... helping people live better
2017 ANNUAL REPORT
ENRICHING LIVES
EMBRACING CHANGE
Extendicare is reinve nting traditional
forms of senior care providing a new
perspective on delive ring the right
care at the right time in the right place.
2017
Achievements
Advanced to next stage of provincial
Commenced construction of two Esprit
review process on redevelopment
private-pay retirement communities
plans for six Extendicare long-term
in Bolton (112 suites) and Barrie
care centres in Ontario
(124 suites), Ontario
Built a 24-bed addition to Extendicare
Successfully renewed ParaMed’s
Eaux Claires, a long-term care centre
status of Exemplary Standing,
in Edmonton that welcomed its first
Accreditation Canada’s highest award
resident in February 2018
Opened Esprit’s Douglas Crossing
new senior care centres under
Retirement Community (103 suites)
Extendicare Assist
Began management of seven
in Uxbridge, Ontario and began
construction on a 47-suite expansion
due to open late 2018
Grew SGP Purchasing Partner
Network’s third-party clients served
by 10%
Extendicare is reinve nting traditional
forms of senior care providing a new
perspective on delive ring the right
care at the right time in the right place.
At a Glance
Continuum of Care
Long-term Care
Retirement Living
Home Health Care
Management and Consulting Services
Group Purchasing Services
Letter to Shareholders
Corporate Information
Management’s Discussion and Analysis
Consolidated Financial Statements
Three-year Summary
Securityholder Information
2
4
6
8
10
12
13
14
16
17
61
108
109
AT A
GLANCE
50 Years of
Helping People
Live Better
Extendicare’s dedicated and
experienced team has been
helping people live better through
a commitment to quality care and
services that includes long-term care,
retirement living, home health care,
and management, consulting and
group purchasing services.
Our Locations
As at December 31, 2017
Long-term care centres
Retirement living communities
ParaMed home health care locations
15
1
2
1
7
1
5
4
29 75
9
1
1
58
Extendicare – owned
long-term care centres
44
Extendicare Assist – managed
long-term care centres
11.3M
ParaMed Home Health Care hours
delivered through 35 branches
6
Extendicare Assist – managed
retirement living centres
45.2K
SGP Purchasing Partner Network
third-party residents served
8
Esprit Lifestyle
Communities
2
Corporate Profile
Extendicare is a leading provider of care and services for seniors throughout Canada. Through our network of 116 operated
senior care and living centres, as well as our home health care operations, we are committed to delivering care and services
throughout the health care continuum to meet the needs of a growing seniors’ population in Canada. Our qualified and highly
trained workforce of 23,700 individuals is dedicated to helping people live better through a commitment to quality service and
a passion for what we do.
Extendicare’s common shares trade on the TSX under the symbol “EXE”, and pay monthly cash dividends at the discretion of
its board of directors. More information is available at www.extendicare.com.
Financial Highlights
(millions of dollars unless otherwise noted)
Revenue from Continuing Operations
NOI from Continuing Operations(1)
2017
2016
2015
1,097.3
1,060.8
943.3
2017
2016
2015
135.8
130.1
119.8
Adjusted EBITDA from Continuing Operations(1)
AFFO from Canadian Continuing Operations(1)
2017
2016
2015
97.6
92.9
83.7
2017
2016
2015
58.4
58.6
44.0
Our Segments
Long-term care
Retirement living
Home health care
Management, consulting and
group purchasing
Pro forma 2017 revenue and NOI
Segmented Revenue
from Canadian operations for
estimated stabilized impact of
completed/committed transactions.
Segmented NOI
55%
5%
38%
2%
50%
14%
29%
7%
(1) Refer to non-GAAP measures on page 18.
Forward-looking Statements
Information provided by Extendicare from time to time, including in this Annual Report, contains or may contain forward-looking statements concerning anticipated future
events, results, circumstances, economic performance or expectations with respect to Extendicare and its subsidiaries, including, without limitation, statements regarding
its business operations, business strategy and financial condition. Please refer to page 18 for a caution to the reader on the reliance of such statements.
3
Extendicare 2017 Annual Report CONTINUUM
OF CARE
We offer a range of senior care services across
the spectrum to ensure that Canadian seniors
receive the care they need at any stage in their
health care journey.
... helping people live better
94%
would recommend us
4
We strive to provide a positive, healthy and safe environment for those in our
care. Extendicare’s person-centred quality management program is focused
on delivering consistent and effective care. Our program is guided by a quality
framework that is based on customer needs and service quality.
Each year we conduct surveys as a means to assess our performance and
identify opportunities for improvement. We have implemented a continuous
review process that categorizes the feedback and turns them into actionable
insights. These results help us understand what matters most to our clients and
how best to serve them.
We are proud that our clients and their families have the confidence in the quality
of our care and services, such that they would recommend our services to others.
At Extendicare, we strongly believe that the
best starting point in meeting the needs of
our residents, is by asking them what’s most
important to them.
Rosemary Lindau and April Coulter, two Extendicare consultants, started “My Wishes” with the
goal of incorporating what residents of our long-term care homes felt was most important to
them in their end of life journey. Using cards, they were able to encourage discussion about
end of life in a non-threatening way. Since its launch, the program has been introduced in
nine homes to over 250 residents. This innovative program has received positive feedback
across the health care sector. One achievement the team is proud of is the implementation of
“My Wishes” into Extendicare’s national policy on Advance Care Planning.
I have learned how powerful the voice
of the resident is, and how impactful acting
on their wishes can be. By simply listening...
we can drive change in long-term care
and beyond.
April Coulter, Extendicare Long-term Care Consultant
Extendicare 2017 Annual Report
5
LONG-TERM
CARE
8,112
Resident capacity
98%
Average occupancy
... helping people live better
Extendicare’s long-term care services are
designed for those who require a higher
level of specialized nursing and personal
care services.
Extendicare is proud to be playing a leadership role in the renewal of older
long-term care homes across Ontario, with a view to providing a non-institutional
environment offering greater privacy and dignity for our residents. Enhancing
the mix of preferred accommodation will improve our revenue stream and
operating margins.
6
84%
Average occupancy of Ontario
preferred accommodation
11.5K
Dedicated employees
1.4%Year-over-year growth
in revenue
We would like to thank everyone for
the exceptional care and attention
paid to my mother since her
admission to Extendicare Kirkland...
you are an exceptional home and
we feel very comfortable leaving our
beloved mother in your care.
Long-term care centre family member,
Extendicare Kirkland Lake
7
Extendicare 2017 Annual Report
RETIREMENT
LIVING
676
Suites
102
Year-over-year increase
in suites
Our Esprit Lifestyle Communities allow
residents to enjoy life to its fullest with
the comfort of available care focused on
enhancing and enriching lives.
We continue to expand the number of private-pay retirement communities through
accretive acquisitions and developments under our Esprit Lifestyle Communities
brand. This facilitates the diversification of our revenue stream and delivers higher
operating margins.
8
96%
Occupancy of stabilized
communities as at year end
70%
Average occupancy for 2017
(includes communities in
lease up)
23.9%
Year-over-year increase in
same-store NOI
Seeing the horses helps my mother
remember growing up, the cold
winters, riding her horse to school
after two to three hours of doing
chores at home.
Retirement community family member on
the horse therapy at Riverbend Crossing
9
Extendicare 2017 Annual Report HOME
HEALTH
CARE
11.3M
Annual hours of service
31K
Daily hours of service
ParaMed helps its clients enjoy
greater independence at home by
providing the highest quality of care as
demonstrated by its Exemplary Standing
ranking by Accreditation Canada.
We continue to experience year-over-year increases in our home health care
business volumes and clients served. ParaMed is positioned to meet the
growing demand for quality cost-effective care in the community.
10
11.7K
Dedicated employees
4.1%
Year-over-year increase
in daily hours of service
9%
Year-over-year growth in NOI
I have been having a tough time
with meals lately due to medication
and not being able to eat. Skye, my
home support worker, made meals
I can and want to eat…she has gone
above and beyond for me.
ParaMed client, Calgary AB
Extendicare 2017 Annual Report
11
MANAGEMENT
AND CONSULTING
SERVICES
6,216
Beds under management
1.5%
Year-over-year growth in
combined (Extendicare Assist
and SGP) revenue
Extendicare Assist offers management
and consulting services to other health
care operators in the areas of clinical
care, dietary services, information
technology, financial and administrative
services, operational reviews and more.
We continue to seek out and develop new partnerships nationwide, including the
provision of consulting services for development and redevelopment projects in
the long-term care sector. We strive to improve the performance of our partners
by applying our breadth of experience in the Canadian senior care sector.
12
GROUP
PURCHASING
SERVICES
SGP Purchasing Partner Network
provides its partners with quality
national products and services;
everything from food, clinical
supplies, furniture and equipment
to maintenance contracts.
We continue to build on our strong foundation by expanding our member base
to include larger providers in additional markets. By continuously evaluating
our product offerings and considering new innovations and trials, we gain
efficiencies and enrich the lives of the residents we serve.
45.2K
Third-party residents served
4.9%
Year-over-year growth in
combined (Extendicare Assist
and SGP) NOI
13
Extendicare 2017 Annual Report LETTER TO
SHAREHOLDERS
Mission Statement
Fellow Shareholders,
Extendicare is about helping
people live better.
We help our residents
and clients live better by
promoting quality of life.
We create remarkable
moments through highly
engaged and motivated
team members.
Stakeholders know this
because we continuously
measure, improve and publicly
share our performance.
14
Fifty years ago, Extendicare was founded to become a
long-term care (LTC) service provider that would relieve
overburdened hospitals. Core to this vision was a
commitment to establishing the highest standards of care
that would enhance the lives of residents. This legacy of
“helping people live better” lives on today.
In its first year of operation, the Company broke ground on
four LTC centres in Ontario. Today, we own or operate over
100 LTC centres across the country serving over 13,500
residents. We have grown not only in size but in services
across the continuum of care – where senior care centres
that were once hospital-like, focused mainly on medical
care, are now warm, home-like environments where a patient
is cared for emotionally, spiritually and socially. We offer a
variety of social and recreational activities such as horse
therapy and memory care, and we have changed the ways
of delivering care. We launched ParaMed in 1975 to serve
seniors living in their homes, as “aging in place” has become
more desirable. Extendicare is now the largest private-sector
provider of both LTC and home health care in Canada.
Providing long-term care that positively impacts the lives of
our residents remains a key focus. Thus, the redevelopment
of our 21 Ontario Class C LTC beds is a priority, and we have
an investment plan of approximately $400 million over the
next five years to achieve this. To date, we have submitted
applications to the Ministry of Health and Long-Term Care
(MOHLTC) to redevelop 16 of our centres, including an
additional 400 to 500 new LTC beds in response to the
MOHLTC’s recent call for new licence applications. We have
received word from the MOHLTC that our first redevelopment
project is in the final stage of approval and we are optimistic
about breaking ground in 2018. This 256-bed LTC project is
in Stittsville, Ontario, a growing suburb of Ottawa, and will
be part of a beautiful campus of care. We believe working
with the provincial government to advance these projects
is an important initiative to improve the quality and privacy
driven by growth in our home health care business volumes,
of accommodations for seniors and to secure this reliable
funding enhancements and higher preferred accommodation
revenue stream into the future.
in our LTC operations, and continued growth of our retirement
To expand our footprint in the senior care sector and diversify
living operations. These factors contributed to the growth in
NOI, from continuing operations of 4.4% to $135.8 million for
our revenue with more private-pay businesses, we own
and operate eight retirement communities under the Esprit
the year.
Lifestyle Communities brand. Since launch, we have acquired
Revenue and NOI from our Canadian operations each grew
six communities and completed development of two in
by 3.3%, reflecting an NOI margin of 12%, while AFFO from
markets with strong demand. Three of the communities
our Canadian operations of $58.4 million, or $0.657 per share,
that were acquired in 2015 achieved stabilized occupancy
was relatively flat compared to 2016.
and, at the end of 2017, had a combined occupancy of
96%. Our newest centre, Douglas Crossing Retirement
Community in Uxbridge, Ontario, welcomed its first resident
on October 30, 2017, and after only four months of service
achieved occupancy of 71%. As a result, we have proceeded
with the construction of a 47-suite addition, anticipated
to be completed in late 2018. Two additional retirement
communities are under construction in Ontario, with our
Bolton community slated to open in the fall of 2018, and our
Barrie community to open in the summer of 2019. In February
2018, we announced an agreement to acquire Lynde Creek
Retirement Community in Whitby, Ontario, for $34.5 million,
with closing anticipated in April 2018. This growing
segment of our business will then consist of 11 retirement
communities that are expected to contribute stabilized NOI
of approximately $21 million.
We believe that home care has an important role to play in
the future of senior care in Canada. Remaining in their own
home is often the preferred care option for seniors. It is
also advocated by the government as a low-cost solution
to meet the growing demographic demand. ParaMed, our
home health care business, is a key partner with provincial
governments in delivering high-quality home care and
currently employs over 11,700 individuals servicing roughly
75,000 clients annually.
As well, our Extendicare Assist management and
consulting services, and SGP Purchasing Partner Network
continue to experience increased demand for our day to
day management, application support and development
services. By associating with these Extendicare business
units, our clients leverage the expertise and economies of a
larger organization.
Stable Growth in 2017
Our results for 2017 reflect continued execution towards our
stated strategy while increasing private-pay revenue from
retirement living. Extendicare’s revenue from continuing
operations for 2017 grew to $1.10 billion, up 3.4% over 2016,
Our dividends paid in 2017 aggregated $0.48 per share,
representing a payout ratio on total AFFO of 73%.
Final Remarks
We expect radical change in the Canadian senior care
landscape over the coming years. The aging demographic,
as the number of people over 65 outpace those under
15 years of age, will dramatically impact the amount
and nature of services demanded by Canadians. And
governments, constrained in their capacity to meet this
demand, will increasingly be looking to private-sector
partners for solutions to meet these challenges.
Extendicare has grown to be a trusted senior care provider by
being patient-centred and highly committed to quality care.
We believe we are well positioned to adapt to changes and
capture opportunities that will arise to meet the growth in
demand for our services.
We owe our success to our team members on the frontlines
– those who serve our clients as if they were their extended
families. The health care landscape will continue to change;
however, there is one thing that will not change – our team’s
commitment to helping people live better. We thank you for
all of your support as we continue on our journey to being the
best senior care and services company in Canada.
Sincerely,
Timothy L. Lukenda
President and Chief Executive Officer
15
Extendicare 2017 Annual Report Corporate Information
Extendicare Inc. Board of Directors
Alan D. Torrie HR, GN
Chairman of the Board
Alan R. Hibben A, AQ, GN
Corporate Director and Advisor
Timothy L. Lukenda
President and Chief Executive Officer
Margery O. Cunningham A
Corporate Director and Consultant
Michael R. Guerriere QR
Chief Medical Officer, Vice President and
Chief Strategy Officer of TELUS Health
Sandra L. Hanington A, GN, QR
President and Chief Executive Officer
of the Royal Canadian Mint
Benjamin J. Hutzel HR
Corporate Director
Donna E. Kingelin AQ, QR
Corporate Director and Consultant
Al Mawani A, AQ
Principal of Exponent Capital Partners Inc.
Gail Paech HR, QR
President and Chief Executive Officer of
Associated Medical Services Inc.
Honorary Directors
George A. Fierheller
Dr. Seth. B. Goldsmith
Alvin G. Libin
J. Thomas MacQuarrie, QC
Committees
A
AQ
GN
HR
QR
Audit
Acquisitions
Governance and Nominating
Human Resources
Quality and Risk
Officers and Executives
Extendicare Inc.
Extendicare (Canada) Inc.
Timothy L. Lukenda
President and Chief Executive Officer
Timothy L. Lukenda
Chairman and Chief Executive Officer
Mark A. Lugowski
Vice President, Esprit Lifestyle Communities
Elaine E. Everson
Vice President and Chief Financial Officer
Elaine E. Everson
Vice President and Chief Financial Officer
Christina L. McKey
Vice President
Jillian E. Fountain
Corporate Secretary
Jillian E. Fountain
Corporate Secretary
Tracey L. Mulcahy
Vice President, Quality, Risk and Innovation
Brandon L. Parent
Vice President, General Counsel
Christopher J. Dennis
Vice President, Home Health Care Operations
and President, ParaMed Inc.
Brandon L. Parent
Vice President, General Counsel
Karen A. Scanlan
Vice President, People and Culture
Michael A. Harris
Vice President, LTC Operations
Gary M. Loder
Vice President, Extendicare Assist and SGP
Purchasing Partner Network
16
Management’s Discussion and Analysis
Year ended December 31, 2017
Dated: February 28, 2018
Table of Contents
Basis of Presentation
Additional Information
Forward-looking Statements
Non-GAAP Measures
Business Strategy
Significant 2017 Events and Developments
Business Overview
Key Performance Indicators
2017 Selected Annual Information
2017 Selected Quarterly Information
2017 Fourth Quarter Financial Review
17
18
18
18
20
20
22
25
27
28
30
2017 Financial Review
Adjusted Funds from Operations
Other Significant Developments
Update of Regulatory and Funding Changes
Affecting Results
Liquidity and Capital Resources
Commitments and Contingencies
Related Party Transactions
Risks and Uncertainties
Accounting Policies and Estimates
34
39
41
42
46
49
51
51
57
Basis of Presentation
This Management’s Discussion and Analysis (MD&A) provides information on Extendicare Inc. and its subsidiaries, and unless the context
otherwise requires, references to “Extendicare”, the “Company”, “we”, “us” and “our” or similar terms refer to Extendicare Inc., either alone
or together with its subsidiaries. The Company’s common shares (the “Common Shares”) are listed on the Toronto Stock Exchange (TSX)
under the symbol “EXE”. The registered office of Extendicare is located at 3000 Steeles Avenue East, Suite 700, Markham, Ontario, Canada,
L3R 9W2.
Extendicare and its predecessors have been in operation since 1968, providing care and services to seniors throughout Canada. Following
the sale of substantially all of its U.S. business in 2015 and the repositioning of the Company as a pure-play Canadian services provider to
the expanding senior care sector, we have continued to grow the Company’s operations across the continuum of seniors’ care.
In July 2015, Extendicare completed the sale of substantially all of its U.S. business and senior care operations (the “U.S. Sale Transaction”),
which were conducted through its wholly owned U.S. subsidiary, Extendicare Health Services, Inc. and its subsidiaries. In December 2016,
the Company disposed of its non-strategic U.S. information technology hosting and professional services (U.S. IT Hosting) business. The
operating results of the disposed U.S. operations are reported as discontinued operations throughout this MD&A.
Extendicare has prepared this MD&A to provide information to current and prospective investors of the Company to assist them to
understand Extendicare’s financial results for the year ended December 31, 2017. This MD&A should be read in conjunction with
Extendicare’s audited consolidated financial statements for the years ended 2017 and 2016, and the notes thereto, prepared in accordance
with International Financial Reporting Standards (IFRS). These financial statements and notes are available on Extendicare’s website at
www.extendicare.com. All currencies are in Canadian dollars unless otherwise indicated. Except as otherwise specified, references to years
indicate the fiscal year ended December 31, 2017, or December 31 of the year referenced.
The discussion and analysis in this MD&A are based upon information available to management as of February 28, 2018. This MD&A
should not be considered all-inclusive, as it excludes changes that may occur in general economic, political and environmental conditions.
Additionally, other events may or may not occur, which could affect the Company in the future.
17
Extendicare 2017 Annual Report Additional Information
Additional information about Extendicare, including its latest Annual Information Form, may be found on SEDAR’s website at www.sedar.
com under Extendicare’s issuer profile and on Extendicare’s website at www.extendicare.com. A copy of this and other public documents
of Extendicare are available upon request to the Corporate Secretary of Extendicare.
Forward-looking Statements
Information provided by Extendicare from time to time, including in this Annual Report, contains or may contain forward-looking
statements concerning anticipated future events, results, circumstances, economic performance or expectations with respect to the
Company, including, without limitation, statements regarding its business operations, business strategy, growth strategy, results of
operations and financial condition; statements relating to indemnification provisions and deferred consideration in respect of the U.S.
Sale Transaction; and the acquisition and development of retirement communities, including statements related to the expected annual
revenue, net operating income (NOI) yield, and adjusted funds from operations to be derived from acquisitions and development projects.
Forward-looking statements can be identified by the expressions “anticipate”, “believe”, “estimate”, “expect”, “intend”, “objective”, “plan”,
“project”, “will” or other similar expressions or the negative thereof. These forward-looking statements reflect the Company’s current
expectations regarding future results, performance or achievements and are based upon information currently available to the Company
and on assumptions that the Company believes are reasonable.
Although forward-looking statements are based upon estimates and assumptions that the Company believes are reasonable based upon
information currently available, these statements are not representations or guarantees of future results, performance or achievements of
the Company and are inherently subject to significant business, economic and competitive uncertainties and contingencies. In addition to
the assumptions and other factors referred to specifically in connection with these forward-looking statements, the risks, uncertainties and
other factors that could cause the actual results, performance or achievements of Extendicare to differ materially from those expressed
or implied by the forward-looking statements, include, without limitation, the following: changes in the overall health of the economy and
government; the ability of the Company to attract and retain qualified personnel; changes in the health care industry in general and the
long-term care industry in particular because of political and economic influences; changes in applicable accounting policies; changes in
regulations governing the health care and long-term care industries and the compliance by Extendicare with such regulations; changes in
government funding levels for health care services; changes in tax laws; resident care and class action litigation, including the Company’s
exposure to punitive damage claims, increased insurance costs and other claims; the ability of Extendicare to maintain and increase
resident occupancy levels and home health care volumes; changes in competition; changes in demographics and local environment
economies; changes in foreign exchange and interest rates; changes in the financial markets, which may affect the ability of Extendicare
to refinance debt; and the availability and terms of capital to Extendicare to fund capital expenditures and acquisitions; changes in the
anticipated outcome and benefits of dispositions, acquisitions and development projects, including risks relating to completion; and those
other risks, uncertainties and other factors identified in the Company’s other public filings with the Canadian securities regulators available
on SEDAR’s website at www.sedar.com under Extendicare’s issuer profile.
The forward-looking statements contained in this Annual Report are expressly qualified by this cautionary statement. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements of Extendicare. The forward-looking
statements speak only as of the date of this Annual Report. Except as required by applicable securities laws, the Company assumes no
obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Non-GAAP Measures
Extendicare assesses and measures operating results and financial position based on performance measures referred to as “net
operating income”, “net operating income margin”, “EBITDA”, “Adjusted EBITDA”, “Adjusted EBITDA margin”, “earnings before depreciation,
amortization, and other expense”, “earnings (loss) from continuing operations before separately reported items, net of taxes”, “Funds from
Operations”, and “Adjusted Funds from Operations”. These measures are commonly used by Extendicare and its investors as a means
of assessing the performance of the core operations in comparison to prior periods. They are presented by Extendicare on a consistent
basis from period to period, thereby allowing for consistent comparability of its operating performance. In addition, the Company
assesses its return on investment in development activities using the non-GAAP financial measure “NOI Yield”. These are not measures
recognized under GAAP and do not have standardized meanings prescribed by GAAP. These non-GAAP measures are presented in this
document because either: (i) management believes that they are a relevant measure for users of the financial statements to assess the
Company’s operating performance and ability to make cash distributions; or (ii) certain ongoing rights and obligations of Extendicare may
be calculated using these measures. Such non-GAAP measures may differ from similar computations as reported by other issuers, and
accordingly, may not be comparable to similarly titled measures as reported by such issuers. They are not intended to replace earnings
(loss) from continuing operations, net earnings (loss), cash flow, or other measures of financial performance and liquidity reported in
accordance with GAAP.
18
Management’s Discussion and Analysis
References to “net operating income”, or “NOI”, in this document are to revenue less operating expenses, and this value represents the
underlying performance of our operating business segments. References to “net operating income margin” are to net operating income as
a percentage of revenue.
References to “EBITDA” in this document are to earnings (loss) from continuing operations before net finance costs, income taxes,
depreciation and amortization. References to “Adjusted EBITDA” in this document are to EBITDA adjusted to exclude the line item “other
expense”, and as a result, is equivalent to the line item “earnings before depreciation, amortization, and other expense” reported on the
consolidated statements of earnings. References to “Adjusted EBITDA Margin” are to Adjusted EBITDA as a percentage of revenue.
Management believes that certain lenders, investors and analysts use EBITDA and Adjusted EBITDA to measure a company’s ability to
service debt and meet other payment obligations, and as a common valuation measurement in the long-term care industry. For example,
certain of our debt covenants use Adjusted EBITDA in their calculations.
References to “earnings (loss) from continuing operations before separately reported items, net of tax” in this document are to earnings
(loss) from continuing operations, excluding the following separately reported line items: “fair value adjustments”, “loss (gain) on foreign
exchange”, and “other expense”. These line items are reported separately and excluded from certain performance measures, because they
are transitional in nature and would otherwise distort historical trends. They relate to the change in the fair value of, or gains and losses on
termination of, convertible debentures, and interest rate agreements, as well as gains or losses on the disposal or impairment of assets,
and foreign exchange gains or losses on capital items. In addition, these line items may include acquisition related costs, restructuring
charges, proxy contest costs, and the write-off of unamortized financing costs on early retirement of debt. The above separately reported
line items are reported on a pre-tax and on an after-tax basis as a means of deriving earnings (loss) from operations and related earnings
per share excluding such items.
“Funds from Operations”, or “FFO”, is defined as Adjusted EBITDA less depreciation for furniture, fixtures, equipment and computers,
or “depreciation for FFEC”, accretion costs, net interest expense, and current income taxes. Depreciation for FFEC is considered
representative of the amount of maintenance (non-growth) capital expenditures, or “maintenance capex”, to be used in determining “Funds
from Operations”, as the depreciation term is generally in line with the life of these assets. FFO is a recognized earnings measure that is
widely used by public real estate entities, particularly by those entities that own and/operate income-producing properties. Management
believes that certain investors and analysts use FFO, and as such has included FFO to assist with their understanding of the Company’s
operating results.
“Adjusted Funds from Operations”, or “AFFO”, is defined as FFO plus: i) the reversal of non-cash financing and accretion costs; ii) the
reversal of non-cash share-based compensation; iii) the principal portion of government capital funding; iv) amounts received from income
support arrangements; and v) the reversal of income or loss of the captive insurance company that was included in the determination
of FFO, as those operations are funded through investments held for U.S. self-insured liabilities, which are not included in the Company’s
reported cash and short-term investments. In addition, AFFO is further adjusted to account for the difference in total maintenance capex
incurred from the amount deducted in the determination of FFO. Since our actual maintenance capex spending fluctuates on a quarterly
basis with the timing of projects and seasonality, the adjustment to AFFO for these expenditures from the amount of depreciation for FFEC
already deducted in determining FFO, may result in an increase to AFFO in the interim periods reported. Management believes that AFFO is
a relevant measure of the ability of the Company to earn cash and make cash distributions to shareholders.
Both FFO and AFFO are subject to other adjustments, as determined by management in its discretion, that are not representative of
Extendicare’s operating performance.
References to “payout ratio” in this document are to the ratio of dividends declared per share to AFFO per basic share.
References to “NOI Yield” in this document are to a financial measure used by the Company to assess its return on investment in
development activities. NOI Yield is defined by the Company as the estimated stabilized NOI of a development property in the first year it
achieves expected stabilized occupancy divided by the estimated Adjusted Development Costs, as defined below. Management believes
that this is a relevant measure of the Company’s total economic return of a development project.
“Adjusted Development Costs” is defined as development costs on a GAAP basis (which includes the cost of land, hard and soft
development costs, furniture, fixtures and equipment) plus/minus cumulative net operating losses/earnings generated by the development
property prior to achieving expected stabilized occupancy, plus an estimated imputed cost of capital during the development period
through to the expected stabilized occupancy.
Reconciliations of “earnings (loss) from continuing operations before income taxes” to “Adjusted EBITDA” and “net operating income” are
provided under the headings “2017 Selected Quarterly Information”, “2017 Fourth Quarter Financial Review” and “2017 Financial Review”.
Reconciliations of “earnings from continuing operations” to “FFO” and “AFFO” are provided under the heading “Adjusted Funds from
Operations”.
Reconciliations of “net cash from operating activities” to “AFFO” are provided under the heading “Adjusted Funds from
Operations — Reconciliation of Net Cash from Operating Activities to AFFO”.
19
Extendicare 2017 Annual Report Business Strategy
Our strategy is to be the leading provider of care and services to seniors in Canada. To do this, we strive to provide quality, person-centred
care through compassionate caregivers across the continuum of care. We have complemented our core long-term care services through
the growth of our home health care operations and expansion into the private-pay retirement sector. We intend to continue to grow our
private-pay home health care services and retirement business lines through acquisition and development, as well as supporting continued
growth in our management, consulting and group purchasing divisions. In doing so, we intend to diversify our revenue streams to achieve
a better balance between government and privately funded activities.
Our goal is to be well-positioned geographically, and from a service delivery standpoint, to be able to offer the right care, at the right time, in
the right place for Canadian seniors as they age and their care and service needs change.
We will continue to emphasize quality, transparency and communication with our customers and stakeholders in order to continue to be
viewed as a leader in the Canadian senior care sector. To accomplish this strategy, we want to be a health care employer of choice in the
communities in which we operate. We know that we are only as good as the care and customer service being provided by each of our
employees on a daily basis.
By executing this strategy effectively, we believe we can provide an appropriate and consistent return to our shareholders who have
demonstrated their belief in our mission by investing in Extendicare.
Significant 2017 Events and Developments
This section provides an update on our current activities related to the continued expansion into the Canadian retirement sector. Refer to
the discussion under the heading “Other Significant Developments” for a summary of other developments affecting the financial results or
operations of Extendicare.
Growth of Retirement Operations
As part of the execution of our strategy to continue to grow along the senior care and services continuum, we continue to expand
our private-pay retirement operations through the acquisition and development of retirement communities under our Esprit Lifestyle
Communities brand. Our retirement communities offer independent and enhanced living and memory care, as well as short-term stay, and
respite care.
Since 2015, we have acquired six retirement communities, completed the development of Cedar Crossing Retirement Community (Cedar
Crossing) in Simcoe, Ontario, that opened in the fourth quarter of 2016, and completed the first phase of Douglas Crossing Retirement
Community (Douglas Crossing) in Uxbridge, Ontario, that opened in the fourth quarter of 2017.
Retirement Acquisitions
On February 23, 2018, the Company entered into a definitive agreement to acquire the Lynde Creek Retirement Community, located in
Whitby, Ontario, for a cash purchase price of $34.5 million, subject to normal closing adjustments. The acquired community consists of
the Lynde Creek Manor Retirement Residence, offering 93 independent and assisted living suites, (the “Manor”); the Lynde Creek Life Lease
Village, with 113 townhomes, (the “Village”); and 3.7 acres of adjacent land for expansion (the “Excess Land”). Closing, which is subject to
customary conditions, is expected to occur in the second quarter of 2018.
The Manor is a modern private pay luxury retirement residence with 93 suites offering independent supportive living (ISL) and assisted
living (AL) suites, and is currently 100% occupied. The Village is a 113-unit townhome development that sits adjacent to the Manor.
Included in the purchase agreement is the ownership of the underlying land and the leasehold interest related to the life leases. Upon the
resale of a townhome, the Company retains a 10% residual interest in the proceeds. The Excess Land is situated immediately adjacent to
the Manor, with zoning that allows for a strategic expansion to include additional ISL/AL suites or seniors apartments units.
20
Management’s Discussion and Analysis
Projects in Development
In October 2017, we opened the initial 103 suites of our Douglas Crossing Retirement Community, in Uxbridge, Ontario. As a result of
the robust pre-lease activity at Douglas Crossing, we have accelerated our expansion plans for this community, and are in the process
of completing a 47-suite addition that is anticipated to be completed in late 2018. As well, construction is under way on our Bolton
(112 suites) and Barrie (124 suites) retirement projects, which are anticipated to open in the fourth quarter of 2018, and the 2019 second
quarter, respectively.
The following table summarizes these projects that are in various stages of development, and provides our expected stabilized occupancy,
estimated Adjusted Development Costs, estimated stabilized NOI, and corresponding NOI Yield. The NOI Yield is a non-GAAP financial
measure that we use to assess our return on investment. Refer to the discussion under the heading “Non-GAAP measures”.
