Extendicare Health Services, Inc.

August 04, 2005 17:03 ET

Extendicare Health Services, Inc. Achieves Record Operational Results for the Second Quarter

MILWAUKEE, WISCONSIN--(CCNMatthews - Aug. 4, 2005) - Extendicare Health Services, Inc. (EHSI) is a wholly owned subsidiary of Extendicare Inc. (TSX:EXE.MV and EXE.SV; NYSE: EXE).



- Q2 net income of $15.3 million
- Assisted Living Concepts (ALC) contributed $11.2 million of
EBITDA
- EBITDA margin of 17.0%
- Strong Medicare census of 19.1%
- Nursing home occupancy of 92.7%


EHSI reported net income of $15.3 million in the 2005 second quarter compared to $8.8 million in the 2004 second quarter. Results for the 2005 second quarter included a pre-tax loss of $5.1 million on disposal of assets and impairment of long-lived assets compared to a pre-tax gain of $4.5 million in the 2004 second quarter. The valuation of interest rate caps resulted in a pre-tax loss in each of the second quarters of 2005 and 2004 of $0.9 million and $4.3 million, respectively. In addition, the 2004 second quarter included a pre-tax loss of $6.0 million on the refinancing and retirement of debt.

"EHSI continues to reach new heights, largely driven by the successful deployment of our sales-based model," said Mel Rhinelander, EHSI's Chairman and Chief Executive Officer. "In addition, the Assisted Living Concepts acquisition is continuing to perform ahead of our expectations and, we believe it will solidify our position as a significant player in the assisted living component of senior care."

EHSI's average daily Medicare patient census on a same-facility basis rose 16.4% to 2,437 compared to 2,093 in the 2004 second quarter, and improved slightly from the 2005 first quarter of 2,433. As a percent of same-facility nursing home census, Medicare patients represented 19.1% in the 2005 second quarter compared to 16.6% in the 2004 second quarter. Nursing home occupancy, on a same-facility basis, rose during the 2005 second quarter to 92.7% compared to 91.8% in the 2004 second quarter, and was down moderately from 93.8% in the 2005 first quarter. The performance on a same-facility basis of EHSI remained strong in the 2005 second quarter as a result of maintaining average daily Medicare census, increased Medicaid funding, and lower utility costs.

EHSI's acquisition of ALC is performing above management's initial expectations. For the 2005 second quarter, ALC contributed revenue of $46.6 million and EBITDA of $11.2 million. However, these results were impacted by adjustments that related to the 2005 first quarter, as the Company refined its preliminary purchase price allocation of ALC's net assets acquired. Excluding these adjustments, ALC's revenue and EBITDA for the 2005 second quarter were $46.2 million and $10.2 million, respectively.

In July 2005 the Centers for Medicare and Medicaid Services (CMS) announced their final regulations and rates for Medicare for fiscal 2006, subject to approval. If approved, CMS will implement a 3.1% market basket increase effective October 1, 2005, and changes to the Resource Utilization Groups (RUGs) funding categories that will reduce the average per diem rates effective January 1, 2006. While CMS's proposal was more positive for the industry than previously anticipated, EHSI estimates the new funding formula will result in a net decline in its average Medicare rate per diem of about $10.00, commencing in January 2006.

Additionally, CMS's recent approval of Indiana's provider tax plan provided EHSI with 21 months of revenue totaling $13.1 million and earnings before income taxes of $5.6 million, retroactive to July 1, 2003, in the 2005 second quarter.

Quarters ended June 30, 2005 and June 30, 2004

Revenue increased $79.0 million, or 33.9%, over the 2004 second quarter. Excluding new and disposed facilities, revenue on a same-facility basis grew by $34.3 million, or 15.1%, due to: higher prior period settlement adjustments of $12.6 million, primarily associated with the Indiana Medicaid settlements; an average increase in payor rates of $13.6 million; improvements in occupancy and patient mix of $7.2 million; and an improvement of $0.8 million from other items.

EBITDA increased $19.9 million to $53.1 million in the 2005 second quarter from $33.2 million in the 2004 second quarter, and as a percent of revenue increased to 17.0% from 14.2%. New facilities, net of those disposed, contributed EBITDA of $11.6 million in the 2005 second quarter compared to a loss at the EBITDA level of $0.1 million in the 2004 second quarter. In addition, the net impact of prior period revenue and provider tax settlement adjustments contributed EBITDA of $5.0 million in the 2005 second quarter compared to none in the 2004 second quarter. Remaining operations improved EBITDA due primarily to higher resident occupancy and patient mix, with funding improvements mostly offset by cost increases. Labor related costs, on a same-facility basis, were up $9.8 million between periods associated with higher staffing levels to accommodate increased census, and included an average wage rate increase of 1.4%.

