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| SKH > SEC Filings for SKH > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
The following table shows the revenue and percentage of our total revenue generated by each of these segments for the periods presented (dollars in thousands):
Three Months Ended September 30,
2008 2007
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage
Long-term care services:
Skilled nursing facilities $ 154,603 84.7 % $ 136,762 84.7 %
Assisted living facilities 5,055 2.8 4,402 2.7
Total long-term care services 159,658 87.5 141,164 87.4
Ancillary services :
Third-party rehabilitation therapy services 17,383 9.5 17,730 11.0
Hospice 5,424 3.0 2,571 1.6
Total ancillary services 22,807 12.5 20,301 12.6
Other 9 - 3 -
Total $ 182,474 100.0 % $ 161,468 100.0 %
Nine Months Ended September 30,
2008 2007
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage
Long-term care services:
Skilled nursing facilities $ 463,107 85.2 % $ 386,559 84.5 %
Assisted living facilities 14,320 2.6 12,782 2.8
Total long-term care services 477,427 87.8 399,341 87.3
Ancillary services :
Third-party rehabilitation therapy services 51,683 9.5 51,896 11.4
Hospice 14,422 2.7 5,975 1.3
Total ancillary services 66,105 12.2 57,871 12.7
Other 17 - 3 -
Total $ 543,549 100.0 % $ 457,215 100.0 %
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Sources of Revenue
Long-Term Care Services Segment
Skilled Nursing Facilities. Within our skilled nursing facilities, we
generate our revenue from Medicare, Medicaid, managed care providers, insurers,
private pay and other sources. We believe that our skilled mix, which we define
as the number of Medicare and managed care patient days at our skilled nursing
facilities divided by the total number of patient days at our skilled nursing
facilities for any given period, is an important indicator of our success in
attracting high-acuity patients because it represents the percentage of our
patients who are reimbursed by Medicare and managed care payors, for whom we
receive higher reimbursement rates. Medicare and managed care payors typically
do not provide reimbursement for custodial care, which is a basic level of
healthcare.
The following table sets forth our Medicare, managed care, private pay/other
and Medicaid patient days for our skilled nursing facilities as a percentage of
total patient days for our skilled nursing facilities and the level of skilled
mix for our skilled nursing facilities:
Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
Medicare 16.4 % 17.5 % 17.4 % 18.5 %
Managed care 6.6 5.9 7.0 5.9
Skilled mix 23.0 23.4 24.4 24.4
Private and other 18.8 17.6 17.7 16.8
Medicaid 58.2 59.0 57.9 58.8
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Total 100.0 % 100.0 % 100.0 % 100.0 %
Skilled mix in the first nine months of 2008 was consistent with the same period in the prior year as we continue to focus on high-acuity residents and expand our Express Recovery Unit facilities. Skilled mix of 23.0% in the third quarter of 2008 reflected a decline from 24.6% in the second quarter of 2008, which is consistent with prior-year trends based on seasonality.
The following table sets forth revenue by state and revenue by state as a percentage of total long-term care revenue for the periods (dollars in thousands):
Three Months Ended September 30,
2008 2007
Revenue Percentage of Revenue Percentage of
Dollars Revenue Dollars Revenue
California $ 65,646 41.1 % $ 63,184 44.8 %
Kansas 12,871 8.1 9,728 6.9
Missouri 13,145 8.2 15,026 10.6
Nevada 7,721 4.8 6,482 4.6
New Mexico 19,271 12.1 5,334 3.8
Texas 41,004 25.7 41,410 29.3
Total $ 159,658 100.0 % $ 141,164 100.0 %
Nine Months Ended September 30,
2008 2007
Revenue Percentage of Revenue Percentage of
Dollars Revenue Dollars Revenue
California $ 197,939 41.5 % $ 189,384 47.5 %
Kansas 35,820 7.5 28,121 7.0
Missouri 41,531 8.7 36,081 9.0
Nevada 22,628 4.7 18,856 4.7
New Mexico 53,697 11.2 5,334 1.3
Texas 125,812 26.4 121,565 30.5
Total $ 477,427 100.0 % $ 399,341 100.0 %
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Assisted Living Facilities. Within our assisted living facilities, we
generate our revenue primarily from private pay sources, with a small portion
earned from Medicaid or other state specific programs.
Ancillary Service Segment
Rehabilitation Therapy. As of September 30, 2008, we provided rehabilitation
therapy services to a total of 185 healthcare facilities, including 65 of our
facilities, compared to 176 facilities, including 64 of our facilities, as of
September 30, 2007. In addition, we have contracts to manage the rehabilitation
therapy services for our ten healthcare facilities in New Mexico. Rehabilitation
therapy revenue derived from servicing our own facilities is included in our
revenue from skilled nursing facilities. Our rehabilitation therapy business
receives payment for services from the third-party skilled nursing facilities
that it serves based on negotiated patient per diem rates or a negotiated fee
schedule based on the type of service rendered.
Hospice. We provide hospice care in California and New Mexico. We derive
substantially all of the revenue from our hospice business from Medicare and
Medicaid reimbursement for hospice services.