Name/Location
Douglas Crossing, Uxbridge, ON
Phase I
Phase II
Bolton, ON
Barrie, ON
# of
Suites
Actual /
Expected
Opening
Expected
Stabilized
Occupancy
Date
Expected
Stabilized
Occupancy
(%)
Estimated
Adjusted
Development
Costs
(millions)
Estimated
Stabilized
NOI
(millions)
Expected
NOI Yield
103
47
112
124
Oct. 30/17
Q4/2018
Q4/2018
Q2/2019
Q1/2020
Q4/2021
Q4/2021
93%
95%
92%
$40.3
$31.5
$39.7
$3.5
$2.4
$3.2
8.6%
7.6%
8.0%
Retirement Community Financings
As at December 31, 2017, the Company had construction financing available for its Cedar Crossing, Douglas Crossing, and Bolton
retirement development projects of up to $9.9 million, $29.7 million, and $20.8 million, respectively, of which an aggregate of $29.9 million
was drawn (2016 — $12.6 million). Loan payments are interest-only, based on a variable 30-day banker’s acceptance rate plus 2.5%, with
no standby fee. The construction loans are repayable on demand by the lender and, in any event, are to be fully repaid as follows: Cedar
Crossing, in November 2018 (being 24 months from the issuance of the occupancy permit); Douglas Crossing, in October 2021 (being
60 months from close of the loan); and Bolton, by the earlier of April 2022 or 36 months from the issuance of the occupancy permit. We
anticipate securing construction financing under similar terms for the Barrie project. Permanent financing for each of the communities
will be sought upon maturity of the construction financing.
In August 2016, the Company secured financing on three of the retirement communities that had been acquired in 2015, representing
non-revolving credit facilities aggregating $56.3 million (the “Retirement Mortgages”). These financings have seven-year terms, and bear
interest at variable rates of prime plus 0.5% or 30-day banker’s acceptance rate plus 1.9%. In conjunction with securing the Retirement
Mortgages, the Company entered into interest rate swap contracts to lock in the rates at 3.11% for the full term. These interest rate swap
contracts are measured at fair value through profit or loss.
21
Extendicare 2017 Annual Report Business Overview
Extendicare, through its subsidiaries, is the largest private-sector operator of long-term care centres in Canada and we believe is the
largest private-sector provider of publicly funded home health care services in Canada through our wholly owned subsidiary ParaMed Inc.
(ParaMed). In addition, the Company owns and operates retirement communities under the Esprit Lifestyle Communities brand, provides
management and consulting services to third-party owners of senior care and living centres through its Extendicare Assist division, and
provides group purchasing services to third-party clients through its SGP Purchasing Partner Network division. In 2017, approximately
56% of the revenue from our Canadian operations was derived from our long-term care operations, approximately 40% was from our
home health care business, approximately 2% was from our retirement living operations, and the balance was from our management,
consulting and group purchasing operations.
As at December 31, 2017, Extendicare owned and operated 58 LTC centres, 8 retirement communities, and managed 50 senior care and
living centres for third parties. In total, we operated 116 senior care and living centres across four provinces in Canada, with capacity for
15,004 residents, with a significant presence in Ontario and Alberta, where approximately 76% and 11% of its residents, respectively were
served. ParaMed’s home health care services operated from 35 locations across six provinces providing approximately 11.3 million hours
of service annually. SGP Purchasing Partner Network provided group purchasing services to third-party clients representing over 45,200
seniors across Canada. In all, as at December 31, 2017, the Company employed approximately 23,700 individuals across Canada that are
dedicated to helping people live better through a commitment to quality service and passion for what we do.
The table below summarizes the senior care and living centres operated by Extendicare, including those managed for third parties,
as at December 31, 2017. The Company operates nine of its Ontario LTC centres under 25-year finance lease arrangements, with full
ownership obtained at the end of the lease term. Extendicare believes that ownership of its centres provides financial and strategic
advantages.
Long-term Care
Retirement Living
Chronic Care Unit
No. of
Centres
Resident
Capacity
No. of
Centres
Resident
Capacity
No. of
Centres
Resident
Capacity
No. of
Centres
By Province
Owned/Leased
Ontario
Alberta
Saskatchewan
Manitoba
Managed
Ontario
Alberta
Manitoba
34
14
5
5
58
40
1
2
43
5,206
1,495
649
762
8,112
5,165
102
168
5,435
4
–
4
–
8
5
1
–
6
335
–
341
–
676
552
109
–
661
–
–
–
–
–
1
–
–
1
1
–
–
–
–
–
120
–
–
120
120
Total
101
13,547
14
1,337
116
15,004
(1) The centres are categorized based on the predominant level of care provided, the type of licensing and the type of funding provided. For example, two of our long-term care
centres with retirement wings have been categorized as LTC centres. In addition, government-funded supportive living suites have been categorized as LTC centres due to the
nature of the regulatory oversight and government-determined fee structure.
The following reflects the change in operating capacity of our Canadian senior care and living centres during 2017 and 2016.
Senior Care Centres
As at beginning of year
Managed contracts added
Managed contracts ceased
Retirement communities acquired/developed
Operational capacity adjustments
As at end of year
No. of
Centres
118
7
(10)
1
—
116
2017
Resident
Capacity
15,022
764
(900)
103
15
15,004
No. of
Centres
116
1
(2)
3
—
118
2016
Resident
Capacity
14,890
41
(135)
226
—
15,022
22
Management’s Discussion and Analysis
Total
Resident
Capacity
5,541
1,495
990
762
8,788
5,837
211
168
6,216
38
14
9
5
66
46
2
2
50
Operating Segments
The Company reports the following segments within its Canadian operations: i) long-term care; ii) retirement living; iii) home health
care; iv) management, consulting and group purchasing as “other Canadian operations”; and v) the Canadian corporate functions and
any intersegment eliminations as “corporate Canada”. For financial reporting purposes, the Company’s owned and operated centres
are reported under the “long-term care” or the “retirement living” operating segment based on the predominate level of care provided.
The Company’s managed centres are reported under the “other Canadian operations” segment, as the revenue from those operations is
earned on a fee-for-service basis.
The Company continues to group its former and remaining U.S. operations as one segment, consisting of its wholly owned Bermuda-
based captive insurance company, Laurier Indemnity Company, Ltd. (the “Captive”) that insured Extendicare’s U.S. general and
professional liability risks up to the date of the U.S. Sale Transaction. The Captive’s expense incurred or release of reserves for self-
insured liabilities as well as the disposed U.S. businesses are presented as discontinued operations; while the Captive’s costs to
administer and manage the settlement of the remaining claims are reported as continuing operations within the U.S. segment.
The following describes the continuing businesses and operating segments of Extendicare.
Long-term Care (including government-funded supportive living)
Extendicare owns and operates for its own account 58 LTC centres with capacity for 8,112 residents, inclusive of a stand-alone
designated supportive living centre (140 suites) and a designated supportive living wing (60 suites) in Alberta, and two retirement
wings (76 suites) in Ontario. Revenue from the long-term care operations represented 56.2% of consolidated revenue from continuing
operations in 2017 (2016 — 57.4%).
In Canada, provincial legislation and regulations closely control all aspects of operation and funding of LTC centres, including the fee
structure, subsidies, the adequacy of physical centres, standards of care and accommodation, equipment and personnel. A substantial
portion of the long-term care fees paid to providers of these services are funded by provincial programs, with a portion to be paid by the
resident. Nobody is refused access to long-term care due to an inability to pay. A government subsidy, generally based on an income
test, is available for residents who are unable to afford the resident co-payment. In Alberta, designated supportive living centres provide
services similar to those provided by retirement communities, and were introduced by AHS as an alternative setting for residents not yet
requiring the needs of a more expensive LTC centre. The designated supportive living operations are licensed, regulated and funded by
AHS, in a similar manner to LTC centres, including a government-determined fee structure.
In Ontario, operators have the opportunity to receive additional funding through higher accommodation rates charged to residents for
private and semi-private accommodation, at maximum preferred accommodation rates that are fixed by the government. Operators are
permitted to designate up to 60% of the resident capacity of a centre as preferred accommodation and charge higher accommodation
rates that vary according to the structural classification of the LTC centre.
The following summarizes the composition of the owned/leased LTC centres operated by Extendicare in Ontario, as at December 31,
2017, as well as the maximum preferred differential rates for each classification of bed.
Ontario Owned/Leased
New
Class C (1)
No. of
Centres
Private
$25.63 premium
Private
$18.45 premium
Semi-private
$8.20 premium
Basic/Other
13
21
34
1,099
–
1,099
–
476
476
–
1,396
1,396
748
1,411
2,159
Total
1,847
3,283
5,130
Composition of Beds
(1) Beds in operation of 3,283 exclude 4 beds held in abeyance.
Retirement Living
Through its subsidiaries, Extendicare owns and operates retirement communities under the Company’s Esprit Lifestyle Communities
brand. As at December 31, 2017, eight retirement communities (676 suites) were in operation, four of which are located in Saskatchewan
(341 suites) and four are located in Ontario (335 suites). In October 2017, we completed construction of and opened the first phase of a
retirement community in Uxbridge, Ontario (103 suites), with a further 47 suites to be completed by the end of 2018. In addition, we have
two retirement communities (236 suites) under development in Ontario that are scheduled to open in 2018 and 2019.
Extendicare’s retirement communities provide services to private-pay residents at rates set by Extendicare based on the services
provided and market conditions. The monthly fees vary depending on the type of accommodation, level of care and services chosen
by the resident, and the location of the retirement community. Residents are free to choose the living arrangements best suited to their
personal preference and needs and, more importantly, change the level of care and support they receive as their needs evolve over time.
Revenue from these operations represented 1.9% of consolidated revenue from continuing operations in 2017 (2016 — 1.5%).
23
Extendicare 2017 Annual Report Home Health Care
Extendicare provides home health care services through ParaMed, whose professionals and staff members are skilled in providing complex
nursing care, occupational, physical and speech therapy, and assistance with daily activities to accommodate clients of all ages living at
home. Revenue from these operations represented 39.7% of consolidated revenue from continuing operations in 2017 (2016 — 39.1%).
Provincial governments fund a wide range of home health care services, and contract these services to providers such as ParaMed.
In 2017, ParaMed received approximately 98% of its revenue from contracts tendered by locally administered provincial agencies
(2016 — 97%), with the remainder from private-pay clients. ParaMed operates from 35 locations in six provinces across Canada (29 in
Ontario, 1 in British Columbia, 2 in Alberta, 1 in Manitoba, 1 in Nova Scotia, and 1 in Quebec), providing approximately 11.3 million hours
of service annually. During 2017, approximately 83% of ParaMed’s hours of service were provided in Ontario, 12% were provided in British
Columbia, 4% in Alberta, and the balance were provided in Manitoba, Nova Scotia and Quebec.
Other Canadian Operations
Extendicare’s other Canadian operations are composed of its management and consulting services provided by Extendicare Assist, and
group purchasing services provided by SGP Purchasing Partner Network. Revenue from these two operations, collectively, represented
1.7% of consolidated revenue from continuing operations in 2017 (2016 — 1.7%).
Management and Consulting Services
Through its Extendicare Assist division, Extendicare has leveraged its expertise in operating senior care centres by providing a wide range
of management and consulting services to third-party owners. Extendicare Assist partners with not-for-profit and for-profit organizations,
hospitals and municipalities that seek to improve their management practices, levels of care and operating efficiencies. Most of the
contracts include management, accounting and purchasing services, staff training, reimbursement assistance, and, where applicable, the
implementation of Extendicare’s policies and procedures. In addition, Extendicare Assist provides consulting services to third parties in
respect of development and redevelopment projects in the long-term care sector.
As a skilled manager and operator of senior care centres for third parties, Extendicare Assist’s managed portfolio consisted of 50
senior care centres with capacity for 6,216 residents as at December 31, 2017 (December 31, 2016 — 53 centres with capacity for 6,332
residents). Contracts to manage eight centres (751 beds) and two centres (149) ceased in January and May 2017, respectively, following
the sale of the centres to new operators. During 2017, we secured new contracts to manage seven centres; one took effect in January
(112 beds), five took effect in May (492 beds), and one in November (160 beds). Extendicare Assist has subsequently secured contracts to
manage three additional centres (416 beds) that are expected to transition in March.
Group Purchasing Services
Through its SGP Purchasing Partner Network division (SGP), Extendicare offers cost-effective purchasing contracts to other senior care
providers for food, capital equipment, furnishings, cleaning and nursing supplies, and office products. SGP negotiates long-term and high
volume contracts with its suppliers that provide members with preferred pricing, thereby providing a cost-effective way to secure quality
national brand-name products, along with a range of innovative services. As at December 31, 2017, SGP provided services to third-party
clients with capacity for approximately 45,200 residents (December 31, 2016 — 40,900 residents).
U.S. Remaining Operations — Captive Insurance Company
Prior to the U.S. Sale Transaction, Extendicare self-insured certain risks related to general and professional liability of its disposed
U.S. operations through the Captive. The obligation to settle any such claims relating to the period prior to the closing of the U.S. Sale
Transaction, including claims incurred but yet to be reported, remains with Extendicare, which it intends to fund through the Captive.
The majority of the risks that Extendicare self-insured relating to the U.S. operations are long-term in nature, and accordingly, claim
payments for any particular policy year can occur over a long period of time. In addition, through the Captive, the Company maintained
third-party liability insurance on a “claims made” basis, as opposed to “occurrence based” coverage, meaning that some level of coverage
may continue to be required. Any expense incurred or release of reserves for U.S. self-insured liabilities are presented as discontinued
operations; while the costs to administer and manage the settlement of the remaining claims are reported as continuing operations within
the U.S. segment.
As at December 31, 2017, the accrual for U.S. self-insured general and professional liabilities was $61.1 million (US$48.6 million)
compared to US$70.6 million at the beginning of the year, and the investments held for U.S. self-insured liabilities totalled $86.3 million
(US$68.6 million) compared to US$101.4 million at the beginning of the year, with the decline in each reflecting the “run off” of these
operations. During 2017, following the completion of independent actuarial reviews, the Company released US$4.4 million of reserves for
self-insured liabilities, bringing the total released since the sale of the U.S. operations in 2015 to US$19.7 million. Following the release
of these reserves, the Captive has transferred US$21.0 million of its funds previously held for investment to the Company for general
corporate use, of which US$16.0 million was transferred in 2017 and US$5.0 million was transferred in 2016. The loss provisions for our
U.S. general and professional liability risks are based upon management’s best available information, including independent actuarial
estimates. The Captive is currently appropriately capitalized, but there can be no assurance that it will remain as such in the future should
general and professional liability claims incurred prior to the closing of the U.S. Sale Transaction, including claims incurred but yet to be
reported, increase significantly. For further information on our self-insured liabilities, refer to the discussion under the heading “Accrual for
U.S. Self-insured Liabilities” found within the “Liquidity and Capital Resources” section of this MD&A.
24
Management’s Discussion and Analysis
Key Performance Indicators
In addition to those measures identified under the heading “Non-GAAP Measures”, management uses certain key performance indicators
in order to compare the financial performance of Extendicare’s continuing operations between periods. In addition, we assess the
operations on a same-store basis between the reported periods. Such performance indicators may not be comparable to similar indicators
presented by other companies. Set forth below is an analysis of the key performance indicators and a discussion of significant trends
when comparing Extendicare’s financial results from continuing operations.
The following is a glossary of terms for some of our key performance indicators:
“Stabilized community” is the classification by the Company of a retirement community that has achieved its expected stabilized
occupancy level, which varies from project to project; such operations in respect of this report specifically refer to three retirement
communities (Empire Crossing, Stonebridge Crossing and Riverbend Crossing);
“Non same-store” or “NSS”, generally refers to those centres or business that were not continuously operated by us since the beginning of
the previous fiscal year or have been classified as held for sale, such operations in respect of this report specifically refer to four retirement
communities that were acquired or opened during 2016 and 2017 (Yorkton Crossing, West Park Crossing, Cedar Crossing and Douglas
Crossing);
“Occupancy” is measured as the percentage of the number of earned resident days (or the number of occupied suites in the case of a
retirement community) relative to the total available resident days. Total available resident days is the number of beds (or suites in the
case of a retirement community) available for occupancy multiplied by the number of days in the period; and
“Same-store” or “SS” generally refers to those centres or businesses that were continuously operated by us since the beginning of
the previous fiscal year, and which are not classified as held for sale; such operations in respect of this report specifically refer to all
continuing operations excluding the four retirement communities acquired or opened during 2016 and 2017.
Long-term Care
The average occupancy at our LTC centres was 97.7% this quarter compared to 97.9% in the 2016 fourth quarter, and for the year was
97.7% compared to 98.0% in 2016. In terms of the quarterly trends throughout the year, slightly lower occupancy levels are to be expected
during the winter months as a result of outbreaks, which can lead to temporary freezes on admissions.
In Ontario, overall government funding is occupancy-based, but once the average occupancy level of 97% or higher for the calendar year
is achieved, operators receive government funding based on 100% occupancy. In 2017, Extendicare’s LTC centres in Ontario achieved an
overall average occupancy of 98.1%, with all but two of the centres achieving the 97% occupancy threshold.
In addition, Extendicare’s Ontario LTC centres receive premiums for preferred accommodation. The average occupancy of the private
beds in our “New” centres improved to 98.1% this quarter from 97.2% in the 2016 fourth quarter, and for the year improved to 97.9% from
96.8% in 2016. The average occupancy of the private beds at our Class C centres improved to 98.8% this quarter from 97.9% in the 2016
fourth quarter, and for the year improved to 98.4% from 98.7% in 2016. This decline was primarily due to admissions challenges at one of
our LTC centres, which we anticipate will recover next year.
The following table provides the average occupancy levels of our LTC operations for the past eight quarters.
Long-term Care Centres
Q1
Q2
Q3
Q4
2017
Year
Q1
Q2
Q3
Q4
2016
Year
Average Occupancy (%)
Total LTC
Ontario LTC
Total operations
Preferred Accommodation (1)
New centres — private
Class C centres — private
Class C centres — semi-private
97.2%
97.6%
98.2%
97.7%
97.7%
98.0%
97.9%
98.1%
97.9%
98.0%
97.6%
98.2%
98.5%
98.2%
98.1%
98.5%
98.5%
98.6%
98.2%
98.5%
97.1%
98.5%
64.5%
98.0%
98.3%
65.7%
98.3%
97.8%
67.3%
98.1%
98.8%
66.5%
97.9%
98.4%
66.1%
96.4%
99.1%
63.5%
96.8%
99.2%
64.3%
96.9%
98.7%
64.8%
97.2%
97.9%
65.0%
96.8%
98.7%
68.4%
(1) Average occupancy reported for the available private and semi-private rooms reflects the percentage of residents occupying those beds and paying the respective premium rates.
25
Extendicare 2017 Annual Report Retirement Living
Our retirement living operating segment consists of eight retirement communities in operation, four of which are classified as non same-
store, representing two newly developed communities acquired in February 2016, and two that we developed and opened in November
2016 and October 2017, respectively. All of the retirement communities in operation were in lease-up during 2016. Three of the
communities that were acquired in 2015, Empire, Stonebridge and Riverbend, are now considered stabilized communities, having reached
their expected stabilized occupancy levels by the end of 2017.
As at Occupancy
The following table provides the combined occupancy of our stabilized and lease-up retirement communities as at the end of each quarter
in 2017, and as at the end of each of 2016.
Retirement Communities
As at Occupancy:
Stabilized communities (Empire/Stonebridge/Riverbend)
Lease-up communities
Mar. 31
Jun. 30
Sept. 30
Dec. 31
90.7%
47.3%
90.2%
50.6%
95.9%
61.3%
95.9%
68.6%
2017
2016
Dec. 31
93.9%
41.5%
The occupancy of the three stabilized communities improved to an average of 95.9% as at December 31, 2017, from 93.9% at the end
of 2016. The decline experienced in early 2017 was due to higher attrition through the winter months. The occupancy of the five lease-
up communities improved to an average of 68.6% as at December 31, 2017, up from 61.3% at September 30, 2017, notwithstanding the
opening of a new 103-suite retirement community, Douglas Crossing, at the end of October.
Average Occupancy
The following table provides the average occupancy of the retirement communities in total and for each of the stabilized and lease-up
groupings, reflecting improvements throughout 2017.
Retirement Communities
Q1
Q2
Q3
Q4
Average Occupancy (%) — total
Stabilized communities
Lease-up communities
63.4%
87.6%
45.2%
66.6%
88.1%
50.6%
71.9%
92.1%
56.7%
75.9%
95.5%
63.8%
2017
Year
69.7%
90.8%
54.6%
Q1
61.2%
77.2%
37.4%
Q2
53.8%
76.9%
31.7%
Q3
Q4
61.0%
84.4%
38.5%
63.0%
87.6%
41.7%
2016
Year
59.8%
81.5%
37.5%
Home Health Care
Revenue from provincial programs represented approximately 98% of Extendicare’s home health care revenue in 2017 (2016 — 97%).
ParaMed’s average daily hours of service declined this quarter by 1.0% to 30,634 from 30,932 in the 2016 fourth quarter, with
improvements in the Ontario volumes, offset by reductions in other provinces. In terms of the quarterly trends throughout 2017, the decline
in volumes experienced in the third and fourth quarters of 2017 is not unusual due to a combination of seasonality generally experienced
during the summer months and the impact of provincial agencies managing their budgets throughout the year. We also experienced a
decline in our Ontario volumes during the summer months of 2016; however, the impact was offset by our expanded business in British
Columbia that quarter. For 2017, our average daily hours of service increased by 4.1% to 31,032 from 29,807 in 2016, reflecting the
government’s commitment to allocate additional funds to this segment of the Canadian health care system, and we anticipate ParaMed’s
business will continue to grow. For further information on the home health care operations, refer to the discussion under the heading
“Update of Regulatory and Funding Changes Affecting Results — Ontario Home Health Care Legislation and Funding”.
The following table provides the service volumes of our home health care operations for the past eight quarters.
Home Health Care
Service Volumes
Q1
Q2
Q3
Q4
2017
Year
Q1
Q2
Q3
Q4
2016
Year
Hours of service (000’s)
Hours per day
2,815.7
31,285
2,859.1
31,418
2,833.6
30,800
2,818.4
30,634
11,326.8
31,032
2,625.1
28,847
2,666.4
29,302
2,772.0
30,130
2,845.8
30,932
10,909.3
29,807
26
Management’s Discussion and Analysis
2017 Selected Annual Information
The following is a summary of selected annual financial information for each of the past three years.
(thousands of dollars unless otherwise noted)
2017
2016
2015
Financial Results
Revenue
Earnings before depreciation, amortization, and other expense (Adjusted EBITDA)
Earnings from continuing operations
per basic share ($)
Gain (loss) on sale of U.S. operations, net of taxes
Earnings (loss) from discontinued operations
Net earnings
per basic share ($)
per diluted share ($)
AFFO (continuing operations)
per basic share ($)
AFFO
per basic share ($)
Cash dividends declared
per share ($)
Financial Position (at year end)
Total assets
Total non-current liabilities
Long-term debt
Long-term debt, including current portion
U.S./Canadian dollar average exchange rate for the year
U.S./Canadian dollar closing exchange rate at year end
1,097,331
97,597
31,712
0.36
–
(29,580)
2,132
0.02
0.02
58,495
0.659
58,495
0.659
42,583
0.480
934,281
588,804
476,404
536,068
1.2986
1.2571
1,060,758
92,935
31,417
0.36
(8,458)
12,493
35,452
0.40
0.40
66,722
0.755
65,056
0.736
42,422
0.480
988,617
605,353
448,742
503,568
1.3248
1.3427
943,279
83,691
23,710
0.27
205,418
2,950
232,078
2.64
2.41
43,587
0.497
50,828
0.579
42,125
0.480
1,026,947
636,798
428,679
454,074
1.2787
1.3840
Financial Results — The selected information provided for each of the years under the heading “Financial Results”, reflects the
classification of the operations in connection with the U.S. Sale Transaction and the U.S. IT Hosting business as discontinued. The U.S.
senior care operations were sold in 2015, resulting in a gain, net of tax, of $205.4 million, and the U.S. IT Hosting business was sold in
2016, resulting in a loss, net of tax of $8.4 million. A comparison between the 2017 and 2016 results is provided under the heading “2017
Financial Review”. The financial results for 2016, in comparison to 2015, reflect growth from all segments of our continuing operations,
resulting from LTC funding enhancements, growth in our home health care operations following a significant acquisition in 2015, the
expansion of our retirement living operations through the acquisition and development of retirement communities, and an increase in
clients served by our management services and group purchasing operations.
Financial Position — Since the end of 2015, our total assets and non-current liabilities have declined, largely due to the “run off” of our
former U.S. self-insured liabilities and related investments held by the Captive. During 2016 and 2017, our total assets declined by
$38.3 million and $54.3 million, respectively. Our investments held for U.S. self-insured liabilities declined by $40.7 million (US$26.3 million)
in 2016, and by $49.8 million (US$32.8 million) in 2017. Our total non-current liabilities declined by $31.4 million in 2016 and by
$16.5 million in 2017, largely due to the decline in our accrual for U.S. self-insured liabilities of $53.6 million (US$36.6 million) in 2016 and
$33.7 million (US$22.0 million) in 2017, partially offset by an increase in long-term debt. Our total long-term debt, including current portion,
increased by $49.5 million in 2016 and by $32.5 million in 2017, reflecting the issuance of debt in connection with the acquisition and
development of our retirement communities.
A comparison between the 2017 and 2016 results is provided in the discussion under the headings “2017 Financial Review” and “Liquidity
and Capital Resources”.
27
Extendicare 2017 Annual Report 2017 Selected Quarterly Information
The following is a summary of selected quarterly financial information for the past eight quarters.
(thousands of dollars unless otherwise noted)
Q4
Q3
Q2
Revenue
Net operating income
Net operating income margin
Adjusted EBITDA
Adjusted EBITDA margin
Earnings (loss) from continuing operations
Loss on sale of U.S. operations, net of taxes
Earnings (loss) from discontinued operations
Net earnings (loss)
AFFO (continuing operations)
per basic share ($)
AFFO
per basic share ($)
Maintenance Capex
Continuing operations
Discontinued operations
Cash dividends declared
per share ($)
Weighted Average Number of Shares
Basic
Diluted
U.S./Canadian dollar average exchange rate
for the period
281,398
35,622
12.7%
27,555
9.8%
10,301
−
3,333
13,634
15,713
0.178
15,713
0.178
3,271
—
10,623
0.120
273,230
34,729
12.7%
24,025
8.8%
6,545
−
−
6,545
15,646
0.176
15,646
0.176
2,777
—
10,642
0.120
273,845
33,867
12.4%
24,588
9.0%
9,919
−
(32,913)
(22,994)
14,448
0.162
14,448
0.162
1,858
—
10,666
0.120
2017
Q1
268,858
31,604
11.8%
21,429
8.0%
4,947
−
−
4,947
12,688
0.143
12,688
0.143
907
—
10,652
0.120
Q4
Q3
Q2
276,854
33,754
12.2%
24,246
8.8%
13,250
(8,458)
19,848
24,640
13,534
0.152
13,366
0.150
5,419
112
10,637
0.120
88,663
99,918
268,096
35,040
13.1%
25,525
9.5%
9,955
−
(643)
9,312
20,832
0.236
20,300
0.230
2,825
280
10,619
0.120
88,495
99,739
261,425
34,747
13.3%
26,647
10.2%
9,695
−
(4,947)
4,748
20,012
0.227
19,155
0.217
2,835
232
10,595
0.120
88,269
99,513
2016
Q1
254,383
26,595
10.5%
16,517
6.5%
(1,483)
−
(1,765)
(3,248)
12,344
0.140
12,235
0.139
1,040
110
10,571
0.120
88,057
99,302
88,633
99,916
88,844
100,123
88,938
100,244
88,807
100,086
1.2722
1.2546
1.3449
1.3238
1.3337
1.3052
1.2873
1.3731
The following is a reconciliation of “earnings (loss) from continuing operations before income taxes” to Adjusted EBITDA and “net
operating income”.
(thousands of dollars)
Q4
Q3
Q2
2017
Q1
Q4
Q3
Q2
2016
Q1
Earnings (loss) from continuing operations
before income taxes
Add (Deduct):
Depreciation and amortization
Net finance costs (income)
Other expense
Adjusted EBITDA
Add (Deduct):
Administrative costs
Lease costs
Net operating income
13,212
9,874
12,763
6,715
13,618
13,169
13,597
(1,556)
8,170
6,173
−
7,766
6,385
−
7,911
3,914
−
7,532
7,182
−
8,496
460
1,672
7,783
4,573
−
7,753
5,092
205
7,147
8,790
2,136
27,555
24,025
24,588
21,429
24,246
25,525
26,647
16,517
6,372
1,695
35,622
9,058
1,646
34,729
7,524
1,755
33,867
8,513
1,662
31,604
7,843
1,665
33,754
7,843
1,672
35,040
6,458
1,642
34,747
8,407
1,671
26,595
28
Management’s Discussion and Analysis
There are a number of factors affecting the trend of our quarterly results from continuing operations.
With respect to our core operations, while year-over-year quarterly comparisons will generally remain comparable, sequential quarters can
vary materially for seasonal and other trends. The significant factors that impact the results from period to period are as follows:
• Ontario long-term care funding tied to flow-through envelopes requires revenue be deferred until it is matched with the related costs for
resident care in the periods in which the costs are incurred, resulting in a fluctuation in revenue and operating expenses by quarter, and
they are generally at their lowest in the first quarter and at their highest in the fourth quarter;
• Ontario long-term care providers generally receive annual flow-through funding increases and case mix index adjustments effective April
1st and accommodation funding increases effective July 1st, and Alberta long-term care providers generally receive annual inflationary
rate increases and acuity-based funding adjustments on April 1st, and accommodation funding increases effective July 1st;
• maintenance capex spending, which impacts our AFFO, fluctuates on a quarterly basis with the timing of projects and seasonality, and
is generally at its lowest in the first quarter and its highest in the fourth quarter; and
• utility costs are generally at their highest in the first quarter and their lowest in the second and third quarters, and can vary by as much
as $1.5 million to $2.0 million.
In addition, we report as separate line items, “other expense”, “fair value adjustments”, and “loss (gain) on foreign exchange”, as these are
transitional in nature and would otherwise distort historical trends. Those items impacting our results are as follows:
• transaction and integration costs in connection with acquisitions, asset impairment charges, gains or losses on disposals, proxy contest
costs and other costs considered transitional in nature are reported as “other expense”; as a result of acquisitions, a proxy contest, and
asset impairment charges; the results from continuing operations for 2017 do not reflect any such charges as “other expense”; and the
2016 results from continuing operations included “other expense” of $4.0 million for the year ($2.1 million, $0.2 million, nil, $1.7 million in
each of the quarters, respectively);
•
interest rate swaps are measured at fair value through profit or loss each period as “fair value adjustments”; as a result, a net gain of
$2.5 million was recorded in 2017 (loss of $0.1 million in the first quarter, gain of $1.1 million in the second quarter, a gain of $1.2 million
in the third quarter; and a gain of $0.3 million in the fourth quarter); compared to a net gain of $1.0 million recorded in 2016 (loss of
$0.8 million in the third quarter and a gain of $1.8 million in the fourth quarter); and
• foreign currency exchange rate fluctuations between the U.S. and Canadian dollars impact translation of our remaining U.S. net assets
as a result of U.S. net proceeds and deferred consideration received in respect of the disposal or our U.S. operations in July 2015
and repatriation of funds from our Captive, our earnings from continuing operations included the following in “loss (gain) on foreign
exchange”, resulting in: a net foreign exchange gain of $0.8 million in 2017 (loss of $0.4 million in the first quarter, gain of $1.5 million in
the second quarter, a loss of $0.7 million in the third quarter, and a gain of $0.4 million in the fourth quarter); compared to a net foreign
exchange loss of $1.2 million in 2016 (loss of $4.0 million in the first quarter, loss of $0.8 million in the second quarter, and gains of
$1.3 million and $2.3 million in the third and fourth quarters, respectively).
Further details on the above can be found under the sections “Significant 2017 Events and Developments”, “Key Performance Indicators”,
“Other Significant Developments” and “Update of Regulatory and Funding Changes Affecting Results”.
29
Extendicare 2017 Annual Report 2017 Fourth Quarter Financial Review
The following provides a breakdown of our consolidated statement of earnings between our Canadian and U.S. operations.
