

 

 —

 

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

Loss on early extinguishment of debt

 

 

2,301

 

 

12,714

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(52,572)

 

 

(136,383)

 

Accounts payable and other accrued expenses and other

 

 

28,632

 

 

40,945

 

Net cash provided by operating activities

 

 

67,358

 

 

35,302

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(48,465)

 

 

(70,790)

 

Purchases of marketable securities

 

 

(22,671)

 

 

(38,845)

 

Proceeds on maturity or sale of marketable securities

 

 

46,210

 

 

53,014

 

Net change in restricted cash and equivalents

 

 

(4,497)

 

 

20,984

 

Purchases of inpatient assets, net of cash acquired

 

 

 —

 

 

(108,299)

 

Sales of assets

 

 

79,307

 

 

149,398

 

Other, net

 

 

(484)

 

 

(4,500)

 

Net cash provided by investing activities

 

 

49,400

 

 

962

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

478,000

 

 

662,000

 

Repayments under revolving credit facility

 

 

(509,650)

 

 

(611,000)

 

Proceeds from issuance of long-term debt

 

 

23,872

 

 

354,137

 

Proceeds from tenant improvement draws under lease arrangements

 

 

6,083

 

 

1,157

 

Repayment of long-term debt

 

 

(109,798)

 

 

(436,923)

 

Debt issuance costs

 

 

(4,402)

 

 

(12,441)

 

Distributions to noncontrolling interests and stockholders

 

 

(1,680)

 

 

(897)

 

Net cash used in financing activities

 

 

(117,575)

 

 

(43,967)

 

Net decrease in cash and cash equivalents

 

 

(817)

 

 

(7,703)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

 

51,408

 

 

61,543

 

End of period

 

$

50,591

 

$

53,840

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

325,229

 

$

333,509

 

Net taxes refunded

 

 

(1,810)

 

 

(9,777)

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Capital leases

 

$

(14,909)

 

$

(49,622)

 

Financing obligations

 

 

18,279

 

 

28,933

 

 

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

 

Company History

 

Genesis Healthcare, Inc., a Delaware corporation, was incorporated in October 2005 under the name of SHG Holding Solutions, Inc., and subsequently changed its name to Skilled Healthcare Group, Inc. (Skilled).  On February 2, 2015, Skilled combined its businesses and operations (the Combination) with FC-GEN Operations Investment, LLC, a Delaware limited liability company (FC-GEN), pursuant to a Purchase and Contribution Agreement dated August 18, 2014. In connection with the Combination, Skilled changed its name to Genesis Healthcare, Inc.

 

Effective December 1, 2012, FC-GEN completed the acquisition of Sun Healthcare Group, Inc. (Sun Healthcare) and its subsidiaries.

 

Description of Business

 

Genesis Healthcare, Inc. is a healthcare services company that through its subsidiaries (collectively, the Company or Genesis) owns and operates skilled nursing facilities, assisted/senior living facilities and a rehabilitation therapy business.  The Company has an administrative services company that provides a full complement of administrative and consultative services that allows its affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. At September 30, 2017, the Company provides inpatient services through 472 skilled nursing, assisted/senior living and behavioral health centers located in 30 states.  Revenues of the Company’s owned, leased and otherwise consolidated inpatient businesses constitute approximately 86% of its revenues.

 

The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy.  These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others.  Recently the Company has expanded its delivery model for providing rehabilitation services to community-based and at-home settings, as well as internationally in China.  After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 11% of the Company’s revenues.

 

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

 

Basis of Presentation

 

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

 

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

 

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative

7


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

assessment of power and economics that considers which entity has the power to direct the activities that “most significantly impact” the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's composition of variable interest entities was not material at September 30, 2017.

 

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, 2016 filed with the U.S. Securities and Exchange Commission (the SEC) on Form 10-K on March 6, 2017.

 

Certain prior year disclosure amounts have been reclassified to conform to current period presentation.

 

Going Concern Considerations

 

The accompanying unaudited financial statements have been prepared on the basis the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date the Company’s financial statements were issued (November 8, 2017). Management considered the recent results of operations as well as the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due before November 8, 2018.

 

The Company’s results of operations have been negatively impacted by the persistent pressure of healthcare reforms enacted in recent years.  This challenging operating environment has been most acute in the Company’s inpatient segment, but also has had a detrimental effect on the Company’s rehabilitation therapy segment and its customers.  In recent years, the Company has implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment.  These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments accelerated in the third quarter of 2017.  These factors caused the Company to be unable to comply with certain financial covenants at September 30, 2017 under the Revolving Credit Facilities, the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements and other agreements.   The Company has received waivers from the parties to the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements at September 30, 2017.  The Company is engaged in discussions with its counterparties to the Revolving Credit Facilities to secure a 90-day forbearance agreement through late January 2018.  

 

The Company’s ability to service its financial obligations, in addition to its ability to comply with the financial and restrictive covenants contained in the major agreements and other agreements, is dependent upon, among other things, its ability to attain a sustainable capital structure and its future performance which is subject to financial, economic, competitive, regulatory and other factors.  Many of these factors are beyond the Company’s control.  As currently structured, it is unlikely that the Company will be able to generate sufficient cash flow to cover required financial obligations, including its rent obligations, its debt service obligations and other obligations due to third parties.

 

The Company and its counterparties to the Restructuring Plans, as defined in Note 16 – “Subsequent Events – Restructuring Plans,” have entered into these preliminary and non-binding agreements in an effort to attain a sustainable capital structure for the Company.  The Company believes that it is in the best interest of all creditors to grant necessary

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

waivers or reach negotiated settlements to enable the Company to continue as a going concern while it works with its counterparties to the Restructuring Plans to strengthen significantly its capital structure.  However, there can be no assurance that timely and adequate waivers will be received in future periods or such settlements reached.  If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not timely obtained, the defaults can cause acceleration of the Company’s financial obligations under certain of its agreements, which the Company may not be in a position to satisfy.  Accordingly, the Company has classified the obligations of the effected agreements as current liabilities in its consolidated balance sheets as of September 30, 2017.

 

In the event of a failure to obtain necessary and timely waivers or otherwise achieve the fixed charge reductions contained in the Restructuring Plans, the Company may be forced to seek reorganization under the U.S. Bankruptcy Code.  See Part II. Item 1A, “Risk Factors.”

 

The existence of these factors raises substantial doubt about the Company’s ability to continue as a going concern.

 

Recently Adopted Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU)  No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company adopted ASU 2016-09 effective January 1, 2017.  Its adoption had no material impact on the Company’s consolidated financial condition and results of operations.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which serves to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  The adoption of ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company adopted ASU 2017-04 when it performed its annual goodwill impairment test at September 30, 2017.  The adoption of ASU 2017-04 eliminated Step 2 of the goodwill impairment test.  See Note 15 – “Asset Impairment Charges.”

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which serves to supersede most existing revenue recognition guidance, including guidance specific to the healthcare industry.  The FASB later issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations, in March 2016, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, in April 2016, ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients, in May 2016, and ASU 2016-20,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, in December 2016, all of which further clarified aspects of Topic 606. The standard provides a principles-based framework for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU will be effective for annual and interim reporting periods beginning after December 15, 2017.  The standard may be applied retrospectively to each period presented (full retrospective method) or retrospectively with the cumulative effect recognized in beginning retained earnings as of the date of adoption (modified retrospective method). The Company will adopt the requirements of this standard effective January 1, 2018 using the modified retrospective method.  A cross-functional implementation team has been established consisting of representatives from all of our operating segments. The implementation team is working to analyze the impact of the standard on the Company’s contract portfolio by reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to revenue contracts. In addition, the Company is in the process of identifying and implementing the appropriate changes to business processes and controls to support recognition and disclosure under the new standard.  The Company expects to apply the portfolio approach practical expedient and is in the process of reviewing its revenue sources and evaluating the appropriate distribution of patient accounts into portfolios with similar collection experience that, when evaluated for collectibility, will result in a materially consistent revenue amount for such portfolios as if each patient account was evaluated on an individual contract basis. The Company is also evaluating the existence of variable consideration in the form of various reimbursement programs, such as bundled payment initiatives, which could have an impact on the revenue recognized.  The Company expects that the adoption of the new standard will impact amounts presented in certain categories on its consolidated statements of operations, as upon adoption, certain amounts currently classified as bad debt expense may be reflected as implicit price concessions, and therefore an adjustment to net revenues. The Company is still evaluating the impact of the standard on its consolidated financial position, results of operations and cash flows.  The Company is actively monitoring various industry publications, which continue to evolve.  As such, any conclusions reached in the final industry guidance that are inconsistent with the Company's current assessment could result in revisions to the Company's expectations regarding the new standard’s impact on its consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which is intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values; eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value; and requires separate presentation of financial assets and financial liabilities by measurement category.  The new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated financial condition and results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. ASU 2016-02 must be adopted using a modified retrospective transition. The adoption of ASU 2016-02 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 August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which addresses how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted.  The adoption of  ASU 2016-15 is not expected to have a material impact on the Company’s consolidated statements of cash flows.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  The adoption of ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The adoption of  ASU 2016-18 is not expected to have a material impact on the Company’s consolidated statements of cash flows.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combination (805): Clarifying the Definition of a Business (ASU 2017-01), which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted in certain circumstances.  The Company does not expect the adoption of ASU 2017-01 to have a material impact 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 and nine months ended September 30, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended September 30, 

 

Nine months ended September 30, 

 

    

2017

    

2016

    

2017

    

2016

Medicare

 

22

%  

 

24

%  

 

23

%  

 

25

%  

Medicaid

 

57

%  

 

55

%  

 

56

%  

 

54

%  

Insurance

 

12

%  

 

11

%  

 

12

%  

 

11

%  

Private and other

 

 9

%  

 

10

%  

 

 9

%  

 

10

%  

Total

 

100

%  

 

100

%  

 

100

%  

 

100

%  

 

The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of inpatient facilities, the mix of patients and the rates of reimbursement among payors. 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Likewise, payment for ancillary medical services, including services provided by the Company’s rehabilitation therapy services business, varies based upon the type of payor and payment methodologies.  Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect the Company’s profitability.

 

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

 

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

 

Concentration of Credit Risk

 

The Company is exposed to the credit risk of its third-party customers, many of whom are in similar lines of business as the Company and are exposed to the same systemic industry risks of operations as the Company, resulting in a concentration of risk.  These include organizations that utilize the Company’s rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in regulatory and systemic industry conditions. 

 

Management assesses its exposure to loss on accounts at the customer level.  The greatest concentration of risk exists in the Company’s rehabilitation services business where it has over 200 distinct customers, many being chain operators with more than one location.  The four largest customers of the Company’s rehabilitation services business comprise $108.7 million, approximately 67%, of the outstanding contract receivables in the rehabilitation services business at September 30, 2017.  One customer, which is a related party of the Company, comprises $83.2 million, approximately 52%, of the outstanding contract receivables in the rehabilitation services business at September 30, 2017.  See Note 14 – “Related Party Transactions.”    An adverse event impacting the solvency of any one or several of these large customers resulting in their insolvency or other economic distress would have a material impact on the Company. 

 

In July 2017, a significant customer of the Company’s rehabilitation therapy services business filed for receivership. This customer operated 65 skilled nursing facilities in six states at the time of the filing.  The Company has recorded a $35.6 million non-cash impairment charge in the nine months ended September 30, 2017 and separately classified the charge in the line item “customer receivership” in the unaudited consolidated statements of operations.  In

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

the three and nine months ended September 30, 2017, the Company recognized revenues of $8.8 million and $27.6 million, respectively, for the customer in receivership compared to $9.5 million and $29.8 million, respectively, for the same periods in the prior year.  In the three and nine months ended September 30, 2017, the Company recognized income from continuing operations of $1.2 million and $4.2 million, respectively, for the customer in receivership compared to $1.4 million and $5.1 million, respectively, for the same periods in the prior year. 

 

In September 2017, another customer of the Company’s rehabilitation services business filed for receivership.  The Company, however, only provided services to one of the skilled nursing facilities included in the receivership filing.  The Company recorded a non-cash customer receivership charge of $0.3 million in the three months ended September 30, 2017.

   

The Company’s business is subject to a number of other known and unknown risks and uncertainties, which are discussed in Part II. Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the SEC on March 6, 2017, and in the Company’s Quarterly Reports on Form 10-Q, including the risk factors discussed herein in Part II. Item 1A.

 

(3)   Significant Transactions and Events

 

Skilled Nursing Facility Divestitures

 

The Company divested or closed 28 skilled nursing facilities in the nine months ended September 30, 2017. 

 

One skilled nursing facility located in California was closed on September 28, 2017. The skilled nursing facility remains subject to a master lease agreement and had annual revenue of $6.9 million and pre-tax net loss of $1.6 million.  The Company recognized a loss of $0.5 million.

 

One skilled nursing facility located in Colorado was divested on July 10, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $5.7 million and pre-tax net loss of $2.2 million.  The Company recognized a loss of $0.5 million.

 

One skilled nursing facility located in North Carolina was divested on June 1, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $6.4 million and pre-tax net loss of $1.0 million.  The Company recognized a loss of $0.5 million.

 

Eighteen skilled nursing facilities (16 owned and 2 leased) located in Kansas, Missouri, Nebraska and Iowa were divested on April 1, 2017.  The 18 skilled nursing facilities had annual revenue of $110.1 million, pre-tax net loss of $10.7 million and total assets of $91.6 million.  Sale proceeds of approximately $80 million, net of transaction costs, were used principally to repay the indebtedness of the skilled nursing facilities.  The Company recognized a loss of $6.3 million, which is included in other loss (income) on the consolidated statements of operations.  The 16 owned skilled nursing facilities qualified and were presented as assets held for sale at December 31, 2016.  One of the leased skilled nursing facilities was subleased to a new operator resulting in a loss associated with a cease to use asset of $4.1 million.

 

One skilled nursing facility located in Tennessee was divested on April 1, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $7.4 million and pre-tax net income of $0.5 million.  The Company recognized a loss of $0.7 million.

 

Four skilled nursing facilities located in Massachusetts were subject to a master lease agreement and were divested on March 14, 2017.  These facilities, along with two other facilities that were divested previously and subleased to a third-party operator, were sold and terminated from the master lease resulting in an annual rent credit of $1.2 million.  The master lease termination resulted in a capital lease net asset and obligation write-down of $14.9 million.  The four

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

skilled nursing facilities had annual revenue of $26.7 million and pre-tax net income of $1.2 million. The Company recognized a loss of $1.4 million.

 

Two skilled nursing facilities located in Georgia were divested on February 1, 2017 at the expiration of their respective lease terms.  The two skilled nursing facilities had annual revenue of $10.6 million and pre-tax net loss of $0.4 million.  The Company recognized a loss of $0.5 million.

 

Losses are presented in other loss (income) on the consolidated statements of operations.

 

HUD Financings

 

In the nine months ended September 30, 2017, the Company completed the financings of three skilled nursing facilities with the U.S. Department of Housing and Urban Development (HUD) insured loans.  The total loan amount of the three financings was $23.9 million.  Proceeds from the financings along with other cash on hand was used to partially pay down a Real Estate Bridge Loan by $25.1 million. See Note 8 – “Long-Term Debt – Real Estate Bridge Loans” and Long-Term Debt  – HUD Insured Loans.” 

 

Dining and Nutrition Partnership

 

In April 2017, the Company entered into a strategic dining and nutrition partnership to further leverage its national platforms, process expertise and technology.  The relationship, which is expected to be accretive to the Company, will provide additional liquidity, cost efficiency and enhanced operational performance.

 

(4)Loss Per Share

 

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

 

Basic EPS was computed by dividing net loss by the weighted-average number of outstanding common shares for the period. Diluted EPS is computed by dividing net loss plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding common shares after giving effect to all potential dilutive common shares.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per common share follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

  

2017

  

2016

    

2017

    

2016

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(615,022)

 

$

(52,355)

 

$

(804,117)

 

$

(159,364)

Less: Net loss attributable to noncontrolling interests

 

 

(241,200)

 

 

(31,921)

 

 

(314,446)

 

 

(72,895)

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(373,822)

 

$

(20,434)

 

$

(489,671)

 

$

(86,469)

Loss from discontinued operations, net of taxes

 

 

(2)

 

 

(24)

 

 

(70)

 

 

(1)

Net loss attributable to Genesis Healthcare, Inc.

 

$

(373,824)

 

$

(20,458)

 

$

(489,741)

 

$

(86,470)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

94,940

 

 

90,226

 

 

93,376

 

 

89,617

Basic and diluted net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to Genesis Healthcare, Inc.

 

$

(3.94)

 

$

(0.23)

 

$

(5.24)

 

$

(0.96)

Loss from discontinued operations, net of taxes

 

 

(0.00)

 

 

(0.00)

 

 

(0.00)

 

 

(0.00)

Net loss attributable to Genesis Healthcare, Inc.

 

$

(3.94)

 

$

(0.23)

 

$

(5.24)

 

$

(0.96)

 

The following were excluded from net loss attributable to Genesis Healthcare, Inc. and the weighted-average diluted shares computation for the three and nine months ended September 30, 2017 and 2016, as their inclusion would have been anti-dilutive (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

  

2017

  

2016

  

2017

  

2016

 

 

Net loss

 

 

 

Net loss

 

 

 

Net loss

 

 

 

Net loss

 

 

 

 

attributable to

 

 

 

attributable to

 

 

 

attributable to

 

 

 

attributable to

 

 

 

 

Genesis

 

Anti-dilutive

 

Genesis

 

Anti-dilutive

 

Genesis

 

Anti-dilutive

 

Genesis

 

Anti-dilutive

 

  

Healthcare, Inc.

  

shares

  

Healthcare, Inc.

  

shares

  

Healthcare, Inc.

  

shares

  

Healthcare, Inc.

  

shares

Exchange of restricted stock units of noncontrolling interests

 

$

(242,806)

 

61,692

 

$

(26,959)

 

64,391

    

$

(319,784)

 

62,108

 

$

(58,465)

 

64,437

Employee and director unvested restricted stock units

 

 

 —

 

40

 

 

 —

 

 —

 

 

 —

 

988

 

 

 —

 

 —

Convertible note

 

 

113

 

3,000

 

 

 —

 

 —

 

 

335

 

3,000

 

 

 —

 

 —

 

 

The combined impact of the assumed conversion to common stock and related tax implications attributable to the noncontrolling interest, the grants under the 2015 Omnibus Equity Incentive Plan, and the convertible note are anti-dilutive to EPS because the Company is in a net loss position for the three and nine months ended September 30, 2017 and 2016. As of September 30, 2017, there were 61,600,511 units attributable to the noncontrolling interests outstanding.  In addition to the outstanding units attributable to the noncontrolling interests, the conversion of all of those units will result in the issuance of an incremental 10,726 shares of Class A common stock. 

   

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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.

 

A summary of the Company’s segmented revenues follows (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

 

 

 

 

 

2017

 

2016

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

1,103,554

 

83.8

%  

$

1,192,498

 

84.0

%  

$

(88,944)

 

(7.5)

%

Assisted/Senior living facilities

 

 

24,185

 

1.8

%  

 

29,423

 

2.1

%  

 

(5,238)

 

(17.8)

%

Administration of third party facilities

 

 

2,266

 

0.2

%  

 

2,659

 

0.2

%  

 

(393)

 

(14.8)

%

Elimination of administrative services

 

 

(370)

 

 —

%  

 

(340)

 

 —

%  

 

(30)

 

8.8

%

Inpatient services, net

 

 

1,129,635

 

85.8

%  

 

1,224,240

 

86.3

%  

 

(94,605)

 

(7.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

244,471

 

18.6

%  

 

261,543

 

18.4

%  

 

(17,072)

 

(6.5)

%

Elimination intersegment rehabilitation therapy services

 

 

(92,573)

 

(7.0)

%  

 

(101,156)

 

(7.1)

%  

 

8,583

 

(8.5)

%

Third party rehabilitation therapy services

 

 

151,898

 

11.6

%  

 

160,387

 

11.3

%  

 

(8,489)

 

(5.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

42,901

 

3.3

%  

 

40,376

 

2.8

%  

 

2,525

 

6.3

%

Elimination intersegment other services

 

 

(8,982)

 

(0.7)

%  

 

(6,009)

 

(0.4)

%  

 

(2,973)

 

49.5

%

Third party other services

 

 

 33,919

 

2.6

%  

 

34,367

 

2.4

%  

 

(448)

 

(1.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,315,452

 

100.0

%  

$

1,418,994

 

100.0

%  

$

(103,542)

 

(7.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

 

 

2017

 

2016

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

3,404,181

 

84.0

%  

$

3,595,258

 

82.9

%  

$

(191,077)

 

(5.3)

%

Assisted/Senior living facilities

 

 

72,262

 

1.8

%  

 

90,772

 

2.1

%  

 

(18,510)

 

(20.4)

%

Administration of third party facilities

 

 

6,841

 

0.2

%  

 

8,608

 

0.2

%  

 

(1,767)

 

(20.5)

%

Elimination of administrative services

 

 

(1,139)

 

 —

%  

 

(1,077)

 

 —

%  

 

(62)

 

5.8

%

Inpatient services, net

 

 

3,482,145

 

86.0

%  

 

3,693,561

 

85.2

%  

 

(211,416)

 

(5.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

743,605

 

18.4

%  

 

821,704

 

19.1

%  

 

(78,099)

 

(9.5)

%

Elimination intersegment rehabilitation therapy services

 

 

(287,599)

 

(7.1)

%  

 

(311,060)

 

(7.2)

%  

 

23,461

 

(7.5)

%

Third party rehabilitation therapy services

 

 

456,006

 

11.3

%  

 

510,644

 

11.9

%  

 

(54,638)

 

(10.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

133,168

 

3.3

%  

 

142,336

 

3.3

%  

 

(9,168)

 

(6.4)

%

Elimination intersegment other services

 

 

(25,459)

 

(0.6)

%  

 

(16,971)

 

(0.4)

%  

 

(8,488)

 

50.0

%

Third party other services

 

 

 107,709

 

2.7

%  

 

125,365

 

2.9

%  

 

(17,656)

 

(14.1)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

4,045,860

 

100.0

%  

$

4,329,570

 

100.0

%  

$

(283,710)

 

(6.6)

%

16


 

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 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

 

 

 

Three months ended September 30, 2017

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

Services

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

Net revenues

 

$

1,130,005

 