Regulatory and Other Governmental Actions Affecting Revenue
Our revenue is derived from services provided to patients in the following
payor classes (dollars in thousands):
Three Months Ended September 30,
2008 2007
Revenue Percentage Revenue Percentage
Dollars of Revenue Dollars of Revenue
Medicare $ 65,433 35.9 % $ 58,371 36.2 %
Medicaid 58,519 32.1 50,846 31.5
Subtotal Medicare and Medicaid 123,952 68.0 109,217 67.7
Managed Care 16,505 9.0 13,610 8.4
Private and Other 42,017 23.0 38,641 23.9
Total $ 182,474 100.0 % $ 161,468 100.0 %
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Nine Months Ended September 30,
2008 2007
Revenue Percentage Revenue Percentage
Dollars of Revenue Dollars of Revenue
Medicare $ 199,832 36.8 % $ 169,792 37.1 %
Medicaid 169,412 31.1 139,205 30.5
Subtotal Medicare and Medicaid 369,244 67.9 308,997 67.6
Managed Care 52,502 9.7 38,028 8.3
Private and Other 121,803 22.4 110,190 24.1
Total $ 543,549 100.0 % $ 457,215 100.0 %
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We derive a substantial portion of our revenue from government Medicare and
Medicaid programs. For the nine months ended September 30, 2008, we derived
36.8% and 31.1% of our total revenue from the Medicare and Medicaid programs,
respectively, and for the nine months ended September 30, 2007, we derived 37.1%
and 30.5% of our total revenue from the Medicare and Medicaid programs,
respectively. In addition, our rehabilitation therapy services, for which we
receive payment from private payors, are significantly dependent on Medicare and
Medicaid funding, as those private payors are generally reimbursed by these
programs.
Medicare. Medicare is a federal health insurance program for people age 65 or
older, people under age 65 with certain disabilities, and people of all ages
with End-Stage Renal Disease. The Medicare program has Part A hospital insurance
that helps to cover inpatient care in hospitals and in skilled nursing
facilities (not custodial or long-term care). It also helps cover hospice care
and some home health care. Skilled nursing facilities are paid on the basis of a
prospective payment system, or PPS. The PPS payment rates are adjusted for case
mix and geographic variation in wages and cover all costs of furnishing covered
skilled nursing facilities services (routine, ancillary, and capital-related
costs). The amount to be paid is determined by classifying each patient into a
resource utilization group, or RUG category, which is based upon each patient's
acuity level. Payment rates have historically increased each Federal fiscal year
using a skilled nursing facilities market basket index.
On July 31, 2008, Center for Medicare and Medicaid Services (CMS) released
its final rule on the fiscal year 2009 per diem payment rates for skilled
nursing facilities. Under the final rule, CMS revised and rebased the skilled
nursing facility market basket, resulting in a 3.4% market basket increase
factor. Using this increase factor, the final rule increased aggregate payments
to skilled nursing facilities nationwide by approximately $780.0 million.
Additionally, in the final rule issued July 31, 2008, CMS decided to defer
consideration of a possible $770 million reduction in payments to skilled
nursing facilities related to a proposed adjustment to the refinement of nine
new case mix groups until 2009 when the fiscal year 2010 per diem payment rates
are set.
Recent legislation, effective July 15, 2008, known as the Medicare
Improvement for Patients and Providers Act of 2008 (H.R. 6331), extended certain
therapy cap exceptions. These caps, effective January 1, 2006, imposed a limit
to the annual amount that Medicare Part B (covering outpatient services) will
pay for outpatient physical, speech language and occupation therapy services for
each patient. These caps may result in decreased demand for rehabilitation
therapy services reimbursed under Part B but for the caps. The Deficit Reduction
Act of 2005, or DRA, established exceptions to the therapy caps for a variety of
circumstances. These exceptions were scheduled to expire on June 30, 2008 and
the recently enacted H.R. 6331 now extends the exception process through
December 31, 2009.
Medicare Part B also provides payment for certain professional services,
including professional consultations, office visits and office psychiatry
services, provided by a physician or practitioner located at a distant site.
Such telehealth services previously were reimbursed only if the patient was
located in the office of a physician or practitioner, a critical access
hospital, a rural health clinic, a federally qualified health center or a
hospital. The new H.R. 6331 now includes payment for such telehealth services if
the patient is in a skilled nursing facility. We are unable to predict the
impact of this aspect of the new legislation on our revenues and business at
this time.
Beginning January 1, 2006, the Medicare Modernization Act of December 2003,
or MMA, implemented a major expansion of the Medicare program through the
introduction of a prescription drug benefit under new Medicare Part D. Medicare
beneficiaries who elect Part D coverage and are dual eligible beneficiaries,
those eligible for both Medicare and Medicaid benefits, are enrolled
automatically in Part D and have their outpatient prescription
drug costs covered by this new Medicare benefit, subject to certain limitations.
Most of the nursing facility residents we serve whose drug costs are currently
covered by state Medicaid programs are dual eligible beneficiaries. Accordingly,
Medicaid is no longer a significant payor for the prescription pharmacy services
provided to these residents. Medicaid will continue as a significant payor for
over the counter medications.