(thousands of dollars)
Revenue
Operating expenses
Net operating income
Administrative costs
Lease costs
Adjusted EBITDA
Depreciation and amortization
Other expense
Earnings before net finance costs
and income taxes
Interest expense (net of capitalized interest)
Interest revenue
Accretion
Fair value adjustments
Gain on foreign exchange
Net finance costs (income)
Earnings from continuing operations before
income taxes
Income tax expense (recovery)
Current
Deferred
Total income tax expense (recovery)
Earnings from continuing operations
Loss from sale of U.S. operations, net of taxes
Earnings (loss) from discontinued operations
Net earnings
Earnings from continuing operations
Add (Deduct) (1):
Fair value adjustments
Gain on foreign exchange
Other expense
Earnings from continuing operations before
separately reported items, net of taxes
Three months ended December 31
Canada
279,085
245,776
33,309
6,462
1,695
25,152
8,170
–
2017
Total
281,398
245,776
35,622
6,372
1,695
27,555
8,170
–
U.S.
2,313
–
2,313
(90)
–
2,403
–
–
Canada
275,305
243,100
32,205
7,835
1,665
22,705
8,496
1,672
2016
Total
276,854
243,100
33,754
7,843
1,665
24,246
8,496
1,672
U.S.
1,549
–
1,549
8
–
1,541
–
–
16,982
2,403
19,385
12,537
1,541
14,078
7,342
(1,091)
351
(271)
(179)
6,152
–
–
265
–
(244)
7,342
(1,091)
616
(271)
(423)
21
6,173
6,691
(851)
294
(1,832)
(592)
3,710
−
(1,896)
334
−
(1,688)
(3,250)
6,691
(2,747)
628
(1,832)
(2,280)
460
Total
Change
4,544
2,676
1,868
(1,471)
30
3,309
(326)
(1,672)
5,307
651
1,656
(12)
1,561
1,857
5,713
10,830
2,382
13,212
8,827
4,791
13,618
(406)
1,679
1,232
2,911
7,919
–
–
7,919
–
–
–
2,382
–
3,333
5,715
1,679
1,232
2,911
10,301
–
3,333
13,634
(603)
(220)
(823)
9,650
–
–
9,650
(1)
1,192
1,191
(604)
972
368
2,283
260
2,543
3,600
(8,458)
19,848
13,250
(8,458)
19,848
(2,949)
8,458
(16,515)
14,990
24,640
(11,006)
7,919
2,382
10,301
9,650
3,600
13,250
(2,949)
(199)
(206)
–
–
(244)
–
(199)
(450)
–
(1,344)
(526)
(1,917)
–
(1,427)
–
(1,344)
(1,953)
(1,917)
1,145
1,503
1,917
7,514
2,138
9,652
5,863
2,173
8,036
1,616
(1) The separately reported items being added to or deducted from earnings from continuing operations are net of income taxes, and are non-GAAP measures. Refer to the
discussion of non-GAAP measures.
30
Management’s Discussion and Analysis
The following provides a reconciliation of “earnings from continuing operations before income taxes” to “Adjusted EBITDA” and “net
operating income”.
(thousands of dollars)
Canada
U.S.
Three months ended December 31
2017
Total
Canada
U.S.
2016
Total
Total
Change
Earnings from continuing operations before
income taxes
Add (Deduct):
Depreciation and amortization
Net finance costs (income)
Other expense
Adjusted EBITDA
Add (Deduct):
Administrative costs
Lease costs
Net operating income
10,830
2,382
13,212
8,827
4,791
13,618
(406)
8,170
6,152
–
–
21
–
8,170
6,173
–
8,496
3,710
1,672
–
(3,250)
–
8,496
460
1,672
25,152
2,403
27,555
22,705
1,541
24,246
6,462
1,695
33,309
(90)
–
2,313
6,372
1,695
35,622
7,835
1,665
32,205
8
–
1,549
7,843
1,665
33,754
(326)
5,713
(1,672)
3,309
(1,471)
30
1,868
The following is an analysis of the consolidated results from operations for the 2017 fourth quarter in comparison to the 2016 fourth
quarter. Refer to the discussion that follows under the heading “Summary of Results of Operations by Segment” for an analysis of the
revenue and net operating income by operating segment, including the components of non same-store revenue and net operating income.
Consolidated Revenue
Consolidated revenue from continuing operations grew by $4.5 million or 1.6% to $281.4 million in the 2017 fourth quarter, driven primarily
by LTC funding enhancements, expansion of the retirement living operations, and higher investment income from the Captive, partially
offset by the impact of favourable prior period settlement adjustments of $2.2 million received in the 2016 fourth quarter. Growth in
revenue prior to these items was $6.7 million or 2.4% over 2016.
Consolidated Operating Expenses
Consolidated operating expenses from continuing operations increased by $2.6 million or 1.1% to $245.8 million in the 2017 fourth quarter.
The 2016 fourth quarter results included unfavourable prior period accrual adjustments of $0.6 million with respect to our home health
care operations. Prior to these items, operating expenses were higher by $3.2 million or 1.3% over 2016, driven by, increased costs of
resident care and expansion of the retirement living operations. Total labour costs increased by $1.3 million over the 2016 fourth quarter,
and represented 85.5% and 85.9% of operating expenses in the fourth quarters of 2017 and 2016, respectively, and as a percentage of
revenue were 74.7% and 75.4%, respectively.
Consolidated Net Operating Income
Consolidated net operating income from continuing operations increased by $1.9 million or 5.5% to $35.6 million in the 2017 fourth quarter,
and represented 12.7% of revenue compared to 12.2% in the same 2016 quarter. Net operating income from the Canadian operations
improved by $1.1 million, and represented 11.9% of revenue this quarter compared to 11.7% in the same 2016 quarter. As noted above,
the 2016 results were impacted by favourable accrual adjustments of $1.6 million. Prior to these items, net operating income from the
Canadian operations improved by $2.7 million or 8.8%, reflecting LTC funding enhancements, growth of our retirement living, management
and group purchasing operations, and an increased contribution from our home health care operations. Net operating income from our
U.S. operations reflected higher investment income from the Captive of $0.8 million.
Administrative and Lease Costs
Administrative and lease costs from continuing operations declined by $1.4 million to $8.1 million in the 2017 fourth quarter, reflecting
lower share-based compensation expense and reduced professional fees.
Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA from continuing operations improved by $3.3 million or 13.6% to $27.5 million this quarter from
$24.2 million in the same 2016 quarter, representing 9.8% and 8.8% of revenue, respectively. Adjusted EBITDA from the Canadian
operations contributed $2.4 million to the improvement, reflecting the increase in net operating income and lower administrative costs,
as previously discussed. Prior to the favourable accrual adjustments of $1.6 million recorded in the 2016 fourth quarter, Adjusted EBITDA
from the Canadian operations improved by $4.0 million, and as a percentage of revenue was 9.0% this quarter compared to 7.7% in
the same 2016 quarter. Adjusted EBITDA from the U.S. operations improved by $0.9 million reflecting higher investment income and a
reduction in administrative costs.
31
Extendicare 2017 Annual Report Net Finance Costs (Income)
Net finance costs increased by $5.7 million to $6.2 million this quarter, and included a reduction in interest revenue in connection with
deferred consideration from the U.S. Sale Transaction of $1.9 million and unfavourable changes in the valuation of interest rate swaps
of $1.5 million and the loss (gain) on foreign exchange of $1.9 million. For further information on the deferred consideration, refer to the
discussion under the heading “Other Significant Development — 2015 U.S. Sale Transaction — Deferred Consideration”.
Income Taxes
The income tax provision this quarter was $2.9 million on pre-tax earnings of $13.2 million, representing an effective tax rate of 22.0%,
compared to a provision of $0.4 million on pre-tax earnings of $13.6 million in the 2016 fourth quarter, representing an effective tax rate of
2.7%. The income tax provision for 2016 included the reversal of a $3.6 million provision following the successful appeal of a prior period
tax reassessment (refer to the discussion under the heading “Other Significant Developments — Tax Rules and Regulations”). In addition,
the effective tax rates for each period were distorted by, among other things, fair value adjustments, gains and losses on foreign exchange,
and other expense items that have been separately reported. The effective tax rate on earnings from continuing operations before
separately reported items was 22.9% this quarter and 28.1% in the 2016 fourth quarter, with the reduction in effective rates primarily due to
the proportion of earnings between taxable and non-taxable entities.
Discontinued Operations
The earnings from discontinued operations reported in the 2016 fourth quarter included the after-tax loss on sale of the U.S. IT Hosting
operations of $8.4 million.
The earnings from discontinued operations, net of tax, was $3.3 million this quarter compared to earnings of $19.8 million in the 2016
fourth quarter, excluding the above noted loss on sale for 2016. The 2017 activity related to a $3.1 million release of the Captive’s reserves
and a net reduction in indemnification provisions and other items in respect of the U.S. Sale Transaction. The 2016 activity related to a
$12.8 million release of the Captive’s reserves and a reclassification of a $9.2 million impairment loss on the IT Hosting operations to loss
on sale, partially offset by a net after-tax increase in indemnification provisions and other items in respect of the U.S. Sale Transaction.
For further information on the discontinued operations, refer to note 22 of the audited consolidated financial statements, and the
discussions under the headings “Other Significant Development — 2015 U.S. Sale Transaction — Deferred Consideration” and “Other
Significant Developments — 2016 Sale of U.S. IT Hosting Business”.
Summary of Results of Operations by Segment
The following provides an analysis of the operating performance of each of our operating segments followed by a table summarizing our
segmented “revenue”, “operating expenses” and “net operating income”.
Long-term Care Operations
Net operating income from our long-term care operations was $18.3 million this quarter compared to $19.6 million in the 2016 fourth
quarter. Excluding the impact of favourable prior period revenue settlement adjustments of approximately $2.2 million received in the 2016
fourth quarter, net operating income improved by $0.9 million, and as a percentage of revenue was 11.6% this quarter compared to 11.2%
in the same 2016 period. Revenue grew by $3.5 million, or 2.2%, of which approximately $2.3 million related to our Ontario flow-through
envelopes, and was therefore directly offset by increased costs of resident care, approximately $0.2 million was from improvements in
preferred accommodation, and the balance was from other funding enhancements. Operating expenses increased by $2.6 million, or 1.8%,
primarily due to higher labour, supply, maintenance, and food costs, partially offset by lower property taxes and utility costs. Labour costs
increased by $1.8 million and represented 82.0% of operating expenses this quarter compared to 82.3% in the same 2016 period.
Retirement Living Operations
Net operating income from our retirement living operations improved by $0.9 million this quarter, with improvements from the lease up
of the non same-store operations (West Park, Yorkton and Cedar) and the four in operation since the beginning of 2016. On a same-store
basis, growth in net operating income was $0.4 million was primarily attributable to higher revenue, with the improvement in average
occupancy to 93.4% this quarter from 81.3% in the 2016 fourth quarter.
Home Health Care Operations
Net operating income from our home health care operations improved by $1.0 million or 10.0% to $11.0 million this quarter, and
represented 10.1% of revenue compared to 9.2% in the 2016 fourth quarter. Excluding the impact of unfavourable prior period accrual
adjustments of approximately $0.6 million recorded in the 2016 fourth quarter, net operating income improved by $0.4 million, and as a
percentage of revenue was 10.1% this quarter compared to 9.7%. This improvement was largely attributable to higher revenue due to a
shift in the mix of services provided. Overall volumes were down by 1% in the quarter, with improvements in our Ontario volumes offset by
declines in other provinces. Total labour costs declined by $1.0 million and represented 91.9% of operating expenses in the 2017 fourth
quarter compared to 92.3% in the same 2016 quarter.
32
Management’s Discussion and Analysis
Other Canadian Operations
Net operating income from our management and group purchasing operations increased by $0.5 million this quarter, and represented
57.8% of revenue compared to 51.9% in the 2016 fourth quarter, largely due to growth in group purchasing clients, with the Extendicare
Assist operations unchanged from the same 2016 quarter, having benefited from increased consulting revenue this quarter.
U.S. Operations
Net operating income of the Captive improved by $0.8 million this quarter due to higher investment income.
The following table summarizes our segmented “revenue”, “operating expenses” and “net operating income”.
Three months ended December 31
(thousands of dollars)
Long-term
Care
Retirement
Living
Home
Health Care
Other
Canadian
Operations
Corporate
Canada
Total
Canada
Total
U.S.
Total
2017 — Same-store
Revenue
Operating expenses
Net operating income
Net operating income margin (%)
2017 — Non Same-store
Revenue
Operating expenses
Net operating loss
2017 — Total
Revenue
Operating expenses
Net operating income
Net operating income margin (%)
2016 — Same-store
Revenue
Operating expenses
Net operating income
Net operating income margin (%)
2016 — Non Same-store
Revenue
Operating expenses
Net operating loss
2016 — Total
Revenue
Operating expenses
Net operating income
Net operating income margin (%)
Change in Total
Revenue
Operating expenses
Net operating income
158,694
140,349
18,345
11.6%
–
–
–
158,694
140,349
18,345
11.6%
157,425
137,809
19,616
12.5%
–
–
–
157,425
137,809
19,616
12.5%
1,269
2,540
(1,271)
4,103
2,892
1,211
29.5%
1,995
2,200
(205)
6,098
5,092
1,006
16.5%
3,734
2,902
832
22.3%
706
1,408
(702)
4,440
4,310
130
2.9%
1,658
782
876
109,141
98,160
10,981
10.1%
–
–
–
109,141
98,160
10,981
10.1%
108,672
98,688
9,984
9.2%
–
–
–
108,672
98,688
9,984
9.2%
469
(528)
997
5,149
2,175
2,974
57.8%
–
–
–
5,149
2,175
2,974
57.8%
4,765
2,293
2,472
51.9%
–
–
–
4,765
2,293
2,472
51.9%
384
(118)
502
3
–
3
277,090
243,576
33,514
2,313
−
2,313
100.0%
12.1%
100.0%
279,403
243,576
35,827
12.8%
–
–
–
3
–
3
1,995
2,200
(205)
–
–
–
1,995
2,200
(205)
279,085
245,776
33,309
2,313
–
2,313
281,398
245,776
35,622
100.0%
11.9%
100.0%
12.7%
3
–
3
274,599
241,692
32,907
1,549
–
1,549
276,148
241,692
34,456
100.0%
12.0%
100.0%
12.5%
–
–
–
3
–
3
706
1,408
(702)
–
–
–
706
1,408
(702)
275,305
243,100
32,205
1,549
–
1,549
276,854
243,100
33,754
100.0%
11.7%
100.0%
12.2%
–
–
–
3,780
2,676
1,104
764
–
764
4,544
2,676
1,868
33
Extendicare 2017 Annual Report 2017 Financial Review
The following provides a breakdown of our consolidated statement of earnings between our Canadian and U.S. operations.
(thousands of dollars)
Revenue
Operating expenses
Net operating income
Administrative costs
Lease costs
Adjusted EBITDA
Depreciation and amortization
Other expense
Earnings before net finance costs and
income taxes
Interest expense (net of capitalized interest)
Interest revenue
Accretion
Fair value adjustments
Loss (gain) on foreign exchange
Net finance costs (income)
Earnings from continuing operations before
income taxes
Income tax expense (recovery)
Current
Deferred
Total income tax expense
Earnings from continuing operations
Loss from sale of U.S. operations, net of taxes
Earnings (loss) from discontinued operations
Net earnings (loss)
Earnings from continuing operations
Add (Deduct) (1):
Fair value adjustments
Loss (gain) on foreign exchange
Other expense
Earnings from continuing operations before
separately reported items, net of taxes
Years ended December 31
2017
Total
1,097,331
961,509
135,822
31,467
6,758
97,597
31,379
−
66,218
28,082
(3,902)
2,812
(2,474)
(864)
23,654
U.S.
5,249
−
5,249
1,134
−
4,115
−
−
4,115
−
(207)
1,283
−
(1,530)
(454)
Canada
1,057,063
930,622
126,441
28,662
6,650
91,129
31,179
4,013
55,937
27,039
(3,276)
1,176
(985)
753
24,707
2016
Total
1,060,758
930,622
130,136
30,551
6,650
92,935
31,179
4,013
57,743
27,039
(10,838)
2,501
(985)
1,198
18,915
U.S.
3,695
−
3,695
1,889
−
1,806
−
−
1,806
−
(7,562)
1,325
−
445
(5,792)
Total
Change
36,573
30,887
5,686
916
108
4,662
200
(4,013)
8,475
1,043
6,936
311
(1,489)
(2,062)
4,739
Canada
1,092,082
961,509
130,573
30,333
6,758
93,482
31,379
−
62,103
28,082
(3,695)
1,529
(2,474)
666
24,108
37,995
4,569
42,564
31,230
7,598
38,828
3,736
10,149
603
10,752
27,243
–
–
27,243
−
100
100
4,469
–
(29,580)
(25,111)
10,149
703
10,852
31,712
–
(29,580)
2,132
6,818
(2,094)
4,724
26,506
–
–
26,506
(1,017)
3,704
2,687
4,911
(8,458)
12,493
8,946
5,801
1,610
7,411
31,417
(8,458)
12,493
35,452
4,348
(907)
3,441
295
8,458
(42,073)
(33,320)
27,243
4,469
31,712
26,506
4,911
31,417
295
(1,813)
805
−
−
(1,512)
–
(1,813)
(707)
–
(722)
267
(196)
−
141
–
(722)
408
(196)
(1,091)
(1,115)
196
26,235
2,957
29,192
25,855
5,052
30,907
(1,715)
(1) The separately reported items being added to or deducted from earnings from continuing operations are net of income taxes, and are non-GAAP measures. Refer to the
discussion of non-GAAP measures.
34
Management’s Discussion and Analysis
The following provides a reconciliation of “earnings from continuing operations before income taxes” to “Adjusted EBITDA” and “net
operating income”.
(thousands of dollars)
Canada
U.S.
Years ended December 31
2017
Total
Canada
U.S.
2016
Total
Total
Change
Earnings from continuing operations before
income taxes
Add (Deduct):
Depreciation and amortization
Net finance costs (income)
Other expense
Adjusted EBITDA
Add (Deduct):
Administrative costs
Lease costs
Net operating income
37,995
4,569
42,564
31,230
7,598
38,828
3,736
31,379
24,108
–
93,482
30,333
6,758
130,573
–
(454)
–
4,115
1,134
–
5,249
31,379
23,654
–
97,597
31,179
24,707
4,013
91,129
–
(5,792)
–
1,806
31,179
18,915
4,013
92,935
31,467
6,758
135,822
28,662
6,650
126,441
1,889
–
3,695
30,551
6,650
130,136
200
4,739
(4,013)
4,662
916
108
5,686
The following is an analysis of the consolidated results from operations for 2017 in comparison to 2016. Refer to the discussion that
follows under the heading “Summary of Results of Operations by Segment” for an analysis of the revenue and net operating income by
operating segment, including the components of non same-store revenue and net operating income.
Consolidated Revenue
Consolidated revenue from continuing operations grew by $36.6 million or 3.4% to $1,097.3 million in 2017, driven primarily by a 4.1%
increase in home health care business volumes, increased government funding for home health care to support mandated wage increases
for personal support workers (PSWs) of approximately $2.1 million, LTC funding enhancements (including favourable prior year settlement
adjustments of $0.8 million in 2017 and $1.2 million in 2016), expansion of the retirement living operations, and a $1.6 million increase in
investment income from the Captive, partially offset by one less day this year.
Consolidated Operating Expenses
Consolidated operating expenses from continuing operations increased by $30.9 million or 3.3% to $961.5 million in 2017, primarily due
to growth in the home health care volumes, the mandatory PSW wage increases, increased severance costs in our home health care
operations of approximately $0.8 million largely in connection with productivity initiatives, increased costs of resident care, expansion of
the retirement operations, and the impact of favourable labour cost accrual adjustments of $1.0 million recorded in 2016, partially offset
by one less day this year. The majority of our operating expenses are labour related, which increased by $26.2 million over 2016, and
represented 86.6% of operating expenses in each of 2017 and 2016, and as a percentage of revenue were 75.9% and 76.0%, respectively.
Consolidated Net Operating Income
Consolidated net operating income from continuing operations improved by $5.7 million or 4.4% to $135.8 million in 2017, and as a
percentage of revenue was 12.4% in 2017 compared to 12.3% in 2016. Net operating income from the Canadian operations improved
by $4.1 million, and represented 12.0% of revenue in each of 2017 and 2016. Prior to the $2.2 million of favourable prior year revenue
settlements and operating expense accrual adjustments recorded in 2016, as noted above, net operating income from the Canadian
operations improved by $6.3 million, reflecting growth in our home health care business volumes and retirement living operations, partially
offset by increased costs of resident care, and one less day this year. Net operating income from our U.S. operations reflected higher
investment income from the Captive of $1.6 million.
Administrative and Lease Costs
Administrative costs from continuing operations increased by $0.9 million to $31.5 million in 2017, reflecting an increase from our
Canadian operations of $1.7 million, partially offset by reduced costs to support the remaining U.S. operations. The higher costs of
our Canadian operations included a one-time executive compensation charge of $2.0 million recorded in the 2017 third quarter. As a
percentage of revenue, the Canadian operations administrative costs represented 2.8% of revenue in 2017 compared to 2.7% in 2016.
Lease costs increased by $0.1 million this year, primarily due to lease termination costs.
35
Extendicare 2017 Annual Report Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA from continuing operations improved by $4.7 million or 5.0% to $97.6 million in 2017, and represented
8.9% of revenue compared to 8.8% in 2016. Adjusted EBITDA from the Canadian operations improved by $2.3 million to $93.5 million
this year, reflecting growth from net operating income offset by higher administrative and lease costs, as previously discussed, and as a
percentage of revenue was unchanged at 8.6%. Prior to the one-time executive compensation charge of $2.0 million recorded this year and
the $2.2 million of favourable prior year adjustments recorded in 2016, Adjusted EBITDA from the Canadian operations as a percentage of
revenue would have been 8.7% this year compared to 8.4% in 2016. Adjusted EBITDA from the U.S. operations improved by $2.4 million due
to the increase in investment income and reduction in administrative costs.
Depreciation and Amortization
Depreciation and amortization costs increased by $0.2 million to $31.4 million this year, largely due to acquisitions and completed
development projects.
Other Expense
The Company has not recorded any amounts in other expense in 2017. In 2016, the other expense of $4.0 million related to proxy contest
costs, including advisory and professional fees, of $1.9 million, impairment of goodwill for certain properties of $1.7 million, and the
balance to integration and acquisitions costs.
Net Finance Costs (Income)
Net finance costs increased by $4.7 million to $23.6 million this year, and included favourable changes of $3.6 million in the valuation of
interest rate swaps and loss (gain) on foreign exchange. Excluding these items, net finance costs increased by $8.3 million primarily due
to a reduction in interest revenue in connection with deferred consideration from the U.S. Sale Transaction of $7.4 million, and increased
interest expense due to higher debt levels.
Income Taxes
The income tax provision for 2017 was $10.8 million on pre-tax earnings of $42.6 million, representing an effective tax rate of 25.5%,
compared to a provision of $7.4 million on pre-tax earnings of $38.8 million in 2016, representing and effective tax rate of 19.1%. The
income tax provision for 2016 included the reversal of a $3.6 million provision following the successful appeal of a prior period tax
reassessment (refer to the discussion under the heading “Other Significant Developments — Tax Rules and Regulations”). In addition, the
effective tax rates for each period were distorted by, among other things, fair value adjustments, gains and losses on foreign exchange, and
other expense items that have been separately reported. The effective tax rate on earnings from continuing operations before separately
reported items was 25.6% this year and 28.2% in 2016, with the reduction in effective rates primarily due to the proportion of earnings
between taxable and non-taxable entities.
Discontinued Operations
The earnings from discontinued operations reported in 2016 included the after-tax loss on sale of the U.S. IT Hosting operations of
$8.4 million.
The loss from discontinued operations, net of tax, was $29.6 million this year compared to earnings of $12.5 million in 2016, excluding
the above noted loss on sale for 2016. The 2017 activity related to the U.S. Sale Transaction that included the write-off of deferred
consideration of $37.5 million ($32.2 million after tax), and a net increase in indemnification provisions and other items of $4.8 million
($3.1 million after tax), partially offset by a $5.7 million release of the Captive’s reserves. The 2016 activity related to a $16.8 million release
of the Captive’s reserves, partially offset by a net after-tax increase in indemnification provisions and other items in respect of the U.S. Sale
Transaction, and a net loss from the operations of the disposed U.S. IT Hosting business prior to its sale, totalling $11.5 million, partially
offset by a $4.0 million release of the Captive’s reserves and a net decrease in indemnification provisions in respect of the U.S. Sale
Transaction.
For further information on the discontinued operations, refer to note 22 of the audited consolidated financial statements, and the
discussions under the headings “Other Significant Developments — 2015 U.S. Sale Transaction — Deferred Consideration” and “Other
Significant Developments — 2016 Sale of U.S. IT Hosting Business”.
36
Management’s Discussion and Analysis
Summary of Results of Operations by Segment
The following table summarizes our segmented “revenue”, “operating expenses” and “net operating income”, followed by an analysis of the
operating performance of each of our operating segments.
Years ended December 31
(thousands of dollars)
Long-term
Care
Retirement
Living
Home
Health Care
Other
Canadian
Operations
Corporate
Canada
Total
Canada
Total
U.S.
Total
2017 — Same-store
Revenue
Operating expenses
Net operating income
616,887
542,965
73,922
Net operating income margin (%)
12.0%
2017 — Non Same-store
Revenue
Operating expenses
Net operating loss
2017 — Total
Revenue
Operating expenses
Net operating income
−
−
−
616,887
542,965
73,922
Net operating income margin (%)
12.0%
2016 — Same-store
Revenue
Operating expenses
Net operating income
Net operating income margin (%)
2016 — Non Same-store
Revenue
Operating expenses
Net operating loss
2016 — Total
Revenue
Operating expenses
Net operating income
Net operating income margin (%)
Change in Total
Revenue
Operating expenses
Net operating income
608,618
532,999
75,619
12.4%
−
−
−
608,618
532,999
75,619
12.4%
8,269
9,966
(1,697)
15,186
11,450
3,736
24.6%
5,487
6,840
(1,353)
20,673
18,290
2,383
11.5%
13,844
10,829
3,015
21.8%
1,630
3,998
(2,368)
15,474
14,827
647
4.2%
5,199
3,463
1,736
435,718
391,867
43,851
10.1%
−
−
−
435,718
391,867
43,851
10.1%
414,406
374,191
40,215
9.7%
−
−
−
414,406
374,191
40,215
9.7%
21,312
17,676
3,636
18,789
8,387
10,402
55.4%
−
−
−
18,789
8,387
10,402
55.4%
18,518
8,605
9,913
53.5%
−
−
−
18,518
8,605
9,913
53.5%
271
(218)
489
15
−
15
1,086,595
954,669
131,926
5,249
−
5,249
1,091,844
954,669
137,175
100.0%
12.1%
100.0%
12.6%
−
−
−
15
−
15
5,487
6,840
(1,353)
−
−
−
5,487
6,840
(1,353)
1,092,082
961,509
130,573
5,249
−
5,249
1,097,331
961,509
135,822
100.0%
12.0%
100.0%
12.4%
47
−
47
1,055,433
926,624
128,809
3,695
−
3,695
1,059,128
926,624
132,504
100.0%
12.2%
100.0%
12.5%
−
−
−
47
−
47
1,630
3,998
(2,368)
−
−
−
1,630
3,998
(2,368)
1,057,063
930,622
126,441
3,695
−
3,695
1,060,758
930,622
130,136
100.0%
12.0%
100.0%
12.3%
(32)
−
(32)
35,019
30,887
4,132
1,554
−
1,554
36,573
30,887
5,686
37
Extendicare 2017 Annual Report Long-term Care Operations
Net operating income from our long-term care operations declined by $1.7 million or 2.2% to $73.9 million in 2017, and represented 12.0%
of revenue compared to 12.4% in 2016. Both years were impacted by favourable prior year adjustments of approximately $0.8 million
in 2017 and $2.2 million in 2016. Excluding these items, net operating income was lower by approximately $0.3 million, primarily due
to one less day this year, and funding enhancements offset by higher costs of resident care. Revenue growth of $8.3 million, or 1.4%,
included approximately $6.3 million related to our Ontario flow-through envelopes, prior year funding received in the 2017 first quarter of
$0.8 million, improvements in preferred accommodation of approximately $0.7 million, and other funding enhancements, partially offset
by prior year settlement adjustments received in the 2016 fourth quarter of $1.2 million, a $1.3 million reduction in funding tied to lower
property taxes, and the impact of one less day this year. Operating expenses increased by $10.0 million, or 1.9%, primarily due to higher
labour, supply, maintenance, and food costs, as well as the impact of favourable labour cost accrual adjustments of $1.0 million recorded
in the 2016 third quarter, partially offset by lower property tax assessments of $1.5 million, lower utility costs of $0.4 million, and one less
day this year. Labour costs increased by $7.9 million this year, and as a percentage of operating expense, were 83.2% this year compared
to 83.3% in 2016.
Retirement Living Operations
Net operating income from our retirement living operations improved by $1.7 million to $2.4 million in 2017. On a same-store basis, net
operating income from four retirement communities (Empire, Harvest, Stonebridge and Riverbend) improved by $0.7 million, reflecting an
increase in revenue of $1.3 million, partially offset by higher operating costs that included increased property taxes of $0.2 million. The
average occupancy of the same-store retirement communities increased to 86.5% this year from 75.3% in 2016. Net operating income
from our three stabilized retirement communities (Empire, Stonebridge and Riverbend) improved by $0.7 million this largely due to an
increase in average occupancy to 90.8% from 81.5% in 2016.
Home Health Care Operations
Net operating income from our home health care operations improved by $3.6 million or 9.0% to $43.8 million in 2017, and represented
10.1% of revenue compared to 9.7% in 2016. This improvement was due to a 4.1% growth in daily hours of service to 31,032 this year from
29,807 in 2016, partially offset by one less day this year and increased labour costs. Revenue growth of $21.3 million, or 5.1%, included
approximately $2.1 million of funding enhancements from the Ontario government to compensate operators for mandatory PSW wage
increases. Operating expenses grew by $17.7 million primarily due to higher labour costs of $16.3 million, and included higher severance
costs this year of approximately $0.8 million largely in connection with our productivity initiatives, in addition to the impact of mandated
benefit cost increases in the western provinces and by increased WSIB charges. Management is in dialogue with the respective health care
authorities regarding enhanced funding to compensate for increased costs; however, the outcome is uncertain at this time. Labour costs
represented 92.5% of operating expenses in each of 2017 and 2016. Management initiatives continue with a specific focus to improve
efficiency and reduce costs in our core home health care operations.
Other Canadian Operations
Net operating income from our management and group purchasing operations improved by $0.5 million to $10.4 million in 2017, and
represented 55.4% of revenue this year compared to 53.5% in 2016. Growth in group purchasing clients offset the impact of a net decline
in the number of managed clients of Extendicare Assist. As at December 31, 2017, Extendicare Assist managed three fewer centres
than as at the end of 2016, due to the sale of centres to new operators, partially offset by new contracts secured. Extendicare Assist has
subsequently secured contracts to manage three additional centres (416 beds) that are expected to transition in March.
U.S. Operations
Net operating income of the Captive increased by $1.6 million this year due to higher investment income.
38
Management’s Discussion and Analysis
Adjusted Funds from Operations
The following table provides a reconciliation of our “earnings from continuing operations” to FFO and AFFO. A reconciliation of our “net
cash from operating activities” to AFFO is also provided under the heading “Reconciliation of Net Cash from Operating Activities to AFFO”.