$

244,471

 

$

42,778

 

$

123

 

$

(101,925)

 

$

1,315,452

 

Salaries, wages and benefits

 

 

507,075

 

 

205,232

 

 

27,097

 

 

 —

 

 

 —

 

 

739,404

 

Other operating expenses

 

 

442,816

 

 

19,455

 

 

15,242

 

 

 —

 

 

(101,926)

 

 

375,587

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

40,732

 

 

 —

 

 

40,732

 

Provision for losses on accounts receivable

 

 

22,078

 

 

1,974

 

 

447

 

 

688

 

 

 —

 

 

25,187

 

Lease expense

 

 

37,895

 

 

(14)

 

 

302

 

 

487

 

 

 —

 

 

38,670

 

Depreciation and amortization expense

 

 

51,666

 

 

3,497

 

 

167

 

 

4,060

 

 

 —

 

 

59,390

 

Interest expense

 

 

103,306

 

 

14

 

 

 9

 

 

21,102

 

 

 —

 

 

124,431

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(1,596)

 

 

 —

 

 

(1,596)

 

Other loss

 

 

2,379

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,379

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

1,056

 

 

 —

 

 

1,056

 

Customer receivership

 

 

 —

 

 

297

 

 

 —

 

 

 —

 

 

 —

 

 

297

 

Long-lived asset impairments

 

 

161,483

 

 

1,881

 

 

 —

 

 

 —

 

 

 —

 

 

163,364

 

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

360,046

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(571)

 

 

502

 

 

(69)

 

(Loss) income before income tax benefit

 

 

(558,739)

 

 

12,135

 

 

(486)

 

 

(65,835)

 

 

(501)

 

 

(613,426)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

1,596

 

 

 —

 

 

1,596

 

(Loss) income from continuing operations

 

$

(558,739)

 

$

12,135

 

$

(486)

 

$

(67,431)

 

$

(501)

 

$

(615,022)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2016

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

1,224,580

 

$

261,543

 

$

40,226

 

$

150

 

$

(107,505)

 

$

1,418,994

 

Salaries, wages and benefits

 

 

586,654

 

 

219,864

 

 

27,896

 

 

 —

 

 

 —

 

 

834,414

 

Other operating expenses

 

 

428,820

 

 

18,903

 

 

10,610

 

 

 —

 

 

(107,505)

 

 

350,828

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

46,545

 

 

 —

 

 

46,545

 

Provision for losses on accounts receivable

 

 

21,088

 

 

4,722

 

 

(161)

 

 

(47)

 

 

 —

 

 

25,602

 

Lease expense

 

 

34,745

 

 

24

 

 

269

 

 

474

 

 

 —

 

 

35,512

 

Depreciation and amortization expense

 

 

53,313

 

 

2,943

 

 

163

 

 

4,685

 

 

 —

 

 

61,104

 

Interest expense

 

 

109,339

 

 

14

 

 

10

 

 

22,449

 

 

 —

 

 

131,812

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

15,363

 

 

 —

 

 

15,363

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(934)

 

 

 —

 

 

(934)

 

Other income

 

 

(4,991)

 

 

 —

 

 

(182)

 

 

 —

 

 

 —

 

 

(5,173)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

3,057

 

 

 —

 

 

3,057

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,608)

 

 

715

 

 

(893)

 

(Loss) income before income tax benefit

 

 

(4,388)

 

 

15,073

 

 

1,621

 

 

(89,834)

 

 

(715)

 

 

(78,243)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(25,888)

 

 

 —

 

 

(25,888)

 

(Loss) income from continuing operations

 

$

(4,388)

 

$

15,073

 

$

1,621

 

$

(63,946)

 

$

(715)

 

$

(52,355)

 

17


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,483,284

 

$

743,605

 

$

132,718

 

$

450

 

$

(314,197)

 

$

4,045,860

 

Salaries, wages and benefits

 

 

1,597,007

 

 

619,928

 

 

86,365

 

 

 —

 

 

 —

 

 

2,303,300

 

Other operating expenses

 

 

1,303,448

 

 

56,433

 

 

44,456

 

 

 —

 

 

(314,198)

 

 

1,090,139

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

127,041

 

 

 —

 

 

127,041

 

Provision for losses on accounts receivable

 

 

62,448

 

 

8,641

 

 

995

 

 

616

 

 

 —

 

 

72,700

 

Lease expense

 

 

110,661

 

 

 —

 

 

897

 

 

1,446

 

 

 —

 

 

113,004

 

Depreciation and amortization expense

 

 

159,483

 

 

11,110

 

 

506

 

 

12,887

 

 

 —

 

 

183,986

 

Interest expense

 

 

309,948

 

 

42

 

 

28

 

 

63,455

 

 

 —

 

 

373,473

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

2,301

 

 

 —

 

 

2,301

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(4,097)

 

 

 —

 

 

(4,097)

 

Other loss

 

 

15,112

 

 

732

 

 

 —

 

 

(242)

 

 

 —

 

 

15,602

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

7,862

 

 

 —

 

 

7,862

 

Customer receivership

 

 

 —

 

 

35,864

 

 

 —

 

 

 —

 

 

 —

 

 

35,864

 

Long-lived asset impairments

 

 

161,483

 

 

1,881

 

 

 —

 

 

 —

 

 

 —

 

 

163,364

 

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

360,046

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,702)

 

 

1,411

 

 

(291)

 

(Loss) income before income tax benefit

 

 

(596,352)

 

 

8,974

 

 

(529)

 

 

(209,117)

 

 

(1,410)

 

 

(798,434)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

5,683

 

 

 —

 

 

5,683

 

(Loss) income from continuing operations

 

$

(596,352)

 

$

8,974

 

$

(529)

 

$

(214,800)

 

$

(1,410)

 

$

(804,117)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2016

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,694,638

 

$

821,704

 

$

141,970

 

$

366

 

$

(329,108)

 

$

4,329,570

 

Salaries, wages and benefits

 

 

1,748,232

 

 

689,833

 

 

96,759

 

 

 —

 

 

 —

 

 

2,534,824

 

Other operating expenses

 

 

1,296,069

 

 

58,927

 

 

36,198

 

 

 —

 

 

(329,108)

 

 

1,062,086

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

139,999

 

 

 —

 

 

139,999

 

Provision for losses on accounts receivable

 

 

68,757

 

 

12,165

 

 

993

 

 

(139)

 

 

 —

 

 

81,776

 

Lease expense

 

 

107,047

 

 

71

 

 

1,209

 

 

1,469

 

 

 —

 

 

109,796

 

Depreciation and amortization expense

 

 

167,208

 

 

9,137

 

 

805

 

 

13,672

 

 

 —

 

 

190,822

 

Interest expense

 

 

328,385

 

 

43

 

 

30

 

 

72,395

 

 

 —

 

 

400,853

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

15,830

 

 

 —

 

 

15,830

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(2,073)

 

 

 —

 

 

(2,073)

 

Other income

 

 

(4,119)

 

 

 —

 

 

(43,965)

 

 

 —

 

 

 —

 

 

(48,084)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

9,804

 

 

 —

 

 

9,804

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

15,192

 

 

 —

 

 

15,192

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(3,894)

 

 

1,741

 

 

(2,153)

 

(Loss) income before income tax expense

 

 

(16,941)

 

 

51,528

 

 

49,941

 

 

(261,889)

 

 

(1,741)

 

 

(179,102)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(19,738)

 

 

 —

 

 

(19,738)

 

(Loss) income from continuing operations

 

$

(16,941)

 

$

51,528

 

$

49,941

 

$

(242,151)

 

$

(1,741)

 

$

(159,364)

 

 

 

18


 

Table of Contents

GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The following table presents the segment assets as of September 30, 2017 compared to December 31, 2016 (in thousands):   

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Inpatient services

 

$

4,376,132

 

$

5,194,811

 

Rehabilitation therapy services

 

 

411,195

 

 

454,723

 

Other services

 

 

52,236

 

 

67,348

 

Corporate and eliminations

 

 

87,365

 

 

62,319

 

Total assets

 

$

4,926,928

 

$

5,779,201

 

 

The following table presents segment goodwill as of September 30, 2017 compared to December 31, 2016 (in thousands):   

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Inpatient services

 

$

 —

 

$

355,070

 

Rehabilitation therapy services

 

 

73,814

 

 

73,814

 

Other services

 

 

11,828

 

 

11,828

 

Total goodwill

 

$

85,642

 

$

440,712

 

 

The Company conducted its annual goodwill impairment analysis as of September 30, 2017, resulting in an impairment charge of $351.5 million in the inpatient services segment.  See Note 15 – “Asset Impairment Charges – Goodwill.”  The divestiture of nine of the Company’s skilled nursing facilities and planned divestitures of seven other sklled nursing facilities resulted in a derecognition of goodwill in the nine months ended September 30, 2017, of $3.6 million in its inpatient services segment.  See Note 3 – “Significant Transactions and Events – Skilled Nursing Facility Divestitures.”

 

 

(6)Property and Equipment

 

Property and equipment consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Land, buildings and improvements

 

$

604,985

 

$

673,092

 

Capital lease land, buildings and improvements

 

 

745,245

 

 

818,273

 

Financing obligation land, buildings and improvements

 

 

2,522,415

 

 

2,584,178

 

Equipment, furniture and fixtures

 

 

456,990

 

 

447,767

 

Construction in progress

 

 

22,360

 

 

49,859

 

Gross property and equipment

 

 

4,351,995

 

 

4,573,169

 

Less: accumulated depreciation

 

 

(881,049)

 

 

(807,776)

 

Net property and equipment

 

$

3,470,946

 

$

3,765,393

 

 

 

 

 

 

In the nine months ended September 30, 2017, the Company amended one of its master lease agreements resulting in a net capital lease asset write-down of $14.9 million.   See Note 3 – “Significant Transactions and Events – Skilled Nursing Facility Divestitures.”  The write-down consisted of $55.6 million of gross capital lease asset included in the line description “Capital lease land, buildings and improvements” offset by $40.7 million of accumulated depreciation. 

                    

In the three and nine months ended September 30, 2017, the Company recognized an impairment charge of $163.4 million on its property and equipment.  See Note 15 – “Asset Impairment Charges - Long-Lived Assets with a Definite Useful Life.”

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(7)   Goodwill and Identifiable Intangible Assets

 

The changes in the carrying value of goodwill are as follows (in thousands):

 

 

 

 

 

 

    

Total

Balance at December 31, 2016

 

$

440,712

 

 

 

 

Goodwill disposal associated with inpatient divestitures

 

 

(3,600)

Goodwill impairment associated with inpatient segment

 

 

(351,470)

Balance at September 30, 2017

 

$

85,642

 

The Company has no accumulated amortization of goodwill.

 

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. 

 

The Company conducted its annual goodwill impairment analysis as of September 30, 2017, resulting in an impairment charge of $351.5 million in the inpatient services segment.  See Note 15 – “Asset Impairment Charges – Goodwill.”  The divestiture of nine of the Company’s skilled nursing facilities and planned divestitures of seven other sklled nursing facilities resulted in a derecognition of goodwill in the nine months ended September 30, 2017, of $3.6 million in its inpatient services segment.  See Note 3 – “Significant Transactions and Events – Skilled Nursing Facility Divestitures.”

 

Identifiable intangible assets consist of the following at September 30, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

    

September 30, 2017

    

Weighted Average Remaining Life (Years)

Customer relationship assets, net of accumulated amortization of $52,667

 

$

60,166

 

8

Favorable leases, net of accumulated amortization of $31,406

 

 

36,517

 

10

Trade names

 

 

50,556

 

Indefinite

Identifiable intangible assets

 

$

147,239

 

 

 

 

 

 

 

 

 

 

    

December 31, 2016

    

Weighted Average Remaining Life (Years)

Customer relationship assets, net of accumulated amortization of $43,862

 

$

67,348

 

9

Management contracts, net of accumulated amortization of $17,872

 

 

14,651

 

2

Favorable leases, net of accumulated amortization of $29,421

 

 

43,011

 

10

Trade names

 

 

50,556

 

Indefinite

Identifiable intangible assets

 

$

175,566

 

 

 

Acquisition-related identified intangible assets consist of customer relationship assets, management contracts, favorable lease contracts and trade names.

 

Customer relationship assets exist in the Company’s rehabilitation services, respiratory services, management services and medical staffing businesses.  These assets are amortized on a straight-line basis over the expected period of benefit.

Management contracts are derived through the organization of facilities under an upper payment limit supplemental payment program in Texas that provides supplemental Medicaid payments with federal

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

matching funds for skilled nursing facilities that are affiliated with county-owned hospital districts. Under this program, the Company acts as the manager of the facilities and shares in these supplemental payments with the county hospitals. 

Favorable lease contracts represent the estimated value of future cash outflows of operating lease contracts compared to lease rates that could be negotiated in an arms-length transaction at the time of measurement.  Favorable lease contracts are amortized on a straight-line basis over the lease terms. 

The Company’s trade names have value, in particular in the rehabilitation business which markets its services to other providers of skilled nursing and assisted/senior living services.  The trade name asset has an indefinite life and is measured no less than annually or if indicators of potential impairment become apparent. 

 

For the three months ended September 30, 2017 and 2016, the amortization expense related to customer relationship assets totaled $2.6 million and $2.6 million, respectively.  For the nine months ended September 30, 2017 and 2016, the amortization expense related to customer relationship assets totaled $7.7 million and $7.7 million, respectively. 

 

For the three months ended September 30, 2017 and 2016, the amortization expense related to management contracts totaled $2.3 million and $2.3 million, respectively.  For the nine months ended September 30, 2017 and 2016, the amortization expense related to management contracts totaled $6.8 million and $6.8 million, respectively. 

 

For the three months ended September 30, 2017 and 2016, the amortization expense related to favorable leases totaled $1.7 million and $2.0 million, respectively.  For the nine months ended September 30, 2017 and 2016, the amortization expense related to favorable leases totaled $5.3 million and $6.1 million, respectively. 

 

Based upon amounts recorded at September 30, 2017, total estimated twelve months ended amortization expense of identifiable intangible assets will be $17.0 million in 2018, $16.7 million in 2019, $12.6 million in 2020, $11.1 million in 2021, and $7.2 million in 2022 and $32.1 million, thereafter.

Asset impairment charges for the three and nine months ended September 30, 2017, totaled $8.5 million.  The Company recorded a $7.3 million impairment of its management contract assets related to the expiration of and lack of a sustained, state sponsored replacement program for the Texas Minimum Payment Amount Program (MPAP).  The impairment is included in goodwill and identifiable intangible asset impairments on the consolidated statements of operations.  See Note 15 – “Asset Impairment Charges - Identifiable Intangible Assets with a Definite Useful Life – Management Contracts.”  The remaining $1.2 million pertains to the impairment on favorable lease assets associated with the underperforming properties.  The impairment is included in goodwill and identifiable intangible asset impairments on the consolidated statements of operations. See Note 15 – “Asset Impairment Charges – Identifiable Intangible Assets with a Definite Useful Life – Favorable Leases.”  For the three and nine months ended September 30, 2016, no impairment charges were recorded. 

 

 

 

 

 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(8)   Long-Term Debt

 

Long-term debt at September 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

September 30, 2017

 

December 31, 2016

 

Revolving credit facilities, net of debt issuance costs of $9,952 at September 30, 2017 and $9,220 at December 31, 2016

 

$

351,247

 

$

383,630

 

Term loan agreement, net of debt issuance costs of $3,312 at September 30, 2017 and $3,859 at December 31, 2016

 

 

116,290

 

 

116,174

 

Real estate bridge loans, net of debt issuance costs of $3,710 at September 30, 2017 and $4,400 at December 31, 2016

 

 

289,120

 

 

313,549

 

HUD insured loans, net of debt issuance costs of $5,396 at September 30, 2017 and $4,773 at December 31, 2016

 

 

261,370

 

 

241,570

 

Notes payable, net of convertible debt discount of $842 at September 30, 2017 and $990 at December 31, 2016

 

 

76,337

 

 

73,829

 

Mortgages and other secured debt (recourse)

 

 

12,711

 

 

13,235

 

Mortgages and other secured debt (non-recourse), net of debt issuance costs of $121 at September 30, 2017 and $131 at December 31, 2016

 

 

28,283

 

 

29,157

 

 

 

 

1,135,358

 

 

1,171,144

 

Less:  Current installments of long-term debt

 

 

(851,344)

 

 

(24,594)

 

Long-term debt

 

$

284,014

 

$

1,146,550

 

 

Revolving Credit Facilities

 

The Company’s revolving credit facilities, as amended, (the Revolving Credit Facilities) consist of a senior secured, asset-based revolving credit facility of up to $525.0 million under three separate tranches:  Tranche A-1, Tranche A-2 and HUD Tranche.  The Revolving Credit Facilities mature on February 2, 2020.  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 3.00% to 3.50%; (ii) for Tranche A-2 ranges from 3.00% to 3.50%; and (iii) for HUD Tranche ranges from 2.50% to 3.00%.  The applicable margin is based on the level of commitments for all three tranches, and in regards to base rate loans (i) for Tranche A-1 ranges from 2.00% to 2.50%; (ii) for Tranche A-2 ranges from 2.00% to 2.50%; and (iii) for HUD Tranche ranges from 1.50% to 2.00%.

 

Borrowing levels under the Revolving Credit Facilities are limited to a borrowing base that is computed based upon the level of the Company’s eligible accounts receivable, as defined therein.  In addition to paying interest on the outstanding principal borrowed under the Revolving Credit Facilities, the Company is required to pay a commitment fee to the lenders for any unutilized commitments.  The commitment fee rate ranges from 0.375% per annum to 0.50% depending upon the level of unused commitment.

 

The Revolving Credit Facilities contain financial, affirmative and negative covenants, and events of default that are substantially identical to those of the Term Loan Agreement (as defined below), but also contain a minimum liquidity covenant and a springing minimum fixed charge coverage covenant tied to the minimum liquidity requirement.  The most restrictive financial covenant is the maximum leverage ratio which requires the Company to maintain a leverage ratio, as defined, of no more than 7.25 to 1.0 through December 31, 2017 and stepping down gradually over the course of the loan to 6.5 to 1.0 beginning in 2020.

 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Borrowings and interest rates under the three tranches were as follows at September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

    

 

 

    

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

Revolving Credit Facilities

 

Commitment

 

 

Borrowings

 

Interest

 

Tranche A-1

 

$

440,000

 

 

$

300,000

 

5.14

%

Tranche A-2

 

 

50,000

 

 

 

35,800

 

4.74

%

HUD tranche

 

 

35,000

 

 

 

25,400

 

4.50

%

 

 

$

525,000

 

 

$

361,200

 

5.06

%

 

As of September 30, 2017, the Company had a total borrowing base capacity of $457.9 million with outstanding borrowings under the Revolving Credit Facilities of $361.2 million and $54.8 million of drawn letters of credit securing insurance and lease obligations, leaving the Company with approximately $41.9 million of available borrowing capacity under the Revolving Credit Facilities.

 

Term Loan Agreement

 

The Company and certain of its affiliates, including FC-GEN Operations Investment, LLC (the Borrower) are party to a four-year term loan agreement (the Term Loan Agreement) with an affiliate of Welltower Inc. (Welltower) and an affiliate of Omega Healthcare Investors, Inc. (Omega).  The Term Loan Agreement provides for term loans (the Term Loans) in the aggregate principal amount of $120.0 million, with scheduled annual amortization of 2.5% of the initial principal balance in years one, two and three, and 5.0% in year four.  The Term Loan Agreement has a maturity date of July 29, 2020.  Borrowings under the Term Loan Agreement bear interest at a rate equal to a base rate (subject to a floor of 1.00%) or an ABR rate (subject to a floor of 2.0%), plus in each case a specified applicable margin.   The initial applicable margin for base rate loans is 13.0% per annum and the initial applicable margin for ABR rate loans is 12.0% per annum.  At the Company’s election, with respect to either base rate or ABR rate loans, up to 2.0% of the interest may be paid either in cash or paid-in-kind.  As of September 30, 2017, the Term Loans had an outstanding principal balance of $119.6 million.

 

The Term Loan Agreement is secured by a first priority lien on the equity interests of the subsidiaries of the Company and the Borrower as well as certain other assets of the Company, the Borrower and their subsidiaries, subject to certain exceptions.  The Term Loan Agreement is also secured by a junior lien on the assets that secure the Revolving Credit Facilities, as amended, on a first priority basis.

 

Welltower and Omega, or their respective affiliates, are each currently landlords under certain master lease agreements to which the Company and/or its affiliates are tenants. 

 

The Term Loan Agreement contains financial, affirmative and negative covenants, and events of default that are customary for debt securities of this type.  Financial covenants include four maintenance covenants which require the Company to maintain a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio and maximum capital expenditures.  The most restrictive financial covenant is the maximum leverage ratio which requires the Company to maintain a leverage ratio, as defined therein, of no more than 7.25 to 1.0 through December 31, 2017 and stepping down gradually over the course of the loan to 6.5 to 1.0 beginning in 2020.

 

Real Estate Bridge Loans

 

The Company is party to four separate bridge loan agreements with Welltower (Welltower Bridge Loans).  The Welltower Bridge Loans have an effective date of October 1, 2016 and are the result of the combination of two real estate bridge loans executed in 2015 upon the Company’s separate acquisitions of the real property of 87 skilled nursing and assisted living facilities.  The Welltower Bridge Loans are subject to payments of interest only during the term with a balloon payment due at maturity, provided, that to the extent the subsidiaries receive any net proceeds from the sale

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

and/or refinance of the underlying facilities such net proceeds are required to be used to repay the outstanding principal balance of the Welltower Bridge Loans.  Each Welltower Bridge Loan has a maturity date of January 1, 2022 and a 10.0% interest rate that increases annually by 0.25% beginning January 1, 2018.  At September 30, 2017, the Welltower Bridge Loans are secured by a mortgage lien on the real property of the 39 facilities and a second lien on certain receivables of the operators of 24 of the facilities.  In the nine months ended September 30, 2017, the Welltower Bridge Loans were paid down $27.6 million, $9.0 million for the sale of three skilled nursing facilities and $18.6 million for the refinancing of bridge loan debt with HUD insured loans.  See Note 3 – “Significant Transactions and Events - Skilled Nursing Facility Divestitures” and Significant Transactions and Events - HUD Financings.” Of the four original separate bridge loan agreements, one was fully retired using proceeds from the sale of the three skilled nursing facilities in the nine months ended September 30, 2017.  The three remaining Welltower Bridge Loans have an outstanding principal balance of $282.9 million at September 30, 2017. 