Six Months ended June 30, 2005 and June 30, 2004

Revenue increased $141.7 million, or 30.5%, over the first half of 2004. Excluding new and disposed facilities, revenue on a same-facility basis grew by $70.8 million, or 15.7%, due to: favorable prior period settlement adjustments of $26.1 million, primarily associated with the Pennsylvania and Indiana Medicaid settlements; an average increase in payor rates of $28.9 million; improvements in occupancy and patient mix of $15.6 million; and an improvement of $0.2 million from other items.

EBITDA increased $27.1 million to $92.6 million in the first half of 2005 from $65.5 million in the first half of 2004, and as a percent of revenue increased to 15.3% from 14.1%. New facilities, net of those disposed, contributed EBITDA of $15.7 million in the first half of 2005 compared to none in the first half of 2004. In addition, the net impact of prior period revenue and provider tax settlement adjustments contributed EBITDA of $7.8 million in the first half of 2005 compared to $1.3 million in the first half of 2004. Remaining operations improved EBITDA due primarily to higher resident occupancy and patient mix, with funding improvements mostly offset by cost increases. Labor related costs, on a same-facility basis, were up $22.2 million between periods associated with higher staffing levels to accommodate increased census, and included an average wage rate increase of 1.3%.

Net interest costs for the first half of 2005 were up $7.0 million from the first half of 2004. The 2004 results included non-recurring interest income associated with the settlement of the Greystone notes receivable of $2.7 million. The remaining increase was due to the added interest costs associated with the ALC acquisition, partially offset by a decline in other debt and interest rates.

Other Items

During the 2005 second quarter, the Company reported a pre-tax loss of $5.1 million on disposal of assets and impairment of long-lived assets. This net amount was the result of a gain of $0.6 million on the sale of an investment, offset by a $5.7 million provision for asset impairment of a nursing home whose operations were transferred to a third-party in 2004.

In June 2005, EHSI acquired a 127-bed nursing facility in Kentucky for $8.2 million in cash.

EHSI is currently in negotiations for the sale of its six remaining leased nursing home properties in Florida for proceeds of about $10.0 million and a pre-tax gain on sale of approximately $4.0 million. The transaction is anticipated to be completed in the 2005 third quarter.

On August 4, 2005, EHSI amended its $155.0 million credit facility (Amended and Restated Credit Facility) to among other things: increase the borrowing capacity to $200.0 million, comprised of an $86.0 million term loan and a $114.0 million revolving credit facility, and to extend the maturity date for just over one year to July 31, 2010. In addition, EHSI would have the ability, with willing lenders, to increase the term loan or the revolving credit facility by up to $15.0 million, for a total credit facility of up to $215.0 million. Proceeds from the Amended and Restated Credit Facility were immediately used to terminate and repay the balance of ALC's $34.0 million of borrowings under its GE Capital Term Loan and Credit Facility, and will be used to repay ALC's approximately $22.0 million of Revenue Bonds. Upon the payment in full of ALC's Revenue Bonds, and subject to certain limitations, EHSI will no longer be restricted from advancing funds to and from ALC, including funds from borrowings under its Amended and Restated Credit Facility.

Extendicare Health Services, Inc. of Milwaukee, Wisconsin, is a wholly owned subsidiary of Extendicare Inc., and is a major provider of long-term care and related services in the United States. Through its subsidiaries, Extendicare Inc. operates 441 long-term care facilities in the United States and Canada, with capacity for over 34,600 residents. As well, through its operations in the United States, Extendicare offers medical specialty services such as subacute care and rehabilitative therapy services, while home health care services are provided in Canada. Extendicare Inc. employs 37,900 people in North America.

In a separate news release issued today, Extendicare Inc. announced its 2005 second quarter financial results. On August 5, 2005, at 10:00 a.m. (ET), Extendicare Inc. will hold a conference call to discuss its results for the second quarter. The call will be webcast live, and archived, in the investor information section of the Company's website at www.extendicare.com. Alternatively, the call in number is 1-866-540-8136 or 416-340-8010. For those unable to listen to the call live, a taped rebroadcast will be available until midnight on August 19, 2005. To access the rebroadcast, dial 1-800-408-3053 or 416-695-5800, conference ID number 3158845. Also, a supplemental information package containing historical annual and quarterly financial results and operating statistics on the Company can be found on the website under Investor Information/Investor Documents/Supplemental Information.

The attached statements reflect certain reclassifications to the prior period figures to conform to the 2005 presentation.