(thousands of dollars unless otherwise noted)
2017
2016
Change
2017
2016
Change
Three months ended
December 31
Twelve months ended
December 31
Earnings from continuing operations
Add (Deduct):
Depreciation and amortization
Depreciation for FFEC (maintenance capex) (1)
Other expense
Fair value adjustments
Loss (gain) on foreign exchange
Current income tax expense (recovery) on other expense,
fair value adjustments, and gain/loss on foreign exchange (2)
Deferred income tax expense
FFO (continuing operations)
Amortization of financing costs
Accretion costs
Non-cash share-based compensation
Principal portion of government capital funding
Income support (retirement acquisitions)
Amounts offset through investments held for self-insured liabilities (3)
Additional maintenance capex (1)
AFFO (continuing operations)
Discontinued operations
AFFO
Per Basic Share ($)
FFO (continuing operations)
FFO
AFFO (continuing operations)
AFFO
Per Diluted Share ($)
FFO (continuing operations)
FFO
AFFO (continuing operations)
AFFO
Dividends ($)
Declared
Declared per share ($)
Weighted Average Number of Shares (thousands)
Basic
Diluted
10,301
13,250
(2,949)
31,712
31,417
295
8,170
(1,914)
—
(271)
(423)
(161)
1,232
16,934
417
616
289
1,232
—
(2,418)
(1,357)
15,713
—
15,713
0.191
0.191
0.178
0.178
0.191
0.191
0.171
0.171
8,496
(1,882)
1,672
(1,832)
(2,280)
(3,588)
972
14,808
428
628
292
1,180
1,358
(1,623)
(3,537)
13,534
(168)
13,366
0.167
0.167
0.152
0.150
0.165
0.167
0.149
0.147
(326)
(32)
(1,672)
1,561
1,857
3,427
260
2,126
(11)
(12)
(3)
52
(1,358)
(795)
2,180
2,179
168
2,347
0.024
0.024
0.026
0.028
0.026
0.024
0.022
0.024
31,379
(7,495)
—
(2,474)
(864)
—
703
52,961
1,728
2,812
1,496
4,928
66
(4,178)
(1,318)
58,495
—
58,495
0.596
0.596
0.659
0.659
0.596
0.596
0.640
0.640
31,179
(7,567)
4,013
(985)
1,198
(4,248)
1,610
56,617
1,592
2,501
941
5,648
6,263
(2,288)
(4,552)
66,722
(1,666)
65,056
0.641
0.618
0.755
0.736
0.638
0.618
0.724
0.707
200
72
(4,013)
(1,489)
(2,062)
4,248
(907)
(3,656)
136
311
555
(720)
(6,197)
(1,890)
3,234
(8,227)
1,666
(6,561)
(0.045)
(0.022)
(0.096)
(0.077)
(0.042)
(0.022)
(0.084)
(0.067)
10,623
0.120
10,637
0.120
(14)
–
42,583
0.480
42,422
0.480
161
–
88,633
99,916
88,663
99,918
88,805
100,088
88,372
99,624
(1) The aggregate of these two line items represents our total actual maintenance capex incurred in the period. An amount equivalent to our depreciation for FFEC, or furniture,
fixtures, equipment and computers, is deducted in determining FFO, and the difference in total maintenance capex incurred is adjusted for in determining AFFO.
(2) Represents current income tax with respect to items that are excluded from the computation of FFO and AFFO from continuing operations, such as fair value adjustments, gains
or losses on foreign exchange, other expense, and provisions for prior period tax reassessments.
(3) Represents AFFO of the Captive that decreases/(increases) the Captive’s investments held for self-insured liabilities not impacting the Company’s reported cash and short-term
investments.
39
Extendicare 2017 Annual Report AFFO 2017 Fourth Quarter Financial Review
AFFO improved by $2.3 million to $15.7 million ($0.178 per basic share) in the 2017 fourth quarter from $13.4 million ($0.150 per basic
share) in the same 2016 period. AFFO from continuing operations contributed $2.2 million of the improvement reflecting an improvement
in Adjusted EBITDA, net of a reduction in income support on acquired retirement communities, lower current income taxes, and a reduction
in maintenance capex, partially offset by higher net interest expense of $2.3 million. The increase in net interest expense included lower
interest revenue in connection with deferred consideration from the U.S. Sale Transaction of $1.9 million. A discussion of the factors
impacting Adjusted EBITDA from continuing operations can be found under the heading “2017 Fourth Quarter Financial Review”.
Maintenance capex from continuing operations was $3.3 million this quarter, compared to $5.4 million in the 2016 fourth quarter,
representing 1.2% and 2.0% of revenue from continuing operations, respectively.
The following provides a breakdown of AFFO and maintenance capex between our Canadian and U.S. operations.
(thousands of dollars unless otherwise noted)
AFFO (continuing operations)
Discontinued operations
AFFO
Maintenance capex (continuing operations)
Discontinued operations
Maintenance capex
Average U.S./Canadian dollar exchange rate
Canada
15,728
−
15,728
3,271
−
3,271
U.S.
(15)
−
(15)
−
−
−
2017
Total
15,713
−
15,713
3,271
−
3,271
1.2722
Three months ended December 31
Canada
11,719
−
11,719
5,419
−
5,419
U.S.
1,815
(168)
1,647
−
112
112
2016
Total
13,534
(168)
13,366
5,419
112
5,531
1.3337
Total
Change
2,179
168
2,347
(2,148)
(112)
(2,260)
AFFO 2017 Financial Review
The following provides a breakdown of AFFO and maintenance capex between our Canadian and U.S. operations.
(thousands of dollars unless otherwise noted)
AFFO (continuing operations)
Discontinued operations
AFFO
Maintenance capex (continuing operations)
Discontinued operations
Maintenance capex
Average U.S./Canadian dollar exchange rate
Canada
58,351
−
58,351
8,813
−
8,813
U.S.
144
−
144
−
−
−
2017
Total
58,495
−
58,495
8,813
−
8,813
1.2986
Twelve months ended December 31
Canada
58,625
−
58,625
12,119
−
12,119
U.S.
8,097
(1,666)
6,431
−
734
734
2016
Total
66,722
(1,666)
65,056
12,119
734
12,853
1.3248
Total
Change
(8,227)
1,666
(6,561)
(3,306)
(734)
(4,040)
AFFO declined by $6.5 million to $58.5 million ($0.659 per basic share) in 2017 from $65.0 million ($0.736 per basic share) in 2016,
representing a decline in AFFO from continuing operations, partially offset by a reduction in losses from discontinued operations. The
decline in AFFO from continuing operations of $8.2 million was primarily attributable to higher net interest expense of $7.8 million, a
reduction in the contribution of Adjusted EBITDA net of income support on acquired retirement communities, and lower government
capital funding, partially offset by lower maintenance capex. The increase in net interest expense included lower interest revenue in
connection with deferred consideration from the U.S. Sale Transaction of $7.4 million. A discussion of the factors impacting Adjusted
EBITDA from continuing operations can be found under the heading “2017 Financial Review”.
Maintenance capex from continuing operations was $8.8 million this year, compared to $12.1 million in 2016, representing 0.8% and 1.1%
of revenue from continuing operations. These costs fluctuate on a quarterly and annual basis with the timing of projects and seasonality.
Management monitors and prioritizes the capital expenditure requirements of its properties throughout the year, taking into account the
urgency and necessity of the expenditure. In 2018, we are expecting to spend in the range of $9 million to $10 million in maintenance
capex, and in the range of $50 million to $55 million in growth capex related primarily to the retirement development projects.
40
Management’s Discussion and Analysis
Reconciliation of Net Cash from Operating Activities to AFFO
The following table provides a reconciliation of our “net cash from operating activities” to AFFO, which includes the impact of discontinued
operations.
(thousands of dollars)
Net cash from operating activities
Add (Deduct):
Net change in operating assets and liabilities, including interest, taxes and payments
for U.S. self-insured liabilities
Current income tax on items excluded from AFFO (1)
Depreciation for FFEC (maintenance capex) (2)
Additional maintenance capex (2)
Principal portion of government capital funding
Income support (retirement acquisitions)
Amounts offset through investments held for self-insured liabilities (3)
Other
AFFO
Three months ended
December 31
Twelve months ended
December 31
2017
2016
2017
10,581
16,998
47,160
2016
311
11,042
(1,391)
(1,914)
(1,357)
1,232
−
(2,418)
(62)
15,713
4,341
(3,357)
(1,885)
(3,646)
1,180
1,358
(1,623)
−
13,366
20,802
(1,230)
(7,495)
(1,318)
4,928
66
(4,178)
(240)
58,495
63,717
4,258
(8,658)
(4,195)
5,648
6,263
(2,288)
−
65,056
(1) Represents current income tax with respect to items that are excluded from the computation of AFFO, such as the gain on sale of the U.S. operations, the provision for U.S.
government investigations, fair value adjustments, gains or losses on foreign exchange, other expense, and provisions for prior period tax reassessments.
(2) These two line items combined represent the total of our maintenance capex incurred in the period. An amount equivalent to our depreciation for FFEC, or furniture, fixtures,
equipment and computers, is deducted in determining FFO, and the difference in total maintenance capex incurred is adjusted for in determining AFFO.
(3) Represents AFFO of the Captive that decreases/(increases) its investments held for self-insured liabilities not impacting the Company’s reported cash and short-term
investments.
Other Significant Developments
The discussion under the heading “Significant 2017 Events and Developments” summarizes our current activities related to the continued
expansion into the retirement sector. This section provides a summary of other developments that have impacted the financial results or
operations of Extendicare for 2017 in comparison to 2016.
Expansion of Alberta Long-term Care Centre
In February 2018, the Company completed a 24-bed addition to its Extendicare Eaux Claires long-term care centre in Edmonton, Alberta,
at an estimated cost of $3.5 million. The initial 180-bed centre was built in 2011 with a design allowing for expansion. We anticipate
the additional beds will achieve stabilized occupancy in the second quarter of 2018, and provide incremental net operating income of
approximately $0.6 million annually.
2015 U.S. Sale Transaction — Deferred Consideration
As part of the proceeds from the U.S. Sale Transaction, the Company was entitled to receive an ongoing cash stream for a period of
15 years relating to certain U.S. skilled nursing centres that were leased prior to the closing (the “Leased Centres”). The present value
ascribed to these proceeds was reflected as deferred consideration and was recorded at amortized cost using the effective interest
method. During the 2017 second quarter, the Company was notified of the potential for an event of default by the operator of the Leased
Centres, and subsequently received notice that the operator of the Leased Centres had failed to make its required minimum lease
payments. As a result of this event and related discussions, the Company does not expect to receive any further amounts and has written
off the balance of the deferred consideration of US$27.9 million, resulting in a charge of $37.5 million in the 2017 second quarter. For
further details, refer to note 22 of the audited consolidated financial statements.
2016 Sale of U.S. IT Hosting Business
On December 22, 2016, the Company completed the sale of substantially all of the assets used in the operation of its U.S. IT Hosting
business for cash proceeds of $11.5 million (US$8.5 million), prior to working capital adjustments and transaction costs. Net proceeds
from the sale, after working capital adjustments and transaction costs, were $9.5 million (US$7.1 million), resulting in a pre-tax loss on sale
of $8.6 million (after-tax loss of $8.4 million). During 2016, an impairment assessment of the U.S. IT Hosting operations using the expected
proceeds resulted in a pre-tax impairment loss of $9.2 million (US$7.1 million) in the aggregate, booked in the second and third quarters of
2016. This impairment loss was reclassified to the loss on sale following the final sale in the 2016 fourth quarter. For further details, refer
to note 22 of the audited consolidated financial statements.
41
Extendicare 2017 Annual Report Other Financing Activity
In February 2017, the Company renewed Canadian Mortgage and Housing Corporation (CMHC) mortgages totalling $16.5 million on two of
its Ontario long-term care (LTC) centres for a term of 15 years to February 2032, at a fixed rate of 3.35%.
In March 2017, the Company renewed its existing $5.8 million CMHC mortgage on a Manitoba LTC centre for a term of almost 10 years to
November 2026, at a fixed rate of 3.04%.
In May 2017, the Company secured a $30.0 million term loan with the Canadian Imperial Bank of Commerce (the “CIBC Term Loan”) upon
maturity of $3.6 million of the existing mortgages on nine Alberta LTC centres. The CIBC Term Loan bears an interest rate based on a
variable 30-day banker’s acceptance rate plus 1.8% for a term of five years to May 2022, with principal and interest payable in monthly
installments based on a 20-year amortization. The maximum borrowing base under the CIBC Term Loan will be determined annually based
on the aggregate of the updated lending values established for each property. The Company entered into an interest rate swap contract to
lock in the rate at 3.27% for the full term. The interest rate swap contract is measured at fair value through profit or loss.
In November 2017, the Company arranged for a demand credit facility in the amount of $65.0 million (the “ParaMed Credit Facility”)
that is secured by the assets of our home health care business, and is available for general corporate purposes of the Company. The
ParaMed Credit Facility has no financial covenants, but does contain normal and customary terms. The full $65.0 million was available and
unutilized as at December 31, 2017.
Extendicare has a demand credit facility in the amount of $47.3 million with the Royal Bank of Canada (the “RBC Credit Facility”) that is
secured by 13 Class C LTC centres in Ontario and is guaranteed by certain Canadian subsidiaries of Extendicare. As at December 31, 2017,
Extendicare had letters of credit totalling approximately $43.8 million issued under the RBC Credit Facility, of which $39.9 million secure
our defined benefit pension plan obligations and the balance were issued in connection with obligations relating to recently acquired
centres and those centres under development. The letter of credit to secure the pension plan obligations renews annually in May based on
an actuarial valuation. The RBC Credit Facility has no financial covenants, but does contain normal and customary terms including annual
re-appraisals of the centres that could limit the maximum amount available.
Tax Reassessment
Following a successful notice of objection to appeal a 2015 reassessment by the Canada Revenue Agency (CRA), the Company reversed a
$3.6 million tax provision, reflected as a current income tax recovery, in the 2016 fourth quarter. Given the nature of this item, including the
fact that it related to prior periods, it was excluded from the determination of AFFO and “earnings (loss) from continuing operations before
separately reported items, net of taxes” for the year ended December 31, 2016.
Update of Regulatory and Funding Changes Affecting Results
In Canada, provincial legislation and regulations closely control all aspects of operation and funding of long-term care centres and
publicly funded home health care services, including the fee structure, subsidies, the adequacy of physical centres, standards of care and
accommodation, equipment and personnel. A substantial portion of the fees paid to providers of these services are funded by provincial
programs, with a portion to be paid by residents or clients. Each province has a different system for managing the services provided. In
some provinces, the government has delegated responsibility for the funding and administration of long-term care programs to regional
health authorities. As a result, there can be significant variability in the regulations governing the provision of and reimbursement for care
from location to location.
In most provinces, a license must be obtained from the applicable provincial ministry of health in order to operate either a long-term care
centre or a retirement centre. In general, there has not been any issuance of new licenses for LTC beds across the country because of the
funding implications for governments. In addition to the license procedure, or in some provinces in place of, operators in Alberta, Manitoba,
Ontario and Saskatchewan are required to sign service contracts that incorporate service expectations with the provincial government or
regional health authority.
In December 2016, Bill 41, Patients First Act, 2016, received royal assent, and forms part of the Ontario government’s Patients First: Action
Plan for Health Care to transform the health care system and create a more patient-centred system in Ontario. The major elements of Bill
41 include the removal of the Community Care Access Centres (CCACs) from the definition of “health services providers”, and introduction
of rules governing the transfer of the CCACs’ assets and staff to the 14 Local Health Integration Networks (LHINs), in addition to increasing
the size and span of control of the LHIN boards. In April 2017, the Ontario Ministry of Health and Long-Term Care (the “MOHLTC”) approved
orders to integrate the CCACs with the LHINs having the same geographic area as the CCAC. The integrations were completed by the end
of June 2017, resulting in the LHINs now being accountable for home health care and the coordination of a person’s placement in an LTC
centre. The government’s focus has now shifted to the next steps in the transformation of the health care system involving enhancing
roles of the LHINs to better meet the care needs of the local communities, including among other things, the establishment of patient and
family advisory committees and geographic sub-regions. The government continues to stress its commitment to the expansion of the
home health care sector and to work with all parties in completing the transformational work. Extendicare has strong relationships with all
of the LHINs and does not anticipate any material adverse impact from the implementation of Bill 41.
42
Management’s Discussion and Analysis
In November 2017, Bill 148, Fair Workplaces, Better Jobs Act, 2017 (the “Act”), received royal assent, and came into effect in 2018. The Act
contains a number of amendments to both the Employment Standards Act and the Labour Relations Act, as part of the Ontario government’s
efforts to overhaul workplace laws. These changes include, among other things, an increase in minimum wage to $14 per hour that took
effect on January 1, 2018, with a further increase to $15 per hour on January 1, 2019, revisions to vacation, holiday pay and personal leave
entitlements that took effect on January 1, 2018, equal pay for equal work standards to take effect on April 1, 2018, and amendments to
schedule change notifications and minimum “on call” payments to take effect on January 1, 2019, in addition to lower voting thresholds
for unionization. Operationally, the Act will necessitate changes in the manner in which the Company manages its workforce in a number
of business areas and could otherwise subject the Company to increased unionization. Financially, the Company expects that the impact
of the Act on its private-pay businesses will not be significant, and that the impact on its government-funded long-term care and home
health care businesses will be offset by funding under its current government service contracts. There can, however, be no assurance that
any such funding will be commensurate with the Company’s additional costs to service resulting from such legislative changes. While the
Company does not anticipate the increases to the minimum wage will have a significant impact on the financial results given the current
pay rates of its workforce, there can be no assurance that these changes will not necessitate increased pay rates for those already above
the minimum wage, in order for the Company to retain and attract employees. As the Company’s labour costs account for approximately
87% of its operating costs, increased labour costs could have a significant adverse effect on the Company’s results from operations
and cash flows, should such cost increases not be met with commensurate increases in government funding. Management is unable to
predict the nature and extent of any changes the government may make to its funding programs or the effect of any such changes on the
Company, but expects that the government will comply with its contractual obligations relating thereto.
In December 2017, Bill 160, Strengthening Quality and Accountability for Patients Act, received royal assent and the regulations associated
therewith are currently being drafted. Bill 160, which supports the Ontario government’s Patients First: Action Plan for Health Care, includes
new legislation as well as changes to a number of existing pieces of legislation. Bill 160, among other things, provides updates to the Long-
Term Care Homes Act, 2007 (LTCHA) to add new enforcement tools, including financial penalties, and new provincial offences to ensure
operators are addressing concerns promptly. The legislation also includes a consent-based framework to protect residents who need to be
secured in a LTC centre for safety reasons. In addition, Bill 160 provides updates to the Retirement Homes Act, 2010 that would strengthen
the oversight powers of the Retirement Homes Regulatory Authority (RHRA) and increase transparency, accountability and governance of
the RHRA.
Ontario Redevelopment Program
In February 2015, the MOHLTC released updates to its plan to redevelop approximately 31,000 older long-term care beds by the end of
2025. The new per diem construction funding subsidy includes: an increase to the base rate from $13.30 to $16.65 per bed for large
centres of 161 beds or more; an incremental per diem of $1.50 per bed for small centres with up to 96 beds; an incremental per diem
of $0.75 per bed for medium centres with 97 to 160 beds; and a per diem of up to $0.38 per bed for those centres eligible for enhanced
transition support. In addition, LTC centres are no longer required to meet Leadership in Energy and Environmental Design, or LEED,
construction standards; however, those that achieve LEED Silver status will continue to receive a per diem premium of $1.00 per bed.
Following their redevelopment, LTC centres meeting the enhanced design standards will be eligible to receive a 30-year license.
In November 2017, the MOHLTC announced plans for 5,000 new LTC beds by 2022 and 30,000 new beds over the next decade, and in
February 2018 put out a call for applications (CFA) related to the 5,000 new LTC beds, indicating the prioritization for applications where
an increase in needed capacity has been established. Applications can be submitted by parties interested in developing new LTC centres
and/or expanding the capacity of LTC centres to be redeveloped.
During 2016, we formalized a plan to redevelop our 21 Class C LTC centres (3,287 beds) in Ontario under the government’s enhanced
redevelopment program. To date, we have requested approval from the MOHLTC to move ahead with the redevelopment of 16 of our
existing Class C centres. With the MOHLTC’s announcement of 5,000 new LTC beds, we have modified our redevelopment plans to
request additional beds for some of our redevelopment projects. In addition, as part of the Company’s approach to campus of care, we
plan to participate in requests for beds in new developments where market opportunity exists. Each project is unique and the overall plan
involves a combination of renovations and new construction. While factors could arise that affect the timing or sequence of this plan, we
are working closely with the MOHLTC with a goal to accelerating our efforts to redevelop these centres. As these redevelopment projects
are completed, we expect to realize the benefit of improved performance and extended license terms. As at February 28, 2018, we have
received confirmation from the MOHLTC that six of our applications have advanced to the next stage of the MOHLTC’s review process
which, upon completion, will result in license transfer approval and commencement of construction.
43
Extendicare 2017 Annual Report Ontario Long-term Care Funding
Ontario is Extendicare’s largest market for its senior care services. Funding for LTC centres in Ontario is based on reimbursement for the
level of care assessed to be required by the residents, in accordance with scheduled rates. The MOHLTC allocates funds through “funding
envelopes”, specifically: nursing and personal care (NPC); programs and support services (PSS); and accommodation (which includes a
sub-envelope for raw food). The funding for the NPC and PSS envelopes is generally adjusted annually based on the acuity of residents
as determined by a classification assessment of resident care needs. The NPC, PSS and food envelopes are “flow-through” envelopes,
whereby any deviation in actual costs from scheduled rates is either absorbed by the provider (if actual costs exceed funding allocations)
or is returned to the MOHLTC (if actual costs are below funding allocations). With respect to the accommodation envelope, providers
retain any excess funding received over costs incurred. The province sets the rates for standard accommodation, as well as the maximum
amounts that a provider can charge for semi-private and private accommodation (preferred accommodation). The provider is permitted to
bill and retain the premiums charged for preferred accommodation. The accommodation rates are substantially paid for by the resident;
however, the province guarantees funding for standard accommodation through resident subsidies. Overall government funding is
occupancy-based, but once the average occupancy level of 97% or higher for the calendar year is achieved, operators receive government
funding based on 100% occupancy. In addition, under the MOHLTC’s occupancy protection program, providers with occupancy levels equal
to 90% and less than 94% receive funding based on their actual occupancy plus 1%, and those with occupancy levels equal to 94% and less
than 97% receive funding based on their actual occupancy plus 2%. In 2017, all but two of Extendicare’s LTC centres in Ontario achieved
the 97% occupancy threshold.
On April 1st each year, the MOHLTC generally provides flow-through funding adjustments on the government funded portion of the fees.
Funding for the NPC and PSS flow-through envelopes increased by 2% on April 1, 2017. These funding enhancements, along with our case
mix index and re-indexing adjustments, are estimated to provide Extendicare with additional annual revenue of approximately $3.4 million
to offset additional costs for resident care and services within the NPC and PSS flow-through envelopes (April 2016 — $1.8 million).
On July 1st each year, the MOHLTC generally implements annual accommodation funding increases to the per diem rates provided to
long-term care providers. The July 1, 2017 funding enhancements increased the daily rates for the non flow-through component of the
accommodation envelope by $0.76 (1.4%) and by $0.55 (6.5%) for the flow-through food component. Extendicare estimates that this
enhanced funding represents additional annual revenue of approximately $2.5 million in total, of which approximately $1.0 million is flow-
through funding (2016 — $1.7 million in total, of which $0.6 million was flow-through).
In addition, LTC operators in Ontario are permitted to designate up to 60% of the resident capacity of a centre as preferred accommodation
and charge higher accommodation rates that vary according to the structural classification of the LTC centre. For beds that are not
classified as “New” or “A” beds, the maximum preferred accommodation premiums increased effective July 1, 2017, by $0.11 to $8.20
per day for a semi-private room and by $0.25 to $18.45 per day for a private room. For beds that are classified as “New” and “A” beds, the
maximum preferred accommodation premiums increased effective July 1, 2017, by $0.17 to $12.30 per day for a semi-private room and
by $0.35 to $25.63 per day for a private room. Extendicare has 13 “New” LTC centres in Ontario with 1,847 beds, of which 1,099 are private
beds. We will benefit from this premium increase for preferred accommodation over time as new residents are admitted.
Alberta Long-term Care Funding
Alberta is Extendicare’s second largest market for its senior care services. Since April 2010, AHS has been using an activity-based funding
system for continuing care centres that includes the measurement of a resident’s acuity through the use of a resident assessment
instrument — minimum data set, or RAI-MDS, to determine the resident’s level of care and resources required. The Alberta Continuing Care
Association is actively engaged in discussions with the Alberta Government and AHS to further enhance care funding to accommodate
higher expenses within continuing care, and to revise the existing funding model used within continuing care. It was anticipated that a
revised care funding model would be implemented for fiscal 2016/2017; however, following receipt of public input to inform new or revised
legislation, the provincial government has publicly indicated that it will release its strategy related to continuing care in 2018 that will
outline its approaches affecting long-term care in the future.
In March 2017, the AHS issued retroactive funding adjustments for long-term care and designated supportive living providers for fiscal
2015/2016 and 2016/2017 in recognition of labour contract settlements. As a result, Extendicare received prior period funding of
$0.8 million, and an estimated increase in ongoing annual revenue of $0.5 million. In addition, the government announced its annual
funding changes for fiscal 2017/2018, effective April 1, 2017, incorporating changes to the case mix index, occupancy and an inflationary
component. The Company estimates that the April 1, 2017 funding changes represent additional annual revenue of approximately
$0.9 million (April 2016 — $1.2 million).
Beginning on July 1, 2017, the annual accommodation charge adjustments (the portion paid directly by residents of long-term care and
designated supportive living centres) increased by 2.2%, based on inflation as reflected by Alberta’s CPI. Extendicare estimates that the
2.2% increase represents additional revenue of approximately $0.6 million (July 2016 — $0.9 million).
44
Management’s Discussion and Analysis
Ontario Home Health Care Funding
Extendicare’s ParaMed Home Health Care division operates in six provinces across Canada, currently providing approximately 11.3 million
hours of care annually, which we believe makes ParaMed the largest private-sector provider of publicly funded home health care in Canada,
and the largest in Ontario. Based on the service volumes provided in 2017, the Ontario market represents approximately 83% of ParaMed’s
service volumes, of which approximately 98% are received from government-funded contracts at specified rates, and the remainder from
private-pay clients.
In shaping the delivery of health care to Canadians, both the federal and provincial governments have stated that home health care is an
area that merits further investment to ensure that more health care services are available in the home. Recent health accord agreements
reached between the federal government and each of the provinces beginning in fiscal 2017/2018, included targeted funding for home
health care. For Ontario alone, targeted home health care funding has been reported as an additional $2.3 billion over the next decade. As
additional funds are allocated by governments to this segment of the Canadian health care system, Extendicare anticipates ParaMed’s
business will continue to grow. ParaMed is looking at a number of private-pay home health care opportunities to further leverage its
platform.
In October 2017, the MOHLTC re-announced its investment of $100 million in fiscal 2017/2018 in home care supports and services.
The funding is expected to support 1.5 million additional hours of personal support, 390,000 additional hours of nursing care, 110,000
additional hours of rehabilitation, and 600,000 additional hours of respite services for caregivers. As part of the initiative to expand
home health care, the MOHLTC announced two new self-directed care initiatives involving: i) a self-directed care program (SDC Program)
for eligible clients (children and clients in exceptional circumstances) that involves direct funding; and ii) the creation of a self-directed
care organization (SDCO) to provide eligible clients with the opportunity to receive their personal support services from a new provincial
agency, that does not include a direct funding component. In both instances, the LHINs will continue to conduct the client assessments
and coordinate the care plans. Under the SDC program, eligible clients will be provided with direct funding to purchase services in their
care plan or to employ people to provide those services. Under the SDCO initiative, eligible clients will have the option to receive personal
support services from the SDCO, or to opt for the traditional care model currently managed through the LHINs. The MOHLTC is proposing
that only clients with a high volume of personal support service needs (6 months or longer; and requiring 14 hours or more of personal
support services per week) will be eligible for this new program, and estimates that the total number of eligible clients will be approximately
6,000 individuals province wide, representing approximately 1% of the individuals the government estimates it provides home health
care services to in the province. The number of clients who will choose to participate in this program is not yet known, but the MOHLTC
has indicated that it anticipates only a minority of eligible clients will change from the traditional care. The timing of the provision of
services by the SDCO will be phased in, starting with pilot projects in three LHINs expected to begin in the spring of 2018. While ParaMed
has continued to experience year-over-year growth in its Ontario government volumes, management cannot predict how funding will be
directed by the LHINs, or how many additional hours are expected to be implemented and directed to existing service providers.
The Ontario government’s rates for home health care services were pre-determined between the former CCACs and the service providers,
with varying rates for each contract awarded, and had remained static since they were last contracted for under the competitive bidding
model. Based upon a recommendation from the Auditor General’s special report on the former CCACs in September 2015, the MOHLTC
implemented harmonized billing rates for specific personal support services during the second and third quarters of 2017, retroactive to
April 1, 2017. This change has not resulted in any significant overall impact on the Company’s home health care revenues.
45
Extendicare 2017 Annual Report Liquidity and Capital Resources
The following table summarizes the sources and uses of cash between our continuing and discontinued operations for each of 2017 and 2016.
(thousands of dollars unless otherwise noted)
Continuing
Discontinued
Cash provided by operating activities, before working
capital changes and interest and income taxes
Net change in operating assets and liabilities
Accounts receivable
Other assets
Accounts payable and accrued liabilities
Interest, taxes and claims payments
Interest paid
Interest received
Income taxes paid
Payments for U.S. self-insured liabilities
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
Net cash from discontinued operations
Foreign exchange loss on U.S. cash held
Increase (decrease) in cash and short-term
investments
Cash and short-term investments at beginning of year
Cash and short-term investments at end of year
Average U.S./Canadian dollar exchange rate
99,333
9,569
4,283
(6,144)
7,708
(29,560)
3,932
(10,093)
−
(35,721)
71,320
(18,564)
(23,612)
−
(2,570)
26,574
101,582
128,156
2017
Total
Continuing
Discontinued
2016
Total
99,333
93,876
(904)
92,972
−
−
−
−
−
9,569
4,283
(6,144)
7,708
−
−
−
(24,160)
(29,560)
3,932
(10,093)
(24,160)
(24,160)
(59,881)
(24,160)
24,160
−
−
−
−
−
−
47,160
5,596
(23,612)
−
(2,570)
26,574
101,582
128,156
1.2986
(9,150)
14,108
(33,807)
(28,849)
(26,524)
10,835
(16,627)
−
(32,316)
32,711
(58,514)
16,065
8,415
(717)
(2,040)
103,622
101,582
831
458
217
(8,319)
14,566
(33,590)
1,506
(27,343)
(16)
−
(10)
(32,976)
(26,540)
10,835
(16,637)
(32,976)
(33,002)
(65,318)
(32,400)
41,072
(257)
(8,415)
−
−
−
−
311
(17,442)
15,808
−
(717)
(2,040)
103,622
101,582
1.3248
As at December 31, 2017, Extendicare had cash and short-term investments on hand of $128.2 million compared with $101.6 million at
the beginning of the year, resulting in an increase in cash of $26.6 million. Cash flow generated by the operating activities of our continuing
operations of $71.3 million was in excess of our cash dividends paid of $37.5 million by $33.8 million. The issuance of long-term debt
of $43.7 million and repatriation of $21.1 million of funds from the Captive primarily supported the capital expenditures, principal debt
repayments, and the purchase of shares for cancellation under our normal course issuer bid.
Discontinued operations reflect the payment of claims for self-insured liabilities as a component of net cash from operating activities,
which are funded by the Captive’s investments held for self-insured liabilities as a component of net cash from investing activities, as those
invested funds are not included in cash and short-term investments. In addition, the 2016 activity for discontinued operations included the
operations of our former U.S. IT Hosting business that was sold in December 2016.
Net cash from operating activities of the continuing operations was a source of cash of $71.3 million in 2017 compared to $32.7 million in
2016. The improvement of $38.6 million was primarily due to an improvement in earnings and a favourable net change in operating assets
and liabilities of $36.6 million. The 2016 change in accounts payable and accrued liabilities included payments of $19.4 million that were
funded by cash held in escrow that was recognized as a source of cash from investing activities, as described below. The 2016 net cash
from operating activities of $32.7 million, would have otherwise been $52.1 million.
Net cash from investing activities of the continuing operations was a use of cash of $18.6 million in 2017 compared to a use of cash of
$58.5 million in 2016. The 2017 activity included the repatriation of the Captive’s funds of $21.1 million (US$16.0 million) and the collection
of other assets, offset by purchases of property, equipment and other intangible assets of $41.1 million. The 2016 activity included the
acquisition of two retirement communities for $40.5 million in February 2016, taxes paid of $10.8 million in connection with the U.S. Sale
Transaction, and purchases of property, equipment and other intangible assets of $37.4 million, partially offset by a release of funds held
in escrow of $19.4 million (US$14.0 million) to support obligations assumed in respect of the disposed U.S. operations, the transfer of
$6.6 million from the Captive’s investments held for self-insured liabilities, and the collection of other assets.