 

On April 1, 2016, the Company acquired one skilled nursing facility and entered into a $9.9 million real estate bridge loan (the Other Real Estate Bridge Loan).  The Other Real Estate Bridge Loan has a term of three years and accrues interest at a rate equal to LIBOR plus a margin of 4.00%. The Other Real Estate Bridge Loan bore interest of 5.23% at September 30, 2017. The Other Real Estate Bridge Loan 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 pay down the outstanding principal balance of the Other Real Estate Bridge Loan.  The Other Real Estate Bridge Loan has an outstanding principal balance of $9.9 million at September 30, 2017.

 

HUD Insured Loans

 

As of September 30, 2017 the Company has 29 skilled nursing facility loans insured by HUD with a combined aggregate principal balance of $266.8 million, which includes a $13.7 million debt premium on 10 skilled nursing facility loans established in purchase accounting in connection with the Combination.  In the nine months ended September 30, 2017, 13 skilled nursing facilities with HUD insured loans were sold and the loans totaling $63.1 million were retired.  See Note 3 – “Significant Transactions and Events - Skilled Nursing Facility Divestitures.”  Also in the nine months ended September 30, 2017, three skilled nursing facilities were financed with HUD insured loans for $23.9 million.  See Note 3 – “Significant Transactions and Events - HUD Financings.”

 

The HUD insured loans have an original amortization term of 30 to 35 years and an average remaining term of 30 years with fixed interest rates ranging from 3.0% to 4.2% and a weighted average interest rate of 3.5%. Depending on the mortgage agreement, prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required thereafter. Any further HUD insured loans will require additional HUD approval.

 

All HUD insured loans are non-recourse loans to the Company. All loans are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of September 30, 2017, the Company has total escrow reserve funds of $21.2 million with the loan servicer that are reported within prepaid expenses.

 

Notes Payable

 

In connection with Welltower’s sale of 64 skilled nursing facilities to Second Spring Healthcare Investments (Second Spring) on November 1, 2016, the Company issued a note totaling $51.2 million to Welltower.  The note accrues cash interest at 3% and paid-in-kind interest at 7%.  Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every May 1 and November 1.  The note matures on October 30, 2020.  The note has an outstanding accreted balance of $53.0 million at September 30, 2017.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

In connection with Welltower’s sale of 28 skilled nursing facilities to Cindat Best Years Welltower JV LLC (CBYW) on December 23, 2016, the Company issued two notes totaling $23.7 million to Welltower.  The first note has an initial principal balance of $11.7 million and accrues cash interest at 3% and paid-in-kind interest at 7%.  Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every June 15 and December 15.  The note matures on December 15, 2021.  The note has an outstanding accreted principal balance of $12.1 million at September 30, 2017.  The second note has an initial principal balance of $12.0 million and accrues cash interest at 3% and paid-in-kind interest at 3%.  Cash interest is paid and paid-in-kind interest accretes the principal amount semi-annually every June 15 and December 15.  From the second anniversary up to the day before the note matures, CBYW can convert all or any portion of the note into fully paid shares of common stock at the conversion rate of 3,000,000 shares of common stock per the full accreted principal amount of the note.  The note matures on December 15, 2021.  The note has an outstanding accreted principal balance of $12.2 million at September 30, 2017.

 

Other Debt

 

Mortgages and other secured debt (recourse). The Company carries mortgage loans and notes payable on certain of its corporate office buildings and other acquired assets.  The loans are secured by the underlying real property and have fixed or variable rates of interest with a weighted average interest rate of 3.3% at September 30, 2017, with maturity dates ranging from 2018 to 2020. 

 

Mortgages and other secured debt (non-recourse). Loans are carried by certain of the Company’s consolidated joint ventures.  The loans consist principally of revenue bonds and secured bank loans.  Loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest with a weighted average interest rate of 4.6% at September 30, 2017.  Maturity dates range 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.  The aggregate principal balance of these loans includes a $1.6 million debt premium on one debt instrument.   The Company’s consolidated current installment of long-term debt increased $11.5 million due to the reclassification of a non-recourse loan of $11.5 million, which has a maturity date of March 27, 2018.

 

Debt Covenants

 

The Revolving Credit Facilities, the Term Loan Agreement and the Welltower Bridge Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio, a springing minimum fixed charge coverage ratio tied to minimum liquidity and maximum capital expenditures.  At September 30, 2017, the Company was not in compliance with certain of the financial covenants contained in the Credit Facilities.  The Company received timely waivers from the counterparties to the Term Loan Agreement and the Welltower Bridge Loans for any and all breaches of financial or other covenants as of September 30, 2017.  The Company is engaged in discussions with our counterparties to the Revolving Credit Parties to secure a 90-day forbearance agreement through late January 2018.

 

The Company’s ability to maintain compliance with its debt covenants depends in part on management’s ability to increase revenue and control costs.  Should the Company fail to comply with its debt covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing credit  agreements.  To the extent any cross-default provisions may apply, the default would have an even more significant impact on the Company’s financial position. 

 

The Company believes that it is in the best interests of all creditors to grant necessary waivers or reach negotiated settlements to enable the Company to execute and complete the Restructuring Plans in order to establish a sustainable capital structure.  However, there can be no assurance that such timely and adequate waivers will be received in future periods or such settlements will be reached or executed.  If the defaults are not cured within applicable cure periods, if

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

any, and if waivers or other necessary relief are not obtained, the defaults can cause acceleration of the Company’s financial obligations under certain of its agreements, which the Company may not be in a position to satisfy. 

 

There can be no assurances that any of these efforts will prove successful.  In the event of a failure to obtain timely and necessary waivers or otherwise achieve a viable restructuring of the Company’s financial obligations, it may be forced to seek reorganization under the U.S. Bankruptcy Code. 

 

The maturity of total debt of $1,143.3 million, excluding debt issuance costs and other non-cash debt discounts and premiums, at September 30, 2017 is as follows (in thousands): 

 

 

 

 

 

 

Twelve months ended September 30, 

    

 

 

2018

 

$

28,372

2019

 

 

17,584

2020

 

 

486,141

2021

 

 

59,069

2022

 

 

313,491

Thereafter

 

 

238,686

Total debt maturity

 

$

1,143,343

 

 

 

The debt maturity table has been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of the consolidated financial statements. However, for the reasons described in Note 1 – “General Information – Going Concern Considerations,” $851.3 million, related to several of the Company’s debt instruments with the stated maturities as summarized above are classified as a current liability at September 30, 2017.  These debt instruments include the Revolving Credit Facilities, the Term Loan Agreement, the Welltower Bridge Loans and the Notes Payable.

 

 

 

 

 

(9)   Leases and Lease Commitments

 

The Company leases certain facilities under capital and operating leases.  Future minimum payments for the next five years and thereafter under such leases at September 30, 2017 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

Twelve months ended September 30, 

    

Capital Leases

    

Operating Leases

2018

 

$

90,425

 

$

142,646

2019

 

 

93,333

 

 

139,688

2020

 

 

92,453

 

 

139,419

2021

 

 

94,561

 

 

135,437

2022

 

 

96,755

 

 

112,149

Thereafter

 

 

2,967,233

 

 

227,737

Total future minimum lease payments

 

 

3,434,760

 

$

897,076

Less amount representing interest

 

 

(2,439,736)

 

 

 

Capital lease obligation

 

 

995,024

 

 

 

Less current portion

 

 

(949,050)

 

 

 

Long-term capital lease obligation

 

$

45,974

 

 

 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The lease commitment table has been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of the consolidated financial statements. However, for the reasons described in Note 1 – “General Information – Going Concern Considerations,” $949.1 million, related to several of the Company’s capital lease commitments with the stated maturities as summarized above are classified as a current liability at September 30, 2017.  While obligations under the operating leases are not included on the balance sheet, approximately $617.8 million will become due and payable, if defaulted upon.

 

Capital Lease Obligations

 

The capital lease obligations represent the present value of future minimum lease payments under such capital lease and cease to use arrangements and bear a weighted average imputed interest rate of 10.0% at September 30, 2017, and mature at dates ranging from 2017 to 2047.

 

Deferred Lease Balances

 

At September 30, 2017 and December 31, 2016, the Company had $36.5 million and $43.0 million, respectively, of favorable leases net of accumulated amortization, included in identifiable intangible assets, and $19.0 million and $28.8 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 operating leases in place that requires those contracts be recorded at their then fair value.  The fair value of a lease is determined through a comparison of the actual rental rate with rental rates prevalent for similar assets in similar markets.  A favorable lease asset to the Company represents a rental stream that is below market, and conversely an unfavorable lease is one with its cost above market rates.  These assets and liabilities amortize as lease expense over the remaining term of the respective leases on a straight-line basis.  At September 30, 2017 and December 31, 2016, the Company had $34.4 million and $31.6 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.  

 

The Company has master lease agreements with Welltower, Sabra Health Care REIT, Inc. (Sabra), Second Spring and Omega (collectively, the Master Lease Agreements).  The Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity.  At September 30, 2017, the Company is not in compliance with the financial covenants contained in the Master Lease Agreements.  The Company received waivers from the counterparties to the Master Lease Agreements for any and all breaches of financial and other covenants as of September 30, 2017.

 

The Company has a master lease agreement with CBYW involving 28 of its facilities.  The Company did not meet certain financial covenants contained in this master lease agreement at September 30, 2017.  The Company received a waiver for these covenant breaches through October 24, 2019. 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

At September 30, 2017, the Company did not meet certain financial covenants contained in three leases related to 26 of its facilities.  The Company is and expects to continue to be current in the timely payment of its obligations under such leases.  These leases do not have cross default provisions, nor do they trigger cross default provisions in any of the Company’s other loan or lease agreements.  The Company will continue to work with the related credit parties to amend such leases and the related financial covenants.  The Company does not believe the breach of such financial covenants has a material adverse impact on it at September 30, 2017.  The Company has been afforded certain cure rights to such defaults by posting collateral in the form of additional letters of credit or security deposit.

 

The Company’s ability to maintain compliance with its lease covenants depends in part on management’s ability to increase revenue and control costs.  Due to continuing changes in the healthcare industry, as well as the uncertainty with respect to changing referral patterns, patient mix, and reimbursement rates, it is possible that future operating performance may not generate sufficient operating results to maintain compliance with its quarterly lease covenant compliance requirements. Should the Company fail to comply with its lease covenants at a future measurement date, it would, absent necessary and timely waivers and/or amendments, be in default under certain of its existing lease agreements. To the extent any cross-default provisions may apply, the default would have an even more significant impact on the Company’s financial position.

 

The Company believes that it is in the best interests of all creditors to grant necessary and timely waivers or reach negotiated settlements to enable the Company to execute and complete the Restructuring Plans in order to establish a sustainable capital structure.  However, there can be no assurance that such waivers will be received in future periods or such settlements will be reached.  If the defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained timely, the defaults can cause acceleration of the Company’s financial obligations under certain of its agreements, which the Company may not be in a position to satisfy. 

 

There can be no assurances that any of these efforts will prove successful.  In the event of a failure to obtain necessary waivers or otherwise achieve a viable restructuring of the Company’s financial obligations, it may be forced to seek reorganization under the U.S. Bankruptcy Code. 

 

(10)Financing Obligation

 

Financing obligations represent the present value of future minimum lease payments under such lease arrangements and bear a weighted average imputed interest rate of 10.6% at September 30, 2017, and mature at dates ranging from 2021 to 2043.

 

Future minimum payments for the next five years and thereafter under leases classified as financing obligations at September 30, 2017 are as follows (in thousands):

 

 

 

 

 

 

Twelve months ended September 30, 

    

 

 

2018

 

$

275,150

2019

 

 

281,193

2020

 

 

287,838

2021

 

 

294,677

2022

 

 

292,964

Thereafter

 

 

7,929,586

Total future minimum lease payments

 

 

9,361,408

Less amount representing interest

 

 

(6,444,677)

Financing obligations

 

$

2,916,731

Less current portion

 

 

(2,908,020)

Long-term financing obligations

 

$

8,711

 

 

 

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The financing obligation table has been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of the consolidated financial statements. However, for the reasons described in Note 1 – “General Information – Going Concern Considerations,” $2.9 billion, related to several of the Company’s financing obligation commitments with the stated maturities as summarized above are classified as a current liability at September 30, 2017. 

 

 

(11)Income Taxes

 

The Company effectively owns 60.6% of FC-GEN, an entity taxed as a partnership for U.S. income tax purposes.  This is the Company’s only source of taxable income.  FC-GEN is subject to income taxes in several U.S. state and local jurisdictions.  The income taxes assessed by these jurisdictions are included in the Company’s tax provision, but at its 60.6% ownership of FC-GEN.

 

For the three months ended September 30, 2017, the Company recorded income tax expense of $1.6 million from continuing operations, representing an effective tax rate of (0.3)%, compared to income tax benefit of $25.9 million from continuing operations, representing an effective tax rate of 33.1%, for the same period in 2016.

 

For the nine months ended September 30, 2017, the Company recorded income tax expense of $5.7 million from continuing operations, representing an effective tax rate of (0.7)%, compared to income tax benefit of $19.7 million from continuing operations, representing an effective tax rate of 11.0%, for the same period in 2016.

 

The change in the effective tax rate for the three and nine months ended September 30, 2017, is attributable to the following:

·

a one-time adjustment to increase the Company’s deferred tax liability that was recorded in the nine months ended September 30, 2016 reporting period of $3.0 million;

·

in the three months ended September 30, 2016 reporting period, the Company released a $28.2 million FASB Interpretation No. 48 (FIN 48) reserve due to the expiration of the statute of limitations regarding Sun Healthcare’s utilization of its net operating loss carryforward to offset built-in-gain pursuant to Internal Revenue Code (IRC) Section 382, significantly reducing the quarterly accrual of interest and penalty under FIN 48;

·

in the three months ended September 30, 2017, the Company increased its deferred tax liability to revise a previously concluded tax position of $11.5 million; and

·

in the three months ended September 30, 2017, the Company impaired the goodwill recorded on its inpatient business operating segment which resulted in a decrease to the Company’s deferred tax liability of $9.7 million.     

 

The Company continues to assess the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard.  Management had previously determined that the Company would not realize its deferred tax assets and established a valuation allowance against the deferred tax assets.  As of September 30, 2017, management has determined that the valuation allowance is still necessary.

 

The Company’s Bermuda captive insurance company is expected to generate positive U.S. federal taxable income in 2017, with no net operating loss to offset its taxable income.  The captive also does not have any tax credits to offset its U.S. federal income tax.

 

The Company provides rehabilitation therapy services within the People’s Republic of China and Hong Kong.  At September 30, 2017, 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.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

Exchange Rights and Tax Receivable Agreement

 

Following the Combination, the owners of FC-GEN have the right to exchange their membership units in FC-GEN,  along with an equivalent number of Class C shares, for shares of Class A common stock of the Company or cash, at the Company’s option.  As a result of such exchanges, the Company’s membership interest in FC-GEN would increase and its purchase price would be reflected in its share of the tax basis of FC-GEN’s tangible and intangible assets.  Any resulting increases in tax basis are likely to increase tax depreciation and amortization deductions and, therefore, reduce the amount of income tax the Company would otherwise be required to pay in the future.  Any such increase would also decrease gain (or increase loss) on future dispositions of the affected assets.  There were exchanges of 2,248,869 FC-GEN units and Class C shares during the nine months ended September 30, 2017 equating to 2,249,256 Class A shares.  The exchanges during the nine months ended September 30, 2017 resulted in a $14.5 million IRC Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN.  There were exchanges of 200,000 FC-GEN units and Class C shares during the nine months ended September 30, 2016 equating to 200,034 Class A shares.  The exchanges during the nine months ended September 30, 2016 resulted in a $0.9 million IRC Section 754 tax basis step-up in the tax deductible goodwill of FC-GEN.

 

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

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

defined in the TRA. As a result of these assumptions, FC-GEN could be required to make payments under the TRA that are greater or less than the specified percentage of the actual benefits realized by the Company that are subject to the TRA.  In addition, if FC-GEN elects to terminate the TRA early, it would be required to make an early termination payment, which upfront payment may be made significantly in advance of the anticipated future tax benefits.

 

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

 

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

 

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

 

(12)Commitments and Contingencies

 

Loss Reserves For Certain Self-Insured Programs

 

General and Professional Liability and Workers’ Compensation

 

The Company self-insures for certain insurable risks, including general and professional liabilities and workers’ compensation liabilities through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary among states in which the Company operates, including wholly owned captive insurance subsidiaries, to provide for potential liabilities for general and professional liability claims and workers’ compensation claims. Policies are typically written for a duration of 12 months and are measured on a “claims made” basis. Regarding workers’ compensation, the Company self-insures to its deductible and purchases statutorily required insurance coverage in excess of its deductible. There is a risk that amounts funded by the Company’s self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments. This liability includes an estimate of the development of reported losses and losses incurred but not reported. Provisions for changes in insurance reserves are made in the period of the related coverage. The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.

 

The Company’s management employs its judgment and periodic independent actuarial analysis in determining the adequacy of certain self-insured workers’ compensation and general and professional liability obligations recorded as liabilities in the Company’s financial statements. The Company evaluates the adequacy of its self-insurance reserves on a semi-annual basis or more frequently when it is aware of changes to its incurred loss patterns that could impact the accuracy of those reserves. The methods of making 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

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

legal functions. These functions ensure that the claims are properly administered so that the historical data is reliable for estimation purposes. Case reserves, which are approved by the Company’s legal and risk management departments, are determined based on an estimate of the ultimate settlement and/or ultimate loss exposure of individual claims.

 

The reserves for loss for workers’ compensation risks are discounted based on actuarial estimates of claim payment patterns using a discount rate of approximately 1% for each policy period presented. The discount rate for the current policy year is 1.48%. The discount rates are based upon the risk-free rate for the appropriate duration for the respective policy year. The removal of discounting would have resulted in an increased reserve for workers’ compensation risks of $6.5 million and $8.9 million as of September 30, 2017 and December 31, 2016, respectively. The reserves for general and professional liability are recorded on an undiscounted basis.

 

For the three and nine months ended September 30, 2017 and 2016, the provision for general and professional liability risk totaled $33.8 million and $34.1 million, respectively.  For the nine months ended September 30, 2017 and 2016, the provision for general and professional liability risk totaled $102.2 million and $104.3 million, respectively.  The reserves for general and professional liability were $425.6 million and $392.1 million as of September 30, 2017 and December 31, 2016, respectively.

 

For the three months ended September 30, 2017 and 2016, the provision for workers’ compensation risk totaled $16.4 million and $20.2 million, respectively.  For the nine months ended September 30, 2017 and 2016, the provision for workers’ compensation risk totaled $45.3 million and $42.2 million, respectively.  The reserves for workers’ compensation risks were $198.1 million and $226.0 million as of September 30, 2017 and December 31, 2016, respectively.

 

Health Insurance

 

The Company offers employees an option to participate in self-insured health plans.  Health insurance claims are paid as they are submitted to the plans’ administrators.  The Company maintains an accrual for claims that have been incurred but not yet reported to the plans’ administrators and therefore have not yet been paid.  This accrual for incurred but not yet reported claims was $18.1 million and $19.6 million as of September 30, 2017 and December 31, 2016, respectively.  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

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

or other equitable remedy. The settlement of any pending investigation, litigation or other proceedings could require the Company to make substantial settlement payments and result in its incurring substantial costs.

 

Settlement Agreement

 

On June 9, 2017, the Company and the U.S. Department of Justice (the DOJ) entered into a settlement agreement  regarding four matters arising out of the activities of Skilled or Sun Healthcare prior to their operations becoming part of the Company’s operations (collectively, the Successor Matters).  The four matters are: the Creekside Hospice Litigation, the Therapy Matters Investigation, the Staffing Matters Investigation and the SunDance Part B Therapy Matter (each as defined below).  The Company agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.

 

The settlement agreement calls for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program.  The Settlement Amount has been recorded fully in accrued expenses in the consolidated balance sheets at December 31, 2016.  The Company will remit the Settlement Amount over a period of five (5) years.  The first installment was paid in June 2017.  The remaining outstanding Settlement Amount at September 30, 2017 is $49.2 million, of which $9.0 million is recorded in accrued expenses and $40.2 million is recorded in other long-term liabilities. 

 

Creekside Hospice Litigation

 

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

 

On or about August 6, 2014, in relation to the investigation the DOJ filed a notice of intervention in two pending qui tam proceedings filed by private party relators under the FCA and the NFCA and advised that it intended to take over the actions. The DOJ filed its complaint in intervention on November 25, 2014, against Creekside, Skilled Healthcare Group, Inc., and Skilled Healthcare, LLC, asserting, among other things, that certain claims for hospice services provided by Creekside in the time period 2010 to 2013 (prior to the Combination) did not meet Medicare requirements for reimbursement and were in violation of the civil False Claims Act.

 

Therapy Matters Investigation

 

In February 2015, representatives of the DOJ informed the Company that they were investigating the provision of therapy services at certain Skilled facilities from 2005 through 2013 (prior to the Combination) and may pursue legal action against the Company and certain of its subsidiaries including Hallmark Rehabilitation GP, LLC for alleged violations of the federal and state healthcare fraud and abuse laws and regulations related to such services (the Therapy Matters Investigation). Those laws could have included the FCA and similar state laws.

 

Staffing Matters Investigation

 

In February 2015, representatives of the DOJ informed the Company that it intended to pursue legal action against the Company and certain of its subsidiaries related to staffing and certain quality of care allegations at certain Skilled facilities that occurred prior to the Combination, related to the issues adjudicated against the Company and those

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

subsidiaries in a previously disclosed class action lawsuit that Skilled settled in 2010 (the Staffing Matters Investigation). Those laws could have included the FCA and similar state laws.

 

SunDance Part B Therapy Matter

 

A subsidiary of Sun Healthcare, SunDance Rehabilitation Corp. (SunDance), operates an outpatient agency licensed to provide Medicare Part B therapy services at assisted/senior living facilities in Georgia and is a party to a qui tam proceeding that was filed by a private party relator under the FCA.  No SunDance agencies outside of Georgia are part of the qui tam proceeding. The Civil Division of the United States Attorney's Office for the District of Georgia filed a notice of intervention in this matter in March 2016 and asserts that certain SunDance claims for therapy services did not meet Medicare requirements for reimbursement.