Statements contained in this release other than statements of historical fact, including statements regarding anticipated financial performance, business strategy and management's plans and objectives for future operations, are forward-looking statements. These forward-looking statements can be identified as such because the statements generally include words such as "expect", "intend", "anticipate", "believe", "estimate", "plan" or "objective" or other similar expressions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. In addition to the risks and uncertainties related to these statements, other risks and uncertainties are identified in Extendicare Inc.'s or Extendicare Health Services, Inc.'s filings with Canadian and United States securities regulators and include, but are not limited to, the following: changes in the health care industry in general and the long-term care industry in particular because of political and economic influences; changes in regulations governing the industry and the Company's compliance with such regulations; changes in government funding levels for health care services; resident care litigation, including exposure for punitive damage claims and increased insurance costs, and other claims asserted against the Company; the successful integration of Assisted Living Concepts, Inc.; the Company's ability to attract and retain qualified personnel; the availability and terms of capital to fund the Company's capital expenditures; changes in competition; and demographic changes. Given these risks and uncertainties, readers are cautioned not to place undue reliance on the Company's forward-looking statements. All forward-looking statements contained in this report are necessarily estimates reflecting the best judgment of the party making such statements based upon current information, and the Company assumes no obligation to update any forward-looking statement.




EXTENDICARE HEALTH SERVICES, INC.
Condensed Consolidated Statements of Income
Three months Six months
ended June 30 ended June 30
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2005 2004 2005 2004
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(thousands of U.S. dollars)
Revenues
Nursing and assisted
living facilities 304,451 225,660 590,808 450,086
Outpatient therapy 2,903 3,009 5,630 5,674
Other 4,994 4,659 10,057 9,069
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312,348 233,328 606,495 464,829
Operating and administrative
costs 253,440 197,932 503,476 394,878
Lease costs 5,784 2,229 10,392 4,493
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EBITDA (1) 53,124 33,167 92,627 65,458
Depreciation and amortization 12,267 8,831 22,607 17,512
Interest expense 10,179 6,658 18,736 14,858
Interest income (311) (2,274) (724) (3,889)
Valuation adjustment on interest
rate caps 939 4,320 2,237 4,393
Loss (gain) on disposal of assets and
impairment of long-lived assets 5,070 (4,469) 4,622 (2,857)
Loss on refinancing and retirement
of debt 5,978 275 6,332
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Income before income taxes 24,980 14,123 44,874 29,109
Income tax expense 9,681 5,297 17,521 10,936
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Net income 15,299 8,826 27,353 18,173
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(1) EBITDA refers to income before interest, taxes, depreciation,
amortization, valuation adjustment on interest rate caps, loss
(gain) on disposal of assets and impairment of long-lived
assets, and loss on refinancing and retirement of debt.