The following table summarizes the components of our property, equipment and other intangible asset expenditures between our
continuing and discontinued operations for each of 2017 and 2016. Growth capex, excluding acquisitions, relates to the construction
of new beds, building improvements or other capital costs, all of which are aimed at earnings growth. The increase in growth capex
relates primarily to the retirement communities currently under development in Ontario. Maintenance capex relates to our actual
capital expenditures incurred to sustain and upgrade existing property and equipment. Management monitors the capital expenditure
46
Management’s Discussion and Analysis
requirements of its properties throughout the year, and prioritizes its capital projects taking into account the urgency and necessity of
the expenditure. In 2018, we are projecting to spend in the range of $9 million to $10 million in maintenance capex, and in the range of
$50 million to $55 million in growth capex related primarily to the retirement development projects.
(thousands of dollars)
Growth Capex
Canadian operations
U.S. operations
Deduct: capitalized interest
Growth capex
Maintenance Capex
Canadian operations
U.S. operations
Maintenance capex
2017
Total
Continuing
33,521
−
(1,197)
32,324
8,813
−
8,813
41,137
Continuing
Discontinued
26,259
−
(979)
25,280
12,119
−
12,119
37,399
−
704
−
704
−
734
734
1,438
2016
Total
26,259
704
(979)
25,984
12,119
734
12,853
38,837
Net cash from financing activities of the continuing operations was a use of cash of $23.6 million in 2017 compared to a source of cash
of $16.1 million in 2016. The 2017 activity included scheduled debt repayments of $22.0 million, cash dividends paid of $37.5 million, and
Common Shares acquired for cancellation under a normal course issuer bid at a cost of $6.5 million, partially offset by the net issuance
of $26.4 million on refinancing of long-term debt, and draws on construction financing of $17.3 million. The 2016 activity included the
issuance of the Retirement Mortgages of $56.3 million, $12.6 million in draws on construction financing, and a release of restricted cash of
$4.8 million, partially offset by scheduled debt repayments of $21.0 million and cash dividends paid of $36.1 million. For information on the
change in long-term debt, refer to “Liquidity and Capital Resources — Long-term Debt”.
Net cash from discontinued operations impacting the cash from continuing operations reflects the intercompany movements of cash
between the discontinued and continuing operations. The 2016 activity of $8.4 million related to the net proceeds from the sale of our U.S.
IT Hosting business of $9.5 million, partially offset by the net change in cash of those operations during 2016.
Capital Structure
The following table summarizes our shareholders’ equity for 2017 and 2016.
(thousands of dollars unless otherwise noted)
Shareholders’ Equity
Common Shares
Equity portion of convertible debentures
Contributed surplus
Accumulated deficit at beginning of year
Net earnings for the period
Dividends declared
Purchase of Common Shares in excess of book value and other
Accumulated deficit at end of year
Accumulated other comprehensive income
Shareholders’ equity
U.S./Canadian dollar exchange rate at end of year
2017
2016
490,881
5,573
2,437
498,891
(322,025)
2,132
(42,583)
(2,608)
(365,084)
(4,851)
128,956
1.2571
489,656
5,573
941
496,170
(315,051)
35,452
(42,422)
(4)
(322,025)
614
174,759
1.3427
Share Information (thousands)
Common Shares (TSX symbol: EXE) (1)
February 27, 2018
88,266.5
December 31, 2017
88,523.3
December 31, 2016
88,684.5
(1) Closing market value per the TSX on February 27, 2018, was $8.14.
The closing rates used to translate assets and liabilities of the U.S. operations were 1.2571 at December 31, 2017, and 1.3427 at
December 31, 2016. As a result of the stronger Canadian dollar at the end of 2017, compared to the end of 2016, the foreign currency
translation adjustment account declined by $3.1 million due to the devaluation in net assets of our continuing self-sustaining U.S.
operations, representing an increase (decrease) in net assets of approximately $0.2 million for every one-cent weakening (strengthening)
of the Canadian dollar against the U.S. dollar.
47
Extendicare 2017 Annual Report Distributions
The declaration and payment of distributions is at the discretion of our board of directors (the “Board”) as to the amount and timing of
dividends to be declared and paid, after consideration of a number of factors including results of operations, requirements for capital
expenditures and working capital, future financial prospects of Extendicare, debt covenants and obligations, and any other factors deemed
relevant by the Board. If our Board determines that it would be in Extendicare’s best interests, it may modify the amount and frequency of
dividends to be distributed to holders of Common Shares.
In each of 2017 and 2016, the Company declared cash dividends of $0.48 per share, for a total of $42.6 million and $42.4 million,
respectively. The portion distributed in cash in 2017 was $37.5 million (2016 — $36.3 million), and $5.1 million (2016 — $6.1 million) was by
way of shares issued under a dividend reinvestment plan. A total of 535,025 Common Shares were issued in 2017 through the dividend
reinvestment plan (2016 — 731,194 Common Shares).
Net cash from operating activities was $47.2 million in 2017 and $0.3 million in 2016. In both periods, cash from operating activities
included deductions for working capital payments that were funded by cash from investing activities on the statements of cash flows.
These payments related to our U.S. self-insured liabilities of $24.2 million in 2017 and $33.0 million in 2016, which were fully funded from
investments held by the Captive. In addition, payments made in 2016 to settle obligations of the former U.S. operations were funded from
cash held in escrow of $19.4 million. Cash flow generated from the operating activities of our continuing operations, excluding these items
that were funded from investment activities, were $71.3 million in 2017 and $52.1 million in 2016, each of which were in excess of the cash
dividends declared. For further information on the sources and uses of cash between our continuing and discontinued operations, refer to
the previous discussion under the heading “Liquidity and Capital Resources”.
Compared to our AFFO of $58.5 million for 2017 (2016 — $65.0 million), dividends declared of $42.6 million represented a payout ratio of
approximately 73% (2016 — 65%). For further information on our AFFO, refer to the discussion under the heading “Adjusted Funds from
Operations”.
Normal Course Issuer Bid
During 2017, under a normal course issuer bid that commenced on January 13, 2017 and ended on January 12, 2018, the Company
purchased and cancelled 696,220 Common Shares at a weighted average price of $9.27 per share, for a total cost of $6.5 million. During
2016, the Company did not acquire any Common Shares for cancellation.
On January 10, 2018, Extendicare received the approval of the TSX to renew its normal course issuer bid (the “Bid”) to purchase for
cancellation up to 8,770,000 Common Shares (approximately 10% of the public float) through the facilities of the TSX, and on alternative
Canadian trading systems. The Bid commenced on January 15, 2018, and provides Extendicare with flexibility to purchase Common
Shares for cancellation until January 14, 2019, or on such earlier date as the Bid is complete. Subject to the TSX’s block purchase
exception, on any trading day, purchases under the Bid will not exceed 39,219 Common Shares. The price that Extendicare will pay for any
Common Shares purchased under the Bid will be the prevailing market price at the time of purchase and any Common Shares purchased
will be cancelled. As at February 28, 2018, the Company has acquired and cancelled 352,233 Common Shares under the Bid at an average
price of $8.94 per share, for a total cost of $3.1 million, all of which were acquired in January 2018.
Future Liquidity and Capital Resources
Extendicare’s consolidated cash and short-term investments on hand was $128.2 million as at December 31, 2017, compared with
$101.6 million at the beginning of the year, and excluded restricted cash of $2.3 million, and $86.3 million (US$68.6 million) of investments
held by our Captive to support the accrual for U.S. self-insured liabilities of $61.1 million (US$48.6 million). In addition, the Company has
$65.0 million undrawn on its ParaMed Credit Facility.
The Company has acquired six retirement communities since October 2015, for cash of approximately $139 million. In August 2016, the
Company secured financing in the aggregate of $56.3 million on three of the retirement communities, representing approximately 71% of
their acquisition costs. The Company has the opportunity to seek financing on the remaining three once stabilized.
The Company anticipates closing on the acquisition of the Lynde Creek Retirement Community for a cash purchase of $34.5 million
in the second quarter of 2018, following which it intends to secure financing. Refer to the “Retirement Acquisitions” heading under the
“Significant 2017 Events and Developments — Growth of Retirement Operations” section of this MD&A for further details.
In addition, construction financings in the aggregate of up to $60.4 million have been secured on three of the Company’s four retirement
development projects, of which $29.9 million was drawn as at December 31, 2017. As at December 31, 2017, the Company had incurred
approximately $62.1 million of the estimated $125.0 million of Adjusted Development Costs for these four retirement communities.
Management is confident that cash from operating activities and future debt financings will be available and sufficient to support
Extendicare’s ongoing business operations, maintenance capex, debt repayment obligations, growth capex and to fund strategic acquisitions.
48
Management’s Discussion and Analysis
Commitments and Contingencies
Long-term Debt
Continuity of Long-term Debt
The following summarizes the changes in the carrying amounts of long-term debt for 2017 and 2016. Long-term debt totalled
$536.1 million as at December 31, 2017, compared with $503.6 million as at December 31, 2016, representing an increase of $32.5 million
primarily due to the issuance of the CIBC Term Loan, an increase in finance lease obligations for customized cloud-based software, and
a draw on construction loans, partially offset by scheduled debt repayments of $22.0 million. Extendicare and its subsidiaries are in
compliance with all of their respective financial covenants as at December 31, 2017. Details of the components, terms and conditions of
long-term debt are provided in note 12 of the audited consolidated financial statements.
(millions of dollars)
Long-term debt at beginning of year, prior to financing costs
Issue of long-term debt
CIBC Term Loan
Retirement Mortgages
Construction loans
Finance lease obligations
Repayment of long-term debt
Accretion of convertible debentures
Financing costs at end of year
Long-term debt at end of year
Less: current portion
2017
510.3
26.4
—
17.3
8.9
(22.0)
0.9
541.8
(5.7)
536.1
(59.7)
476.4
2016
461.6
—
56.3
12.6
—
(21.0)
0.8
510.3
(6.7)
503.6
(54.8)
448.8
Long-term Debt Maturities and Weighted Average Interest Rates
Management has limited the amount of debt that may be subject to changes in interest rates, with all of its debt at fixed rates, other than
the construction loans of $29.9 million. The variable-rate Retirement Mortgages and CIBC Term Loan aggregating $85.6 million as at
December 31, 2017, have effectively been converted to fixed rate financing with interest rate swaps over the full term. As at December 31,
2017, the interest rate swaps were valued as an asset of $3.5 million.
The following table summarizes key metrics of our consolidated long-term debt as at December 31, 2017, and December 31, 2016.
December 31, 2017
December 31, 2016
Weighted average interest rate of long-term debt outstanding
Weighted average term to maturity of long-term debt outstanding
Weighted average term to maturity of long-term debt outstanding,
excluding finance lease obligations
Trailing twelve months consolidated net interest coverage ratio (1)
Trailing twelve months consolidated interest coverage ratio (2)
Debt to Gross Book Value (GBV)
Total assets (carrying value)
Accumulated depreciation on property and equipment
Accumulated amortization on other intangible assets
GBV
Debt (3)
Debt to GBV
5.0%
7.1 yrs
6.7 yrs
3.8 X
3.3 X
934,281
214,889
12,229
1,161,399
543,446
46.8%
(1) Net interest coverage is defined as Adjusted EBITDA divided by net interest (interest expense before reduction of capitalized interest, net of interest revenue).
(2) Interest coverage is defined as Adjusted EBITDA divided by interest expense before reduction of capitalized interest.
(3) Debt includes convertible debentures at face value of $126.5 million, and excludes finance costs.
5.2%
7.8 yrs
7.2 yrs
5.4 X
3.3 X
988,617
197,476
7,905
1,193,998
512,898
43.0%
49
Extendicare 2017 Annual Report The table below presents the principal, or notional, amounts and related weighted average interest rates by year of maturity, of the
Company’s long-term debt obligations as at December 31, 2017.
(millions of dollars unless otherwise noted)
2018
2019
2020
2021
2022
Convertible debentures (at face value)
Fixed rate
Average interest rate
Long-term debt
Fixed rate (including fixed through swap)
Average interest rate
Variable rate
Average interest rate
Finance lease obligations
Fixed rate
Average interest rate
–
–
22.7
4.13%
29.9
3.87%
8.5
5.97%
126.5
6.00%
14.0
4.21%
–
–
8.5
6.23%
–
–
58.5
4.05%
–
–
9.1
6.26%
–
–
13.5
4.24%
–
–
9.6
6.29%
–
–
55.8
3.71%
–
–
8.6
7.00%
After
2022
–
–
132.3
4.71%
–
–
46.0
6.98%
Total
126.5
6.00%
296.8
4.20%
29.9
3.87%
90.3
6.67%
Fair
Value
129.7
299.4
29.9
103.0
Other Contractual Obligations and Contingencies
The table below provides summary information relating to the contractual obligations, other than long-term debt, as at December 31,
2017. Due to the uncertainty as to the timing of payments to be made with respect to certain obligations, the table excludes our accrual for
U.S. self-insured liabilities of $61.1 million and our decommissioning provisions of $9.2 million. In addition, the table excludes our defined
benefit pension plan obligations, which are described more fully below.
(millions of dollars)
Operating lease obligations
Purchase obligations
2018
3.3
45.1
48.4
2019
2.9
10.9
13.8
2020
2021
2022
1.2
–
1.2
0.9
–
0.9
0.5
–
0.5
After
2022
0.1
–
0.1
Total
8.9
56.0
64.9
Defined Benefit Pension Plan Obligations
The contractual obligations table excludes our defined benefit pension plan obligations. The accrued benefit liability on our statement
of financial position as at December 31, 2017, was $36.6 million (2016 — $37.0 million). We currently have defined benefit registered and
supplementary plans covering certain executives, both of which have been closed to new entrants since 2000. The registered defined
benefit plan was in an actuarial deficit of $2.5 million with plan assets of $5.4 million and accrued benefit obligations of $7.9 million
as at December 31, 2017 (2016 — an actuarial deficit of $2.3 million with plan assets of $5.4 million and accrued benefit obligations of
$7.7 million). The accrued benefit obligations of the supplementary plan were $34.1 million as at December 31, 2017 (2016 — $34.7 million).
We do not set aside assets in connection with the supplementary plan and the benefit payments will be paid from cash from operations.
The benefit obligations under the supplementary plan are secured by a letter of credit totalling $39.9 million as at December 31, 2017
(2016 — $40.4 million). This letter of credit renews annually in May based on an actuarial valuation of the pension obligations. The annual
benefit payments under the supplementary pension plan to be funded from cash from operations over the next five years are expected
to be in the range of $2.0 million to $2.2 million, and the annual contributions to the registered pension plan over the next five years
are expected to be less than $0.1 million. Since the majority of our accrued benefit obligations represent our obligation under our non-
registered supplementary plan, which is not required to be funded, changes in future market conditions are not expected to have a material
adverse effect on our cash flow requirements with respect to our pension obligations, or on our pension expense.
Accrual for U.S. Self-insured Liabilities
The obligation to settle any U.S. self-insured general and professional liability claims relating to the period prior to the closing of the U.S.
Sale Transaction, including claims incurred but yet to be reported, remains with Extendicare, which it intends to fund through the Captive.
Consequently, the balance of the accrual for self-insured liabilities and the related investments held for self-insured liabilities remain on
the consolidated statement of financial position. However, any expense incurred or release of reserves for U.S. self-insured liabilities are
presented as discontinued operations; while the Captive’s costs to administer and manage the settlement of the remaining claims are
reported as continuing operations within the U.S. segment.
Management regularly evaluates and semi-annually engages an independent third-party actuary to provide a report to determine the
appropriateness of the carrying value of this liability. Our most recent independent actuarial review was conducted at the end of the 2017,
which confirmed the adequacy of our reserves.
As at December 31, 2017, the accrual for self-insured general and professional liabilities was $61.1 million (US$48.6 million) compared to
$94.8 million (US$70.6 million) at the beginning of the year. The decline of US$22.0 million reflected claim payments of US$18.6 million
and a release of reserves of US$4.4 million, partially offset by accretion of the discounted liability. The release of reserves of $5.7 million
(US$4.4 million) was reflected in discontinued operations in 2017 following the completion of independent actuarial reviews.
50
Management’s Discussion and Analysis
During 2016, payments for self-insured liabilities were $33.0 million (US$24.9 million) and US$11.5 million in reserves were released
following the completion of independent actuarial reviews. The release of reserves together with an adjustment for the discount rate
applied to the liability, totalling $16.8 million (US$12.7 million), were reflected in discontinued operations.
Most of the risks that Extendicare self-insures are long-term in nature, and accordingly, claim payments for any particular policy year occur
over a long period of time. However, management estimates and allocates a current portion of the accrual for self-insured liabilities on the
statement of financial position. As at December 31, 2017, management estimated that approximately $22.7 million of the accrual for self-
insured general and professional liabilities will be paid within the next year. The timing of payments is not directly within management’s
control; therefore, estimates could change in the future.
Within our Bermuda-based captive insurance company, we hold investments sufficient to support the accrual for self-insured liabilities
and to meet required statutory solvency and liquidity ratios. These invested funds are reported in other assets and totalled $86.3 million
(US$68.6 million) as at December 31, 2017, compared to $136.1 million (US$101.4 million) as at December 31, 2016. During the 2017, the
Captive transferred US$16.0 million of its funds previously held for investment to the Company for general corporate use. Management
believes there are sufficient invested funds held to meet estimated current claims payment obligations.
Legal Proceedings, Claims and Regulatory Actions
Extendicare and its consolidated subsidiaries are defendants in various actions and proceedings that are brought against them from
time to time in connection with their operations. The Company is aware that a statement of claim was filed against it in Ontario in late
November 2017, which seeks an order certifying the action as a class action. The statement of claim, which has not been served on
Extendicare, alleges negligence by the Company in the operation of its long-term care facilities and its provision of care to residents, and
is seeking $150 million in damages. Management is unable to assess whether the claim will be advanced but believes that the allegations,
including the damages sought, are completely without merit. Should the claim be advanced, Extendicare intends to vigorously defend
itself and does not believe the outcome will have a material adverse impact on its business, results of operations or financial condition and
believes that any potential liability will be covered by insurance.
The provision of health care services is subject to complex government regulations. Every effort is made by the Company to avoid or
mitigate deficiencies in the quality of patient care through quality assurance strategies and to remedy any such deficiencies cited by
government inspections within any applicable prescribed time period. Extendicare accrues for costs that may result from investigations
(or any possible related litigation) to the extent that an outflow of funds is probable and a reliable estimate of the amount of the associated
costs can be made.
Related Party Transactions
Tim Lukenda, Extendicare’s President and Chief Executive Officer, and members of his family have a company that owns a long-term care
centre and a retirement centre in Ontario, in which Mr. Lukenda has an approximate 7.1% direct and indirect ownership interest, and with
which Extendicare has an ongoing relationship through the provision of management services to the LTC centre and group purchasing
services to the retirement centre. Mr. Lukenda’s employment contract provides a mechanism and process that effectively removes him
from the decision-making process in situations where a conflict of interest may arise on any matter between the two companies.
In 2017, contingent on his continued employment as of September 30, 2017, our CEO was paid $2.0 million, which amount is reflected
above as part of short-term benefits.
Risks and Uncertainties
There are certain risks inherent in the activities of Extendicare, including the risks described below.
General Business Risks
Extendicare is subject to general business risks inherent in the senior care industry, including: increased government regulation and
oversight; changing consumer preferences; fluctuations in occupancy levels and business volumes; the inability to achieve adequate
government funding increases; increases in labour costs and other operating costs; possible future changes in labour relations;
competition from or the oversupply of other similar properties; changes in neighbourhood or location conditions and general economic
conditions; health related risks; disease outbreaks and control risks; changes in accounting principles and policies; the imposition of
increased taxes or new taxes; capital expenditure requirements; changes in interest rates; and changes in the availability and cost of long-
term financing, which may render refinancing of long-term debt difficult or unattractive. Any one of, or a combination of, these factors may
adversely affect the business, results of operations and financial condition of the Company.
In addition, there are inherent legal, reputational and other risks involved in providing housing and health care services to seniors. The
vulnerability and limited mobility of some seniors enhances such risks. Such risks include fires or other catastrophic events at a property
which may result in injury or death, negligent or inappropriate acts by employees or others who come into contact with our residents, and
unforeseen events at Extendicare’s centres that result in damage to Extendicare’s brand or reputation or to the industry as a whole.
51
Extendicare 2017 Annual Report Risks Related to Growth Activities
The Company expects that it will continue to have opportunities to acquire businesses and properties, develop properties, expand existing
centres, and grow its home health care, management, consulting and group purchasing businesses, but there can be no assurance that
this will be the case.
The provinces restrict the number of licensed LTC beds and any new licenses are awarded through a request for proposal process. If
regulatory approvals are required in order to expand operations of the Company, the failure of the Company or inability to obtain the
necessary approvals, changes in standards applicable to such approvals and possible delays and expenses associated with obtaining such
approvals could adversely affect the ability of the Company to expand and, accordingly, to increase its revenue and earnings.
The success of the business acquisition and development activities of the Company, including the expansion of its private-pay retirement
operations, will be determined by numerous factors, including the ability of the Company to identify suitable acquisition targets,
competition for acquisition and development opportunities, purchase price, ability to obtain external sources of funding or adequate
financing on reasonable terms, the financial performance of the businesses or centres after acquisition or development, and the ability of
the Company to effectively integrate and operate the acquired businesses or centres. Acquired businesses or centres, and development
projects, may not meet financial or operational expectations due to the possibility that the Company has insufficient management
expertise to engage in such activities profitably or without incurring inappropriate amounts of risk, unexpected costs or delays associated
with their acquisition or development, as well as the general investment risks inherent in any real estate investment or business
acquisition. Moreover, new acquisitions may require significant management attention, place additional demands on the Company’s
resources, systems, procedures and controls, and capital expenditures that would otherwise be allocated by the Company in a different
manner to existing businesses. Any failure by the Company to identify suitable candidates for acquisition, secure financing, or operate
the acquired businesses effectively may have an adverse effect on the future growth, results of operations and financial condition of the
Company.
The success of the Company’s ability to grow its management, consulting, group purchasing and home health care businesses, including
the private-pay home health care segment, will be determined by numerous factors, including the ability of the Company to retain, renew
and secure new contracts, identify suitable markets, develop competitive services and marketing and pricing strategies, attract and retain
clients, and hire, retain and motivate key personnel. Changes in government regulations and funding policies, in addition to the financial
performance of the business, also impact growth potential. Any failure by the Company to grow or operate its businesses effectively may
have an adverse effect on the business, results of operations and financial condition of the Company.
Risks Related to Occupancy and Business Volumes
Senior care providers compete primarily on a local and regional basis with many other health care, long-term care and retirement living
providers, including profit-oriented and not-for-profit organizations, hospital-based LTC units, rehabilitation hospitals, home health care
agencies, and rehabilitative therapy providers. Our ability to compete successfully varies from location to location and depends on a
number of factors, including the number of competitors in the local market, the types of services available, our local reputation for quality
care, the commitment and expertise of our staff, our local service offerings, the cost of care in each locality, and the physical appearance,
location, age and condition of our centres. Increased competition could limit our ability to attract and retain residents and clients, maintain
or increase occupancy levels and business volumes, and expand our business. Our ability to continue to attract residents and clients could
have an adverse effect on the business, results of operations and financial condition of the Company.
Risks Related to Government Funding and Regulatory Changes
General
Extendicare’s earnings are highly reliant on government funding and reimbursement programs, and the effective management of staffing
and other costs of operations, which are strictly monitored by government regulatory authorities. Given that we operate in a labour-
intensive industry, where labour costs account for a significant portion of our operating costs (approximately 87% in 2017), government
funding constraints, or funding enhancements that are not commensurate with increased costs, could have a significant adverse effect on
the Company’s results from operations and cash flows. Management is unable to predict whether governments will adopt changes in their
funding and reimbursement programs, and if adopted and implemented, what effect such changes will have on the Company.
Further information on funding and legislative changes affecting the industry can be found under “Update of Regulatory and Funding
Changes Affecting Results”.
All long-term care providers are subject to surveys, inspections, audits and investigations by government authorities to ensure compliance
with applicable laws and licensure requirements of the various government funding programs. Long-term care centres must comply with
applicable regulations that, depending on the jurisdiction in which they operate, may relate to such matters as staffing levels, resident care
related operating standards, occupational health and safety, resident confidentiality, billing and reimbursement, along with environmental
and other standards. Retirement communities are also subject to extensive government regulation and oversight, licensure requirements
and the potential for regulatory change. The government review process is intended to determine compliance with survey and certification
requirements, and other applicable laws. Remedies for survey deficiencies can be levied based upon the scope and severity of the cited
52
Management’s Discussion and Analysis
deficiencies. Remedies range from the assessment of fines to the withdrawal of payments under the government funding programs.
Should a deficiency not be addressed through a plan of correction, a centre can be decertified from the funding program. Extendicare
makes every effort to avoid and mitigate notices of deficiencies through quality assurance strategies. As well, all efforts are undertaken to
correct all legitimate problem areas that have been identified through regulatory inspections.
The revocation of a license by authorities or the cancellation of a service contract due to inadequate performance by the operator has
been historically infrequent and is usually preceded by a series of warnings, notices and other sanctions. Extendicare has never had such a
license or service contract revoked in Canada.
Non-compliance with applicable laws and licensure requirements governing LTC centres and retirement communities could result in
adverse consequences, including severe penalties, which may include criminal sanctions and fines, civil monetary penalties and fines,
administrative and other sanctions, including exclusion from participation in government funded programs, or one or more third-party
payor networks. The Company may be required to refund amounts that have been paid to it by government funded programs. These
penalties could have a material adverse effect on the business, results of operations and financial condition of the Company. Extendicare
takes all appropriate measures to accrue for costs that may result from investigations (or any possible related litigation) to the extent
that an outflow of funds is possible and a reliable estimate of the amount of associated costs can be made; however, there can be no
assurance that such accruals are accurate or sufficient.
Ontario LTC Redevelopment Program
In Ontario, licenses for LTC centres are issued for a fixed term of not more than 30 years, after which a new license may or may not
be issued. LTC operators are to be notified of license renewals at least three years prior to the maturity date. Under the LTCHA, license
terms for Class B and C LTC centres are set to expire in 2025 unless the centres are redeveloped to the government’s new design
standards. In Ontario, Extendicare has 21 Class C LTC centres with 3,287 beds that it plans to redevelop under the government’s enhanced
redevelopment program (see “Ontario Redevelopment Program” under the heading “Update of Regulatory and Funding Changes Affecting
Results”). The extent to which such redevelopment plans are not implemented or proceed on significantly different timing or terms,
including levels of expected government subsidy funding, could have a material adverse effect on the business, results of operations and
financial condition of the Company.
Ontario Home Health Care Business
ParaMed’s largest market is in Ontario, where approximately 83% of its service volumes are generated, and approximately 98% of its
revenue in Ontario is from contracts tendered by locally administered provincial agencies, or LHINs, at specified billing rates. ParaMed is
the largest private-sector provider of publicly funded home health care in the province.
Prior to 2012, government contracts for the provision of home health care services were awarded to service providers, such as ParaMed,
under a competitive bidding model, with specified termination dates. In 2012, the government implemented new open-ended contracts
for all service providers, whereby the government is required to provide six months’ notice of termination, and service providers are
required to provide twelve months’ notice of their intention to terminate a contract. Any new contracts continue to be awarded under a
bidding process to pre-qualified service providers. A service provider’s ability to retain its existing business is evaluated based on, among
other things, an established set of quality indicators. Under this new regime, all of ParaMed’s contracts with the LHINs have remained in
effect, and since 2012, it has experienced year-over-year growth in its Ontario business volumes. Any failure by the Company to retain its
government contracts may have an adverse effect on the business, results of operations and financial condition of the Company.
Risks of Rising Personnel Costs and Related to Labour Relations
Personnel Costs
The long-term care industry is labour intensive. The Company’s labour costs accounted for approximately 87% of its operating costs and
approximately 86% of its combined operating and administrative costs from continuing operations in 2017. The Company competes with
other health care providers in attracting and retaining qualified and skilled personnel to manage and operate the day-to-day operations of
each of its centres and home health care services. The health care industry continues to face shortages of qualified personnel, such as
nurses, certified nurse’s assistants, nurse’s aides, and therapists. The shortage of qualified personnel and general inflationary pressures
may require the Company to enhance its pay and benefits package to compete effectively for such personnel. The Company may not
be able to recover such added costs through increased government funding and reimbursement programs, or through increased rates
charged to residents and clients. The inability to retain and/or attract qualified personnel and meet minimum staffing levels may result
in: a reduction in occupancy levels and volume of services provided; the use of staffing agencies at added costs; an increased risk in the
inability to provide continuity of care between our staff and our residents and clients; and an increased risk of an LTC centre or retirement
community being subject to fines and penalties. An increase in personnel costs or a failure to attract, train and retain qualified and skilled
personnel could adversely affect the business, results of operations and financial condition of the Company.
The Company has contracted out selected dietary and housekeeping services in some of its centres. Should the Company not be satisfied
with the quality or cost of the services provided by companies it has contracted out to, it may have to terminate the related contracts and
recruit replacement staff at an incremental cost.
53
Extendicare 2017 Annual Report Labour Relations
The Company employs over 23,700 persons, of whom approximately 58% are represented by labour unions. Labour relations with the
unions are governed by numerous collective bargaining agreements and many different unions. There can be no assurance that the
Company will not at any time, whether in connection with the renegotiation of a collective bargaining agreement or otherwise, experience
strikes, labour stoppages or any other type of conflict with unions or employees which could have a material adverse effect on the
Company’s business, operating results and financial condition. The centres that Extendicare operates are generally subject to legislation
that prohibits both strikes and lock-outs, and requires compulsory arbitration to settle labour disputes. In jurisdictions where strikes and
lockouts are permitted, certain essential services regulations apply which provide for the continuation of resident care and most services.
Non-unionized employees of the Company may become unionized if they are targeted for certification by a trade union. There can be no
assurance that employees who are not currently unionized will not, in the future, be subject to unionization efforts or that any such efforts
will not result in the unionization of such employees, which could increase the Company’s labour costs.
Risks Related to Liability and Insurance
The businesses that are carried on by Extendicare, directly or indirectly, entail an inherent risk of liability. Management expects that, from
time to time, Extendicare may be, and is in fact from time to time, subject to lawsuits as a result of the nature of its business. Attempts to
advance class action lawsuits have become prevalent in the Canadian marketplace, including senior care. There can be no assurance that
Extendicare will not face risks of this nature. Refer to the “Legal Proceedings, Claims and Regulatory Actions” heading under the “Other
Contractual Obligations and Contingencies — Commitments and Contingencies” section of this MD&A for further details.
Extendicare maintains business and property insurance policies in amounts and with such coverage and deductibles as deemed
appropriate, based on the nature and risks of the business, historical experience and industry standards. There can be no assurance,
however, that claims in excess of the insurance coverage, or in excess of the Company’s reserves, or claims not covered by the insurance
coverage will not arise or that the liability coverage will continue to be available on acceptable terms. Furthermore, there are certain types
of risks, generally of a catastrophic nature, such as war, non-certified acts of terrorism, or environmental contamination, which are either
uninsurable or are not insurable on an economically viable basis. A successful claim against the Company not covered by, or in excess
of, such insurance, or in excess of the Company’s reserves for self-insured retention levels, could have a material adverse effect on the
business, results of operations and financial condition of the Company. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect on the ability of the Company to attract residents, expand the business of the Company
or maintain favourable standings with regulatory authorities.
Prior to the U.S. Sale Transaction, Extendicare self-insured certain risks related to general and professional liability of its disposed U.S.
business through the Captive, its Bermuda-based captive insurance company. The obligation to settle any such claims relating to the
period prior to the closing of the U.S. Sale Transaction, including claims incurred but yet to be reported, remains with Extendicare, which it
intends to fund through the Captive.