 

(13)Fair Value of Financial Instruments

 

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

 

The Company’s financial instruments, other than its accounts receivable and accounts payable, are spread across a number of large financial institutions whose credit ratings the Company monitors and believes do not currently carry a material risk of non-performance.  Certain of the Company’s financial instruments contain an off-balance-sheet risk, in the form of outstanding letters of credit of $54.8 million under the Company’s letter of credit sub-facility on its Revolving Credit Facilities as of September 30, 2017.  These letters of credit are principally pledged to landlords and insurance carriers as collateral.  The Company is not involved in any other off-balance-sheet arrangements that have or are reasonably likely to have a material current or future impact on its financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.

 

Recurring Fair Value Measures 

 

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

 

 

 

 

 

 

Level 1 —

 

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

 

Level 2 —

 

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

 

Level 3 —

 

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

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The tables below present the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, 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

 

 

 

September 30, 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Assets:

 

2017

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

50,591

 

$

50,591

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

16,018

 

 

16,018

 

 

 —

 

 

 —

 

Restricted investments in marketable securities

 

 

124,358

 

 

124,358

 

 

 —

 

 

 —

 

Total

 

$

190,967

 

$

190,967

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

2016

 

(Level 1)

    

(Level 2)

    

(Level 3)

 

Cash and cash equivalents

 

$

51,408

 

$

51,408

 

$

 —

 

$

 —

 

Restricted cash and equivalents

 

 

12,052

 

 

12,052

 

 

 —

 

 

 —

 

Restricted investments in marketable securities

 

 

143,974

 

 

143,974

 

 

 —

 

 

 —

 

Total

 

$

207,434

 

$

207,434

 

$

 —

 

$

 —

 

 

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

 

Debt Instruments 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

 

Revolving credit facilities

 

$

351,247

 

$

351,247

 

$

383,630

 

$

383,630

 

Term loan agreement

 

 

116,290

 

 

116,290

 

 

116,174

 

 

116,174

 

Real estate bridge loans

 

 

289,120

 

 

289,120

 

 

313,549

 

 

313,549

 

HUD insured loans

 

 

261,370

 

 

248,185

 

 

241,570

 

 

226,983

 

Notes payable

 

 

76,337

 

 

76,337

 

 

73,829

 

 

73,829

 

Mortgages and other secured debt (recourse)

 

 

12,711

 

 

12,711

 

 

13,235

 

 

13,235

 

Mortgages and other secured debt (non-recourse)

 

 

28,283

 

 

28,283

 

 

29,157

 

 

29,157

 

 

 

$

1,135,358

 

$

1,122,173

 

$

1,171,144

 

$

1,156,557

 

 

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.

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

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

 

 

 

 

 

 

 

 

 

    

    

 

    

Impairment Charges -

 

 

Carrying Value

 

Nine months ended

 

    

September 30, 2017

    

September 30, 2017

Assets:

 

 

 

 

 

 

Property and equipment, net

 

$

3,470,946

 

$

163,364

Goodwill

 

 

85,642

 

 

351,470

Intangible assets, net

 

 

147,239

 

 

8,576

 

 

 

 

 

 

 

 

    

 

    

    

Impairment Charges -

 

 

Carrying Value

 

Nine months ended

 

 

December 31, 2016

 

September 30, 2016

Assets:

 

 

 

 

 

 

Property and equipment, net

 

$

3,765,393

 

$

 —

Goodwill

 

 

440,712

 

 

 —

Intangible assets, net

 

 

175,566

 

 

 —

 

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

 

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

 

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

 

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

 

(14)Related Party Transactions

 

Prior to the Combination on February 2, 2015, FC-GEN was wholly owned by private investors sponsored by affiliates of Formation Capital, LLC (Formation). 

 

The Company provides rehabilitation therapy services to certain facilities owned and operated by affiliates of FC-GEN’s sponsors.  These services resulted in net revenue of $35.1 million and $109.1 million in the three and nine months ended September 30, 2017, respectively, as compared to net revenue of $38.1 million and $118.6 million in the three and nine months ended September 30, 2016, respectively.  The services resulted in net accounts receivable balances of $83.2 million and $79.7 million at September 30, 2017 and December 31, 2016, respectively.

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The Company contracts with FC PAC Holdings, LLC (FC PAC) to provide hospice and diagnostic services in the normal course of business. FC PAC ownership includes affiliates of Formation, some of whom are members of the Company’s board of directors (the Board).  On May 1, 2016, the Company entered into preferred provider and affiliation agreements with FC PAC.  Fees for these services amounted to $3.2 million and $8.9 million in the three and nine months ended September 30, 2017, respectively, as compared to $2.9 million and $9.4 million in the three and nine months ended September 30, 2016, respectively. 

 

Effective May 1, 2016, the Company completed the sale of its hospice and home health operations to FC Compassus LLC for $72 million in cash and a $12 million interest-bearing note.  Certain members of the Board indirectly beneficially hold ownership interests in FC Compassus LLC totaling less than 10% in the aggregate. The combined note and accrued interest balance of $14.1 million, net of reserves, remains outstanding at September 30, 2017.

 

(15)   Asset Impairment Charges

 

As discussed in Note 1 – “General Information – Going Concern Considerations,” the Company’s results of operations have been impacted severely by the persistent pressure of healthcare reforms enacted over the past decade especially in its inpatient business.  The reduction and diversion of census from the skilled nursing sector has caused the Company to enact certain cost mitigation strategies to offset the loss of organic revenue.  This strategy had been successful in recent years, however, this revenue compression compounded by escalating wage inflation and professional liability losses, and combined with the increased cost of capital through escalating leases and greater debt burden, has accelerated through the third quarter of 2017 resulting in triggering events to assess for conditions of impairment. 

 

Long-Lived Assets with a Definite Useful Life

 

The Company’s long-lived assets and identifiable intangible assets with a definite useful life were tested for impairment at the lowest levels for which there are identifiable cash flows.  The Company estimated the future net undiscounted cash flows expected to be generated from the use of the long-lived assets and then compared the estimated undiscounted cash flows to the carrying amount of the long-lived assets.  The cash flow period was based on the remaining useful life of the primary asset in each long-lived asset group, principally a building for owned skilled nursing facilities, a favorable lease intangible asset for certain leased facilities and customer relationship assets in the rehabilitation therapy services segment.  For the three and nine months ended September 30, 2017, the Company recognized $163.4 million in impairment charges on its long-lived assets with a definite useful life.  This charge is presented in long-lived asset impairments on the consolidated statements of operations.

 

Identifiable Intangile Assets with a Definite Useful Life

 

Management Contracts

 

The management contract asset was derived through the organization of facilities under an upper payment limit supplemental payment program in Texas that provided supplemental Medicaid payments with federal matching funds for skilled nursing facilities that were affiliated with county-owned hospital districts. Under this program, the Company acted as the manager of the facilities and shared in the supplemental payments with the county hospitals. With the expiration of the program, the remaining unamortized asset associated with the management contract was written off.  For the three and nine months ended September 30, 2017, the Company recognized $7.3 million in impairment charges on identifiable intangible assets associated with management contracts.  This charge is presented in goodwill and identifiable intangible impairments on the consolidated statements of operations.

 

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Favorable Leases

 

Favorable lease contracts represent the estimated value of future cash outflows of operating lease contracts compared to lease rates that could be negotiated in an arms-length transaction at the time of measurement.  Favorable lease contracts are amortized on a straight-line basis over the lease terms. These favorable lease contracts are measured for impairment using estimated future net undiscounted cash flows expected to be generated from the use of the leased assets compared to the carrying amount of the favorable lease.  The cash flow period was based on the remaining useful lives of the asset, which for favorable lease assets is the lease term. For the three and nine months ended September 30, 2017, the Company recognized $1.2 million in impairment charges on its favorable lease intangible assets with a definite useful life.  This charge is presented in goodwill and identifiable intangible impairments on the consolidated statements of operations.

 

Goodwill

 

Adverse changes in the operating environment and related key assumptions used to determine the fair value of the Company’s reporting units and indefinite-lived intangible assets may result in future impairment charges for a portion or all of these assets. Specifically, if the rate of growth of government and commercial revenues earned by the Company’s reporting units were to be less than projected or if healthcare reforms were to negatively impact the Company’s business, an impairment charge of a portion or all of these assets may be required. An impairment charge could have a material adverse effect on the Company’s business, financial position and results of operations but would not be expected to have an impact on the Company’s cash flows or liquidity.

 

The Company performed its annual goodwill impairment test as of September 30, 2017 and 2016. The Company conducts the test at the reporting unit level that management has determined aligns with the Company’s segment reporting.  See Note 5 – “Segment Information” for a breakdown of the Company’s goodwill by segment.

 

The Company measures the fair value of each reporting unit to determine whether the fair value exceeds the carrying value based upon the market capitalization including a control premium and a discounted cash flow analysis. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, perpetual growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company earnings multiples for the market-based approach. The cash flows employed in the discounted cash flow analyses are based on the Company’s internal business model for 2017 and, for years beyond 2017 the growth rates used are an estimate of the future growth in the industry in which the Company participates. The discount rates used in the discounted cash flow analyses are intended to reflect the risks inherent in the future cash flows of the reporting unit and are based on an estimated cost of capital, which was determined based on the Company’s estimated cost of capital relative to its capital structure. In addition, the market-based approach utilizes comparable company public trading values, research analyst estimates and, where available, values observed in private market transactions.

 

The Company performed a quantitative test for impairment of goodwill to assess the impact of changes in the regulatory and reimbursement environment.  The Company compares the carrying amount of each of the reporting units to the fair value of each of the reporting units. If the carrying amount of each of its reporting units exceeds its fair value, an impairment of the goodwill is required.  If not, no further testing is needed.  The analysis indicated that the reporting unit carrying value exceeded the fair value of our inpatient reporting unit and accordingly an impairment was necessary.  An impairment of $351.5 million, which represents the entire balance of goodwill associated with the inpatient reporting unit, was recorded in the three and nine months ended September 30, 2017.  This charge was presented in goodwill and identifiable intangible impairments on the consolidated statements of operations.  With respect to the Company’s rehabilitation therapy services and other services segments, the total fair value exceeds the carrying value, so no impairment charge is required.  Although these segments have encountered similar challenging operating environments that have so acutely impacted the Company’s inpatient segment, those challenges have not negatively impacted the operating results of these segments to the level where an impairment charge is warranted.

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GENESIS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

(16)   Subsequent Events

 

Restructuring Plans

 

The Company and its counterparties to the Welltower Master Lease, the Sabra Master Leases, the Welltower Bridge Loans, the Term Loans and certain other loans have entered into preliminary non-binding agreements concerning a proposed long-term restructuring of these master leases and loans (the Restructuring Plans) in an effort to strengthen significantly the capital structure of the Company.

   

These Restructuring Plans include the proposed sale by Sabra and Welltower of certain facilities currently leased to the Company, which the Company intends to re-lease from new third-party landlords at reduced rents. The Company will also make commercially reasonable efforts to refinance or repay through asset sales, certain of its debt obligations with Welltower which, upon completion, is expected to result in a reduction in interest costs. 

 

These Restructuring Plans, if and when fully consummated, are expected to reduce the Company’s current cash fixed charges between $80 million and $100 million annually.  This level of reduction in fixed charges is subject to the successful sale of the Welltower and Sabra facilities to new landlords, the successful re-leasing of those facilities to the Company at reduced rents, the successful refinancing and/or repayment of certain debt obligations and the receipt of additional concessions to be made by other credit parties. The Company believes the transactions under the proposed restructuring could occur during the first half of 2018, however, there can be no assurance that any such transaction under the proposed Restructuring Plans will be agreed to or completed, or that any such agreements will attain a sustainable capital structure even if the Restructuring Plans are implemented.  See Part II, Item 1A, “Risk Factors.”

 

 

 

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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 consolidated financial statements and related notes included in this report, as well as the financial information and MD&A contained in the our Annual Report (defined below).

   

All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than  statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements contain words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue,” “pursue,” “plans” or “prospect,” or the negative or other variations thereof or comparable terminology. They include, but are not limited to, statements about the Company’s expectations and beliefs regarding its future operations and financial performance. Historical results may not indicate future performance. Our forward-looking statements are based on current expectations and projections about future events, and there can be no assurance that they will be achieved or occur, in whole or in part, in the timeframes anticipated by the Company or at all. Investors are cautioned that forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that cannot be predicted or quantified and, consequently, the actual performance of the Company may differ materially from that expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016, particularly in Item 1A, “Risk Factors,” which was filed with the SEC on March 6, 2017 (the Annual Report), as well as others that are discussed in this Form 10-Q. These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, operations, liquidity and stock price. Any forward-looking statements contained herein are made only as of the date of this report. The Company disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

 

Business Overview

 

Genesis is a healthcare services company that through its subsidiaries owns and operates skilled nursing facilities, assisted living facilities and a rehabilitation therapy business.  We have an administrative services company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services.  At September 30, 2017, we provided inpatient services through 472 skilled nursing, senior/assisted living and behavioral health centers located in 30 states.  Revenues of our owned, leased and otherwise consolidated centers constitute approximately 86% of our revenues.

 

We also provide a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and respiratory therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by us, as well as by contract to healthcare facilities operated by others.  After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 11% of our revenues.

 

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

 

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Going Concern Considerations

 

The accompanying unaudited financial statements have been prepared on the basis we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

In evaluating our ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern for 12 months following the date our financial statements were issued (November 8, 2017). Management considered the recent results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due before November 8, 2018.

 

Our results of operations have been negatively impacted by the persistent pressure of healthcare reforms enacted in recent years.  This challenging operating environment has been most acute in our inpatient segment, but also has had a detrimental effect on our rehabilitation therapy segment and its customers.  In recent years, we have implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment.  These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments accelerated in the third quarter of 2017.  These factors caused us to be unable to comply with certain financial covenants at September 30, 2017 under the Revolving Credit Facilities, the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements and other agreements.  We have received waivers from the parties to the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements at September 30, 2017.  We are engaged in discussions with our counterparties to the Revolving Credit Facilities to secure a 90-day forbearance agreement through late January 2018.  

 

Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in the major agreements and other agreements, is dependent upon, among other things, our ability to obtain a sustainable capital structure and our future performance which is subject to financial, economic, competitive, regulatory and other factors.  Many of these factors are beyond our control.  As currently structured, it is unlikely that we will be able to generate sufficient cash flow to cover required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties.

 

We and our counterparties to the Restructuring Plans have entered into preliminary and non-binding agreements in an effort to attain a sustainable capital structure for us.  See Note 16 – “Subsequent Events.”  We believe that it is in the best interest of all creditors to grant necessary waivers or reach negotiated settlements to enable us to continue as a going concern while we work with our counterparties to the Restructuring Plans to strengthen significantly our capital structure.  However, there can be no assurance that timely and adequate waivers will be received in future periods or such settlements reached.  If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not timely obtained, the defaults can cause acceleration of our financial obligations under certain of our agreements, which we may not be in a position to satisfy.  Accordingly, we have classified the obligations of the effected agreements as current liabilities in our consolidated balance sheets as of September 30, 2017.

 

In the event of a failure to obtain necessary and timely waivers or otherwise achieve the fixed charge reductions contained in the Restructuring Plans, we may be forced to seek reorganization under the U.S. Bankruptcy Code.  See Part II. Item 1A, “Risk Factors.”

 

The existence of these factors raises substantial doubt about our ability to continue as a going concern.

 

Recent Transactions and Events

 

Skilled Nursing Facility Divestitures

 

We divested or closed 28 skilled nursing facilities in the nine months ended September 30, 2017. 

 

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One skilled nursing facility located in California was closed on September 28, 2017. The skilled nursing facility remains subject to a master lease agreement and had annual revenue of $6.9 million and pre-tax net loss of $1.6 million.  We recognized a loss of $0.5 million.

 

One skilled nursing facility located in Colorado was divested on July 10, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $5.7 million and pre-tax net loss of $2.2 million.  We recognized a loss of $0.5 million.

 

One skilled nursing facility located in North Carolina was divested on June 1, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $6.4 million and pre-tax net loss of $1.0 million.  We recognized a loss of $0.5 million.

Eighteen skilled nursing facilities (16 owned and 2 leased) located in Kansas, Missouri, Nebraska and Iowa were divested on April 1, 2017.  The 18 skilled nursing facilities had annual revenue of $110.1 million, pre-tax net loss of $10.7 million and total assets of $91.6 million.  Sale proceeds of approximately $80 million, net of transaction costs, were used principally to repay the indebtedness of the skilled nursing facilities.  We recognized a loss of $6.4 million. The 16 owned skilled nursing facilities qualified and were presented as assets held for sale at December 31, 2016.  One of the leased skilled nursing facilities was subleased to a new operator resulting in a loss associated with a cease to use asset of $4.1 million.

 

One skilled nursing facility located in Tennessee was divested on April 1, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $7.4 million and pre-tax net income of $0.5 million.  We recognized a loss of $0.7 million.

 

Four skilled nursing facilities located in Massachusetts were subject to a master lease agreement and were divested on March 14, 2017.  These facilities, along with two other facilities that were divested previously and subleased to a third-party operator, were sold and terminated from the master lease resulting in an annual rent credit of $1.2 million.  The master lease termination resulted in a capital lease net asset and obligation write-down of $14.9 million.  The four skilled nursing facilities had annual revenue of $26.7 million and pre-tax net income of $1.2 million. We recognized a loss of $1.4 million.

 

Two skilled nursing facilities located in Georgia were divested on February 1, 2017 at the expiration of their respective lease terms.  The two skilled nursing facilities had annual revenue of $10.6 million and pre-tax net loss of $0.4 million.  We recognized a loss of $0.5 million.

 

Losses are presented in other loss (income) on the consolidated statements of operations.

 

HUD Financings

 

On September 30, 2017, we completed the financings of two skilled nursing facilities with HUD insured loans.  The total loan amount of the three financings was $23.9 million.  Proceeds from the financings along with other cash on hand was used to partially pay down a Real Estate Bridge Loan by $25.1 million. See Note 8 – “Long-Term Debt – Real Estate Bridge Loans” and Long-Term Debt  – HUD Insured Loans.” 

 

Dining and Nutrition Partnership

 

In April 2017, we entered into a strategic dining and nutrition partnership to further leverage our national platforms, process expertise and technology.  The relationship, which is expected to be accretive to us, will provide additional liquidity, cost efficiency and enhanced operational performance.

 

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Settlement Agreement

 

See Note 12 – “Commitments and Contingencies – Legal Proceedings” for further description of the matters discussed below.

 

On June 9, 2017, we and the DOJ entered into a settlement agreement regarding four matters arising out of the activities of Skilled or Sun Healthcare prior to their operations becoming part of our operations (collectively, the Successor Matters).  The four matters are: the Creekside Hospice Litigation, the Therapy Matters Investigation, the Staffing Matters Investigation and the SunDance Part B Therapy Matter.  We agreed to the settlement in order to resolve the allegations underlying the Successor Matters and to avoid the uncertainty and expense of litigation.

 

The settlement agreement calls for payment of a collective settlement amount of $52.7 million (the Settlement Amount), including separate Medicaid repayment agreements with each affected state Medicaid program.  The Settlement Amount has been recorded fully in accrued expenses in the consolidated balance sheets at December 31, 2016.  We will remit the Settlement Amount over a period of five (5) years.  The first installment was paid in June 2017.  The remaining outstanding Settlement Amount at September 30, 2017 is $49.2 million, of which $9.0 million is recorded in accrued expenses and $40.2 million is recorded in other long-term liabilities.

   

Industry Trends and Recent Regulatory Governmental Actions Affecting Revenue

 

Fiscal Year 2018 Medicare Payment Rates

 

On July 31, 2017, the Centers for Medicare & Medicaid Services (CMS) issued the final rule outlining fiscal year 2018 Medicare payment rates for skilled nursing facilities.  The final rule uses a market basket percentage of 1.0% effective October 1, 2017 to update the federal rates, but if a skilled nursing facility fails to meet quality reporting program requirements there will be a 2.0% penalty. Thus, the increase in the federal rates may increase the amount of our reimbursements for skilled nursing facility services so long as we meet the reporting requirements and avoid the 2% penalty. The final rule was published in the August 4, 2017 Federal Register. 

 

The final rule also includes revisions to the skilled nursing facility Quality Reporting Program and for the Skilled Nursing Facility Value-Based Purchasing (VBP) Program.  The VBP Prgram will affect Medicare payment to skilled nursing facilities beginning in fiscal year 2019 as described in the next section.

 

Skilled Nursing Facility Value-Based Purchasing (VBP) Program

 

The CMS VBP Program is one of many VBP programs that aims to reward quality and improve health care. Effective October 1, 2018, skilled nursing facilities will have an opportunity to receive incentive payments based on performance on the specified quality measure.

 

The Protecting Access to Medicare Act (PAMA) of 2014, enacted into law on April 1, 2014, authorized the VBP Program and requires CMS to adopt a VBP payment adjustment for skilled nursing facilities effective October 1, 2018. By law, the VBP Program is limited to a single readmission measure at a time. 

 

PAMA requires CMS, among other things, to:

·

Furnish value-based incentive payments to skilled nursing facilities for services beginning October 1, 2018.

·

Develop a methodology for assessing performance scores.

·

Adopt performance standards on a quality measure that includes achievement and improvement.

·

Rank skilled nursing facilities based on their performance from low to high. The highest ranked facilities will receive the highest payments, and the lowest ranked 40 percent of facilities will receive payments that are less than what they otherwise would have received without the VBP Program.

 

CMS will withhold 2% of Medicare payments starting October 1, 2018, to fund the incentive payment pool and will then redistribute 60% of the withheld payments back to skilled nursing facilities through the VBP Program based

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upon a 30-day potentially preventable readmission measure.  Failure to qualify for the incentive payment pool at levels that at least match the 2% withholding could have a significant negative impact on our consolidated financial condition and results of operations.  The final rule was published in the August 4, 2017 Federal Register.

 

CMS Advanced Notice of Proposed Rule

 

On April 27, 2017, CMS issued an advanced notice of a proposed rule revising certain aspects of the existing skilled nursing facility prospective payment system (PPS) payment methodology to improve its accuracy, based on the results of the skilled nursing facility Payment Models Research project. The proposal explores the possibility of replacing the PPS’ existing case-mix classification model, the Resource Utilization Groups, Version 4, with a new model, the Resident Classification System, Version I (RCS-I). The proposal discusses options for how such a change could be implemented, as well as a number of other policy changes to consider to complement implementation of RCS-I.  The rule proposal was open for a comment period that ended August 25, 2017.