Historically, adjustments to reimbursement levels under Medicare have had a
significant effect on our revenue. For a discussion of historic adjustments and
recent changes to the Medicare program and related reimbursement rates see
"Business - Sources of Reimbursement" in Part 1, Item 1 in our 2007 Annual
Report on Form 10-K filed with the Securities and Exchange Commission and "Risk
Factors - Reductions in Medicare reimbursement rates or changes in the rules
governing the Medicare program could have a material adverse effect on our
revenue, financial condition and results of operations" in Part 1, Item 1A of
our 2007 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Medicaid. Medicaid is a state-administered medical assistance program for the
indigent, operated by the individual states with the financial participation of
the federal government. Each state has relatively broad discretion in
establishing its Medicaid reimbursement formulas and coverage of service, which
must be approved by the federal government in accordance with federal
guidelines. All states in which we operate cover long-term care services for
individuals who are Medicaid eligible and qualify for institutional care.
Generally, Medicaid payments are made directly to providers, who must accept the
Medicaid reimbursement level as payment in full for services rendered, except in
New Mexico, which has implemented a managed Medicaid program where providers
receive Medicaid payments from insurance companies. Rapidly increasing Medicaid
spending, combined with slow state revenue growth, has led many states to
institute measures aimed at controlling spending growth. Given that Medicaid
outlays are a significant component of state budgets, we expect continuing cost
containment pressures on Medicaid outlays for skilled nursing facilities in the
states in which we operate. In addition, the Deficit Reduction Act of 2005
limited the circumstances under which an individual may become financially
eligible for Medicaid and nursing home services paid for by Medicaid.
Managed Care. Our managed care patients consist of individuals who are
insured by a third-party entity, typically called a senior Health Maintenance
Organization, or HMO, plan, or are Medicare beneficiaries who assign their
Medicare benefits to a senior HMO plan.
Private Pay and Other. Private pay and other sources consist primarily of
individuals or parties who directly pay for their services or are beneficiaries
of the Department of Veterans Affairs or hospice beneficiaries.
Critical Accounting Policies and Estimates Update
There have been no significant changes during the three- and nine-month
periods ended September 30, 2008 to the items that we disclosed as our critical
accounting policies and estimates in our discussion and analysis of financial
condition and results of operations in our 2007 Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Results of Operations
The following table sets forth details of our revenue and earnings as a
percentage of total revenue for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Cost of services (exclusive of rent cost
of revenue and depreciation and
amortization shown below) 79.9 79.1 79.1 79.0
Rent cost of revenue 2.6 2.0 2.5 1.8
General and administrative 3.3 3.1 3.3 3.1
Depreciation and amortization 2.9 2.7 2.9 2.8
88.7 86.9 87.8 86.7
Other income (expenses):
Interest expense (5.0 ) (6.1 ) (5.1 ) (7.5 )
Interest income 0.1 0.2 0.1 0.3
Other (0.1 ) (0.1 ) - -
Equity in earnings of joint venture 0.3 0.2 0.3 0.3
Debt retirement costs - - - (2.5 )
Change in fair value of interest rate
hedge - - - -
Total other income (expenses), net (4.7 ) (5.8 ) (4.7 ) (9.4 )
Income before provision for income taxes 6.6 7.3 7.5 3.9
Provision for income taxes 1.4 3.0 2.5 1.7
Net income 5.2 % 4.3 % 5.0 % 2.2 %
EBITDA margin 14.5 % 15.9 % 15.4 % 13.7 %
Adjusted EBITDA margin 14.6 % 15.9 % 15.4 % 16.3 %
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
Reconciliation of net income to EBITDA and
Adjusted EBITDA (in thousands):
Net income $ 9,576 $ 6,864 $ 26,944 $ 9,965
Interest expense, net of interest income 9,038 9,530 27,516 32,635
Provision for income taxes 2,561 4,801 13,857 7,622
Depreciation and amortization expense 5,301 4,420 15,534 12,619
EBITDA 26,476 25,615 83,851 62,841
Premium on redemption of debt and
write-off of related deferred financing
costs - - - 11,648
Loss on sale of asset 110 - 110 -
Change in fair value of interest rate
hedge - 6 - 40
Adjusted EBITDA $ 26,586 $ 25,621 $ 83,961 $ 74,529
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We define EBITDA as net income before depreciation, amortization and interest expense (net of interest income) and the provision for income taxes. EBITDA margin is EBITDA as a percentage of revenue. We calculate Adjusted EBITDA by adjusting EBITDA (each to the extent applicable in the appropriate period) for:
discontinued operations, net of tax;
the effect of a change in accounting principle, net of tax;
the change in fair value of an interest rate hedge;
reversal of a charge related to the decertification of a facility;
gains or losses on sale of assets;
provision for the impairment of long-lived assets;
the write-off of deferred financing costs of extinguished debt; and
the premium we paid in connection with the repayment of debt using a portion of the proceeds of our initial public offering.
We believe that the presentation of EBITDA and Adjusted EBITDA provides useful information regarding our operational performance because they enhance the overall understanding of the financial performance and prospects for the future of our core business activities. . . .
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