Risks Related to Tax Rules and Regulations
Extendicare is subject to audits from federal, state and provincial tax jurisdictions and is therefore subject to risk in the interpretation of
tax legislation and regulations. Tax rules and regulations are complex and require careful review by the Company’s tax management and
its external tax consultants. Differences in interpretation of tax rules and regulations could result in tax assessments and penalties for the
untimely payment of the determined tax liability, which could have a material adverse effect on the business, results of operations and
financial condition of the Company.
During the 2015 third quarter, Extendicare recorded a provision of $3.6 million for the full amount of taxes in dispute, including interest,
in respect of a CRA reassessment. In 2016, the Company’s notice of objection to appeal the reassessment was accepted by the CRA,
resulting in the reversal of the $3.6 million provision in the 2016 fourth quarter.
Risks Related to Financing
Debt Financing
Due to the level of real property ownership by the Company, a significant portion of the consolidated cash flow of the Company is devoted
to servicing debt, and there can be no assurance that the Company will continue to generate sufficient cash flow from operations to
meet required interest and principal payments. If the Company were unable to meet its required interest or principal payments, it could be
required to seek renegotiation of such payments or obtain equity, debt or other financing.
The Company’s unsecured subordinated convertible debentures, with an aggregate principal amount of $126.5 million and coupon rate
of 6.00% (the “2019 Debentures”), mature on September 30, 2019, and require Extendicare to either repay them in full or refinance them
through the capital markets. Management continues to closely monitor the financial markets and believes that the Company has the
full financial capacity and ability to execute a plan to complete the refinancing of the 2019 Debentures. Although management has the
confidence to complete the refinancing of the 2019 Debentures, there can be no assurance given that the Company will succeed in the
refinancing prior to their maturity.
54
Management’s Discussion and Analysis
Extendicare’s RBC Credit Facility is a demand facility in the amount of $47.3 million that is secured by 13 Class C graded LTC centres in
Ontario and is guaranteed by certain Canadian subsidiaries of the Company. As at December 31, 2017, Extendicare had letters of credit
totalling $43.8 million issued under the RBC Credit Facility, of which $39.9 million secured our defined benefit pension plan obligations. The
RBC Credit Facility has no financial covenants but contains normal and customary terms including annual re-appraisals of the centres that
could limit the maximum level of the line of credit and other restrictions on the Canadian entities making certain payments, investments,
loans and guarantees. A demand for repayment of amounts drawn on the line of credit could inhibit the flow of cash dividends by
Extendicare until alternative financing is obtained.
The Company cannot predict whether future financing will be available, what the terms of such future financing will be (including,
whether it will result in a higher cost of borrowing) or whether its existing debt agreements will allow for the timely arrangement and
implementation of such future financing. If the Company were unable to obtain additional financing or refinancing when needed or on
satisfactory terms, it could have a material adverse effect on the business, results of operations and financial condition of the Company.
Debt Covenants
The Company is in compliance with all of its financial covenants as at December 31, 2017. However, there can be no assurance that future
covenant requirements will be met. The Company’s bank lines and other debt may be affected by its ability to remain in compliance. If
the Company does not remain in compliance with its financial covenants, its ability to amend the covenants or refinance its debt may be
affected.
Interest Rates
The Company has limited the amount of debt that may be subject to changes in interest rates. All of the Company’s long-term debt is
at fixed rates, other than its constructions loans that had an aggregate balance of $29.9 million drawn as at December 31, 2017. The
Company primarily finances its senior care and living centres through fixed-rate mortgages and considers securing interest rate swap
agreements for any variable-rate debt. The variable-rate Retirement Mortgages and CIBC Term Loan aggregating $85.6 million as at
December 31, 2017, have effectively been converted to fixed rate financings with interest rate swaps over the full term. The Company
maintains risk management control systems to monitor interest rate risk attributable to its outstanding or forecasted debt obligations as
well as any offsetting hedge positions. The Company does not enter into financial instruments for trading or speculative purposes.
Risks Related to Property Ownership
Real Property Ownership
All real property investments are subject to a degree of risk. They are affected by various factors, including changes in general economic
conditions (such as the availability of long-term mortgage funds) and in local conditions (such as an oversupply of space or a reduction
in demand for real estate in the area), the attractiveness of the properties to patients and residents, competition from other available
space and various other factors. In addition, fluctuations in interest rates could have a material adverse effect on the business, results of
operations and financial condition of the Company.
Extendicare owns, or operates under finance lease arrangements whereby ownership transfers at the end of the lease term, 100% of its
senior care and living centres, excluding those centres operated under management contracts. Senior care and living centres are limited in
terms of alternative uses; therefore, their values are directly driven by the cash flow from operations. All but eight of the sixty-six properties
owned by Extendicare as at December 31, 2017, are government-funded senior care centres. The value of the real property depends, in
part, on government funding and reimbursement programs. In addition, overbuilding in any of the market areas in which the Company
owns or operates senior care and living centres could cause these centres to experience decreased occupancy or depressed margins,
which could have a material adverse effect on the business, results of operations and financial condition of the Company. Moreover,
certain significant expenditures relating to real property ownership, such as real estate taxes, maintenance costs and mortgage payments,
represent liabilities that must be met regardless of whether the property is producing any income.
Real property investments are relatively illiquid, thereby limiting the ability of the Company to vary its portfolio in a timely manner in
response to changed economic or investment conditions. By specializing in long-term care and retirement living centres, the Company is
exposed to adverse effects on these segments of the real estate market. There is a risk that the Company would not be able to sell its real
property investments or that it may realize sale proceeds below their current carrying value.
Capital Intensive Industry
The Company must commit a substantial portion of its funds to maintain and enhance its senior care and living centres and equipment
to meet regulatory standards, operate efficiently and remain competitive in its markets. During 2017, the company spent $8.8 million in
maintenance capex from continuing operations, and expects to spend in the range of $9 million to $10 million in 2018 to sustain and
upgrade its existing centres. In addition to recurring maintenance capex, the Company invests in enhancements at existing centres aimed
at earnings growth and improved profitability. These, as well as other future capital requirements, could have a material adverse effect on
the business, results of operations and financial condition of the Company.
55
Extendicare 2017 Annual Report Environmental Liabilities
As an owner of interests in real property, the Company is subject to government laws and regulations relating to environmental matters.
The Company may become liable for the costs of removal or remediation of certain hazardous, toxic, or regulated substances present at,
released on or disposed of from, its properties, regardless of whether or not the Company knew of, or was responsible for, their presence,
release or disposal. The failure to remove, remediate, or otherwise address such substances, if any, may adversely affect the ability to sell
such properties or to borrow using such properties as collateral and could potentially result in claims by public or private parties, including
by way of civil action.
Management has determined that future costs could be incurred for possible asbestos remediation of the Company’s pre-1980
constructed centres. Although asbestos is currently not a health hazard in any of these centres, appropriate remediation procedures may
be required to remove potential asbestos-containing materials, consisting primarily of floor and ceiling tiles, in connection with any major
renovation or demolition. Based upon current assumptions, the estimated fair value of the decommissioning provision related to the
asbestos remediation was approximately $11 million undiscounted, or $9.2 million discounted, as at December 31, 2017, refer to note 11 of
the audited consolidated financial statements.
In addition, environmental laws may change and the Company may become subject to more stringent environmental laws in the future.
Compliance with more stringent environmental laws, which may be more rigorously enforced, could have a material adverse effect on the
business, results of operations and financial condition of the Company.
Risks Related to Dependence on Key Personnel
The success of the Company depends, to a significant extent, on the efforts and abilities of its executive officers and other members of
management, as well as its ability to attract and retain qualified personnel to manage existing operations and future growth. Although the
Company has entered into employment agreements with certain of its key employees, it cannot be certain that any of these individuals will
not voluntarily terminate his or her employment with the Company. The loss of an executive officer or other key employee could negatively
affect the Company’s ability to develop and pursue its business strategy, which could have a material adverse effect on the business,
results of operations and financial condition of the Company.
Risks Related to Privacy of Client Information and Cyber Security
As a custodian of a large amount of personal information, including health information, relating to its clients and employees, Extendicare
is exposed to the potential loss, misuse or theft of any such information. If the Company was found to be in violation of the federal and
provincial laws protecting the confidentiality of patient health information, it could be subject to sanctions and civil or criminal penalties,
which could increase its liabilities, harm its reputation and have a material adverse effect on the business, results of operations and
financial condition of the Company. In addition, cyber attacks against large organization are increasing in sophistication and are often
focused on financial fraud, compromising sensitive data for inappropriate use or disrupting business operations. Extendicare mitigates
this risk by deploying appropriate information technology systems, including controls around logical access, physical access and data
management, and training its employees relating to safeguarding of sensitive information.
Extendicare has deployed operational technology solutions enabling process automation, electronic health record data collection and
automated business intelligence. Technology deployments also present security and privacy risks that must be managed proactively
and effectively to prevent breaches that can have an adverse impact on Extendicare’s reputation and results of operations. To counter
internet-based and internal security threats, Extendicare also deploys leading edge solutions to identify risks to its network, software and
hardware systems. Extendicare partners with leading technology security firms to mitigate identified risks and develop contingency plans.
As security threats to Extendicare’s financial, client and employee data increase and evolve, the Company adjusts and adopts new counter-
measures in an effort to ensure it maintains high privacy and security standards.
Although to date the Company has not experienced any material losses relating to cyber attacks or other information security breaches,
there can be no assurance that the Company will not incur such losses in the future. The Company’s risk and exposure to these matters
cannot be fully mitigated because of, among other things, the evolving nature of these threats. As cyber threats continue to evolve, the
Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and
remediate any security vulnerabilities.
56
Management’s Discussion and Analysis
Accounting Policies and Estimates
Critical Accounting Policies and Estimates
A full discussion of Extendicare’s critical accounting policies and estimates is provided in note 3 of the audited consolidated financial
statements for the year ended December 31, 2017, and under the heading “Future Changes in Accounting Policies” that follows this
section.
Management considers an understanding of Extendicare’s accounting policies to be essential to an understanding of its financial
statements because their application requires significant judgement and reliance on estimations of matters that are inherently uncertain,
which affect the application of the accounting policies and reported amounts. Estimates and underlying assumptions are reviewed
on an ongoing basis giving consideration to past experience and other factors that management believes are reasonable under the
circumstances. Accordingly, actual results could differ from those estimated. The estimates and assumptions, which have a significant
risk of causing a material adjustment to the carrying amount of assets and liabilities, are discussed below.
Valuation of Purchase Price Components for Acquisitions
Fair value is the price that would be received when selling an asset, or paid when transferring a liability in an orderly transaction (that is
other than in a forced or liquidation sale) between market participants at the measurement date under current market conditions. The fair
value measurement is based on the presumption that the transaction takes place either: in the principal market for the asset or liability; or
in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous
market must be accessible by the Company.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset
or liability assuming that market participants act in their economic best interests. The Company uses valuation techniques that are
appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant
observable inputs and minimizing the use of unobservable inputs. The techniques used to estimate future cash flows will vary from one
situation to another depending on the circumstances surrounding the asset or liability in question. Management assesses fair value based
on estimated discounted cash flow projections and available market information (including the historical operating results and anticipated
trends, local markets and economic conditions).
As discussed below under the heading “Valuation of Cash Generating Units and Impairment”, an impairment loss is recognized when the
carrying amount of an asset is not recoverable. The impairment loss is determined as the excess of the carrying value over its estimated
recoverable amount.
Intangible assets with indefinite lives are also required to be assessed at a minimum annually, comparing the estimated recoverable
amount to the carrying value to determine if an impairment loss is required to be recognized.
Valuation of Deferred Consideration
As part of the proceeds from the U.S. Sale Transaction, the Company was entitled to receive an ongoing cash stream for a period of 15
years relating to certain U.S. skilled nursing centres that were leased prior to the closing. The present value ascribed to these proceeds
was reflected as deferred consideration, and was recorded at amortized cost using the effective interest method. As a result of events
and discussions that transpired during 2017, the Company does not expect to receive any further amounts in respect of this deferred
consideration, and has written off the balance of US$27.9 million, resulting in a charge of $37.5 million in the 2017 second quarter, refer to
note 22 of the audited consolidated financial statements.
Valuation of Cash Generating Units and Impairment
Non-financial assets consist of property and equipment, intangible assets with finite lives, intangible assets with indefinite lives and
goodwill. Property, plant and equipment represents approximately 51% of our total assets as at December 31, 2017, and goodwill and other
intangibles represent approximately 10%. A CGU is defined to be the smallest group of assets that generates cash inflows from continuing
use that is largely independent of the cash inflows of other assets. The Company has identified each individual centre as a CGU.
Goodwill and indefinite-life intangibles are tested annually, except in the year of acquisition, and other assets are assessed for impairment
when indicators of impairment exist. If any such indication exists, then the asset’s recoverable amount is reassessed. For goodwill, and
intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated annually at
the same time or more frequently if warranted. An impairment loss is recognized in net earnings if the carrying amount of an asset or
its related CGU, or group of assets on the same basis as evaluated by management, exceeds its estimated recoverable amount. The
recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell.
57
Extendicare 2017 Annual Report The determination of recoverable amounts can be significantly impacted by estimates related to current market valuations, current and
future economic conditions in the geographical markets of each CGU, and management’s strategic plans within each of its markets.
Estimates and assumptions used in the determination of any impairment loss are based upon information that is known at the time,
along with future outlook. When impairment tests are performed, the estimated useful lives of the assets are reassessed, with any change
accounted for prospectively. Actual results can differ from these estimates, and can have either a positive or negative impact on the
estimate, and impact whether an impairment situation exists.
In 2017, we performed the impairment assessment of our Canadian operations and determined there was no impairment, compared to a
net pre-tax impairment loss of $1.7 million recognized in 2016 on goodwill for certain properties. Also during 2016, the carrying value of the
assets of the discontinued U.S. IT Hosting business was assessed for impairment based on the expected proceeds, resulting in a pre-tax
impairment loss of $9.2 million. There was no impairment of the property and equipment of our continuing operations in 2017 and 2016.
Valuation of Indemnification Provisions
As a result of the U.S. Sale Transaction, the Company has indemnified certain obligations of its former U.S. operations related to
tax, a corporate integrity agreement, and other items. As at December 31, 2017, the remaining provisions totalled $22.7 million or
US$18.0 million (2016 — $28.4 million or US$21.2 million). In addition, the Company had an indemnification receivable of $2.8 million
(2016 — $8.3 million) as at December 31, 2017. The estimates of these items are assessed every reporting period based on management’s
best estimate of the ultimate costs or recovery of such items, and any changes to the estimates are reflected as part of other expense in
the results of discontinued operations. During 2017, unfavourable changes to the indemnifications totalled $4.8 million (2016 — favourable
changes of $6.5 million), refer to note 22 of the audited consolidated financial statements. Actual results can differ materially from the
estimates made due to a number of factors including the assumptions used by management and other market forces.
Self-insured Liabilities of Discontinued Operations
The obligation to settle any U.S. self-insured general and professional liability claims relating to the period prior to the closing of the
U.S. Sale Transaction in July 2015, including claims incurred but yet to be reported, remains with Extendicare, which it intends to fund
through the Captive. The accrual for U.S. self-insured liabilities of our former U.S. operations is based on management’s best estimate
of the ultimate cost to resolve general and professional liability claims, including both known claims and claims that have been incurred
but not yet reported by the end of the reporting period. The Company estimates the value of losses that may occur within its self-insured
retention levels, based upon individual assessment of the settlement, using historical information and industry data, supported by actuarial
projections, advice from legal counsel, consultants and external risk management. Actual results can differ materially from the estimates
made due to a number of factors including the assumptions used by management and other market forces.
Management regularly evaluates and periodically engages an independent third-party actuary to provide a report to determine the
appropriateness of the carrying value of this liability. Assumptions underlying the determination of the liability are limited by the uncertainty
of predicting future events and assessments regarding expectations of several factors. Such factors include, but are not limited to: the
frequency and severity of claims, which can differ materially by jurisdiction; trends in claims along with unique and identifiable settlements;
coverage limits of third-party reinsurance; the effectiveness of the claims management process; and the outcome of litigation. Therefore,
management’s estimate of the accrual for general and professional liability claims is significantly influenced by assumptions that are
subject to judgement by management and the actuary, which may cause the expense to fluctuate significantly from one reporting period
to another. Differences between the ultimate claims costs and our historical expense for loss and actuarial assumptions and estimates
could have a material adverse effect on our business, results of operations and financial condition.
At December 31, 2017, the accrual for self-insured general and professional liabilities was $61.1 million or US$48.6 million
(2016 — $94.8 million or US$70.6 million). Investments held by the Captive to support these accruals totalled $86.3 million
(US$68.6 million) as at December 31, 2017. Changes in the level of retained risk and other significant assumptions that underlie
management’s estimates could have a material effect on the future carrying value of the self-insured liabilities. For example, a 1% variance
in the accrual for U.S. self-insured liabilities at December 31, 2017, would have impacted our net earnings from discontinued operations
by approximately $0.6 million (US$0.5 million). For further information refer to the discussion under the heading “Liquidity and Capital
Resources — Accrual for U.S. Self-Insured Liabilities”.
Tax Uncertainties
Tax uncertainties are evaluated on the basis of whether it is more likely than not that a tax position will ultimately be sustained upon
examination by the relevant taxing authorities. Tax uncertainties are measured using a probability adjusted or expected value model
whereby amounts are recorded if there is any uncertainty about a filing position, determined by multiplying the amount of the exposure
by the probability that the entity’s filing position will not be sustained. The assessment of tax uncertainties relies on estimates and
assumptions and may involve a series of judgements about future events. New information may become available that causes the
Company to change its judgement regarding the adequacy of existing tax liabilities. Such changes to tax liabilities will impact tax expense
in the period that such a determination is made.
58
Management’s Discussion and Analysis
Deferred Tax Assets and Liabilities
The Company uses the asset and liability method of accounting for deferred income taxes, which takes into account the differences
between financial statement treatment and tax treatment of certain transactions, assets and liabilities. Deferred tax assets and liabilities
are recognized to reflect the expected future tax consequences attributed to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using the substantively enacted tax rates anticipated to apply in the periods that the temporary differences are
expected to be recovered or settled. In assessing whether the deferred tax assets are realizable, management considers whether it is
probable (which the Company has defined as “more likely than not”) that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. As at December 31, 2017, the Company had recognized deferred
tax assets totalling $13.9 million (2016 — $15.3 million). Management believes that it is more likely than not that the Company will realize
the benefits of these deductible differences. In addition, as at December 31, 2017, there were capital losses available for Canadian income
tax purposes of $16.5 million (2016 — $13.8 million) that have not been tax benefited and are available indefinitely to apply against future
capital gains.
New Accounting Policies Adopted
The following new standards were adopted effective January 1, 2017, and have been applied in preparing the financial results for the
year ended December 31, 2017. These accounting standards are summarized below, and are more fully described in note 4 of the audited
consolidated financial statements.
Classification and Measurement of Share-based Payment Transactions
Amendments to IFRS 2 “Share-based Payment” address three classification and measurement issues. The Company has adopted these
amendments, which: (1) clarify measurement basis for cash-settled share-based payments such that the ultimate amount of expense
recorded is equal to the cash settlement that is paid at vesting; (2) clarify the accounting for modifications that change an award from
cash-settled to equity-settled; and (3) introduce a requirement that an equity-settled award, with a net settlement feature for withholding
tax obligations, be treated as it was wholly equity-settled. The adoption of these amendments did not have a material impact on the
Company’s consolidated financial statements.
Recognition of Deferred Tax Assets for Unrealized Losses
Amendments to IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses” clarify that the existence of a deductible temporary
difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is
not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The amendments also clarify
the methodology to determine the future taxable profits used for assessing the utilization of deductible temporary differences. In particular,
these requirements relate to the recognition of deferred tax assets for unrealized losses on debt instruments measured at fair value. The
adoption of the amendments to IAS 12 did not have any impact on the consolidated financial statements.
Future Changes in Accounting Policies
The following new standards, amendments to standards and interpretations, are effective for future annual periods, and have not been
applied in preparing the financial results for the year ended December 31, 2017. These accounting standards are summarized below, and
are more fully described in note 5 of the audited consolidated financial statements.
Revenue Recognition
In May 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers”. The new standard provides a single model and two
approaches to recognizing revenue: at a point in time or over time. IFRS 15 also includes additional disclosure requirements for revenue
accounted for under the standard. The standard applies to contracts with customers, excluding contracts within the scope of the standard
on leases. IFRS 15 becomes effective for annual periods beginning on or after January 1, 2018, and is to be applied retrospectively.
The Company has substantially completed its assessment of the potential impact of IFRS 15, and does not expect that it will have any
material impact on the amount or timing of revenue recognized in the consolidated financial statements on an annual basis. Additional
disclosure requirements may result in respect of revenue for service components of a lease versus the revenue earned under IFRS 16.
Financial Instruments
In July 2014, the IASB issued IFRS 9 “Financial Instruments” (IFRS 9), which addresses the classification, measurement (including
impairment) and recognition of financial assets and financial liabilities. The standard is effective for annual periods beginning on or after
January 1, 2018, and is to be applied retrospectively.
Under IFRS 9, financial assets are classified and measured based on the business model in which they are held and the characteristics
of their contractual cash flows which effectively measures the asset at either fair value or amortized cost. IFRS 9 replaces the current
“incurred loss” impairment model with a new “expected credit loss” model.
59
Extendicare 2017 Annual Report The standard largely retains the existing accounting requirements for financial liabilities and the accounting treatment of fair value
changes attributable to changes in an entity’s own credit risk of financial liabilities that are designated as fair value through profit and
loss (FVTPL). The Company does not currently have any financial liabilities classified as FVTPL. IFRS 9 also includes a new general hedge
accounting standard which aligns hedge accounting more closely with risk management. The Company does not currently apply hedge
accounting in its consolidated financial statements.
The Company is completing its evaluation of the impact on its financial instruments of the adoption of IFRS 9. The key areas that are in
scope of IFRS 9 include: accounts receivable, available-for-sale assets included in investments held for self-insured liabilities and related
accumulated other comprehensive income in shareholders’ equity. The Company is still in the process of finalizing its assessment of the
adoption of IFRS 9; however, it does not expect there to be any material impact relating to the classification and measurement of these
assets on its consolidated financial statements.
Leases
In January 2016, the IASB published IFRS 16 “Leases”. The new standard requires a lessee to recognize assets and liabilities for all
leases with a term of more than 12 months, unless the underlying asset is of low value, using a single model, thereby eliminating the
distinction between operating and finance leases. As a lessee, the Company will recognize new assets and liabilities for its operating
leases. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating
lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. IFRS 16 is effective for periods
beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 “Revenue from Contracts with Customers” has also been
applied. The Company does not plan to early adopt IFRS 16, and is in the process of performing its initial assessment of the potential
impact of this standard on its consolidated financial statements. The Company expects to disclose additional detailed information,
including its transition method, any practical expedients elected and estimated quantitative financial effects, prior to the adoption of
IFRS 16.
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining a system of disclosure controls and procedures (DC&P) to provide reasonable
assurance that all material information relating to the Company is gathered and reported to senior management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure.
An evaluation of the effectiveness of the DC&P was conducted as at December 31, 2017, by management under the supervision of the
Company’s CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that our disclosure controls and procedures, as defined
by National Instrument 52-109, Certification of Disclosures in Issuers’ Annual and Interim Filings, were effective as at December 31, 2017.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting (ICFR) to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial reports for external purposes in
accordance with IFRS.
Management, under the supervision of the Company’s CEO and CFO, has evaluated the effectiveness of our ICFR using the 2013
Integrated Control framework as published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, management has concluded that our ICFR were effective and that there were no material weaknesses in our ICFR as at
December 31, 2017.
In designing such controls, it should be recognized that due to inherent limitations, any controls, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect misstatements.
Additionally, management is required to use judgement in evaluating controls and procedures.
60
Management’s Discussion and Analysis
Consolidated Financial Statements
Year ended December 31, 2017
Dated: February 28, 2018
Management’s Responsibility for
Consolidated Financial Statements
Independent Auditors’ Report
Consolidated Statements of Financial Position
Consolidated Statements of Earnings
61
62
63
64
Consolidated Statements of
Comprehensive Income (Loss)
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
65
66
67
68
Management’s Responsibility for Consolidated Financial Statements
The accompanying consolidated financial statements of Extendicare Inc. (“Extendicare” or the “Company”) and other financial information
contained in this Annual Report are the responsibility of management. The consolidated financial statements have been prepared in
conformity with International Financial Reporting Standards, using management’s best estimates and judgements, where appropriate. In
the opinion of management, these consolidated financial statements reflect fairly the financial position, results of operations and cash
flows of Extendicare within reasonable limits of materiality. The financial information contained elsewhere in this Annual Report has been
reviewed to ensure consistency with that in the consolidated financial statements.
A system of internal accounting and administrative controls is maintained by management to provide reasonable assurance that assets
are safeguarded against loss from unauthorized use or disposition and that financial records are properly maintained to provide accurate
and reliable consolidated financial statements.
The board of directors of Extendicare (the “Board of Directors”) is responsible for ensuring that management fulfills its responsibilities for
financial reporting and internal controls. The Board of Directors carries out this responsibility principally through its independent Audit
Committee comprised of unrelated and outside directors. The Audit Committee meets regularly during the year to review significant
accounting and auditing matters with management and the independent auditors and to review and approve the interim and annual
consolidated financial statements of Extendicare.
The consolidated financial statements have been audited by KPMG LLP, which has full and unrestricted access to the Audit Committee.
KPMG’s report on the consolidated financial statements follows.
TIMOTHY L. LUKENDA
President and Chief Executive Officer
ELAINE E. EVERSON
Vice President and Chief Financial Officer
February 28, 2018
61
Extendicare 2017 Annual Report Independent Auditors’ Report
To the Shareholders of Extendicare Inc.
We have audited the accompanying consolidated financial statements of Extendicare Inc. (“Extendicare” or the “Company”), which
comprise the consolidated statements of financial position as at December 31, 2017, and December 31, 2016, and the consolidated
statements of earnings, comprehensive income (loss), changes in equity, and cash flows for the years then ended, and a summary of
significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and
plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of
Extendicare Inc. as at December 31, 2017, and December 31, 2016, and its consolidated financial performance and its consolidated cash
flows for the years then ended, in accordance with International Financial Reporting Standards.
Chartered Professional Accountants,
Licensed Public Accountants
Toronto, Canada
February 28, 2018
62
Consolidated Financial Statements
Consolidated Statements of Financial Position
As at December 31
(in thousands of Canadian dollars)
Assets
Current assets
Cash and short-term investments
Restricted cash
Accounts receivable
Income taxes recoverable
Other assets
Total current assets
Non-current assets
Property and equipment
Goodwill and other intangible assets
Other assets
Deferred tax assets
Total non-current assets
Total Assets
Liabilities and Equity
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Long-term debt
Provisions
Total current liabilities
Non-current liabilities
Long-term debt
Provisions
Other long-term liabilities
Deferred tax liabilities
Total non-current liabilities
Total Liabilities
Share capital
Equity portion of convertible debentures
Contributed surplus
Accumulated deficit
Accumulated other comprehensive income (loss)
Shareholders’ Equity
Total Liabilities and Equity
See accompanying notes to consolidated financial statements.
Commitments and contingencies (note 24).
Subsequent events (notes 15 and 31).
Approved by the Board
Alan D. Torrie
Chairman
Timothy L. Lukenda
President and Chief Executive Officer
notes
2017
2016
7
10
8
9
10
23
12
11
12
11
13
23
15
12
14
128,156
101,582
2,300
42,491
7,194
20,634
2,227
52,234
3,058
25,251
200,775
184,352
479,968
95,901
143,746
13,891
733,506
934,281
123,420
3,500
59,664
29,937
216,521
476,404
63,062
35,022
14,316
588,804
805,325
490,881
5,573
2,437
(365,084)
(4,851)
128,956
934,281
465,433
89,770
233,715
15,347
804,265
988,617
121,830
430
54,826
31,419
208,505
448,742
100,006
36,039
20,566
605,353
813,858
489,656
5,573
941
(322,025)
614
174,759
988,617
63
Extendicare 2017 Annual Report
Consolidated Statements of Earnings
Years ended December 31
(in thousands of Canadian dollars except for per share amounts)
notes
2017
2016
616,887
20,673
435,718
24,053
1,097,331
961,509
31,467
6,758
999,734
97,597
31,379
–
66,218
28,082
349
2,463
(864)
(3,902)
(2,474)
23,654
42,564
10,149
703
10,852
31,712
—
(29,580)
2,132
0.36
0.02
608,618
15,474
414,406
22,260
1,060,758
930,622
30,551
6,650
967,823
92,935
31,179
4,013
57,743
27,039
349
2,152
1,198
(10,838)
(985)
18,915
38,828
5,801
1,610
7,411
31,417
(8,458)
12,493
35,452
0.36
0.40
17, 29
18
19
20
20
23
22
22
21
21
CONTINUING OPERATIONS
Revenue
Long-term care
Retirement living
Home health care
Management, consulting and other
Total revenue
Operating expenses
Administrative costs
Lease costs
Total expenses
Earnings before depreciation, amortization, and other expense
Depreciation and amortization
Other expense
Earnings before net finance costs and income taxes
Interest expense
Accretion of decommissioning provisions
Other accretion
Loss (gain) on foreign exchange
Interest revenue
Fair value adjustments
Net finance costs
Earnings before income taxes
Income tax expense
Current
Deferred
Total income tax expense
Earnings from continuing operations
DISCONTINUED OPERATIONS
Loss on sale of U.S. operations, net of income taxes
Earnings (loss) from discontinued operations, net of income taxes
Net earnings
Basic and Diluted Earnings per Share
Earnings from continuing operations
Net earnings
See accompanying notes to consolidated financial statements.
64
Consolidated Financial Statements
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31
(in thousands of Canadian dollars)
Net earnings
Other comprehensive income (loss), net of income taxes
Items that will not be reclassified to profit or loss:
notes
2017
2,132
2016
35,452
Defined benefit plan actuarial gains (losses), net of tax
23, 25
(311)
2,313
Items that are or may be reclassified subsequently to profit or loss:
Unrealized gain on available-for-sale securities, net of tax
Reclassification of realized gains on available-for-sale securities to earnings,
net of tax
Foreign currency translation adjustment reclassified to gain on sale of
U. S. operations, net of tax
Other net change in foreign currency translation adjustment
Total items that are or may be reclassified subsequently to profit or loss
16, 23
Other comprehensive income (loss), net of tax
Total comprehensive income (loss)
See accompanying notes to consolidated financial statements.
4,955
5,574
(7,012)
(2,532)
—
(3,097)
(5,154)
(5,465)
(3,333)
(1,431)
(1,532)
79
2,392
37,844
65
Extendicare 2017 Annual Report Consolidated Statements of Changes in Equity
Years ended December 31
Number
of Shares
2017
Amount
Number
of Shares
2016
Amount
88,684,485
489,656
87,953,291
483,385
535,025
(696,220)
5,081
(3,856)
731,194
—
6,271
—
88,523,290
490,881
88,684,485
489,656
5,573
5,573
941
1,496
2,437
(322,025)
2,132
(42,583)
(2,599)
(9)
(365,084)
3,775
—
(3,097)
678
6,391
4,955
(7,012)
4,334
(9,552)
(311)
(9,863)
(4,851)
128,956
5,573
5,573
—
941
941
(315,051)
35,452
(42,422)
—
(4)
(322,025)
6,738
(1,431)
(1,532)
3,775
3,349
5,574
(2,532)
6,391
(11,865)
2,313
(9,552)
614
174,759
(in thousands of Canadian dollars)
Share Capital (note 15)
Balance at January 1
DRIP
Purchase of shares for cancellation
Balance at end of year
Equity Portion of Convertible Debentures
Balance at January 1
Balance at end of year
Contributed Surplus
Balance at January 1
Share-based compensation
Balance at end of year
Accumulated Deficit
Balance at January 1
Net earnings
Dividends declared
Purchase of shares for cancellation in excess of book value
Other
Balance at end of year
Accumulated Other Comprehensive Income
Foreign currency translation differences for foreign operations
Balance at January 1
Foreign currency translation adjustment reclassified to gain
on sale of U.S. operations (note 22)
Change in the year
Balance at end of year
Net change in fair value of available-for-sale financial assets,
net of tax
Balance at January 1
Unrealized change in the year
Net change reclassified to profit or loss
Balance at end of year
Defined benefit plan actuarial losses, net of tax
Balance at January 1
Change in the year
Balance at end of year
Accumulated other comprehensive income (loss)
Shareholders’ Equity
See accompanying notes to consolidated financial statements.