 

Episode Payment Models (EPMs)

 

On January 3, 2017, CMS issued its final rule implementing three new Medicare Parts A and B episode payment models (EPMs) and implements changes to the existing comprehensive care for joint replacement (CJR) model. Under the three new EPMs, acute care hospitals in certain selected geographic areas would participate in retrospective EPMs targeting care for Medicare fee-for-service beneficiaries receiving services during acute myocardial infarction (AMI), coronary artery bypass graft (CABG), and surgical hip/femur fracture treatment (SHFFT) episodes. AMI and CABG episodes would be tested in 98 metropolitan statistical areas (MSAs) and SHFFT episodes would be tested in the current 67 MSAs participating in CJR.  The SHFFT payment model would support clinicians in providing care to patients who received surgery after a hip fracture, other than hip replacement.  All related care within 90 days of hospital discharge would be included in the episode of care. Hospitals would have been permitted to share in risk and savings with other providers, including skilled nursing facilities. The provisions contained in the instructions were to become effective January 1, 2018. 

 

On August 17, 2017, CMS issued a proposed rule reducing the number of selected geographies mandated to participate in the CJR model from 67 MSAs to 34 MSAs. The proposed rule would also cancel the EPMs and the Cardiac Rehabilitation incentive payment model that were scheduled to begin on January 1, 2018.

 

Requirements for Participation

 

On October 4, 2016, CMS published a final rule to make major changes to improve the care and safety of residents in long-term care facilities that participate in the Medicare and Medicaid programs. The policies in this final rule are targeted at reducing unnecessary hospital readmissions and infections, improving the quality of care, and strengthening safety measures for residents in these facilities.

 

Changes finalized in this rule include:

·

Strengthening the rights of long-term care facility residents.

·

Ensuring that long-term care facility staff members are properly trained on caring for residents with dementia and in preventing elder abuse.

·

Ensuring that long-term care facilities take into consideration the health of residents when making decisions on the kinds and levels of staffing a facility needs to properly take care of its residents.

·

Ensuring that staff members have the right skill sets and competencies to provide person-centered care to residents. The care plans developed for residents will take into consideration their goals of care and preferences.

·

Improving care planning, including discharge planning for all residents with involvement of the facility’s interdisciplinary team and consideration of the caregiver’s capacity, giving residents information they need for follow-up after discharge, and ensuring that instructions are transmitted to any receiving facilities or services.

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·

Updating the long-term care facility’s infection prevention and control program, including requiring an infection prevention and control officer and an antibiotic stewardship program that includes antibiotic use protocols and a system to monitor antibiotic use.

 

The regulations are effective on November 28, 2016. CMS is implementing the regulations using a phased approach. The phases are as follows:

 

·

Phase 1: The regulations included in Phase 1 were implemented by November 28, 2016.

·

Phase 2: The regulations included in Phase 2 must be implemented by November 28, 2017.

·

Phase 3: The regulations included in Phase 3 must be implemented by November 28, 2019.

 

Some regulatory sections are divided among more than one phase, and some of the more extensive new requirements have been placed in later phases to allow facilities time to successfully prepare to achieve compliance.

 

The total costs associated with implementing the new regulations is not known at this time.  Failure to comply with the new regulations could result in exclusion from the Medicare and Medicaid programs and have an adverse impact on our business, financial condition or results of operations.  We have substantially complied with the regulations imposed through the Phase 1 implementation and expect to be in substantial compliance with the Phase 2 regulations by the November 28, 2017 implementation deadline.

 

Improving Medicare Post-Acute Care Transformation Act (IMPACT)

 

In 2014, with strong support from most stakeholders, Congress enacted the Improving Medicare Post-Acute Care Transformation Act (IMPACT Act). The intent of this enactment was to improve the uniformity of data reporting across the post-acute sector and to move forward with a common assessment tool rationalizing the delivery of post-acute services. The IMPACT Act further requires that CMS develop and implement quality measures from five quality measure domains using standardized assessment data.  In addition, the Act requires the development and reporting of measures pertaining to resource use, hospitalization, and discharge to the community. Through the use of standardized quality measures and standardized data, the intent of the IMPACT Act, among other obligations, is to enable interoperability and access to longitudinal information for such providers to facilitate coordinated care, improved outcomes, and overall quality comparisons.

 

Data collection for certain measures including pressure ulcers, falls and functional goals has been gathered quarterly beginning October 1, 2016 and was submitted prior to the June 1, 2017 deadline.  Failure to submit required data would have resulted in a 2% Medicare payment penalty beginning October 1, 2017.

 

Texas Minimum Payment Amount Program (MPAP)

 

We manage the operations of 20 skilled nursing facilities in the State of Texas, which we consolidate through our controlling interests in those entities through management agreements.  Those skilled nursing facilities had participated in a voluntary supplemental Medicaid payment program known as the Minimum Payment Amount Program (MPAP), which expired August 31, 2016.  The purpose of MPAP funds was to continue a level of funding for participating skilled nursing facilities so that they can more readily provide quality care to Medicaid beneficiaries.  While the state had been actively appealing CMS, the MPAP expired.  On an annualized basis prior to its expiration, our share of MPAP had provided for $62 million of revenue and enhanced pre-tax income of the participating skilled nursing facilities by approximately $18 million. 

 

Key Performance and Valuation Measures

 

In order to assess our financial performance between periods, we evaluate certain key performance and valuation measures for each of our operating segments separately for the periods presented.  Results and statistics may not be comparable period-over-period due to the impact of acquisitions and dispositions, or the impact of new and lost therapy contracts. 

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The following is a glossary of terms for some of our key performance and valuation measures and non-GAAP measures:

 

“Actual Patient Days” is defined as the number of residents occupying a bed (or units in the case of an assisted/senior living center) for one qualifying day in that period.

 

“Adjusted EBITDA” is defined as EBITDA adjusted for newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental performance measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, non-GAAP measures.

 

“Adjusted EBITDAR” is defined as EBITDAR adjusted for newly acquired or constructed businesses with start-up losses and other adjustments to provide a supplemental valuation measure. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with, non-GAAP measures.

 

“Available Patient Days” is defined as the number of available beds (or units in the case of an assisted/senior living center) multiplied by the number of days in that period.

 

“Average Daily Census” or “ADC” is the number of residents occupying a bed (or units in the case of an assisted/senior living center) over a period of time, divided by the number of calendar days in that period.

 

 “EBITDA” is defined as EBITDAR less lease expense. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with non-GAAP measures.

 

“EBITDAR” is defined as net income or loss attributable to Genesis Healthcare, Inc. before net income or loss of non-controlling interests, net income or loss from discontinued operations, depreciation and amortization expense, interest expense and lease expense. See “Reasons for Non-GAAP Financial Disclosure” for an explanation of the adjustments and a description of our uses of, and the limitations associated with non-GAAP measures.

 

“Insurance” refers collectively to commercial insurance and managed care payor sources, including Medicare Advantage beneficiaries, but does not include managed care payors serving Medicaid residents, which are included in the Medicaid category.

 

“Occupancy Percentage” is measured as the percentage of Actual Patient Days relative to the Available Patient Days.

 

“Skilled Mix” refers collectively to Medicare and Insurance payor sources.

 

“Therapist Efficiency” is computed by dividing billable labor minutes related to patient care by total labor minutes for the period.

 

Key performance and valuation measures for our businesses are set forth below, followed by a comparison and analysis of our financial results (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

Nine months ended September 30, 

 

    

2017

    

2016

 

    

2017

    

2016

Financial Results

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,315,452

 

$

1,418,994

 

 

$

4,045,860

 

$

4,329,570

EBITDA

 

 

(429,605)

 

 

114,673

 

 

 

(240,975)

 

 

412,573

Adjusted EBITDAR

 

 

147,788

 

 

172,141

 

 

 

488,829

 

 

539,842

Adjusted EBITDA

 

 

109,118

 

 

136,629

 

 

 

375,825

 

 

430,046

Net loss attributable to Genesis Healthcare, Inc.

 

 

(373,824)

 

 

(20,458)

 

 

 

(489,741)

 

 

(86,470)

 

46


 

 

INPATIENT SEGMENT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

Nine months ended September 30, 

 

    

2017

    

2016

 

    

2017

    

2016

    

Occupancy Statistics - Inpatient

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available licensed beds in service at end of period

 

 

55,005

 

 

58,379

 

 

 

55,005

 

 

58,379

 

Available operating beds in service at end of period

 

 

52,907

 

 

56,444

 

 

 

52,907

 

 

56,444

 

Available patient days based on licensed beds

 

 

5,058,848

 

 

5,325,166

 

 

 

15,018,709

 

 

15,846,651

 

Available patient days based on operating beds

 

 

4,872,838

 

 

5,160,945

 

 

 

14,479,602

 

 

15,403,904

 

Actual patient days

 

 

4,123,001

 

 

4,411,152

 

 

 

12,323,181

 

 

13,202,437

 

Occupancy percentage - licensed beds

 

 

81.5

%

 

82.8

%

 

 

82.1

%  

 

83.3

%  

Occupancy percentage - operating beds

 

 

84.6

%

 

85.5

%

 

 

85.1

%  

 

85.7

%  

Skilled mix

 

 

18.7

%

 

19.6

%

 

 

19.7

%  

 

20.4

%  

Average daily census

 

 

44,815

 

 

47,947

 

 

 

45,140

 

 

48,184

 

Revenue per patient day (skilled nursing facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare Part A

 

$

524

 

$

513

 

 

$

527

 

$

513

 

Medicare total (including Part B)

 

 

573

 

 

555

 

 

 

571

 

 

554

 

Insurance

 

 

457

 

 

458

 

 

 

456

 

 

454

 

Private and other

 

 

328

 

 

309

 

 

 

325

 

 

306

 

Medicaid

 

 

219

 

 

218

 

 

 

218

 

 

219

 

Medicaid (net of provider taxes)

 

 

199

 

 

199

 

 

 

199

 

 

199

 

Weighted average (net of provider taxes)

 

$

269

 

$

270

 

 

$

272

 

$

272

 

Patient days by payor (skilled nursing facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

 

439,240

 

 

513,720

 

 

 

1,398,286

 

 

1,617,227

 

Insurance

 

 

293,315

 

 

306,366

 

 

 

917,343

 

 

921,519

 

Total skilled mix days

 

 

732,555

 

 

820,086

 

 

 

2,315,629

 

 

2,538,746

 

Private and other

 

 

257,835

 

 

305,545

 

 

 

779,228

 

 

903,951

 

Medicaid

 

 

2,924,845

 

 

3,063,256

 

 

 

8,616,866

 

 

9,031,537

 

Total Days

 

 

3,915,235

 

 

4,188,887

 

 

 

11,711,723

 

 

12,474,234

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

 

11.2

%

 

12.3

%

 

 

11.9

%  

 

13.0

%  

Insurance

 

 

7.5

%

 

7.3

%

 

 

7.8

%  

 

7.4

%  

Skilled mix

 

 

18.7

%

 

19.6

%

 

 

19.7

%  

 

20.4

%  

Private and other

 

 

6.6

%

 

7.3

%

 

 

6.7

%  

 

7.2

%  

Medicaid

 

 

74.7

%

 

73.1

%

 

 

73.6

%  

 

72.4

%  

Total

 

 

100.0

%

 

100.0

%

 

 

100.0

%  

 

100.0

%  

Facilities at end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased

 

 

362

 

 

375

 

 

 

362

 

 

375

 

Owned

 

 

44

 

 

60

 

 

 

44

 

 

60

 

Joint Venture

 

 

 5

 

 

 5

 

 

 

 5

 

 

 5

 

Managed *

 

 

35

 

 

34

 

 

 

35

 

 

34

 

Total skilled nursing facilities

 

 

446

 

 

474

 

 

 

446

 

 

474

 

Total licensed beds

 

 

54,935

 

 

57,896

 

 

 

54,935

 

 

57,896

 

Assisted/Senior living facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leased

 

 

19

 

 

26

 

 

 

19

 

 

26

 

Owned

 

 

 4

 

 

 4

 

 

 

 4

 

 

 4

 

Joint Venture

 

 

 1

 

 

 1

 

 

 

 1

 

 

 1

 

Managed

 

 

 2

 

 

 2

 

 

 

 2

 

 

 2

 

Total assisted/senior living facilities

 

 

26

 

 

33

 

 

 

26

 

 

33

 

Total licensed beds

 

 

2,208

 

 

2,643

 

 

 

2,208

 

 

2,643

 

Total facilities

 

 

472

 

 

507

 

 

 

472

 

 

507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Jointly Owned and Managed— (Unconsolidated)

 

 

15

 

 

15

 

 

 

15

 

 

15

 

 

47


 

REHABILITATION THERAPY SEGMENT**:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

Nine months ended September 30, 

 

    

2017

    

2016

 

    

2017

    

2016

    

Revenue mix %:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company-operated

 

 

37

%  

 

37

%

 

 

37

%  

 

37

%  

Non-affiliated

 

 

63

%  

 

63

%

 

 

63

%  

 

63

%  

Sites of service (at end of period)

 

 

1,525

 

 

1,582

 

 

 

1,525

 

 

1,582

 

Revenue per site

 

$

152,956

 

$

156,362

 

 

$

460,360

 

$

489,854

 

Therapist efficiency %

 

 

66

%  

 

67

%

 

 

68

%  

 

69

%  


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

** Excludes respiratory therapy services.

 

Reasons for Non-GAAP Financial Disclosure

 

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

 

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

 

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

 

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

 

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

 

provide better transparency as to the measures used by management and others who follow our industry to estimate the value of our company; and

 

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

 

We use Non-GAAP Financial Measures primarily as performance measures and believe that the GAAP financial measure most directly comparable to them is net income (loss) attributable to Genesis Healthcare, Inc. We use Non-GAAP Financial Measures to assess the value of our business and the performance of our operating businesses, as well as the employees responsible for operating such businesses. Non-GAAP Financial Measures are useful in this regard because they do not include such costs as interest expense, income taxes and depreciation and amortization expense which may vary from business unit to business unit depending upon such factors as the method used to finance the

48


 

original purchase of the business unit or the tax law in the state in which a business unit operates. By excluding such factors when measuring financial performance, many of which are outside of the control of the employees responsible for operating our business units, we are better able to evaluate value and the operating performance of the business unit and the employees responsible for business unit performance. Consequently, we use these Non-GAAP Financial Measures to determine the extent to which our employees have met performance goals, and therefore the extent to which they may or may not be eligible for incentive compensation awards.

 

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

 

Although we use Non-GAAP Financial Measures as financial measures to assess value and the performance of our business, the use of these Non-GAAP Financial Measures is limited because they do not consider certain material costs necessary to operate the business.  These costs include our lease expense (only in the case of EBITDAR and Adjusted EBITDAR), the cost to service debt, the depreciation and amortization associated with our long-lived assets, losses (gains) on extinguishment of debt, transaction costs, long-lived asset impairment charges, federal and state income tax expenses, the operating results of our discontinued businesses and the income or loss attributable to non-controlling interests.  Because Non-GAAP Financial Measures do not consider these important elements of our cost structure, a user of our financial information who relies on Non-GAAP Financial Measures as the only measures of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net income (loss) attributable to Genesis Healthcare, Inc. as an important measure of its financial performance because it provides the most complete measure of our performance.

 

Other companies may define Non-GAAP Financial Measures differently and, as a result, our Non-GAAP Financial Measures may not be directly comparable to those of other companies.  Non-GAAP Financial Measures do not represent net income (loss), as defined by GAAP. Non-GAAP Financial Measures should be considered in addition to, not a substitute for, or superior to, GAAP Financial Measures.

 

We use the following Non-GAAP Financial Measures that we believe are useful to investors as key valuation and operating performance measures:

 

EBITDA

 

We believe EBITDA is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (interest and lease expense) and our asset base (depreciation and amortization expense) from our operating results.  In addition, covenants in our debt agreements use EBITDA as a measure of financial compliance.

 

Adjustments to EBITDA

 

We adjust EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, in the case of Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA, when combined with GAAP net income (loss) attributable to Genesis Healthcare, Inc., and EBITDA, is beneficial to an investor’s complete understanding of our operating performance. In addition, such adjustments are substantially similar to the adjustments to EBITDA provided for in the financial covenant calculations contained in our lease and debt agreements.

 

49


 

We adjust EBITDA for the following items:

 

·

Loss on extinguishment of debt. We recognize losses on the extinguishment of debt when we refinance our debt prior to its original term, requiring us to write-off any unamortized deferred financing fees.  We exclude the effect of losses or gains recorded on the early extinguishment of debt because we believe these gains and losses do not accurately reflect the underlying performance of our operating businesses.

 

·

Other loss (income).  We primarily use this income statement caption to capture gains and losses on the sale or disposition of assets.  We exclude the effect of such gains and losses because we believe they do not accurately reflect the underlying performance of our operating businesses.

 

·

Transaction costs. In connection with our acquisition and disposition transactions, we incur costs consisting of investment banking, legal, transaction-based compensation and other professional service costs.  We exclude acquisition and disposition related transaction costs expensed during the period because we believe these costs do not reflect the underlying performance of our operating businesses.

 

·

Customer receivership. We exclude the non-cash costs related to a customer receivership and the related write-down of unpaid accounts receivable.  We believe these costs do not accurately reflect the underlying performance of our operating businesses.

 

·

Long-lived asset impairments.  We exclude non-cash long-lived asset impairment charges because we believe including them does not reflect the ongoing operating performance of our operating businesses.  Additionally, such impairment charges represent accelerated depreciation expense, and depreciation expense is excluded from EBITDA.

 

·

Goodwill and identifiable intangible asset impairments.  We exclude non-cash goodwill and identifiable intangible asset impairment charges because we believe including them does not reflect the ongoing operating performance of our operating businesses. 

 

·

Severance and restructuring.  We exclude severance costs from planned reduction in force initiatives associated with restructuring activities intended to adjust our cost structure in response to changes in the business environment.  We believe these costs do not reflect the underlying performance of our operating businesses.  We do not exclude severance costs that are not associated with such restructuring activities.

 

·

Losses of newly acquired, constructed or divested businesses.  The acquisition and construction of new businesses is an element of our growth strategy.  Many of the businesses we acquire have a history of operating losses and continue to generate operating losses in the months that follow our acquisition.  Newly constructed or developed businesses also generate losses while in their start-up phase.  We view these losses as both temporary and an expected component of our long-term investment in the new venture.  We adjust these losses when computing Adjusted EBITDA in order to better analyze the performance of our mature ongoing business.  The activities of such businesses are adjusted when computing Adjusted EBITDA until such time as a new business generates positive Adjusted EBITDA.  The operating performance of new businesses is no longer adjusted when computing Adjusted EBITDA beginning in the period in which a new business generates positive Adjusted EBITDA and all periods thereafter.  The divestiture of underperforming or non-strategic facilities is also an element of our business strategy.  We eliminate the results of divested facilities beginning in the quarter in which they become divested.  We view the losses associated with the wind-down of such divested facilities as not indicative of the performance of our ongoing operating business.

 

·

Stock-based compensation.  We exclude stock-based compensation expense because it does not result in an outlay of cash and such non-cash expenses do not reflect the underlying operating performance of our operating businesses.

 

50


 

·

Other Items.  From time to time we incur costs or realize gains that we do not believe reflect the underlying performance of our operating businesses.  In the current reporting period, we incurred the following expenses that we believe are non-recurring in nature and do not reflect the ongoing operating performance of our operating businesses.

 

(1)

Skilled Healthcare and other loss contingency expense – We exclude the estimated settlement cost and any adjustments thereto regarding the four legal matters inherited by us in the Skilled and Sun Healthcare transactions and disclosed in the commitments and contingencies footnote to our consolidated financial statements describing our material legal proceedingsIn the nine months ended September 30, 2016, we increased our estimated loss contingency expense by $15.2 million related to these matters.  We believe these costs are non-recurring in nature as they will no longer be recognized following the final settlement of these matters.  We do not exclude the estimated settlement costs associated with all other legal and regulatory matters arising in the normal course of business.  Also, we do not believe the excluded costs reflect the underlying performance of our operating businesses.

 

(2)

Regulatory defense and related costs – We exclude the costs of investigating and defending the matters associated with the Skilled Healthcare and other loss contingency expense as noted in footnote (1).  We believe these costs are non-recurring in nature as they will no longer be recognized following the final settlement of these matters. Also, we do not believe the excluded costs reflect the underlying performance of our operating businesses.

 

(3)

Other non-recurring costs – In the three and nine months ended September 30, 2017, we excluded $3.5 million of costs primarily incurred in connection with the removal of a non-cash actuarially developed discount related to the settlement of workers’ compensation claims for policy years 2012 and prior.  In the three and nine months ended September 30, 2016, we excluded ($0.1) million and $0.8 million, respectively, of costs related to previously reported periods and a regulatory audit associated with acquired businesses and related to pre-acquisition periods.  We do not believe the excluded costs are recurring or reflect the underlying performance of our operating businesses.

 

Adjusted EBITDAR

 

We use Adjusted EBITDAR as one measure in determining the value of prospective acquisitions or divestitures.  Adjusted EBITDAR is also a commonly used measure to estimate the enterprise value of businesses in the healthcare industry.  In addition, covenants in our lease agreements use Adjusted EBITDAR as a measure of financial compliance.

 

The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR.  See the reconciliation of net loss attributable to Genesis Healthcare, Inc. included herein.