EXTENDICARE HEALTH SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
Three months Six months
ended June 30 ended June 30
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2005 2004 2005 2004
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(thousands of U.S. dollars)
Operating activities
Net income 15,299 8,826 27,353 18,173
Adjustments to reconcile net income to net
cash provided from operating activities
Depreciation and amortization 12,267 8,831 22,607 17,512
Provision for self-insured
liabilities 2,042 1,650 4,037 3,300
Payments for self-insured
liabilities (2,307) (1,785) (7,209) (4,897)
Amortization of deferred
financing costs 455 462 925 839
Purchase accounting adjustments:
Amortization of leases
and debt (168) (251)
Amortization of below market
resident leases (1,165) (1,165)
Valuation adjustment on interest
rate caps 939 4,320 2,237 4,393
Loss (gain) on disposal of assets and impairment
of long-lived assets 5,070 (4,469) 4,622 (2,857)
Loss on refinancing and retirement
of debt 5,978 275 6,332
Deferred income taxes 979 (5,683) 3,497 (9,494)
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33,411 18,130 56,928 33,301
Changes in assets and liabilities
Accounts receivable 472 6,398 (27,252) 8,025
Supplies, inventories and
other current assets 2,507 199 2,951 (1,056)
Accounts payable and accrued
liabilities (3,093) 6,828 12,383 2,712
Income taxes 1,449 (1,643) 1,135 (166)
Current due to shareholder
and affiliates (6,540) 3,243 5,204 8,823
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Cash provided by operating
activities 28,206 33,155 51,349 51,639
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Investing activities
Payments for purchases of property
and equipment (5,097) (6,402) (11,437) (11,747)
Payments for new construction
projects (7,407) (3,143) (13,106) (6,943)
Acquisitions (8,335) (4,325) (145,987) (6,454)
Proceeds from sale of
investments 976 4,894 976 4,894
Proceeds from completion of
divestiture agreement 10,000 10,000
Proceeds from repayment of
notes receivable 16,150 20,552
Other assets (619) 138 1,016 (229)
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Cash provided by (used in) investing
activities (20,482) 17,312 (168,538) 10,073
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Financing activities
Proceeds from issuance of
long-term debt 127,376 65,000 128,082
Payments of long-term debt (1,070)(205,791) (20,350)(219,188)
Net change in line of credit 4,000 52,000
Outstanding checks in excess of
bank balance (10,091)
Payment of financing costs (13,107) (125) (13,107)
Advances from shareholder and
affiliate 22,900 22,900
Other liabilities 114 (267) 981 217
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Cash provided by (used in) financing
activities (7,047) (68,889) 97,506 (81,096)
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Increase (decrease) in cash and
cash equivalents 677 (18,422) (19,683) (19,384)
Cash and cash equivalents beginning
of period 9,252 47,893 29,612 48,855
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Cash and cash equivalents end
of period 9,929 29,471 9,929 29,471
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EXTENDICARE HEALTH SERVICES, INC.
Condensed Consolidated Balance Sheets
June 30 Dec. 31
2005 2004
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(thousands of U.S. dollars)
Assets
Current assets
Cash and cash equivalents 9,929 29,612
Accounts receivable, less allowances of
$12,648 and $10,594, respectively 126,894 95,973
Supplies, inventories and other
current assets 21,567 17,751
Income taxes receivable 1,654
Deferred state income taxes 2,947 2,664
Due from shareholder and affiliates 21,662 26,179
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182,999 173,833
Property and equipment 746,665 446,085
Goodwill and other intangible assets 82,846 74,554
Deferred state income taxes 2,830
Other assets 42,284 41,485
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1,057,624 735,957
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Liabilities and Shareholder's Equity
Current liabilities
Accounts payable 20,974 22,297
Accrued liabilities 133,991 99,920
Current portion of accrual for self-
insured liabilities 12,500 18,000
Current portion of amounts due to
shareholder and affiliate 2,974 2,975
Current maturities of long-term debt 5,307 1,071
Income taxes payable 961
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176,707 144,263
Long-term debt and capital lease obligations 549,382 290,861
Accrual for self-insured liabilities 22,956 19,725
Other long-term liablities 19,204 12,448
Deferred state income taxes 1,833
Due to shareholder and affiliates 11,893 16,638
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780,142 485,768
Shareholder's equity 277,482 250,189
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1,057,624 735,957
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EXTENDICARE HEALTH SERVICES, INC.
Financial and Operating Statistics
Three months Six months
ended June 30 ended June 30
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2005 2004 2005 2004
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Components of Nursing and Assisted Living Facility Revenue(millions)
Nursing $248.2 $215.9 $496.2 $430.5
Assisted Living 56.2 9.8 94.6 19.6
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$304.4 $225.7 $590.8 $450.1
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Nursing Facility Statistics
Percent of Revenue by Payor Source (same-facility basis)
Medicare 33.8% 32.5% 33.5% 32.8%
Private/other 14.6 17.6 14.6 17.6
Medicaid 51.6 49.9 51.9 49.6

Average Daily Census by Payor Source (same-facility basis)
Medicare 2,437 2,093 2,435 2,132
Private/other 1,951 2,114 1,984 2,112
Medicaid 8,409 8,435 8,455 8,375
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12,797 12,642 12,874 12,619
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Percent of Average Daily Census by Payor Source (same-
facility basis)
Medicare 19.1% 16.6% 18.9% 16.9%
Private/other 15.2 16.7 15.4 16.7
Medicaid 65.7 66.7 65.7 66.4

Average Revenue per Resident Day by Payor Source
(excluding prior period settlement adjustments)
Medicare (Part A and B) $371.48 $357.65 $371.08 $352.12
Private/other 199.22 189.68 197.90 191.20
Medicaid 147.87 136.31 147.77 135.35
Medicare Part A only 342.18 324.50 341.17 321.17
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Assisted living facilities average daily census
Same-facility basis 1,341 1,322 1,329 1,325
Total 7,483 1,495 6,441 1,491
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Average Occupancy (excluding managed facilities)
(same-facility basis)
Nursing facilities 92.7% 91.8% 93.2% 91.6%
Assisted living facilities 83.1 85.3 83.8 85.9
Combined nursing and assisted
living facilities 91.7 91.1 92.3 91.0
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Average Occupancy (excluding managed facilities)
Nursing facilities 92.5% 91.4% 93.0% 91.4%
Assisted living facilities 87.7 85.1 88.0 85.9
Combined nursing and assisted
living facilities 90.7 90.7 91.3 90.8
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