66
Consolidated Financial Statements
Consolidated Statements of Cash Flows
Years ended December 31
(in thousands of Canadian dollars)
Operating Activities
Net earnings
Adjustments for:
Depreciation and amortization
Share-based compensation
Deferred taxes
Current taxes
Net finance costs
Other expense (gains)
Loss (gain) on foreign exchange and fair value adjustments
Other
Net change in operating assets and liabilities
Accounts receivable
Other assets
Accounts payable and accrued liabilities
Payments for U.S. self-insured liabilities
Interest paid
Interest received
Income taxes paid
Net cash from operating activities
Investing Activities
Purchase of property, equipment and other intangible assets
Acquisitions (note 6)
Tax payments related to the U.S. Sale Transaction
Net proceeds from dispositions (note 22)
Decrease in investments held for self-insured liabilities
Decrease in other assets
Net cash from investing activities
Financing Activities
Issue of long-term debt, excluding line of credit
Repayment of long-term debt, excluding line of credit
Decrease (increase) in restricted cash
Purchase of securities for cancellation
Dividends paid
Other
Net cash from financing activities
Increase (decrease) in cash and short-term investments
Cash and short-term investments at beginning of year
Foreign exchange loss on cash held in foreign currency
Cash and short-term investments at end of year
See accompanying notes to consolidated financial statements.
2017
2016
2,132
35,452
31,379
1,496
(5,063)
8,919
26,992
36,576
(3,338)
240
99,333
9,569
4,283
(6,144)
107,041
(24,160)
(29,560)
3,932
(10,093)
47,160
(41,137)
—
—
—
41,142
5,591
5,596
43,654
(22,029)
(73)
(6,455)
(37,507)
(1,202)
(23,612)
29,144
101,582
(2,570)
128,156
32,364
941
963
14,319
18,718
(9,998)
213
—
92,972
(8,319)
14,566
(33,590)
65,629
(32,976)
(26,540)
10,835
(16,637)
311
(38,837)
(40,500)
(10,808)
9,534
37,956
25,213
(17,442)
68,855
(21,006)
4,783
—
(36,122)
(702)
15,808
(1,323)
103,622
(717)
101,582
67
Extendicare 2017 Annual Report Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts in thousands of Canadian dollars, unless otherwise noted)
1. General Information and Nature of the Business ............................................................................................................... 69
2. Basis of Preparation.............................................................................................................................................................. 69
3. Significant Accounting Policies ........................................................................................................................................... 70
4. New Accounting Policies Adopted ...................................................................................................................................... 77
5. Future Changes in Accounting Policies .............................................................................................................................. 77
6. Acquisitions ........................................................................................................................................................................... 78
7. Accounts Receivable ............................................................................................................................................................ 78
8. Property and Equipment....................................................................................................................................................... 78
9. Goodwill and Other Intangible Assets ................................................................................................................................. 79
10. Other Assets .......................................................................................................................................................................... 80
11. Provisions .............................................................................................................................................................................. 81
12. Long-term Debt ...................................................................................................................................................................... 82
13. Other Long-term Liabilities ................................................................................................................................................... 84
14. Share-based Compensation ................................................................................................................................................. 84
15. Share Capital ......................................................................................................................................................................... 86
16. Equity Reserves ..................................................................................................................................................................... 87
17. Revenue.................................................................................................................................................................................. 87
18. Expenses by Nature .............................................................................................................................................................. 88
19. Other Expense ....................................................................................................................................................................... 88
20. Foreign Exchange (Gain) Loss and Fair Value Adjustments ............................................................................................. 88
21. Earnings per Share ................................................................................................................................................................ 89
22. Discontinued Operations ...................................................................................................................................................... 89
23. Income Taxes ......................................................................................................................................................................... 91
24. Commitments and Contingencies ....................................................................................................................................... 94
25. Employee Benefits ................................................................................................................................................................ 95
26. Management of Risks and Financial Instruments ............................................................................................................. 97
27. Capital Management ........................................................................................................................................................... 103
28. Related Party Transactions ................................................................................................................................................ 104
29. Segmented Information ...................................................................................................................................................... 104
30. Significant Subsidiaries ...................................................................................................................................................... 107
31. Subsequent Event ............................................................................................................................................................... 107
68
Notes to Consolidated Financial Statements
1. General Information and Nature of the Business
The common shares (the “Common Shares”) of Extendicare Inc. (“Extendicare” or the “Company”) are listed on the Toronto Stock Exchange
(TSX) under the symbol “EXE”. Extendicare and its predecessors have been operating since 1968, providing care and services to seniors
throughout Canada. Following the sale of substantially all of its U.S. business in 2015 and the repositioning of the Company as a pure-play
Canadian services provider to the expanding senior care sector, management has successfully deployed the sale proceeds to expand and
grow the Company’s operations across the continuum of seniors’ care.
In July 2015, Extendicare completed the sale of substantially all of its U.S. business and senior care operations (the “U.S. Sale
Transaction”), the operations of which were conducted through its wholly owned U.S. subsidiary, Extendicare Health Services, Inc. and its
subsidiaries (collectively “EHSI”). In December 2016, the Company disposed of its non-strategic U.S. information technology hosting and
professional services (U.S. IT Hosting) business. The results of operations of the disposed U.S. operations are reported as discontinued
operations (note 22).
As part of its continuing operations, Extendicare retained its wholly owned Bermuda-based captive insurance company, Laurier Indemnity
Company, Ltd. (the “Captive”), which, along with third-party insurers, insured Extendicare’s U.S. general and professional liability risks up to
the date of the U.S. Sale Transaction.
References to “Extendicare”, the “Company”, “we”, “us” and “our” or similar terms refer to Extendicare Inc., either alone, or together with its
subsidiaries. The registered office of Extendicare is located at 3000 Steeles Avenue East, Suite 700, Markham, Ontario, Canada, L3R 9W2.
2. Basis of Preparation
a) Statement of Compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). These
consolidated financial statements were approved by the board of directors of Extendicare Inc. (the “Board”) on February 28, 2018.
b) Basis of Measurement
The consolidated financial statements have been prepared on the historical cost basis except for financial assets and liabilities classified
or designated as fair value through profit or loss (FVTPL) or designated as available for sale (AFS) that have been measured at fair value.
Refer to note 3 for the classification of financial assets and liabilities.
Extendicare’s consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. All
financial information presented in dollars has been rounded to the nearest thousand, unless otherwise noted.
c) Use of Estimates and Judgement
The preparation of consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the
reporting period. Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
The more subjective of such estimates are:
• valuation of purchase price components for acquisitions (note 6);
• valuation of deferred consideration (notes 10 and 26(a));
• determination of the recoverable amount of cash generating units (CGUs) subject to an impairment test (note 19);
• valuation of indemnification provisions (notes 11 and 22);
• valuation of self-insured liabilities (notes 11 and 22);
• valuation of financial assets and liabilities (note 26(b));
• valuation of share-based compensation (note 14); and
• accounting for tax uncertainties and the tax rates used for valuation of deferred taxes (note 23).
In addition, the assessment of contingencies (note 24) is subject to judgement.
The recorded amounts for such items are based on management’s best available information and are subject to assumptions and
judgement, which may change as time progresses; accordingly, actual results could differ from estimates.
69
Extendicare 2017 Annual Report 3. Significant Accounting Policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.
a) Basis of Consolidation
The consolidated financial statements include the accounts of Extendicare and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated. The financial statements of Extendicare’s subsidiaries are included within the Company’s
consolidated financial statements from the date that control commences until the date that control ceases, and are prepared for the same
reporting period as Extendicare, using consistent accounting policies.
The acquisition method of accounting is used to account for the acquisition of businesses. Consideration transferred on the acquisition is
measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed on the date of the acquisition
and transaction costs are expensed as incurred. Identified assets acquired and liabilities assumed are measured at their fair value on the
acquisition date. In determining the fair value of identifiable intangible assets acquired, values are assigned to in-place leases as described
in note 3(d). The excess of fair value of consideration given over the fair value of the identifiable net assets acquired is recorded as goodwill,
with any gain on a bargain purchase being recognized in net earnings on the acquisition date.
b) Foreign Currency
Foreign Operations
The assets and liabilities of foreign operations are translated at exchange rates at the reporting date. The income and expenses of foreign
operations are translated at average rates of exchange for the period. The resulting translation adjustments are included in accumulated
other comprehensive income (AOCI) in shareholders’ equity. When a foreign operation is disposed of, the relevant amount in the cumulative
amount of foreign currency translation differences is transferred to net earnings as part of the profit or loss on disposal. Foreign exchange
gains and losses related to intercompany loans that are, in substance, part of the net investment in a foreign operation are included in
AOCI. Foreign exchange gains and losses on intercompany loans with planned or foreseeable settlement are included in net finance costs
within net earnings.
Foreign Currency Transactions
Transactions in foreign currencies are translated at exchange rates at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Non-
monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated at the exchange rate at
the date that the fair value was determined. Foreign currency differences arising on retranslation are recognized in net earnings, except for
differences arising on the retranslation of available-for-sale equity instruments, which are recognized in other comprehensive income (OCI).
Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the
transaction. Foreign exchange gains and losses are included in net finance costs within net earnings.
c) Cash and Short-term Investments
Cash and short-term investments include unrestricted cash and short-term investments less bank overdraft and outstanding cheques.
Short-term investments, comprised of money market instruments, have a maturity of 90 days or less from their date of purchase.
d) Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition or development of the asset. Property and equipment acquired
as a result of a business combination are valued as outlined in note 3(a). Centres that are constructed or that are in progress include all
incurred expenditures for the development and other direct costs related to the acquisition of land, development and construction of the
centres, including borrowing costs of assets meeting certain criteria that are capitalized until the centre is completed for its intended use.
Refer to note 3(h) for the accounting policy for the determination of impairment losses.
Property and equipment are classified into components when parts of an item have different useful lives. The cost of replacing
a component of an item is recognized in the carrying amount of the item if there is a future economic benefit and its cost can be
measured reliably. Any undepreciated carrying value of the assets being replaced will be derecognized and charged to net earnings upon
replacement. The costs of the day-to-day maintenance of property and equipment are recognized in net earnings as incurred.
Depreciation and amortization are computed on a straight-line basis based on the useful lives of each component of property and
equipment. Depreciation of nursing centres under construction commences in the month after the centre is available for its intended use
based upon the useful life of the asset, as outlined in the following table. The depreciation methods, useful lives and residual values are
reviewed at least annually, and adjusted if appropriate.
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Notes to Consolidated Financial Statements
The Company acquires in-place leases in connection with the acquisitions of operating retirement communities. These assets are stated
at the amounts determined upon acquisition and are amortized on a straight-line basis, based upon a review of the residents’ average
length of stay. In-place leases are a component of building, and are generally depreciated over a three-year period.
Land improvements
Buildings:
Building components:
Structure and sprinklers systems
Roof, windows and elevators
HVAC and building systems
Flooring and interior upgrades
In-place leases
Building improvements and extensions
Furniture and equipment:
Furniture and equipment
Computer equipment
Leasehold improvements
10 to 25 years
50 years
25 years
15 to 25 years
5 to 15 years
1 to 3 years
5 to 30 years
5 to 15 years
3 to 5 years
Term of the lease and renewal that is reasonably certain to be exercised
e) Government Grants
Government grants are recognized depending on the purpose and form of the payment from the government.
Forgivable loans issued by the government are accounted for as government grants if there is reasonable assurance the Company will
meet the terms for forgiveness of the loan. Forgivable loans granted by a provincial or health authority body for the construction of a senior
care centre, where the grants are received throughout the duration of the construction project, are netted with the cost of property and
equipment to which they relate when such payments are received.
Capital funding payments for the development of a senior care centre that are received from a provincial body subsequent to construction
over extended periods of time are present valued and are recorded as notes, mortgages and amounts receivable included in other assets,
with an offset to the cost of property and equipment upon inception; as these grants are received over time, the accretion of the receivable
is recognized in interest revenue as part of net finance costs within net earnings.
f) Leases
Leases are classified as either finance or operating leases. Leases that transfer substantially all of the benefits and risks of ownership
of property to the lessee, or otherwise meet the criteria for capitalizing a lease under IFRS, are accounted for as a finance lease; all other
leases are classified as operating leases.
When the Company is the Lessee
Leased assets that are classified as finance leases are presented according to their nature and are measured at amounts equal to the
lower of their fair value and the present value of the minimum lease payments. The corresponding liability due to the lessor is presented
as a finance lease obligation as part of the long-term debt. Property and equipment recognized as finance leases are depreciated on a
consistent basis with owned property and equipment.
Rental payments under operating leases are expensed as incurred. Operating leases with defined scheduled rent increases are recognized
on a straight-line basis over the lease term. Lease incentives received as an inducement to enter into operating leases are initially
recognized as a liability, and are recorded as a reduction of rental expense on a straight-line basis over the term of the lease.
When the Company is the Lessor
Amounts due from lessees under finance leases are recorded as receivables at the amount of the Company’s net investment in the leases.
The interest element of the lease payment is recognized over the term of the lease based on the effective interest method and is included
in financing costs. The Company is not currently the lessor under any finance leases.
g) Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess amount of consideration given over the fair value of the underlying net assets acquired in a business
combination, and is measured at cost less accumulated impairment losses. Goodwill is not amortized, but is tested for impairment on an
annual basis or more frequently if there are indicators that goodwill may be impaired, see note 3(h).
Other Intangible Assets
Other intangible assets that are acquired are recorded at fair value determined upon acquisition, and if the assets have finite useful lives
are measured at cost less accumulated amortization and accumulated impairment losses (refer to note 3(h)). Intangible assets with finite
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Extendicare 2017 Annual Report
lives are amortized based on cost. Subsequent expenditures are capitalized only if a future benefit exists. All other expenditures, including
expenditures on internally generated goodwill, are recognized in net earnings as incurred.
Intangible assets with indefinite useful lives are measured at cost without amortization, and are subject to impairment tests (refer to note 3(h)).
Customer relationships acquired in connection with the purchase of a Canadian home health care business represent the intangible asset
underlying the various contracts in the business. These assets are being amortized over the estimated useful lives over 15 years.
Non-compete agreements acquired through acquisitions are amortized on a straight-line basis over the period until the agreement expires.
Computer software is amortized over five to seven years and internally developed software over a three-year period.
Amortization methods and useful lives are reviewed at least annually, and are adjusted when appropriate.
Impairment
h)
Impairment of financial and non-financial assets is assessed on a regular basis. All impairment losses are charged to loss (gain) from
asset impairment, disposals and other items as part of earnings before net finance costs and income taxes.
Non-financial Assets
Non-financial assets consist of property and equipment, intangible assets with finite lives, intangible assets with indefinite lives and goodwill.
The carrying amounts of non-financial assets are reviewed at each reporting date to determine whether there is any indication of
impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have
indefinite useful lives or those that are not yet available for use, the recoverable amount is estimated annually at the same time or more
frequently if warranted. An impairment loss is recognized in net earnings if the carrying amount of an asset or its related CGU, or group of
assets on the same basis as evaluated by management, exceeds its estimated recoverable amount. A CGU is defined to be the smallest
group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets. The
Company has identified each individual centre as a CGU.
The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell. In assessing value
in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset or CGU. Goodwill and indefinite life intangible assets are
allocated to their respective CGUs for the purpose of impairment testing. Indefinite life intangible assets and corporate assets that do not
generate separate cash flows and are utilized by more than one CGU, are allocated to each CGU for the purpose of impairment testing and
are not tested for impairment separately.
Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU
and then to reduce the carrying amounts of the assets in the CGU on a pro rata basis. Impairment losses on goodwill cannot be reversed. In
respect of other non-financial assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications
that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Financial Assets
A financial asset (note 3(m)) is any asset that consists of: cash; a contractual right to receive cash or another financial asset, or exchange
financial assets or financial liabilities under potentially favourable conditions; an equity instrument of another entity; or certain contracts
that will or may be settled in the Company’s own equity instruments.
Financial assets are reviewed at each reporting date and are deemed to be impaired when objective evidence resulting from one or more
events subsequent to the initial recognition of the asset indicates the estimated future cash flows of the asset has been negatively
impacted. For assets carried at amortized cost or cost and debt securities, the criteria of this assessment includes significant financial
difficulty of the issuer or obligor, the disappearance of an active market for that financial asset because of financial difficulties, or
observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since
the initial recognition of those assets. For equity investments classified as available for sale, a significant or prolonged decline in the fair
value of the security below its cost is also objective evidence that the assets are impaired.
For assets carried at amortized cost or cost, the amount of the impairment loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate, and will be
recognized in net earnings. Impairment losses can be reversed to the extent it was previously recognized in net earnings.
For assets classified as available for sale, the cumulative impairment loss is the difference between the asset carrying amount and the fair
value plus any losses accumulated in the OCI. Impairment losses on equity instruments cannot be reversed through net earnings, whereas
impairment losses on debt instruments can be reversed to the extent they were previously recognized in net earnings.
72
Notes to Consolidated Financial Statements
i) Employee Benefits
Defined Benefit Plans
Defined benefit plans are post-employment plans with a defined obligation to employees in return for the services rendered during the term
of their employment with the Company. The net obligation of these plans is calculated separately for each plan by estimating the present
value of future benefit that employees have earned in return for their service in the current and prior periods. Any unrecognized past service
costs and the fair value of any plan assets are deducted. The discount rate used in deriving the present value is the yield at the reporting
date on AA credit-rated corporate bonds that have maturity dates approximating the Company’s obligations and are denominated in the
same currency in which the benefits are expected to be paid.
The calculation of the future benefit of the plan is performed annually by a qualified actuary using the projected unit credit method. When
the calculation results in a benefit to the plan, the recognized asset is limited to the total of any unrecognized past service costs and the
present value of economic benefits available in the form of reductions in future contributions to the plan.
All actuarial gains and losses arising from defined benefit plans are recognized in OCI during the period in which they are incurred.
Defined Contribution Plans
The Company has corporate specific and multi-employer defined benefit pension plans, as well as deferred compensation plans. Multi-
employer defined benefit pension plans are accounted for as defined contribution plans as the liability per employer is not available.
Deferred compensation plans are also accounted for as defined contribution plans. Defined contribution plans are post-employment plans
where the costs are fixed and there are no legal or constructive obligations to pay further amounts. Obligations for such contributions are
recognized as employee benefit expense in net earnings during the periods in which services are rendered by employees.
Short-term Employee Benefits
The Company has vacation, paid sick leave and short-term disability plans along with other health, drug and welfare plans for its employees.
These employee benefit obligations are measured on an undiscounted basis and are expensed as the related services are rendered.
j) Share-Based Compensation
Cash-settled Share Appreciation Rights Plan
Awards under the Company’s share appreciation rights plan (the “SARP”) have a three-year vesting period. Until the liability is settled, the
Company reports the liability on a pro rata basis at fair value at each reporting date. The fair value of the share appreciation right (SAR)
is determined by using an option pricing model based on the remaining vesting term and the amount by which the “Fair Market Value” of
a Common Share of Extendicare exceeds the grant price, plus “Accrued Distributions”. “Fair Market Value” of a Common Share, on any
particular date, means the volume-weighted average trading price of the Common Share on the TSX for the 10 trading days immediately
preceding such date. “Accrued Distributions” means the product of the aggregate amount of cash distributions per Common Share
declared payable to holders of record during the term of the SAR and the probability of the award being in the money at the end of the
vesting period. Changes in fair value are recognized in net earnings in the period during which these are incurred.
Equity-settled Long-term Incentive Plan
Awards for deferred share units (DSUs) and performance share units (PSUs) are a share-based component of executive and director
compensation, which are accounted for based on the intended form of settlement. Under a long-term incentive plan (LTIP) (note 14),
the Board has the discretion to settle the DSU and PSU awards in cash, market-purchased Common Shares, or Common Shares issued
from treasury. Based on the Board’s intention to settle the awards in Common Shares issued from treasury, the PSU and DSU awards
are accounted for as equity-settled awards. Settlement of the DSUs and PSUs will be net of any applicable taxes and other source
deductions required to be withheld by the Company, which amounts are anticipated to approximate 50% of the fair value of the award on
the redemption date. The compensation expense for these equity-settled awards is prorated over the vesting or performance period, with a
corresponding increase to contributed surplus. The fair value of each award is measured at the grant date. Forfeitures are estimated at the
grant date and are revised to reflect changes in expected or actual forfeitures. In addition, PSU and DSU participants will be credited with
dividend equivalents in the form of additional units when dividends are paid on Common Shares in the ordinary course of business.
k) Provisions
A provision is recognized when there is a present legal or constructive obligation as a result of a past event, it is probable that an outflow
of economic benefits will be required to settle the obligation, and that obligation can be measured reliably. If the effect of the time value of
money is material, provisions are discounted using a current pre-tax rate that reflects the current market assessments of the time value
of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as accretion and
recognized as part of net finance costs. Provisions are reviewed on a regular basis and adjusted to reflect management’s best current
estimates. Due to the judgemental nature of these items, future settlements may differ from amounts recognized. Provisions comprise
estimated self-insured liabilities, decommissioning provisions and other legal claims and obligations.
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Extendicare 2017 Annual Report Self-insured Liabilities
Prior to the U.S. Sale Transaction, Extendicare self-insured certain risks related to general and professional liability. As a result of the U.S.
Sale Transaction (note 22), the Company no longer self-insures, but retained the associated obligation relating to the self-insured liabilities.
The accrual for self-insured liabilities includes the estimated costs of both reported claims and claims incurred but not yet reported. The
provision for self-insured liabilities is based on estimates of loss based upon assumptions made by management supported by actuarial
projections and the advice of external risk management and legal counsel. The accrual for self-insured liabilities is discounted based on
the projected timing of future payment obligations.
Decommissioning Provisions
Management has determined that future costs could be incurred for possible asbestos remediation of the Company’s pre-1980
constructed centres. Although asbestos is currently not a health hazard in any of these centres, appropriate remediation procedures may
be required to remove potential asbestos-containing materials, consisting primarily of floor and ceiling tiles, in connection with any major
renovation or demolition.
The fair value of the decommissioning provision related to asbestos remediation is estimated by computing the present value of the
estimated future costs of remediation based on estimated expected dates of remediation. The computation is based on a number of
assumptions, which may vary in the future depending upon the availability of new information, changes in technology and in costs of
remediation, and other factors.
Indemnification Provisions
Indemnification provisions include management’s best estimate of amounts required to indemnify for obligations related to tax, a
corporate integrity agreement (CIA), and other items, resulting from the U.S. Sale Transaction.
Other Provisions
Other provisions include legal claims that meet the above definition of a provision, along with employee termination payments. Provisions
are not recognized for future operating losses.
l) Fair Value Measurement
Extendicare measures certain financial instruments at fair value at each balance sheet date. Fair value is 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 under current
market conditions. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability
takes place either: in the principal market for the asset or liability; or in the absence of a principal market, in the most advantageous market
for the asset or liability.
The principal or the most advantageous market must be accessible by the Company. The fair value of an asset or a liability is measured
using the assumptions that market participants would use when pricing the asset or liability assuming that market participants act in their
economic best interests.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure
fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the
following fair value hierarchy:
Level 1 – quoted (unadjusted) market prices in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly
(as prices) or indirectly (derived from prices); or
Level 3 – unobservable inputs such as inputs for the asset or liability that are not based on observable market data.
Each type of fair value is categorized based on the lowest level input that is significant to the fair value measurement in its entirety,
categorization of which is re-assessed at the end of each reporting period. For the purpose of fair value disclosures, the Company has
determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the
fair value hierarchy as explained above.
m) Financial Instruments
Financial Assets and Liabilities
Extendicare classifies financial assets and liabilities according to their characteristics and the related management’s intention for use
on an ongoing basis. Financial assets and liabilities are classified into one of the following five classifications: held-to-maturity financial
assets, loans and receivables, financial assets at fair value through profit and loss (FVTPL), assets held for sale (AFS) and financial
liabilities that are designated as FVTPL and other financial liabilities. Below is a description of the valuation methodology.
74
Notes to Consolidated Financial Statements
Held-to-maturity Financial Assets
Held-to-maturity financial assets are those that the Company has the positive intent and ability to hold to maturity. Held-to-maturity
financial assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition,
held-to-maturity financial assets are measured at amortized cost using the effective interest method, less any impairment losses. Any
sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in
the reclassification of all held-to-maturity investments as available-for-sale investments, and prevent the Company from classifying
investment securities as held to maturity for the current and the following two financial years. We currently do not have any financial
assets designated as held to maturity.
Loans and Receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are
recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are
measured at amortized cost using the effective interest method, less any impairment losses.
Financial Assets at Fair Value Through Profit and Loss
Assets classified as FVTPL are financial assets that are acquired for the purpose of selling in the short term. These assets are initially
recognized and subsequently carried at fair value with changes recorded in net earnings and all transaction costs are expensed as
incurred. We currently do not have any financial assets classified as FVTPL.
Assets Held For Sale
AFS financial assets are assets that are not classified in any of the previous categories or are designated as such by management.
These assets are initially recognized at fair value plus transaction costs, and subsequently carried at fair value with changes, except for
impairment losses, recorded in OCI until the assets are derecognized through sale or impairment, at which time the cumulative gain or
loss previously recognized in AOCI is recognized in net earnings. Interest calculated using the effective interest method on available-for-
sale financial assets is recognized in net earnings. Dividends on available-for-sale equity instruments are recognized in net earnings when
Extendicare’s right to receive payment is established.
Financial Liabilities
Financial liabilities include liabilities that are designated as FVTPL and other financial liabilities, both of which are liabilities incurred or
assumed in the conduct of business or specific transactions. All financial liabilities are initially measured at fair value less cost for those
at amortized cost. Financial liabilities that are designated as FVTPL are subsequently measured at fair value with changes recognized
in net earnings as part of finance costs, whereas those that are designated as other financial liabilities are subsequently measured at
amortized cost.
The Company previously had convertible debentures that could be converted to Common Shares at the option of the holder and the
number of Common Shares to be issued did not vary with changes in fair value. Convertible debentures that were issued prior to the
Company being converted from an income trust effective July 1, 2012, were designated as financial liabilities valued at FVTPL, whereas
those issued subsequently had the debt and equity components bifurcated with the debt component classified as other financial liabilities
and the component attributable to the conversion option classified as equity. We currently do not have any financial liabilities valued
at FVTPL.
Summary of Financial Instruments and Classification
All of the Company’s financial instruments are classified as loans and receivables, AFS, other financial liabilities or financial liabilities
valued at FVTPL.
Below is a classification summary of the Company’s financial instruments:
Cash and short-term investments
Total receivables
Notes, mortgages and amounts receivable
Investments held for self-insured liabilities
Interest rate swaps
Accounts payable and accrued liabilities
Long-term debt
Classification
Loans and receivables
Loans and receivables
Loans and receivables
AFS
FVTPL
Other financial liabilities
Other financial liabilities
Measurement
Amortized cost
Amortized cost
Amortized cost
Fair value
Fair value
Amortized cost
Amortized cost
Derivative Financial Instruments
Derivative financial instruments are used to manage risks from fluctuations in exchange rates and interest rates. All derivative instruments,
including embedded derivatives that must be separately accounted for, are valued at their respective fair values in the consolidated
financial statements unless they are effective cash-flow hedging instruments.
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Extendicare 2017 Annual Report On the date a derivative contract is entered into, it must be assessed whether to designate the derivative (or non-derivative) as either
a hedge of the fair value of a recognized asset or liability (a “fair-value hedge”) or a hedge of the variability of cash flows to be received
or paid related to a recognized asset or liability or a forecasted transaction (a “cash-flow hedge”) or as a hedge of a net investment in a
foreign operation. At the inception of any hedge and on an ongoing basis, we assess whether the derivatives that are used in the hedging
transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items. We currently do not have any fair-
value, cash-flow or net investment hedges.
n) Revenue
In Canada, fees charged by Extendicare for its nursing centres and home health care services are regulated by provincial authorities,
and provincial programs fund a substantial portion of these fees. Revenue is recorded in the period in which services and products are
provided.
Retirement living revenue in Canada is primarily derived from private-pay residents and is recognized in the period in which the services are
provided and at rates established by the Company based upon the services provided and market conditions in the area of operation.
Extendicare also offers management, consulting, group purchasing, accounting and administrative services to third parties in Canada.
Revenue is recorded in the period in which services are provided.
In the United States, Extendicare offered information technology services to smaller long-term and post-acute health care providers
through its U.S. IT Hosting business prior to its sale at the end of 2016. This revenue source was primarily derived from application hosting,
customer support, telecommunications, equipment sales and consulting services, and was recognized as these services were provided
and equipment was delivered to our customers.
o) Finance Costs and Finance Income
Finance costs include: interest expense on long-term debt; accretion of the discount on provisions, decommissioning provisions and
convertible debentures; losses on the change in fair value of financial liabilities designated as FVTPL (refer to note 3(m)); and losses in
foreign exchange on non-Canadian based financial assets.
Finance income includes interest income on funds invested, gains on the change in fair value of financial liabilities designated as FVTPL,
accretion on deferred consideration and gains/losses in foreign exchange on non-Canadian based financial assets.
Income Taxes
p)
Extendicare and its subsidiaries are subject to income taxes as imposed by the jurisdictions in which they operate, in accordance with the
relevant tax laws of such jurisdictions. The provision for income taxes for the period comprises current and deferred income tax.
Current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the
jurisdictions in which we operate. Deferred income tax is calculated using tax rates anticipated to apply in the periods that the temporary
differences are expected to reverse.
The income tax rates used to measure deferred tax assets and liabilities are those rates enacted or substantially enacted at the reporting
date, and are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences
can be utilized. For the convertible debentures that were designated as financial liabilities valued at FVTPL (note 3(o)), a deferred tax asset
was not recorded should the fair value of the convertible debentures be in excess of the principal balance of the convertible debentures.
Current and deferred income tax assets and liabilities are offset when there is a legally enforceable right of offset; and the income taxes
are levied by the same taxation authority on either the same taxable entity or different taxable entities, which intend either to settle current
tax liabilities and assets on a net basis or to realize the assets and settle the liabilities simultaneously, for each future period in which
significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
In assessing whether the deferred tax assets are realizable, management considers whether it is probable (which the Company has
defined as “more likely than not”) that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment.
Tax uncertainties are evaluated on the basis of whether it is more likely than not that a tax position will ultimately be sustained upon
examination by the relevant taxing authorities. Tax uncertainties are measured using a probability adjusted or expected value model
whereby amounts are recorded if there is any uncertainty about a filing position, determined by multiplying the amount of the exposure
by the probability that the entity’s filing position will not be sustained. The assessment of tax uncertainties relies on estimates and
assumptions and may involve a series of judgements about future events. New information may become available that causes the
Company to change its judgement regarding the adequacy of existing tax liabilities. Such changes to tax liabilities will impact tax expense
in the period that such a determination is made.
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Notes to Consolidated Financial Statements
q) Discontinued Operations
A discontinued operation is a component of the Company’s business that represents a separate major line of business or geographical
area of operations that has been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or
earlier, if the operation meets the criteria to be classified as held for sale. When an operation is classified as a discontinued operation, the
comparative statements of earnings and cash flow information is re-presented as if the operation had been discontinued from the start
of the comparative period. The U.S. business and senior care operations that were sold on July 1, 2015, as well as the U.S. IT Hosting
operations that were sold on December 22, 2016, were classified as discontinued operations.
4. New Accounting Policies Adopted
Effective January 1, 2017, Extendicare adopted two new accounting amendments issued by the IASB: IFRS 2 “Share-based Payment”, and
IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses”, both of which are summarized below.
Classification and Measurement of Share-based Payment Transactions
Amendments to IFRS 2 “Share-based Payment” address three classification and measurement issues. The Company has adopted these
amendments, which: (1) clarify measurement basis for cash-settled share-based payments such that the ultimate amount of expense
recorded is equal to the cash settlement that is paid at vesting; (2) clarify the accounting for modifications that change an award from
cash-settled to equity-settled; and (3) introduce a requirement that an equity-settled award, with a net settlement feature for withholding
tax obligations, be treated as if it was wholly equity-settled. The adoption of these amendments did not have a material impact on the
consolidated financial statements.