51


 

The following table provides a reconciliation of the non-GAAP valuation measurement Adjusted EBITDAR from net loss attributable to Genesis Healthcare, Inc., the most directly comparable financial measure presented in accordance with GAAP (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

Nine months ended September 30, 

 

    

2017

    

2016

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(373,824)

 

$

(20,458)

 

 

$

(489,741)

 

$

(86,470)

Adjustments to compute Adjusted EBITDAR:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

 2

 

 

24

 

 

 

70

 

 

 1

Net loss attributable to noncontrolling interests

 

 

(241,200)

 

 

(31,921)

 

 

 

(314,446)

 

 

(72,895)

Depreciation and amortization expense

 

 

59,390

 

 

61,104

 

 

 

183,986

 

 

190,822

Interest expense

 

 

124,431

 

 

131,812

 

 

 

373,473

 

 

400,853

Income tax expense (benefit)

 

 

1,596

 

 

(25,888)

 

 

 

5,683

 

 

(19,738)

Lease expense

 

 

38,670

 

 

35,512

 

 

 

113,004

 

 

109,796

Loss on extinguishment of debt

 

 

 —

 

 

15,363

 

 

 

2,301

 

 

15,830

Other loss (income)

 

 

2,379

 

 

(5,173)

 

 

 

15,602

 

 

(48,084)

Transaction costs

 

 

1,056

 

 

3,057

 

 

 

7,862

 

 

9,804

Customer receivership

 

 

297

 

 

 —

 

 

 

35,864

 

 

 —

Long-lived asset impairments

 

 

163,364

 

 

 —

 

 

 

163,364

 

 

 —

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 

360,046

 

 

 —

Severance and restructuring

 

 

256

 

 

1,123

 

 

 

4,950

 

 

7,939

Losses of newly acquired, constructed, or divested businesses

 

 

5,320

 

 

3,594

 

 

 

15,589

 

 

7,121

Stock-based compensation

 

 

2,440

 

 

3,090

 

 

 

7,206

 

 

6,809

Skilled Healthcare and other loss contingency expense (1)

 

 

 —

 

 

 —

 

 

 

 —

 

 

15,192

Regulatory defense and related costs (2)

 

 

41

 

 

1,043

 

 

 

492

 

 

2,101

Other non-recurring costs (3)

 

 

3,524

 

 

(141)

 

 

 

3,524

 

 

761

Adjusted EBITDAR

 

$

147,788

 

$

172,141

 

 

$

488,829

 

$

539,842

 

The following table provides a reconciliation of the non-GAAP performance measurement EBITDA and Adjusted EBITDA from net loss attributable to Genesis Healthcare, Inc., the most directly comparable financial measure presented in accordance with GAAP (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

Nine months ended September 30, 

 

    

2017

    

2016

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Genesis Healthcare, Inc.

 

$

(373,824)

 

$

(20,458)

 

 

$

(489,741)

 

$

(86,470)

Adjustments to compute EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

 2

 

 

24

 

 

 

70

 

 

 1

Net loss attributable to noncontrolling interests

 

 

(241,200)

 

 

(31,921)

 

 

 

(314,446)

 

 

(72,895)

Depreciation and amortization expense

 

 

59,390

 

 

61,104

 

 

 

183,986

 

 

190,822

Interest expense

 

 

124,431

 

 

131,812

 

 

 

373,473

 

 

400,853

Income tax expense (benefit)

 

 

1,596

 

 

(25,888)

 

 

 

5,683

 

 

(19,738)

EBITDA

 

$

(429,605)

 

$

114,673

 

 

 

(240,975)

 

 

412,573

Adjustments to compute Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

 —

 

 

15,363

 

 

 

2,301

 

 

15,830

Other loss (income)

 

 

2,379

 

 

(5,173)

 

 

 

15,602

 

 

(48,084)

Transaction costs

 

 

1,056

 

 

3,057

 

 

 

7,862

 

 

9,804

Customer receivership

 

 

297

 

 

 —

 

 

 

35,864

 

 

 —

Long-lived asset impairments

 

 

163,364

 

 

 —

 

 

 

163,364

 

 

 —

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 

360,046

 

 

 —

Severance and restructuring

 

 

256

 

 

1,123

 

 

 

4,950

 

 

7,939

Losses of newly acquired, constructed, or divested businesses

 

 

5,320

 

 

3,594

 

 

 

15,589

 

 

7,121

Stock-based compensation

 

 

2,440

 

 

3,090

 

 

 

7,206

 

 

6,809

Skilled Healthcare and other loss contingency expense (1)

 

 

 —

 

 

 —

 

 

 

 —

 

 

15,192

Regulatory defense and related costs (2)

 

 

41

 

 

1,043

 

 

 

492

 

 

2,101

Other non-recurring costs (3)

 

 

3,524

 

 

(141)

 

 

 

3,524

 

 

761

Adjusted EBITDA

 

$

109,118

 

$

136,629

 

 

$

375,825

 

$

430,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional lease payments not included in GAAP lease expense

 

 

85,396

 

 

88,871

 

 

 

258,724

 

 

265,781

 

52


 

Results of Operations

 

Same-store Presentation

   

We continue to execute on a strategic plan which includes expansion in core markets and operating segments which we believe will enhance the value of our business in the ever-changing landscape of national healthcare.  We are also focused on right-sizing our operations to fit that new environment and to divest of underperforming and non-strategic assets, many of which came to us as part of larger acquisitions in recent years that were necessary to achieve the net overall growth strategy. 

 

We define our same-store inpatient operations as those skilled nursing and assisted living centers which have been operated by us, in a steady-state, for each comparable period in this Results of Operations discussion.  We exclude from that definition those skilled nursing and assisted living facilities recently acquired that were not operated by us for the entire period, as well as those that were divested prior to or during the most recent period presented.  In cases where we are developing new skilled nursing or assisted living centers, those operations are excluded from our same-store inpatient operations until the revenue driven by operating patient census is stable in the comparable periods.  Additionally, our inpatient business is proportionately impacted by the addition of the extra day in periods containing a leap year, as the nine months ended September 30, 2016 was.  We removed the proportional estimated impact from revenue and operating expenses for presentation of same-store results.

 

Because it is the nature of our rehabilitation therapy services operations to experience high volume of both new and terminated contracts in an annual cycle, and the scale and significance of those contracts can be very different to both the revenue and operating expenses of that business, a same-store presentation based solely on the contract or gym count is not a valid depiction of the business.  Accordingly, we do not reference same-store figures in this MD&A with regard to that business.  Leap year did not have a material impact on the comparability of our rehabilitation therapy services.

 

The volume of services delivered in our other services businesses can also be affected by strategic transactional activity.  To the extent there are businesses to be excluded to achieve same-store comparability those will be noted in the context of the Results of Operations discussion.  Leap year did not have a material impact on the comparability of our other services business.

53


 

 

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

 

A summary of our unaudited results of operations for the three months ended September 30, 2017 as compared with the same period in 2016 follows (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

 

 

 

 

 

2017

 

2016

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

1,103,554

 

83.8

%  

$

1,192,498

 

84.0

%  

$

(88,944)

 

(7.5)

%

Assisted/Senior living facilities

 

 

24,185

 

1.8

%  

 

29,423

 

2.1

%  

 

(5,238)

 

(17.8)

%

Administration of third party facilities

 

 

2,266

 

0.2

%  

 

2,659

 

0.2

%  

 

(393)

 

(14.8)

%

Elimination of administrative services

 

 

(370)

 

 —

%  

 

(340)

 

 —

%  

 

(30)

 

8.8

%

Inpatient services, net

 

 

1,129,635

 

85.8

%  

 

1,224,240

 

86.3

%  

 

(94,605)

 

(7.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

244,471

 

18.6

%  

 

261,543

 

18.4

%  

 

(17,072)

 

(6.5)

%

Elimination intersegment rehabilitation therapy services

 

 

(92,573)

 

(7.0)

%  

 

(101,156)

 

(7.1)

%  

 

8,583

 

(8.5)

%

Third party rehabilitation therapy services

 

 

151,898

 

11.6

%  

 

160,387

 

11.3

%  

 

(8,489)

 

(5.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

42,901

 

3.3

%  

 

40,376

 

2.8

%  

 

2,525

 

6.3

%

Elimination intersegment other services

 

 

(8,982)

 

(0.7)

%  

 

(6,009)

 

(0.4)

%  

 

(2,973)

 

49.5

%

Third party other services

 

 

 33,919

 

2.6

%  

 

34,367

 

2.4

%  

 

(448)

 

(1.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,315,452

 

100.0

%  

$

1,418,994

 

100.0

%  

$

(103,542)

 

(7.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

 

 

 

 

 

 

 

2017

 

2016

 

Increase / (Decrease)

 

 

    

 

 

    

Margin

    

 

 

    

Margin

    

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services

 

$

(403,767)

 

(35.7)

%  

$

158,264

 

12.9

%  

$

(562,031)

 

(355.1)

%

Rehabilitation therapy services

 

 

15,646

 

6.4

%  

 

18,030

 

6.9

%  

 

(2,384)

 

(13.2)

%

Other services

 

 

(310)

 

(0.7)

%  

 

1,794

 

4.4

%  

 

(2,104)

 

(117.3)

%

Corporate and eliminations

 

 

(41,174)

 

 —

%  

 

(63,415)

 

 —

%  

 

22,241

 

(35.1)

%

EBITDA

 

$

(429,605)

 

(32.7)

%  

$

114,673

 

8.1

%  

$

(544,278)

 

(474.6)

%

 

 

54


 

A summary of our unaudited condensed consolidating statement of operations follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

 

 

 

Three months ended September 30, 2017

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

Services

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

Net revenues

 

$

1,130,005

 

$

244,471

 

$

42,778

 

$

123

 

$

(101,925)

 

$

1,315,452

 

Salaries, wages and benefits

 

 

507,075

 

 

205,232

 

 

27,097

 

 

 —

 

 

 —

 

 

739,404

 

Other operating expenses

 

 

442,816

 

 

19,455

 

 

15,242

 

 

 —

 

 

(101,926)

 

 

375,587

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

40,732

 

 

 —

 

 

40,732

 

Provision for losses on accounts receivable

 

 

22,078

 

 

1,974

 

 

447

 

 

688

 

 

 —

 

 

25,187

 

Lease expense

 

 

37,895

 

 

(14)

 

 

302

 

 

487

 

 

 —

 

 

38,670

 

Depreciation and amortization expense

 

 

51,666

 

 

3,497

 

 

167

 

 

4,060

 

 

 —

 

 

59,390

 

Interest expense

 

 

103,306

 

 

14

 

 

 9

 

 

21,102

 

 

 —

 

 

124,431

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(1,596)

 

 

 —

 

 

(1,596)

 

Other loss

 

 

2,379

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,379

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

1,056

 

 

 —

 

 

1,056

 

Customer receivership

 

 

 —

 

 

297

 

 

 —

 

 

 —

 

 

 —

 

 

297

 

Long-lived asset impairments

 

 

161,483

 

 

1,881

 

 

 —

 

 

 —

 

 

 —

 

 

163,364

 

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

360,046

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(571)

 

 

502

 

 

(69)

 

(Loss) income before income tax benefit

 

 

(558,739)

 

 

12,135

 

 

(486)

 

 

(65,835)

 

 

(501)

 

 

(613,426)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

1,596

 

 

 —

 

 

1,596

 

(Loss) income from continuing operations

 

$

(558,739)

 

$

12,135

 

$

(486)

 

$

(67,431)

 

$

(501)

 

$

(615,022)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2016

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

1,224,580

 

$

261,543

 

$

40,226

 

$

150

 

$

(107,505)

 

$

1,418,994

 

Salaries, wages and benefits

 

 

586,654

 

 

219,864

 

 

27,896

 

 

 —

 

 

 —

 

 

834,414

 

Other operating expenses

 

 

428,820

 

 

18,903

 

 

10,610

 

 

 —

 

 

(107,505)

 

 

350,828

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

46,545

 

 

 —

 

 

46,545

 

Provision for losses on accounts receivable

 

 

21,088

 

 

4,722

 

 

(161)

 

 

(47)

 

 

 —

 

 

25,602

 

Lease expense

 

 

34,745

 

 

24

 

 

269

 

 

474

 

 

 —

 

 

35,512

 

Depreciation and amortization expense

 

 

53,313

 

 

2,943

 

 

163

 

 

4,685

 

 

 —

 

 

61,104

 

Interest expense

 

 

109,339

 

 

14

 

 

10

 

 

22,449

 

 

 —

 

 

131,812

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

15,363

 

 

 —

 

 

15,363

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(934)

 

 

 —

 

 

(934)

 

Other income

 

 

(4,991)

 

 

 —

 

 

(182)

 

 

 —

 

 

 —

 

 

(5,173)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

3,057

 

 

 —

 

 

3,057

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,608)

 

 

715

 

 

(893)

 

(Loss) income before income tax benefit

 

 

(4,388)

 

 

15,073

 

 

1,621

 

 

(89,834)

 

 

(715)

 

 

(78,243)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(25,888)

 

 

 —

 

 

(25,888)

 

(Loss) income from continuing operations

 

$

(4,388)

 

$

15,073

 

$

1,621

 

$

(63,946)

 

$

(715)

 

$

(52,355)

 

 

Net Revenues

 

Net revenues for the three months ended September 30, 2017 decreased by $103.5 million, or 7.3%, as compared with the three months ended September 30, 2016.   

 

Inpatient Services – Revenue decreased $94.6 million, or 7.7%, in the three months ended September 30, 2017 as compared with the same period in 2016. On a same-store basis, excluding the impact of 38 divested underperforming facilities and the acquisition or development of nine additional facilities on comparability, inpatient services revenue declined $53.8 million, or 4.6%.  There was $28.2 million less incremental revenue pertaining to the Texas MPAP program in the three months ended September 30, 2017 as compared with the same period in 2016.  The remaining same-store decrease of $25.6 million, or 2.2%, is principally due to a decline in the occupancy and skilled mix of legacy Genesis inpatient facilities, partially offset by increased payment rates.  We attribute the decline in occupancy and skilled mix principally to the impact of healthcare reforms resulting in lower lengths of stay among our skilled patient

55


 

population and lower admissions caused by initiatives among acute care providers, managed care payers and conveners to divert certain skilled nursing referrals to home health or other community based care settings.

 

For an expanded discussion regarding the factors influencing our census decline, see Item 1, “Business – Recent Regulatory and other Governmental Actions Affecting Revenue” in our annual report on form 10-K filed with the SEC, as well as “Key Performance and Valuation Measures” in this MD&A for quantification of the census trends and revenue per patient day. 

 

Rehabilitation Therapy Services – Revenue decreased $8.5 million, or 5.3% comparing the three months ended September 30, 2017 with the same period in 2016.  Of that decrease, $19.2 million is due to lost contract business, offset by $14.1 million attributed to new contracts and price increases to certain existing customers.  The remaining decrease of $3.3 million is principally due to reduced volume of services provided existing customers due to the reduction in lengths of stay and skilled patient populations impacting the entire industry. 

 

Other Services – Other services revenue decreased $0.4 million, or 1.3% in the three months ended September 30, 2017 as compared with the same period in 2016.

 

EBITDA

 

EBITDA for the three months ended September 30, 2017 decreased by $544.3 million.  Excluding the impact of other loss (income), transaction costs, customer receivership charges, long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA decreased $30.4 million, or 23.8% when compared with the same period in 2016.  The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead. 

 

Inpatient Services – EBITDA decreased in the three months ended September 30, 2017 as compared with the same period in 2016, by $562.0 million.  Excluding the impact of other loss (income), long-lived asset impairments and goodwill and identifiable intangible asset impairments, EBITDA decreased $33.1 million, or 21.6%.  On a same store basis, the inpatient services EBITDA, as adjusted, decreased $30.0 million, or 20.3%.  This same-store decline is net of an $8.0 million reduction in our self-insurance program expense in the three months ended September 30, 2017 as compared with the same period in 2016.  While we still see acceleration of professional liability claims activity, we have seen marked improvements in the performance of our workers’ compensation and health benefit programs relative to the same period in 2016.  As compared with the same period in 2016, the three months ended September 30, 2017 has $8.1 million less incremental EBITDA attributed to the Texas MPAP program due to that programs expiration in August 2016.  Accounts receivable collections performance continues to be strong, however, as compared with the three months ended September 30, 2016, which reflected particularly strong collections, the three months ended September 30, 2017 had an incremental provision of $2.0 million.  The remaining $27.9 million decrease in EBITDA of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “Net Revenues,” and accelerating nursing wage inflation.  Nursing wage inflation increased 3.9% in the three months ended September 30, 2017 as compared with the same period in 2016, and is up 1.8% over the immediately preceding three months ended June 30, 2017.  

 

Rehabilitation Therapy Services – EBITDA of the rehabilitation therapy segment decreased by $2.4 million.   On an adjusted basis, excluding the impact of customer receivership charges and long-lived asset impairments, Adjusted EBITDA decreased $0.2 million, or 1.1% comparing the three months ended September 30, 2017 with the same period in 2016.  Lost contracts exceeded new contracts by $0.6 million.  Startup costs of our operations in China for the three therapy months ended September 30, 2017 exceeded those in the comparable period in 2016 by $0.4 million.  The remaining increase of EBITDA of $0.8 million is principally attributed to overhead cost reductions and favorable pricing increases, partially offset by therapist efficiency which declined to 66.3% in the three months ended September 30, 2017 compared with 67.5% in the comparable period in the prior year. 

 

Currently, we operate through affiliates in China a total of twelve locations comprised of the three rehabilitation clinics in Guangzhou, Shanghai and Hong Kong, a rehabilitation facility, and inpatient and outpatient rehabilitation

56


 

services in seven hospital joint ventures and one nursing home.  Startup and development costs of these Chinese ventures are expected to exceed revenues in fiscal 2017.

 

Other Services — EBITDA decreased $2.1 million in the three months ended September 30, 2017 as compared with the same period in 2016.  This decrease was principally driven by increased information technology costs in our physician services business to expand our accountable care organization participation and value based programing compliance. 

 

Corporate and Eliminations — EBITDA increased $22.2 million in the three months ended September 30, 2017 as compared with the same period in 2016.  EBITDA of our corporate function includes other income, charges, gains or losses associated with transactions that in our chief operating decision maker’s view are outside of the scope of our reportable segments.  These other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $17.4 million of the net increase in EBITDA.  Corporate overhead costs decreased $5.0 million, or 10.8%, in the three months ended September 30, 2017 as compared with the same period in 2016. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining decrease in EBITDA of $0.2 million is primarily the result of a reduction in earnings from our unconsolidated affiliates accounted for as equity investments. 

 

Other loss (income) — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets.  Other loss recognized for the three months ended September 30, 2017 was a net $2.4 million, attributable primarily to the transition of three leased skilled nursing facilities to new operators and closure of one skilled nursing facility in that period.  Other income was a net $5.2 million for the same period in 2016, which was principally the recognized gain on the sale of two assisted living facilities in that period.

 

Transaction costs — In the normal course of business, we evaluate strategic acquisition, disposition and business development opportunities. The costs to pursue these opportunities, when incurred, vary from period to period depending on the nature of the transaction pursued and if those transactions are ever completed. Transaction costs incurred for the three months ended September 30, 2017 and 2016 were $1.1 million and $3.1 million, respectively.

 

Asset Impairments — In the three months ended September 30, 2017 we recognized impairments of long-lived assets and goodwill and identifiable intangible assets of $163.4 million and $360.0 million, respectively.  For more information about the conditions of the business which contributed to these impairments, see “Going Concern Considerations” and “Industry Trends” in this MD&A, as well as Note 1 – “General Information – Going Concern Considerations” and Note 15 – “Asset Impairment Charges.”  

 

Other Expense

 

The following discussion applies to the consolidated expense categories between consolidated EBITDA and (loss) income from continuing operations of all reportable segments, other services, corporate and eliminations in our consolidating statement of operations for the three months ended September 30, 2017 as compared with the same period in 2016. 

 

Depreciation and amortization — Each of our reportable segments, other services and corporate overhead have depreciating property, plant and equipment, including depreciation on leased properties accounted for as capital leases or as a financing obligation. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets.  Depreciation and amortization expense decreased $1.7 million in the three months ended September 30, 2017 as compared with the same period in 2016, principally due to divestiture activity.  On a same store basis, depreciation and amortization increased $0.5 million in the three months ended September 30, 2017 as compared with the same period in 2016.

 

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our Revolving Credit Facilities, Term Loan Facility, Real Estate Bridge Loans and mortgage instruments, as well as the

57


 

expense associated with leases accounted for as capital leases or financing obligations.  Interest expense decreased $7.4 million in the three months ended September 30, 2017 as compared with the same period in the prior year.  On a same store basis, interest expense decreased $6.0 million in the three months ended September 30, 2017 as compared with the same period in 2016.  Of that decrease, $0.4 million is due to a reduction in cash interest resulting from the reduced borrowings under the Term Loan Facility through application of proceeds from asset sales and Real Estate Bridge Loans refinanced with lower rate HUD guaranteed mortgage debt.  The remaining $5.6 million decrease is principally attributed to non-cash accounting for lease transactions completed over the past twelve months.

 

Income tax expense — For the three months ended September 30, 2017, we recorded an income tax expense of $1.6 million from continuing operations representing an effective tax rate of (0.3)% compared to an income tax benefit of $25.9 million from continuing operations, representing an effective tax rate of 33.1% for the same period in 2016.  There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve.  Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets.  As of September 30, 2017, we have determined that the valuation allowance is still necessary.

 

Net Loss Attributable to Genesis Healthcare, Inc.

 

The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the three months ended September 30, 2017 as compared with the same period in 2016.  

 

Loss (income) from discontinued operations — Prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disposals of Components of an Entity (ASU 2014-08), we routinely classified reporting units exited, closed or otherwise disposed as discontinued operations.  ASU 2014-08 changed the criteria to qualify such transactions for discontinued operations treatment, making it hard to reach that conclusion.  Therefore, since 2014, none of our more recently exited, closed or otherwise disposed assets have been classified as discontinued operations.  The activity reported as discontinued operations in the three months ended September 30, 2017 and the same period in 2016 was de minimis, associated with exit, closure and disposal activities of reporting units identified as discontinued operations prior to adoption of ASU 2014-08.   

 

Net loss attributable to noncontrolling interests — Following the closing of the Combination, the combined results of Skilled and FC-GEN were consolidated with approximately 42% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity.  The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares.  Since the Combination, there have been conversions of 2.8 million Class C common stock, leaving a remaining direct noncontrolling economic interest of 39.4%.  For the three months ended September 30, 2017 and 2016, loss of $241.8 million and $32.8 million, respectively, has been attributed to the Class C common stock. 

 

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any VIEs where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both.  We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs.  For the three months ended September 30, 2017 and 2016, income of $0.6 million and $0.9 million, respectively, has been attributed to these unaffiliated third parties.

 

 

58


 

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

 

A summary of our unaudited results of operations for the nine months ended September 30, 2017 as compared with the same period in 2016 follows (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

 

 

2017

 

2016

 

Increase / (Decrease)

 

 

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing facilities

 

$

3,404,181

 

84.0

%  

$

3,595,258

 

82.9

%  

$

(191,077)

 

(5.3)

%

Assisted/Senior living facilities

 

 

72,262

 

1.8

%  

 

90,772

 

2.1

%  

 

(18,510)

 

(20.4)

%

Administration of third party facilities

 

 

6,841

 

0.2

%  

 

8,608

 

0.2

%  

 

(1,767)

 

(20.5)

%

Elimination of administrative services

 

 

(1,139)

 

 —

%  

 

(1,077)

 

 —

%  

 

(62)

 

5.8

%

Inpatient services, net

 

 

3,482,145

 

86.0

%  

 

3,693,561

 

85.2

%  

 

(211,416)

 

(5.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rehabilitation therapy services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total therapy services

 

 

743,605

 

18.4

%  

 

821,704

 

19.1

%  

 

(78,099)

 

(9.5)

%

Elimination intersegment rehabilitation therapy services

 

 

(287,599)

 

(7.1)

%  

 

(311,060)

 

(7.2)

%  

 

23,461

 

(7.5)

%

Third party rehabilitation therapy services

 

 

456,006

 

11.3

%  

 

510,644

 

11.9

%  

 

(54,638)

 

(10.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other services

 

 

133,168

 

3.3

%  

 

142,336

 

3.3

%  

 

(9,168)

 

(6.4)

%

Elimination intersegment other services

 

 

(25,459)

 

(0.6)

%  

 

(16,971)

 

(0.4)

%  

 

(8,488)

 

50.0

%

Third party other services

 

 

 107,709

 

2.7

%  

 

125,365

 

2.9

%  

 

(17,656)

 

(14.1)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

4,045,860

 

100.0

%  

$

4,329,570

 

100.0

%  

$

(283,710)

 

(6.6)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

 

 

 

2017

 

2016

 

Increase / (Decrease)

 

 

    

 

 

    

Margin

    

 

 

    

Margin

    

 

 

    

 

 

 

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

Dollars

 

Percentage

 

EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient services

 

$

(126,921)

 

(3.6)

%  

$

478,652

 

13.0

%  

$

(605,573)

 

(126.5)

%

Rehabilitation therapy services

 

 

20,126

 

2.7

%  

 

60,708

 

7.4

%  

 

(40,582)

 

(66.8)

%

Other services

 

 

 5

 

0.0

%  

 

50,776

 

35.7

%  

 

(50,771)

 

(100.0)

%

Corporate and eliminations

 

 

(134,185)

 

 —

%  

 

(177,563)

 

 —

%  

 

43,378

 

(24.4)

%

EBITDA

 

$

(240,975)

 

(6.0)

%  

$

412,573

 

9.5

%  

$

(653,548)

 

(158.4)

%

 

 

59


 

A summary of our unaudited condensed consolidating statement of operations follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,483,284

 

$

743,605

 

$

132,718

 

$

450

 

$

(314,197)

 

$

4,045,860

 

Salaries, wages and benefits

 

 

1,597,007

 

 

619,928

 

 

86,365

 

 

 —

 

 

 —

 

 

2,303,300

 

Other operating expenses

 

 

1,303,448

 

 

56,433

 

 

44,456

 

 

 —

 

 

(314,198)

 

 

1,090,139

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

127,041

 

 

 —

 

 

127,041

 

Provision for losses on accounts receivable

 

 

62,448

 

 

8,641

 

 

995

 

 

616

 

 

 —

 

 

72,700

 

Lease expense

 

 

110,661

 

 

 —

 

 

897

 

 

1,446

 

 

 —

 

 

113,004

 

Depreciation and amortization expense

 

 

159,483

 

 

11,110

 

 

506

 

 

12,887

 

 

 —

 

 

183,986

 

Interest expense

 

 

309,948

 

 

42

 

 

28

 

 

63,455

 

 

 —

 

 

373,473

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

2,301

 

 

 —

 

 

2,301

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(4,097)

 

 

 —

 

 

(4,097)

 

Other loss

 

 

15,112

 

 

732

 

 

 —

 

 

(242)

 

 

 —

 

 

15,602

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

7,862

 

 

 —

 

 

7,862

 

Customer receivership

 

 

 —

 

 

35,864

 

 

 —

 

 

 —

 

 

 —

 

 

35,864

 

Long-lived asset impairments

 

 

161,483

 

 

1,881

 

 

 —

 

 

 —

 

 

 —

 

 

163,364

 

Goodwill and identifiable intangible asset impairments

 

 

360,046

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

360,046

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(1,702)

 

 

1,411

 

 

(291)

 

(Loss) income before income tax benefit

 

 

(596,352)

 

 

8,974

 

 

(529)

 

 

(209,117)

 

 

(1,410)

 

 

(798,434)

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

5,683

 

 

 —

 

 

5,683

 

(Loss) income from continuing operations

 

$

(596,352)

 

$

8,974

 

$

(529)

 

$

(214,800)

 

$

(1,410)

 

$

(804,117)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2016

 

 

 

 

 

 

Rehabilitation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inpatient

 

Therapy

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Services

    

Services

    

Services

    

Corporate

    

Eliminations

    

Consolidated

 

Net revenues

 

$

3,694,638

 

$

821,704

 

$

141,970

 

$

366

 

$

(329,108)

 

$

4,329,570

 

Salaries, wages and benefits

 

 

1,748,232

 

 

689,833

 

 

96,759

 

 

 —

 

 

 —

 

 

2,534,824

 

Other operating expenses

 

 

1,296,069

 

 

58,927

 

 

36,198

 

 

 —

 

 

(329,108)

 

 

1,062,086

 

General and administrative costs

 

 

 —

 

 

 —

 

 

 —

 

 

139,999

 

 

 —

 

 

139,999

 

Provision for losses on accounts receivable

 

 

68,757

 

 

12,165

 

 

993

 

 

(139)

 

 

 —

 

 

81,776

 

Lease expense

 

 

107,047

 

 

71

 

 

1,209

 

 

1,469

 

 

 —

 

 

109,796

 

Depreciation and amortization expense

 

 

167,208

 

 

9,137

 

 

805

 

 

13,672

 

 

 —

 

 

190,822

 

Interest expense

 

 

328,385

 

 

43

 

 

30

 

 

72,395

 

 

 —

 

 

400,853

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

15,830

 

 

 —

 

 

15,830

 

Investment income

 

 

 —

 

 

 —

 

 

 —

 

 

(2,073)

 

 

 —

 

 

(2,073)

 

Other income

 

 

(4,119)

 

 

 —

 

 

(43,965)

 

 

 —

 

 

 —

 

 

(48,084)

 

Transaction costs

 

 

 —

 

 

 —

 

 

 —

 

 

9,804

 

 

 —

 

 

9,804

 

Skilled Healthcare and other loss contingency expense

 

 

 —

 

 

 —

 

 

 —

 

 

15,192

 

 

 —

 

 

15,192

 

Equity in net (income) loss of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

(3,894)

 

 

1,741

 

 

(2,153)

 

(Loss) income before income tax expense

 

 

(16,941)

 

 

51,528

 

 

49,941

 

 

(261,889)

 

 

(1,741)

 

 

(179,102)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

(19,738)

 

 

 —

 

 

(19,738)

 

(Loss) income from continuing operations

 

$

(16,941)

 

$

51,528

 

$

49,941

 

$

(242,151)

 

$

(1,741)

 

$

(159,364)

 

 

Net Revenues

 

Net revenues for the nine months ended September 30, 2017 decreased by $283.7 million, or 6.6%, as compared with the nine months ended September 30, 2016.   

 

Inpatient Services – Revenue decreased $211.4 million, or 5.7%, in the nine months ended September 30, 2017 as compared with the same period in 2016. On a same-store basis, excluding the impact of leap year, 41 divested underperforming facilities and the acquisition or development of ten additional facilities on comparability, inpatient services revenue declined $121.2 million, or 3.5%.  There was $53.0 million less incremental revenue pertaining to the Texas MPAP program in the nine months ended September 30, 2017 as compared with the same period in 2016.  The remaining same-store decrease of $68.2 million, or 2.0%, is principally due to a decline in the occupancy and skilled mix of legacy Genesis inpatient facilities, partially offset by increased payment rates.  We attribute the decline in occupancy

60


 

and skilled mix principally to the impact of healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payers and conveners to divert certain skilled nursing referrals to home health or other community based care settings.

 

For an expanded discussion regarding the factors influencing our census decline, see Item 1, “Business – Recent Regulatory and other Governmental Actions Affecting Revenue” in our Annual Report on Form 10-K filed with the SEC, as well as “Key Performance and Valuation Measures” in this MD&A for quantification of the census trends and revenue per patient day. 

 

Rehabilitation Therapy Services – Revenue decreased $54.6 million, or 10.7% comparing the nine months ended September 30, 2017 with the same period in 2016.  Of that decrease, $60.1 million is due to lost contract business, offset by $27.2 million attributed to new contracts.  The remaining decrease of $21.7 million is principally due to reduced volume of services provided to existing customers due to the reduction in lengths of stay and skilled patient populations impacting the entire industry, and partially offset with price increases to certain existing customers. 

 

Other Services – Other services revenue decreased $17.7 million, or 14.1% in the nine months ended September 30, 2017 as compared with the same period in 2016. On a same-store basis, after eliminating the impact of selling the hospice and homecare businesses on May 1, 2016, other services revenue increased $3.6 million or 3.4%.  This remaining increase was principally attributed to new business growth in our staffing services business.

 

EBITDA

 

EBITDA for the nine months ended September 30, 2017 decreased by $653.5 million.  Excluding the impact of other loss (income), transaction costs, customer receivership charges, long-lived asset impairments, goodwill and identifiable intangible asset impairments and Skilled Healthcare and other loss contingency expense, EBITDA decreased $61.3 million, or 15.1% when compared with the same period in 2016.    The contributing factors for this net decrease are described in our discussion below of segment results and corporate overhead. 

 

Inpatient Services – EBITDA decreased in the nine months ended September 30, 2017 as compared with the same period in 2016, by $605.6 million.  Excluding the impact of other loss (income), long-lived asset impairments and goodwill, EBITDA decreased $64.8 million, or 13.7% when compared with the same period in 2016.  On a same store basis, the inpatient EBITDA decreased $56.2 million.  Of that same-store decline, our self-insurance programs resulted in a reduction of $5.3 million EBITDA in the nine months ended September 30, 2017 as compared with the same period in 2016.  While our self-insurance programs in 2017 are performing within expected ranges, the 2016 period included more favorable development, principally in our workers compensation deductible programs.  Improved accounts receivable collections performance resulted in a reduction in the provision for losses on accounts receivable of $2.6 million and a corresponding increase of EBITDA in the nine months ended September 30, 2017 as compared with the same period in 2016. The comparably higher levels of provision for accounts receivable in the nine months ended September 30, 2016 were principally due to resource allocation to integration activities related to acquisitions completed in 2015 as well as the relative condition of the acquired accounts receivables.  As compared with the same period in 2016, the nine months ended September 30, 2017 has $15.3 million less incremental EBITDA attributed to the Texas MPAP program due to that programs expiration in August 2016.  The remaining $38.2 million decrease in EBITDA of the segment is attributed to the continued pressures on skilled mix and overall occupancy of our inpatient facilities described above under “Net Revenues,” and accelerating nursing wage inflation.  Nursing wage inflation increased 2.9% in the nine months ended September 30, 2017 as compared with the same period in 2016. 

 

Rehabilitation Therapy Services – EBITDA of the rehabilitation therapy segment decreased by $40.6 million comparing the nine months ended September 30, 2017 with the same period in 2016.  Excluding the impact of other loss (income), customer receivership charges and long-lived asset impairments, EBITDA decreased $2.1 million, or 3.5% when compared with the same period in 2016.  Lost therapy contracts exceeded new contracts by $4.8 million.  Startup costs of our operations in China for the nine months ended September 30, 2017 exceeded those in the comparable period in 2016 by $4.1 million.  The remaining increase of EBITDA of $6.8 million is principally attributed to overhead cost

61


 

reductions, favorable average costs of labor and pricing increases, partially offset by therapist efficiency which declined to 67.5% in the nine months ended September 30, 2017 compared with 68.7% in the comparable period in the prior year. 

 

Currently, we operate through affiliates in China a total of twelve locations comprised of the three rehabilitation clinics in Guangzhou, Shanghai and Hong Kong, a rehabilitation facility, and inpatient and outpatient rehabilitation services in seven hospital joint ventures and one nursing home.  Startup and development costs of these Chinese ventures are expected to exceed revenues in fiscal 2017. 

 

Other Services — EBITDA decreased $50.8 million in the nine months ended September 30, 2017 as compared with the same period in 2016.  On a same-store basis, excluding the impact of the sale of the hospice and home health business effective May 1, 2016, EBITDA decreased $3.8 million, principally driven by increased information technology costs in our physician services business to expand our accountable care organization participation and value based programing compliance

 

Corporate and Eliminations — EBITDA increased $43.4 million in the nine months ended September 30, 2017 as compared with the same period in 2016.  EBITDA of our corporate function includes other income, charges, gains or losses associated with transactions that in our chief operating decision maker’s view are outside of the scope of our reportable segments.  These other transactions, which are separately captioned in our consolidated statements of operations and described more fully above in our Reasons for Non-GAAP Financial Disclosure, contributed $30.9 million of the net increase in EBITDA.  Corporate overhead costs decreased $12.3 million, or 8.7%, in the nine months ended September 30, 2017 as compared with the same period in 2016. This decrease is principally due to the focus on cost containment to address market pressures on our business. The remaining increase in EBITDA of $0.2 million is primarily the result of incremental investment income, partially offset with a reduction in investment earnings from our unconsolidated affiliates accounted for on the equity method. 

 

Other loss (income) — Consistent with our strategy to divest assets in non-strategic markets, we incur losses and generate gains resulting from the sale, transition or closure of underperforming operations and assets.  Other loss recognized for the nine months ended September 30, 2017 was a net $15.6 million, principally attributable to the exit or sale of 28 skilled nursing and assisted facilities over the course of 2017.  Other income for the same period in 2016 was principally the recognized gain of $44.0 million on the sale of hospice and homecare operations effective May 1, 2016 and net gain of $4.1 million on sale of two skilled nursing and two assisted living facilities over the course of 2016.

 

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 nine months ended September 30, 2017 and 2016 were $7.9 million and $9.8 million, respectively.

 

Customer receivership – In July 2017, a significant customer of our rehabilitation services business filed for receivership.  This customer operated 65 skilled nursing facilities in six states at the time of the filing.  While we are assessing our options relative to this customer’s accounts, both the accumulated accounts receivable owing and future revenue prospects, we have recorded a $35.6 million non-cash impairment charge in the nine months ended September 30, 2017, representing the outstanding accounts receivable balance from this customer.  Additionally, in September 2017, we became aware of separate customer operating a single nursing center in West Virginia sought protection through a receivership filing.  We recorded a $0.3 million charge in the nine months ended September 30, 2017, representing the outstanding accounts receivable balance from this customer.

 

Asset Impairments — In the nine months ended September 30, 2017 we recognized impairments of long-lived assets and goodwill and identifiable intangible assets of $163.4 million and $360.0 million, respectively.  For more information about the conditions of the business which contributed to these impairments, see “Going Concern Considerations” and “Industry Trends” in this MD&A, as well as Note 1 – “General Information – Going Concern Considerations” and Note 15 – “Asset Impairment Charges.” 

 

62


 

Skilled Healthcare and other loss contingency expense — For the nine months ended September 30, 2016, we accrued $15.2 million for contingent liabilities.  There was no change in the estimated settlement value of that contingent liability in the nine months ended September 30, 2017.  As previously disclosed, the 2016 accrual pertains to the agreement in principle reached with the DOJ in July 2016 and finalized in June 2017.  See Note 12 – “Commitments and Contingencies – Legal Proceedings.”

   

Other Expense

 

The following discussion applies to the consolidated expense categories between consolidated EBITDA and (loss) income from continuing operations of all reportable segments, other services, corporate and eliminations in our consolidating statement of operations for the nine months ended September 30, 2017 as compared with the same period in 2016. 

 

Depreciation and amortization — Each of our reportable segments, other services and corporate overhead have depreciating property, plant and equipment, including depreciation on leased properties accounted for as capital leases or as a financing obligation. Our rehabilitation therapy services and other services have identifiable intangible assets which amortize over the estimated life of those identifiable assets.  Depreciation and amortization expense decreased $6.8 million in the nine months ended September 30, 2017 as compared with the same period in 2016, principally due to divestiture activity.  On a same store basis, depreciation and amortization increased $1.7 million in the nine months ended September 30, 2017 as compared with the same period in 2016.

 

Interest expense — Interest expense includes the cash interest and non-cash adjustments required to account for our Revolving Credit Facilities, Term Loan Facility, Real Estate Bridge Loans and mortgage instruments, as well as the expense associated with leases accounted for as capital leases or financing obligations.  Interest expense decreased $27.4 million in the nine months ended September 30, 2017 as compared with the same period in the prior year.  On a same store basis, interest expense is down $23.6 million in the nine months ended September 30, 2016 as compared with the same period in 2016.  Of that decrease, $1.6 million is due to a reduction in cash interest resulting from the reduced borrowings under the Term Loan Facility through application of proceeds from asset sales and Real Estate Bridge Loans refinanced with lower rate HUD guaranteed mortgage debt.  The remaining $22.0 million decrease is principally attributed to non-cash accounting for lease transactions completed over the past twelve months.

 

Income tax expense — For the nine months ended September 30, 2017, we recorded an income tax expense of $5.7 million from continuing operations representing an effective tax rate of (0.7)% compared to an income tax benefit of $19.7 million from continuing operations, representing an effective tax rate of 11.0% for the same period in 2016.  There is a full valuation allowance against our deferred tax assets, excluding our deferred tax asset on our Bermuda captive insurance company’s discounted unpaid loss reserve.  Previously, in assessing the requirement for, and amount of, a valuation allowance in accordance with the standard, we determined it was more likely than not we would not realize our deferred tax assets and established a valuation allowance against the deferred tax assets.  As of September 30, 2017, we have determined that the valuation allowance is still necessary.

 

Net Loss Attributable to Genesis Healthcare, Inc.

 

The following discussion applies to categories between loss from continuing operations and net loss attributable to Genesis Healthcare, Inc. in our consolidated statements of operations for the nine months ended September 30, 2017 as compared with the same period in 2016.  

 

Loss from discontinued operations — Prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disposals of Components of an Entity (ASU 2014-08), we routinely classified reporting units exited, closed or otherwise disposed as discontinued operations.  ASU 2014-08 changed the criteria to qualify such transactions for discontinued operations treatment, making it hard to reach that conclusion.  Therefore, since 2014, none of our more recently exited, closed or otherwise disposed assets have been classified as discontinued operations.  The activity reported as discontinued operations in the nine months ended September 30, 2017 and the same period in 2016 was de

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minimis, associated with exit, closure and disposal activities of reporting units identified as discontinued operations prior to adoption of ASU 2014-08.   

 

Net loss attributable to noncontrolling interests — Following the closing of the Combination, the combined results of Skilled and FC-GEN were consolidated with approximately 42% direct noncontrolling economic interest shown as noncontrolling interest in the financial statements of the combined entity.  The direct noncontrolling economic interest is in the form of Class C common stock of FC-GEN that are exchangeable on a 1-to-1 basis to our public shares. The direct noncontrolling economic interest will continue to decrease as Class C common stock of FC-GEN are exchanged for public shares.  Since the Combination, there have been conversions of 2.8 million Class C common stock, leaving a remaining direct noncontrolling economic interest of 39.4%.  For the nine months ended September 30, 2017 and 2016, loss of $316.1 million and $75.1 million, respectively, has been attributed to the Class C common stock. 

 

In addition to the noncontrolling interests attributable to the Class C common stock holders, our consolidated financial statements include the accounts of all entities controlled by us through our ownership of a majority voting interest and the accounts of any VIEs where we are subject to a majority of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both.  We adjust net income attributable to Genesis Healthcare, Inc. to exclude the net income attributable to the third party ownership interests of the VIEs.  For the nine months ended September 30, 2017 and 2016, income of $1.6 million and $2.2 million, respectively, has been attributed to these unaffiliated third parties.

 

Liquidity and Capital Resources

 

Cash Flow and Liquidity

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

 

2017

    

2016

 

Net cash provided by operating activities

 

 

$

67,358

 

$

35,302

 

Net cash provided by investing activities

 

 

 

49,400

 

 

962

 

Net cash used in financing activities

 

 

 

(117,575)

 

 

(43,967)

 

Net decrease in cash and cash equivalents

 

 

 

(817)

 

 

(7,703)

 

Beginning of period

 

 

 

51,408

 

 

61,543

 

End of period

 

 

$

50,591

 

$

53,840

 

 

Net cash provided by operating activities in the nine months ended September 30, 2017 increased $32.1 million compared with the same period in 2016.  The increase in cash provided by operations is principally due to improved collections of inpatient account receivable in the nine months ended September 30, 2017 as compared with the same period in 2016, partially offset by timing of disbursements. The nine months ended September 30, 2017 was negatively impacted by the early retirement of workers’ compensation reserves of $25.8 million.

 

Net cash provided by investing activities in the nine months ended September 30, 2017 was $49.4 million, compared to net cash provided of $1.0 million in the same period in 2016. There were proceeds from the asset sales in the nine months ended September 30, 2017 of $79.3 million principally from the sale of 18 skilled nursing facilities located in Kansas, Missouri, Nebraska and Iowa, as compared with the same period in 2016, which included the receipt of $149.4 million in asset sales consisting primarily of $72.0 million, $67.0 million, $9.4 million and $1.9 million for the sale of our hospice and home care business, 18 assisted living facilities in Kansas, an office building in Albuquerque, New Mexico and a closed skilled nursing facility in Missouri, respectively. There were no asset acquisitions in the nine months ended September 30, 2017 compared to a use of investing cash flow of $108.3 million related to the purchase of skilled nursing facilities, which include the acquisition of 11 skilled nursing facilities in Pennsylvania, North Carolina, Maryland, New Jersey and Vermont for $106.8 million, for the same period in the prior year.  Routine capital expenditures for the nine months ended September 30, 2017 decreased by $22.3 million as compared with the same period in the prior year.  The remaining incremental use of cash from investing activities of $12.1 million in the nine

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months ended September 30, 2017 as compared with the same period in 2016 is principally due to the change in restricted cash and equivalents in our captive insurance companies, offset by net purchases in marketable securities. 

 

Net cash used in financing activities was $117.6 million in the nine months ended September 30, 2017 compared to a use of $44.0 million in the same period in 2016.  The net increase in cash used in financing activities of $73.6 million is principally attributed to debt borrowings exceeding debt repayments in the nine months ended September 30, 2017 as compared to the same period in 2016.  In the nine months ended September 30, 2017, we had a net decrease in repayment activity under the Revolving Credit Facilities of $101.4 million as compared with $184.0 million of reduced Revolving Credit Facilities borrowings in the same period in 2016.  In the nine months ended September 30, 2017, we used $72.1 million of the proceeds from the sale of 18 skilled nursing facilities located in Kansas, Missouri, Nebraska and Iowa to repay indebtedness.  In the nine months ended September 30, 2017, we used $23.9 million in proceeds from HUD insured financing on three skilled nursing facilities to repay Real Estate Bridge Loan indebtedness.  In the nine months ended September 30, 2016, we used $54.2 million of the proceeds from the sale of 18 assisted living facilities in Kansas and $72.0 million from the sale of our hospice and home care business to repay long-term debt.  In the nine months ended September 30, 2016, we used the proceeds of $90.9 million of newly issued mortgage debt to purchase skilled nursing facilities.  In the nine months ended September 30, 2016, we used $143.2 million of proceeds from HUD insured financing on 21 skilled nursing facilities to repay $143.2 million of Real Estate Bridge Loan indebtedness.  In the nine months ended September 30,  2016, we used $120.0 million of proceeds from the Term Loans to assist in repayment of the remaining $153.4 million balance of the retired term loan facility. The remaining net reduction in the use of cash of $12.4 million in the nine months ended September 30, 2017 compared with the same period in 2016 is principally due to scheduled debt repayments, debt issuance costs, distributions to noncontrolling interests and proceeds from tenant improvement draws in the 2017 period exceeding similar financing activities in the 2016 period.

 

Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our Revolving Credit Facilities.

 

The objectives of our capital planning strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allows us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment.  Maintaining adequate liquidity is a function of our results of operations, unrestricted cash and cash equivalents and our available borrowing capacity.

 

At September 30, 2017, we had cash and cash equivalents of $50.6 million and available borrowings under our Revolving Credit Facilities of $41.9 million, after taking into account $54.8 million of letters of credit drawn against our Revolving Credit Facilities. During the nine months ended September 30, 2017, we maintained liquidity sufficient to meet our working capital, capital expenditure and development activities.  We expect that our cash balances, available borrowings under our revolving credit facilities and expected cash flow from operations will be insufficient to meet all of our fixed obligations.  Because of these factors and our current financial condition we are seeking to preserve cash and execute on the Restructuring Plans with our key credit parties.  In connection with these Restructuring Plans, the counterparties to the Welltower Bridge Loans, the Term Loans and certain other loans have agreed to defer all principal and interest payments through February 15, 2018. 

 

If we are unable to generate sufficient funds to meet our obligations, we may be required to refinance, restructure or otherwise amend some or all of such obligations, divest assets or raise additional equity.  There is no assurance that such activities can be accomplished or, if accomplished, would raise sufficient funds to meet these obligations.

 

Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in the major agreements and other agreements, is dependent upon, among other things, our ability to develop or attain a sustainable capital structure and our future performance which is subject to financial, economic, competitive, regulatory and other factors. Many of these factors are beyond our control.

 

As currently structured, it is unlikely that we will be able to generate sufficient cash flow to cover required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties.

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We and our counterparties to the Restructuring Plans have entered into preliminary and non-binding agreements in an effort to attain a sustainable capital structure for us.  We believe that it is in the best interest of all creditors to grant necessary waivers or reach negotiated settlements to enable us to continue as a going concern while we work with our counterparties to the Restructuring Plans to strengthen significantly our capital structure.  However, there can be no assurance that such waivers will be received in future periods or such settlements reached.  If future defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained, the defaults can cause acceleration of our financial obligations under certain of our agreements, which we may not be in a position to satisfy.

 

In the event of a failure to obtain necessary waivers or otherwise achieve the fixed charge reductions contained in the Restructuring Plans, we may be forced to seek reorganization under the U.S. Bankruptcy Code.  The existence of these factors raises substantial doubt about our ability to continue as a going concern.

 

Financing Activities

 

During the nine months ended September 30, 2017, we completed three mortgage refinancings through HUD totaling $23.9 million. Since the Combination, we have repaid or refinanced $238.0 million of Real Estate Bridge Loans with $292.8 million remaining outstanding at September 30, 2017.

 

In April 2017, we entered into a strategic dining and nutrition partnership to further leverage our national platforms, process expertise and technology.  The relationship, which is expected to be accretive to us, will provide additional liquidity, cost efficiency and enhanced operational performance.

 

Divestiture of Non-Strategic Facilities

 

Consistent with our strategy to divest assets in non-strategic markets, we have exited the inpatient operations of 30 skilled nursing facilities in 10 states, including:

 

·

The closure of one skilled nursing facility located in California on September 28, 2017 that is subject to a master lease agreement with Sabra as noted in Lease Amendments below. A loss was recognized totaling $0.1 million.

·

The sale of two skilled nursing facilities located in Georgia on October 1, 2017 that were subject to a master lease agreement with Sabra as noted in Lease Amendments below.  A loss was recognized totaling $1.9 million.

·

The sale of one skilled nursing facility located in Colorado on July 10, 2017 that was subject to a master lease agreement with Sabra as noted in Lease Amendments below. The skilled nursing facility had annual revenue of $5.7 million and pre-tax net loss of $2.2 million.  A loss was recognized totaling $0.5 million.

·

The sale of one skilled nursing facility located in North Carolina on June 1, 2017. The skilled nursing facility was subject to a master lease agreement and had annual revenue of $6.4 million and pre-tax net loss of $1.0 million.  A loss was recognized totaling $0.5 million.

·

The sale of 18 skilled nursing facilities (16 owned and 2 leased) in the states of Kansas, Missouri, Nebraska and Iowa on April 1, 2017.  The transaction marks an exit from the inpatient business in these states.  The 18 facilities generated annual revenue of $110.1 million, pre-tax net loss of $10.7 million and had total assets of $91.6 million.  Sale proceeds of $80 million, net of transaction costs, was principally used to repay indebtedness of the skilled nursing facilities.  A loss was recognized totaling $6.4 million.  One of the leased skilled nursing facilities was subleased to a new operator resulting in a loss associated with a cease to use asset of $4.1 million.

·

The sale of four skilled nursing facilities located in Massachusetts that were subject to a master lease agreement and divested on March 14, 2017.  These facilities, along with two other facilities that were divested previously and subleased to a third-party operator, were sold and terminated from the master lease resulting in an annual rent credit of $1.2 million.  The master lease termination resulted in a capital lease net asset and obligation write-down of $14.9 million.  A loss was recognized totaling $1.4 million.

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·

The sale of one skilled nursing facility located in Tennessee on April 1, 2017 that was subject to a master lease agreement with Sabra as noted in Lease Amendments below.  A loss was recognized totaling $0.7 million.

·

The sale of two skilled nursing facilities located in Georgia on February 1, 2017 at the expiration of their respective lease terms.  A loss was recognized totaling $0.5 million.

 

We expect to divest an additional 14 underperforming assets or assets in non-strategic markets through early calendar 2018.

 

Lease Amendments

 

On July 29, 2016, we entered into a memorandum of understanding with Sabra, later amended on February 20, 2017, outlining the terms of a restructuring to our master lease agreements.  The significant features of the restructuring include (i) the application of a 7.5% credit against current rent from the proceeds of certain asset sales with any residual rent related to assets sold continuing to be paid by us through our current terms, which expire in 2020 and 2021; (ii) the reallocation of rents among certain of the master leases in order to establish market based lease coverages, with any excess rent above market lease coverage scheduled to expire in 2020 and 2021; and (iii) extensions of two to four years to the termination dates of certain master leases, which after 2020 and 2021 are estimated to be more reflective of market-based lease coverages.  Based upon the estimated sale proceeds of certain assets and the excess rent associated with the rent reallocation, we project the annual rent reduction by 2021 to be between $11 million and $13 million.  On April 1, 2017, the master lease agreements were amended to reflect the features noted above.

 

 Financial Covenants

 

The Revolving Credit Facilities, the Term Loan Agreement and the Welltower Bridge Loans (collectively, the Credit Facilities) each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio, a springing minimum fixed charge coverage ratio tied to minimum liquidity and maximum capital expenditures.  At September 30, 2017, we were not in compliance with certain of the financial covenants contained in the Credit Facilities.  We received waivers from the counterparties to the Term Loan Agreement and the Welltower Bridge Loans for any and all breaches of financial or other covenants as of September 30, 2017.  We are engaged in discussions with our counterparties to the Revolving Credit Facilities to secure a 90-day forbearance agreement through late January 2018.

 

We have master lease agreements with Welltower, Sabra, Omega and Second Spring (collectively, the Master Lease Agreements).  Our Master Lease Agreements each contain a number of financial, affirmative and negative covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and minimum liquidity.  At September 30, 2017, we were not in compliance with the covenants contained in the Master Lease Agreements.  We received waivers from the counterparties to the Master Lease Agreements for any and all breaches of financial and other covenants as of September 30, 2017.

 

We have a master lease agreement with CBYW involving 28 of our facilities.  We did not meet certain financial covenants contained in this master lease agreement at September 30, 2017.  We received a waiver for this covenant breach through October 24, 2019. 

 

At September 30, 2017, we did not meet certain financial covenants contained in three leases related to 26 of our facilities.  We are and expect to continue to be current in the timely payment of our obligations under such leases.  These leases do not have cross default provisions, nor do they trigger cross default provisions in any of our other loan or lease agreements.  We will continue to work with the related credit parties to amend such leases and the related financial covenants.  We do not believe the breach of such financial covenants has a material adverse impact on us at September 30, 2017.

 

We believe that it is in the best interests of all creditors to grant necessary waivers or reach negotiated settlements to enable us to execute and complete the Restructuring Plans in order to establish a sustainable capital structure. 

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However, there can be no assurance that such waivers will be received in future periods or such settlements will be reached.  If the defaults are not cured within applicable cure periods, if any, and if waivers or other relief are not obtained, the defaults can cause acceleration of our financial obligations under certain of our agreements, which we may not be in a position to satisfy. 

 

There can be no assurances that any of these efforts will prove successful.  In the event of a failure to obtain necessary waivers or otherwise achieve a restructuring of our financial obligations, we may be forced to seek reorganization under the U.S. Bankruptcy Code. 

 

Concentration of Credit Risk

 

We are exposed to the credit risk of our third-party customers, many of whom are in similar lines of business as us and are exposed to the same systemic industry risks of operations, as we, resulting in a concentration of risk.  These include organizations that utilize our rehabilitation services, staffing services and physician service offerings, engaged in similar business activities or having economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in regulatory and systemic industry conditions. 

 

Management assesses its exposure to loss on accounts at the customer level.  The greatest concentration of risk exists in our rehabilitation services business where we have over 200 distinct customers, many being chain operators with more than one location.  The four largest customers of our rehabilitation services business comprise approximately 67% of the outstanding contract receivables in that business.  An adverse event impacting the solvency of any one or several of these large customers resulting in their insolvency or other economic distress would have a material impact on us.  See discussion of customer receivership in Results of Operations.

 

Our business is subject to a number of other known and unknown risks and uncertainties, which are discussed in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the SEC on March 6, 2017, and in our Quarterly Reports on Form 10-Q, including the risk factors discussed herein in Part II. Item 1A.

 

Going Concern Considerations

 

The accompanying unaudited financial statements have been prepared on the basis we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

In evaluating our ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern for 12 months following the date our financial statements were issued (November 8, 2017). Management considered the recent results of operations as well as our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due before November 8, 2018.

 

Our results of operations have been negatively impacted by the persistent pressure of healthcare reforms enacted in recent years.  This challenging operating environment has been most acute in our inpatient segment, but also has had a detrimental effect on our rehabilitation therapy segment and its customers.  In recent years, we have implemented a number of cost mitigation strategies to offset the negative financial implications of this challenging operating environment.  These strategies have been successful in recent years, however, the negative impact of continued reductions in skilled patient admissions, shortening lengths of stay, escalating wage inflation and professional liability losses, combined with the increased cost of capital through escalating lease payments accelerated in the third quarter of 2017.  These factors caused us to be unable to comply with certain financial covenants at September 30, 2017 under the Revolving Credit Facilities, the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements and other agreements.  We have received waivers from the parties to the Term Loans, the Welltower Bridge Loans and the Master Lease Agreements at September 30, 2017.  We are engaged in discussions with our counterparties to the Revolving Credit Facilities to secure a 90-day forbearance agreement through late January 2018.  

 

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Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in the major agreements and other agreements, is dependent upon, among other things, our ability to obtain a sustainable capital structure and our future performance which is subject to financial, economic, competitive, regulatory and other factors.  Many of these factors are beyond our control.  As currently structured, it is unlikely that we will be able to generate sufficient cash flow to cover required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties.

 

We and our counterparties to the Restructuring Plans have entered into preliminary and non-binding agreements in an effort to attain a sustainable capital structure for us.  See Note 16 – “Subsequent Events.”  We believe that it is in the best interest of all creditors to grant necessary waivers or reach negotiated settlements to enable the us to continue as a going concern while we work with our counterparties to the Restructuring Plans to strengthen significantly our capital structure. However, there can be no assurance that timely and adequate waivers will be received in future periods or such settlements reached.  If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not timely obtained, the defaults can cause acceleration of our financial obligations under certain of our agreements, which we may not be in a position to satisfy.  Accordingly, we have classified the obligations of the effected agreements as current liabilities in our consolidated balance sheets as of September 30, 2017.

 

In the event of a failure to obtain necessary and timely waivers or otherwise achieve the fixed charge reductions contained in the Restructuring Plans, we may be forced to seek reorganization under the U.S. Bankruptcy Code.  See Part II. Item 1A, “Risk Factors.”

 

The existence of these factors raises substantial doubt about our ability to continue as a going concern.

 

Off Balance Sheet Arrangements

 

We had outstanding letters of credit of $54.8 million under our letter of credit sub-facility on our Revolving Credit Facilities as of September 30, 2017.  These letters of credit are principally pledged to landlords and insurance carriers as collateral.  We are not involved in any other off-balance-sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures, or capital resources.

 

Contractual Obligations

 

The following table sets forth our contractual obligations, including principal and interest, but excluding non-cash amortization of discounts or premiums and debt issuance costs established on these instruments, as of September 30, 2017 (in thousands).  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

More than

 

 

    

Total

    

1 Yr.

    

2-3 Yrs.

    

4-5 Yrs.

    

5 Yrs.

 

Revolving credit facilities

 

$

403,811

 

$

18,262

 

$

385,549

 

$

 —

 

$

 —

 

Term loan agreement

 

 

169,093

 

 

17,772

 

 

151,321

 

 

 —

 

 

 —

 

Real estate bridge loans

 

 

422,936

 

 

29,747

 

 

70,844

 

 

322,345

 

 

 —

 

HUD insured loans

 

 

412,774

 

 

13,510

 

 

27,072

 

 

27,072

 

 

345,120

 

Notes payable

 

 

106,632

 

 

2,410

 

 

5,300

 

 

98,922

 

 

 —

 

Mortgages and other secured debt (recourse)

 

 

13,235

 

 

11,131

 

 

2,104

 

 

 —

 

 

 —

 

Mortgages and other secured debt (non-recourse)

 

 

31,459

 

 

13,169

 

 

2,617

 

 

2,617

 

 

13,056

 

Financing obligations

 

 

9,361,408

 

 

275,150

 

 

569,031

 

 

587,641

 

 

7,929,586

 

Capital lease obligations

 

 

3,434,760

 

 

90,425

 

 

185,786

 

 

191,316

 

 

2,967,233

 

Operating lease obligations

 

 

897,076

 

 

142,646

 

 

279,107

 

 

247,586

 

 

227,737

 

 

 

$

15,253,184

 

$

614,222

 

$

1,678,731

 

$

1,477,499

 

$

11,482,732

 

 

 

 

 

The contractual obligations table has been prepared assuming we will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of the consolidated financial statements. However, for the reasons described in Note 1 – “General Information – Going Concern Considerations,” $4.7 billion, related to several of our contractual obligations with the stated maturities as summarized above are classified as a current liability at September

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30, 2017.  These obligation include:  the Revolving Credit Facilities, the Term Loan Agreement, the Welltower Bridge Loans, Notes Payable and certain lease arrangements subject to capital lease or financing obligations.  While obligations under the operating leases are not included on the balance sheet, approximately $617.8 million will become due and payable, if defaulted upon.

   

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates. To the extent these interest rates increase, our interest expense will increase, which will make our interest payments and funding other fixed costs more expensive, and our available cash flow may be adversely affected. We routinely monitor risks associated with fluctuations in interest rates and consider the use of derivative financial instruments to hedge these exposures. We do not enter into derivative financial instruments for trading or speculative purposes nor do we enter into energy or commodity contracts.

 

Interest Rate Exposure—Interest Rate Risk Management

 

Our Term Loan Facility, Real Estate Bridge Loans and Revolving Credit Facilities expose us to variability in interest payments due to changes in interest rates.  As of September 30, 2017, there is no derivative financial instrument in place to limit that exposure.

 

A 1% increase in the applicable interest rate on our variable-rate debt would result in an approximately $5.1 million increase in our annual interest expense. 

 

Our investments in marketable securities as of September 30, 2017 consisted of investment grade government and corporate debt securities and money market funds that have maturities of five years or less. These investments expose us to investment income risk, which is affected by changes in the general level of U.S. and international interest rates and securities markets risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Interest rates are near historic lows, with a risk of interest rates increasing before our current investments mature.  While we have the ability and intent to hold our investments to maturity today, rising interest rates could impact our ability to liquidate our investments for a profit and could adversely affect the cost of replacing those investments at the time of maturity with investment of similar return and risk profile.  Despite the complex nature of exposure to the securities markets, given the low risk profile, we do not believe a 1% increase in interest rates alone would have a material impact on our net investment income returns.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.

 

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.

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We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of end of the period covered by this report, the disclosure controls and procedures were effective at that reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

Management determined that there were no changes in our internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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 12  “Commitments and Contingencies—Legal Proceedings,” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

 

Item 1A.  Risk Factors

 

Except for the addition of the risk factor included in Part II. Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017 and the risk factors added below, there have been no material changes or additions to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on March 6, 2017.

 

We have entered into preliminary non-binding agreements with certain of our credit parties concerning a proposed long-term restructuring of certain master leases and loans (the Restructuring Plans) in an effort to develop a sustainable capital structure for us.  However, there can be no assurance that the conditions necessary to achieve the fixed charge reductions contemplated in the Restructuring Plans will be met.  If such fixed charge reductions are not realized, it would have a material adverse effect on our liquidity and  financial condition.

Our ability to service our financial obligations, in addition to our ability to comply with the financial and restrictive covenants contained in our leases and loans is dependent upon, among other things, our ability to attain a sustainable capital structure.  We are in the process of executing on the Restructuring Plans with certain of our credit parties in an effort to attain a sustainable capital structure.  However, there can be no assurance that the conditions necessary for us to realize a reduction in our annual fixed charges will be met.  These conditions include the successful sale of assets leased to us by certain of our landlords to new landlords, the successful re-leasing of these assets to us by new landlords at reduced rents, the successful refinancing and / or repayment of current debt obligations to certain lenders and the receipt of additional concessions to be made by other credit parties.  Many of these conditions are beyond our control.  If we and our counterparties to the Restructuring Plans are unsuccessful, it is unlikely that we will be able to generate sufficient cash flow to cover required financial obligations, including our rent obligations, our debt service obligations and other obligations due to third parties under our current capital structure.  Further, there can be no assurance that we will enter into binding agreements with certain of our credit parties under the proposed Restructuring Plans, and there can be no assurance that such agreements will attain a sustainable capital structure even if the Restructuring Plans are successfully implemented.  In the event of such failure to attain the fixed charge reductions contemplated in the Restructuring Plans, we may be forced to seek reorganization under the U.S. Bankruptcy Code.

We are presently operating under waivers of certain of our financial agreements and are engaged in discussions with the counterparties to the Revolving Credit Facilities to secure a 90-day forbearance agreement through late January

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2018.  There can be no assurance such waivers will be received in future periods, or whether a forbearance agreement will be executed by us and the counterparties to the Revolving Credit Facilities.  In the event future waivers or forbearance agreements are not extended and our creditors accelerate our loan and lease obligations, it would have a material adverse effect on our liquidity and financial condition.

At September 30, 2017, we did not meet certain of the financial covenants contained under a number of our significant loan and lease agreements.  Although we have received waivers and expect to enter into forbearance agreements with our counterparties to these agreements related to our breach of financial covenants at September 30, 2017, there can be no assurance such waivers and/or forbearance agreements will be received in future periods.  If future defaults are not cured within applicable cure periods, if any, and if waivers or other forms of relief are not obtained, the defaults can cause acceleration of our financial obligations, which we may not be in a position to satisfy.  In the event this occurs and we are unable to satisfy an acceleration of our financial obligations, we may be forced to seek reorganization under the U.S. Bankruptcy Code.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item  5. Other Information

 

None.

 

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Item 6. Exhibits

 

(a)Exhibits.

 

 

 

 

Number

 

Description

 

 

 

 

 

 

 

 

 

 

10.1 

Amendment No. 3 dated as of August 8, 2017 to Term Loan Agreement by and among Genesis Healthcare, Inc., FC-GEN Operations Investment, LLC, GEN Operations I, LLC and GEN Operations II, LLC as borrowers, HCRI Tucson Properties, Inc. and OHI Mezz Lender, LLC as the initial lenders and Welltower Inc. as the administrative agent and collateral agent.

10.2 

Amended and Restated Genesis Healthcare, Inc. 2015 Omnibus Equity Incentive Plan

 

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

 

 

73


 

 

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:

November 8, 2017

By

/S/    GEORGE V. HAGER, JR.

 

 

 

George V. Hager, Jr.

 

 

 

Chief Executive Officer

 

 

 

 

Date:

November 8, 2017

By

/S/    THOMAS DIVITTORIO

 

 

 

Thomas DiVittorio

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer and Authorized Signatory)

 

 

74