Recognition of Deferred Tax Assets for Unrealized Losses
Amendments to IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses” clarify that the existence of a deductible temporary
difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is
not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The amendments also clarify
the methodology to determine the future taxable profits used for assessing the utilization of deductible temporary differences. In particular,
these requirements relate to the recognition of deferred tax assets for unrealized losses on debt instruments measured at fair value. The
adoption of the amendments to IAS 12 did not have any impact on the consolidated financial statements.
5. Future Changes in Accounting Policies
The following new standards, amendments to standards and interpretations are effective for future annual periods, and have not been
applied in preparing the financial results for the year ended December 31, 2017.
Revenue Recognition
In May 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers”. The new standard provides a single model and two
approaches to recognizing revenue: at a point in time or over time. IFRS 15 also includes additional disclosure requirements for revenue
accounted for under the standard. The standard applies to contracts with customers, excluding contracts within the scope of the standard
on leases. IFRS 15 becomes effective for annual periods beginning on or after January 1, 2018, and is to be applied retrospectively.
The Company has substantially completed its assessment of the potential impact of IFRS 15 and does not expect it will have any material
impact on the amount or timing of revenue recognized in the consolidated financial statements on an annual basis. Additional disclosure
requirements may result in respect of revenue for service components of a lease versus the revenue earned under IFRS 16.
Financial Instruments
On July 24, 2014, an amendment to IFRS 9 “Financial Instruments” (IFRS 9) was issued, which addresses the classification, measurement
(including impairment) and recognition of financial assets and financial liabilities. The standard is effective for annual periods beginning on
or after January 1, 2018, and is to be applied retrospectively.
Under IFRS 9, financial assets are classified and measured based on the business model in which they are held and the characteristics
of their contractual cash flows which effectively measures the asset at either fair value or amortized cost. IFRS 9 replaces the current
“incurred loss” impairment model with a new “expected credit loss” model.
The standard largely retains the existing accounting requirements for financial liabilities and the accounting treatment of fair value
changes attributable to changes in an entity’s own credit risk of financial liabilities that are designated as FVTPL. The Company does not
currently have any financial liabilities classified as FVTPL. IFRS 9 also includes a new general hedge accounting standard which aligns
hedge accounting more closely with risk management. The Company does not currently apply hedge accounting in its consolidated
financial statements.
77
Extendicare 2017 Annual Report The Company is completing its evaluation of the impact on its financial instruments of adoption of this standard. The key areas that are in
scope of IFRS 9 include: accounts receivable, available-for-sale assets included in investments held for self-insured liabilities and related
accumulated other comprehensive income in shareholders’ equity. The Company is still in the process of finalizing its assessment of the
adoption of IFRS 9; however, it does not expect that there will be any material impact relating to the classification or measurement of these
assets on its consolidated financial statements.
Leases
On January 13, 2016, the IASB published IFRS 16 “Leases”. The new standard requires a lessee to recognize assets and liabilities for all
leases with a term of more than 12 months, unless the underlying asset is of low value, using a single model, thereby eliminating the
distinction between operating and finance leases. As a lessee, the Company will recognize new assets and liabilities for its operating
leases. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating
lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. IFRS 16 is effective for periods
beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 “Revenue from Contracts with Customers” has also been
applied. The Company does not plan to early adopt IFRS 16, and is in the process of performing its initial assessment of the potential
impact of this standard on its consolidated financial statements. The Company expects to disclose additional detailed information,
including its transition method, any practical expedients elected and estimated quantitative financial effects, prior to the adoption of
IFRS 16.
6. Acquisitions
During the 2015 fourth quarter and 2016 first quarter, the Company completed acquisitions of six retirement communities, all of which
are accounted for as business combinations. The purchase price allocations for all these acquisitions were finalized in 2016. These
six retirement communities contributed revenue and net operating income of $19.1 million, and $3.0 million, respectively, for the year
ended December 31, 2017, and revenue and net operating income of $15.5 million, and $1.0 million, respectively, for the year ended
December 31, 2016.
7. Accounts Receivable
Trade receivables
Retroactive rate accruals
Other receivables
Accounts receivable – net of allowance (note 26(a))
8. Property and Equipment
2017
33,466
–
9,025
42,491
Cost or Deemed Cost
January 1, 2016
Additions
Acquisitions (note 6)
Government funding subsidy (note 10)
Disposals
Write-off of fully-depreciated assets
Transfers
Effect of movements in exchange rates
December 31, 2016
Additions
Write-off of fully-depreciated assets
Transfers
December 31, 2017
Land & Land
Improvements
Buildings
Furniture &
Equipment
Leasehold
Improvements
Construction
in Progress
45,345
478,238
82,699
309
2,000
–
(279)
(98)
1,305
(7)
3,254
32,500
3,105
(7,314)
(4,037)
13,416
(190)
48,575
518,972
185
(180)
2,548
3,228
(4,487)
26,797
6,339
1,500
–
(20,172)
(7,380)
1,112
(467)
63,631
3,654
(4,834)
2,637
51,128
544,510
65,088
2,186
113
–
–
(187)
(152)
437
(2)
2,395
108
(124)
(42)
2,337
15,906
29,607
–
–
–
–
(16,177)
–
29,336
34,634
–
(32,176)
31,794
78
Notes to Consolidated Financial Statements
2016
40,832
585
10,817
52,234
Total
624,374
39,622
36,000
3,105
(27,952)
(11,667)
93
(666)
662,909
41,809
(9,625)
(236)
694,857
Accumulated Depreciation
January 1, 2016
Additions
Disposals
Write-off of fully-depreciated assets
Effect of movements in exchange rates
December 31, 2016
Additions
Write-off of fully-depreciated assets
Transfers
December 31, 2017
Carrying amounts
At December 31, 2016
At December 31, 2017
Land & Land
Improvements
Buildings
Furniture &
Equipment
Leasehold
Improvements
Construction
in Progress
3,307
524
–
(98)
–
149,247
19,759
(2,337)
(4,037)
(53)
3,733
162,579
543
(180)
–
19,890
(4,487)
(54)
44,457
7,145
(14,200)
(7,380)
(294)
29,728
6,102
(4,834)
17
4,096
177,928
31,013
1,172
454
(37)
(152)
(1)
1,436
485
(124)
55
1,852
–
–
–
–
–
–
–
–
–
–
Total
198,183
27,882
(16,574)
(11,667)
(348)
197,476
27,020
(9,625)
18
214,889
44,842
47,032
356,393
366,582
33,903
34,075
959
485
29,336
31,794
465,433
479,968
The cost of assets included in property and equipment under finance leases was $81.5 million (2016 – $82.7 million) with accumulated
depreciation of $30.3 million (2016 – $28.9 million) (note 12).
During 2017, the Company capitalized $1.2 million of borrowing costs related to development projects under construction at an
average capitalization rate of 5.3% (2016 – $1.0 million at 6.0%). Building additions included $0.7 million related to a change in the
decommissioning provisions (note 11).
9. Goodwill and Other Intangible Assets
Goodwill
Balance at beginning of year
Impairment (note 19)
Disposal
Effect of movements in exchange rates
Balance at end of year
Other Intangible Assets
Gross carrying value at beginning of year
Additions
Write-off of fully amortized assets
Disposals
Effect of movements in exchange rates
Gross carrying value at end of year
Accumulated amortization at beginning of year
Amortization
Write-off of fully amortized assets
Disposal
Effect of movements in exchange rates
Accumulated amortization at end of year
Net carrying value
Goodwill and other intangible assets
2017
2016
51,675
–
–
–
53,381
(1,672)
(33)
(1)
51,675
51,675
46,000
10,490
(35)
–
–
56,455
7,905
4,359
(35)
–
–
12,229
44,226
95,901
48,724
194
(98)
(2,752)
(68)
46,000
5,751
4,482
(98)
(2,179)
(51)
7,905
38,095
89,770
79
Extendicare 2017 Annual Report 10. Other Assets
Investments held for self-insured liabilities
Amounts receivable and other assets
Deferred consideration
Interest rate swaps (note 12)
less: current portion
2017
86,296
74,625
–
3,459
164,380
20,634
143,746
2016
136,109
84,443
37,429
985
258,966
25,251
233,715
Investments Held for Self-insured Liabilities
Extendicare holds investments within the Captive for self-insured liabilities that are subject to insurance regulatory requirements (note 11).
The investment portfolio comprises U.S. dollar-denominated cash and money market funds of $75.1 million (2016 – $112.4 million), and
investment-grade corporate and government securities of $11.2 million (2016 – $23.7 million). Certain of these investments in the amount
of $45.4 million (US$36.1 million) (2016 – $83.8 million or US$62.4 million), have been pledged as collateral for letters of credit issued by
the banker of the Captive in favour of ceding companies. The decline in the investment portfolio included the transfer of US$16.0 million
in 2017 to the Company for general corporate use. As at December 31, 2017, all investments were categorized as available for sale and
carried at fair value.
Amounts Receivable and Other Assets
Amounts receivable and other assets include discounted amounts receivable due from the government of Ontario with respect
to construction funding subsidies for long-term care centres, totalling $58.5 million (2016 – $63.5 million) of which $5.2 million
(2016 – $4.9 million) is current. These subsidies represent funding for a portion of long-term care centre construction costs over a 20-year
or 25-year period. The weighted average remaining term of this funding is 15 years.
In the 2016 first quarter, the Company received an additional subsidy in connection with two centres and recorded the present value of
the additional funding totalling $6.4 million. The construction funding subsidies have been discounted at rates ranging from 3.27% to
6.5%, with the values being recorded as a reduction in the cost of the property and equipment related to the centres. The accretion of the
note receivable is recognized in interest revenue as part of net finance costs.
Also included in amounts receivable and other assets is a $2.8 million receivable as at December 31, 2017 (2016 – $8.3 million), resulting
from the U.S. Sale Transaction (note 22), as well as prepaid expenses and deposits.
Deferred Consideration
As part of the proceeds from the U.S. Sale Transaction, the Company was entitled to receive an ongoing cash stream for a period of
15 years relating to certain U.S. skilled nursing centres that were leased prior to the closing (the “Leased Centres”). The present value
ascribed to these proceeds was reflected as deferred consideration, and was recorded at amortized cost using the effective interest
method. Subsequent to the 2017 second quarter, the Company received notice that the operator of the Leased Centres had failed to make
its required minimum lease payments. As a result of this event and related discussions, the Company does not expect to receive any
further amounts and has written off the balance of the deferred consideration of US$27.9 million, resulting in a charge of $37.5 million in
the second quarter (note 22).
80
Notes to Consolidated Financial Statements
11. Provisions
January 1, 2016
Provisions recorded (released)
Provisions used
Accretion
Effect of movements in exchange rates
December 31, 2016
Less: current portion
January 1, 2017
Provisions recorded (released)
Provisions used
Accretion
Effect of movements in exchange rates
December 31, 2017
Less: current portion
Accrual for
Self-insured Liabilities
Indemnification
Provisions
Decommissioning
Provisions
148,429
(16,818)
(32,976)
1,325
(5,119)
94,841
31,419
63,422
94,841
(5,718)
(24,160)
1,283
(5,111)
61,135
22,659
38,476
31,879
2,661
(5,030)
–
(1,063)
28,447
–
28,447
28,447
4,885
(8,817)
–
(1,836)
22,679
7,278
15,401
7,806
(18)
–
349
–
8,137
–
8,137
8,137
699
–
349
–
9,185
–
9,185
Total
188,114
(14,175)
(38,006)
1,674
(6,182)
131,425
31,419
100,006
131,425
(134)
(32,977)
1,632
(6,947)
92,999
29,937
63,062
Accrual for Self-insured Liabilities
The obligation to settle any U.S. self-insured general and professional liability claims relating to the period prior to the closing of the U.S.
Sale Transaction, including claims incurred but yet to be reported, remains with Extendicare, which it intends to fund through the Captive.
Consequently, the balance of the accrual for self-insured liabilities and the related investments held for self-insured liabilities (note 10)
remain on the consolidated statement of financial position. However, any expense incurred or release of reserves for U.S. self-insured
liabilities are presented as discontinued operations; while the Captive’s costs to administer and manage the settlement of the remaining
claims are reported as continuing operations within the U.S. segment.
Within the U.S. long-term care industry, operators, including the Company, are periodically subject to lawsuits alleging negligence,
malpractice, or other related claims. The Company retains a portion of the risk within the Captive at a level that the Company believes to be
adequate based upon the nature and risks of its business, historical experience and industry standards, along with the type of insurance
coverage commercially available in the marketplace.
The accrual for self-insured liabilities is based on management’s best estimate of the ultimate cost to resolve general and professional
liability claims, including both known claims and claims that have been incurred but not yet reported by the end of the reporting period.
Actual results can differ materially from the estimates made due to a number of factors including the assumptions used by management
and other market forces.
As at December 31, 2017, the accrual for self-insured general and professional liabilities was $61.1 million (US$48.6 million) compared
to $94.8 million (US$70.6 million) at the beginning of the year. The decline of $33.7 million represented claim payments of $24.2 million
(US$18.6 million), the release of reserves of $5.7 million (US$4.4 million), reflected as other expense (income) in discontinued
operations, and foreign exchange of $5.1 million, partially offset by accretion of $1.3 million (US$1.0 million).
Indemnification Provisions
As a result of the U.S. Sale Transaction (note 22), the Company has agreed to indemnify certain obligations of the U.S. operations
related to tax, a corporate integrity agreement (the “CIA”), and other items. Any revisions to these estimates are reflected as part of other
expense in discontinued operations (note 22). As at December 31, 2017, the remaining provisions totalled $22.7 million (US$18.0 million)
(2016 – $28.4 million or US$21.2 million). Actual results can differ materially from the estimates made due to a number of factors
including the assumptions used by management and other market forces.
Decommissioning Provisions
The decommissioning provisions relate to possible asbestos remediation of Extendicare’s pre-1980 constructed centres (note 3(k)). An
estimated undiscounted cash flow amount of approximately $11 million was discounted using a rate of 1.98% over an estimated time to
settle of 8 years. This represents management’s best estimate and actual amounts may differ.
81
Extendicare 2017 Annual Report 12. Long-term Debt
Canadian Operations
Interest Rate
Year of Maturity
2017
2016
Convertible unsecured subordinated debentures
6.0%
2019
CMHC mortgages
Non-CMHC mortgages
Construction loans
Finance lease obligations
Financing costs
Total debt, net of financing costs
Less: current portion
Long-term debt, net of financing costs
2.93% – 7.7%
2018 – 2037
3.11% – 5.637%
2020 – 2038
BA + 2.5%
on demand
2.69% – 7.19%
2018 – 2028
124,800
123,911
172,844
29,868
90,323
541,746
(5,678)
536,068
59,664
476,404
123,912
138,305
145,750
12,605
89,738
510,310
(6,742)
503,568
54,826
448,742
Canadian Operations
Convertible Unsecured Subordinated Debentures
In 2012, Extendicare issued $126.5 million of aggregate principal amount of 6.00% convertible unsecured subordinated debentures due
September 30, 2019, convertible at $11.25 per Common Share (the “2019 Debentures”).
Interest on the 2019 Debentures is payable semi-annually in March and September. These debentures may be redeemed by the
Company in whole at any time or in part from time to time, at a price equal to the principal amount thereof plus accrued and unpaid
interest, on a notice of not more than 60 days and not less than 30 days prior.
Upon the occurrence of a change of control, whereby more than 66.67% of the Common Shares are acquired by any person, or group
of persons acting jointly, each holder of the 2019 Debentures may require the Company to purchase their debentures at 101% of the
principal. If 90% or more of the debentureholders do so, the Company has the right, but not the obligation, to redeem all the remaining
outstanding 2019 Debentures.
The debt and equity components of the 2019 Debentures were bifurcated as the financial instrument is considered a compound
instrument with $120.7 million classified as a liability and the residual $5.8 million classified as equity attributable to the conversion
option. The liability portion of the 2019 Debentures is recorded at amortized cost. The fees and transaction costs allocated to the debt
component are amortized over the term of the 2019 Debentures using the effective interest method and recognized as part of net
finance costs.
CMHC Mortgages
Extendicare’s Canadian subsidiaries have various mortgages insured through the Canada Mortgage and Housing Corporation (CMHC)
program. The CMHC mortgages are secured by several Canadian financial institutions at rates ranging from 2.93% to 7.7% with maturity
dates through to 2037.
During the 2017 first quarter, one of the mortgages in the amount of $5.8 million, which matured in October 2016, was renewed at 3.04%
to mature in November 2026. In addition, two mortgages totalling $16.5 million, which matured in February 2017, were renewed under the
existing CMHC certificate at a rate of 3.35% to mature in February 2032.
Non-CMHC Mortgages
The Canadian operations have a number of conventional mortgages on certain long-term care centres, at rates ranging from 3.27% to
5.637%. Some of these mortgages have a requirement to maintain a minimum debt service coverage ratio. In May 2017, the Company
secured a $30.0 million term loan with the Canadian Imperial Bank of Commerce (the “CIBC Term Loan”) upon maturity of $3.6 million of
existing mortgages on nine Alberta long-term care centres. The CIBC Term Loan bears an interest rate based on a variable 30-day banker’s
acceptance rate plus 1.8% for a term of five years to May 2022, with principal and interest payable in monthly installments based on a 20-
year amortization. The maximum borrowing base under the CIBC Term Loan will be determined annually based upon the aggregate of the
updated lending value established for each property. The Company entered into an interest rate swap contract to lock in the rate at 3.27%
for the full term.
In addition, in August 2016, the Company secured financing on three of the acquired retirement communities, representing non-revolving
credit facilities aggregating $56.3 million. These financings have seven-year terms, with a floating rate of prime plus 0.5% or banker’s
acceptance (BA) plus 1.9%. In conjunction with securing these credit facilities, the Company entered into interest rate swap contracts to
lock in the interest rates at 3.11% for the full terms of these credit facilities.
82
Notes to Consolidated Financial Statements
All interest rate swap contracts are measured at fair value through profit or loss, and hedge accounting has not been applied. Changes in
fair value are recorded in the statements of earnings (note 20). As at December 31, 2017, the interest rate swaps were valued as an asset of
$3.5 million, which is included as part of other assets (note 10).
Construction Loans
Construction financings totalling $51.4 million for three retirement development projects in Simcoe, Bolton, and Uxbridge, were secured
in 2016 and provide for additional letter of credit facilities of $500,000, $750,000, and $750,000, respectively, at a rate of 2.5% if utilized.
In the 2017 fourth quarter, an additional $9.0 million of construction financing was secured for the Uxbridge expansion. Loan payments
are interest-only based on a floating rate of 30-day banker’s acceptance (BA) plus 2.5%, with no standby fee. The construction loans are
repayable on demand by the lender and, in any event, are to be fully repaid as follows: Simcoe, in November 2018 (being 24 months from
the issuance of the occupancy permit); Uxbridge, in October 2021 (being 60 months from close of the loan); and Bolton, by the earlier
of April 2022 or 36 months from the issuance of the occupancy permit. All these financings have been reflected as current. Permanent
financing for each of the communities will be sought upon maturity of the construction financing.
As at December 31, 2017, an aggregate of $29.9 million was drawn on the construction loans, and letters of credit totalling $0.5 million
were issued under credit facilities.
Finance Lease Obligations
The finance lease obligations outstanding at December 31, 2017 represent finance leases on long-term care centres and the present value
of a subscription to customized cloud-based software to be used in the home health care operations. The Company operates nine Ontario
long-term care centres, which were built between 2001 and 2003, under 25-year finance lease arrangements. The software balance will be
accreted through interest expense, and amortized over the contract term.
Finance lease obligations are payable as follows:
Less than one year
Between one and five years
More than five years
Future Minimum
Lease Payments
Interest
14,256
5,741
53,353
17,489
53,488
7,544
121,097
30,774
2017
Present Value of
Minimum Lease
Payments
8,515
35,864
45,944
90,323
Future Minimum
Lease Payments
12,104
48,416
65,593
126,113
Interest
6,002
19,335
11,038
36,375
2016
Present Value of
Minimum Lease
Payments
6,102
29,081
54,555
89,738
Other
Credit Facility
Extendicare has a demand credit facility in the amount of $47.3 million with the Royal Bank of Canada (the “RBC Credit Facility”) that
is secured by 13 Class C long-term care centres in Ontario and is guaranteed by certain Canadian subsidiaries of Extendicare. As at
December 31, 2017, Extendicare had letters of credit totalling approximately $43.8 million issued under the RBC Credit Facility, of which
$39.9 million secure our defined benefit pension plan obligations and the balance were issued in connection with obligations relating to
recently acquired centres and those centres under development. The letter of credit to secure the pension plan obligations renews annually
based on an actuarial valuation. The unutilized portion of the credit facility was $3.5 million as at December 31, 2017. The RBC Credit
Facility has no financial covenants, but does contain normal and customary terms including annual re-appraisals of the centres that could
limit the maximum amount available.
In the fourth quarter of 2017, the Company arranged for a demand credit facility in the amount of $65.0 million (the “ParaMed Credit
Facility”) that is secured by the assets of our home health care business, and it is available for general corporate purposes of the Company.
The ParaMed Credit Facility has no financial covenants, but it does contain normal and customary terms. The entire amount of the credit
facility was unutilized as at December 31, 2017.
Restricted Cash
In connection with certain financing, funds totalling $2.3 million as at December 31, 2017 (2016 – $2.2 million), included in restricted cash
are designated for future capital expenditures.
Deferred Financing Costs
Deferred financing costs are deducted against long-term debt and are amortized using the effective interest rate method over the term
of the debt. The net decrease of $1.1 million in 2017 related to the amortization of finance costs, offset in part by incremental costs of
$0.6 million related primarily to the refinancing of the CIBC Term Loan.
83
Extendicare 2017 Annual Report Below is a summary of the deferred financing costs:
Canadian Operations
Convertible unsecured subordinated debentures
CMHC mortgages
Non-CMHC mortgages
Finance lease obligations
Total financing costs
Less: current portion
Principal Repayments
Principal repayments on long-term debt, exclusive of finance lease obligations, are as follows:
Year
2018
2019
2020
2021
2022
2023 and beyond
2017
2016
1,387
2,465
1,595
231
5,678
1,463
4,215
2,180
2,877
1,415
270
6,742
1,636
5,106
Amount
52,612
140,448
58,463
13,478
55,781
132,341
453,123
Interest Rates
The weighted average interest rate of all long-term debt at December 31, 2017, was approximately 5.0% (2016 – 5.2%). At December 31,
2017, 94.5% of the long-term debt, including interest rate swaps, was at fixed rates (2016 – 97.5%).
13. Other Long-term Liabilities
Accrued pension plan obligation (note 25)
Share appreciation rights (note 14)
Other
2017
34,072
–
950
2016
34,784
846
409
35,022
36,039
14. Share-based Compensation
The Company’s share-based compensation, which includes SARs, DSUs and PSUs, was an expense of $2.0 million for each of 2017 and 2016.
The carrying amounts of the Company’s share-based compensation arrangements are recorded in the consolidated statements of
financial position as follows:
Accounts payable and accrued liabilities – SARs
Other long-term liabilities – SARs
Contributed surplus – DSUs
Contributed surplus – PSUs
2017
1,146
–
1,220
1,217
2016
822
846
552
389
84
Notes to Consolidated Financial Statements
Cash-settled Share Appreciation Rights Plan
Prior to the implementation of a new long-term incentive plan in 2016, SARs were granted at the discretion of the Board to directors and eligible
employees of Extendicare. As of January 1, 2016, no further awards will be granted under the SARs plan, and those awards that are granted and
outstanding will continue to vest pursuant to the SARs plan. SARs issued by the Company are accounted for as cash-settled awards.
A summary of the Company’s SARs activity is as follows:
Outstanding, beginning of year
Vested
Forfeited
Outstanding, end of year
Average remaining contractural life
Share Appreciation
Rights
Weighted Average
Vesting Price
Share Appreciation
Rights
Weighted Average
Vesting Price
2017
2016
597,000
(216,000)
(9,000)
372,000
0.2 years
$
7.05
6.88
7.69
7.14
$
774,111
(177,111)
–
597,000
0.9 years
$
6.93
6.52
—
$
7.05
The SARs were fair valued using the Black-Scholes model based on the following inputs:
Share price
Volatility
Risk-free interest rate
Strike price
Expected remaining life
2017
9.11
14.00%
1.00% – 1.21%
$6.55 – $7.69
2016
9.96
20.00%
0.56% – 0.69%
$6.52 – $7.69
0.1 years – 0.4 years
0.4 years – 1.4 years
Equity-settled Long-term Incentive Plan
The Board implemented a new long-term incentive plan (the “LTIP”) in 2016 to provide for a new share-based component of executive
and director compensation, which is designed to encourage a greater alignment of the interests of our executives and directors with our
shareholders, in the form of PSUs for our employees and DSUs for our non-employee directors. PSUs and DSUs granted under the LTIP will
not carry any voting rights. DSUs vest immediately upon grant and PSUs vest three years from the date of grant. None of the PSUs had
vested as at December 31, 2017. An aggregate of 4,407,892 Common Shares are reserved and available for issuance pursuant to the LTIP.
A summary of the Company’s DSU and PSU activity is as follows:
Units outstanding, beginning of period
Granted
Reinvested dividend equivalents
Forfeited
Settled
Units outstanding, end of period
Weighted average fair value of units
granted during the period at grant date
Deferred Share Units
Performance Share Units
2017
61,124
72,742
4,137
–
(3,634)
134,369
2016
–
59,967
1,157
–
–
2017
173,550
173,329
10,616
(14,551)
–
2016
–
167,343
6,207
–
–
61,124
342,944
173,550
$ 9.68
$ 9.21
$ 11.63
$ 9.81
The grant date values of PSUs awarded were based on the fair values of one award with two equal components being the adjusted
funds from operations (AFFO) and total shareholder return (TSR). The fair values of the AFFO component were measured using the
previous day’s closing trading price of the Common Shares. The fair values of the TSR component were measured using the Monte Carlo
simulation method.
85
Extendicare 2017 Annual Report
A summary of PSUs granted and the assumptions used to determine the grant date values are as follows:
Grant date
Vesting date
PSUs granted
Fair value of AFFO component
Fair value of TSR component
Grant date fair value
Expected volatility of Extendicare's Common Shares
Expected volatility of the Index
Risk-free rate
Dividend yield
15. Share Capital
Balance at beginning of year
Transactions with shareholders
DRIP
Purchase of shares for cancellation in excess of book value
Twelve months ended December 31, 2017
March 15, 2017
March 15, 2020
160,689
May 25, 2017
May 25, 2020
12,640
Twelve months ended
December 31, 2016
April 7, 2016
April 7, 2019
167,343
$
5.24
6.42
$ 11.66
23.09%
13.41%
0.92%
nil
$
5.11
6.12
$ 11.23
24.90%
13.60%
0.75%
nil
$ 4.80
5.01
$ 9.81
23.19%
12.89%
0.52%
nil
Shares
2017
Amount
Shares
2016
Amount
88,684,485
$489,656
87,953,291
$483,385
535,025
(696,220)
5,081
(3,856)
731,194
–
6,271
–
Balance at end of year
88,523,290
$490,881
88,684,485
$489,656
Authorized Capital
Extendicare is authorized to issue an unlimited number of Common Shares and that number of preferred shares of Extendicare (the
“Preferred Shares”), issuable in series, equal to 50% of the number of Common Shares that are issued and outstanding at the time of
the issuance of any series of Preferred Shares, for consideration and on terms and conditions that the Board may determine without the
approval of shareholders.
Common Shares
Each Common Share is transferable and represents an equal and undivided beneficial interest in the assets of the Company. Each
Common Share entitles the holder to one vote at all meetings of shareholders of the Company. Shareholders are entitled to receive
dividends from the Company if, as and when declared by the Board. During 2017 and 2016, the Company declared cash dividends of
$0.48 per share.
Preferred Shares
Preferred Shares may at any time and from time to time be issued in one or more series. There are currently no Preferred Shares issued.
Distribution Reinvestment Plan
The Company has a Distribution Reinvestment Plan (DRIP) pursuant to which shareholders who are residents in Canada may elect to
reinvest their cash distributions in additional Common Shares on the date of the distribution, at a price equal to 97% of the volume-
weighted average trading price of the Common Shares on the TSX for the five trading days immediately preceding the corresponding
date of distribution. During 2017, the Company issued 0.5 million Common Shares at a value of $5.1 million in connection with the DRIP
(2016 – $0.7 million Common Shares at a value of $6.3 million).
86
Notes to Consolidated Financial Statements
Normal Course Issuer Bid
During 2017, under a normal course issuer bid that commenced on January 13, 2017 and ended on January 12, 2018, the Company
purchased and cancelled 696,220 Common Shares at a weighted average price of $9.27 per share, for a total cost of $6.5 million. During
2016, the Company did not acquire any Common Shares for cancellation.
On January 10, 2018, Extendicare received the approval of the TSX to renew its normal course issuer bid (the “Bid”) to purchase for
cancellation up to 8,770,000 Common Shares (approximately 10% of the public float) through the facilities of the TSX, and on alternative
Canadian trading platforms. The Bid commenced on January 15, 2018, and provides Extendicare with flexibility to purchase Common
Shares for cancellation until January 14, 2019, or on such earlier date as the Bid is complete. Subject to the TSX’s block purchase
exception, on any trading day, purchases under the Bid will not exceed 39,219 Common Shares. The price that Extendicare will pay for any
Common Shares purchased under the Bid will be the prevailing market price at the time of purchase and any Common Shares purchased
will be cancelled. As at February 28, 2018, the Company has acquired and cancelled 352,233 Common Shares under the Bid at an average
price of $8.94 per share, for a total cost of $3.1 million, all of which were acquired in January 2018.
16. Equity Reserves
Equity reserves are included in AOCI and comprise fair value, and translation reserves, as follows:
Unrealized
Gains/Losses on
AFS Securities
Realized Gains/
Losses on AFS
Securities Transferred
to Net Earnings
Total Fair
Value Reserve
Translation
Reserve
Total Equity
Reserves
Balance, January 1, 2016
7,920
(4,571)
3,349
6,738
10,087
Reclassed to gain on sale of U.S. IT
Hosting operations
Recognized during the year
Balance, December 31, 2016
Recognized during the year
Balance, December 31, 2017
–
5,574
13,494
4,955
18,449
–
(2,532)
(7,103)
(7,012)
(14,115)
–
3,042
6,391
(2,057)
4,334
(1,431)
(1,532)
3,775
(3,097)
678
(1,431)
1,510
10,166
(5,154)
5,012
Fair Value Reserve
The fair value reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the investments are
derecognized, at which time, the cumulative change in fair value is recognized in net earnings.
Translation Reserve
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign
operations until the operations are derecognized, at which time, the cumulative change in foreign currency differences are recognized in
net earnings. During 2016, $1.4 million was reclassified to the gain on the sale of the U.S. IT Hosting operations (note 22).
17. Revenue
Long-term care
Retirement living
Home health care
Management, consulting and other
Total revenue
2017
616,887
20,673
435,718
24,053
2016
608,618
15,474
414,406
22,260
1,097,331
1,060,758
Funding received by Extendicare for its long-term care centres and home health care services is regulated by provincial authorities.
Revenue from provincial programs represented approximately 70% of Extendicare’s long-term care revenue (2016 – 70%), and
approximately 98% of Extendicare’s home health care revenue for 2017 (2016 – 97%).
87
Extendicare 2017 Annual Report 18. Expenses by Nature
Employee wages and benefits
Food, drugs, supplies and other variable costs
Property based and other costs
Total operating expenses and administrative costs
Lease costs
Total expenses
19. Other Expense
Proxy contest costs
Acquisition costs and integration costs
Asset impairment
Other expense
2017
851,318
48,566
93,092
992,976
6,758
999,734
2017
–
–
–
–
2016
822,416
44,739
94,018
961,173
6,650
967,823
2016
1,862
479
1,672
4,013
In 2016, the Company incurred proxy contest costs, including advisory and professional fees, of $1.9 million. In connection with
acquisitions, the Company incurred advisory fees aggregating $0.5 million in 2016.
Impairment
Goodwill of the Company arises from acquisitions, and must be assessed for impairment on an annual basis. Based upon the impairment
assessment performed in 2016, the Company recognized a net pre-tax impairment loss of $1.7 million on goodwill for certain properties.
There was no impairment of goodwill in 2017.
Property and equipment must be assessed for impairment when indicators of impairment exist. There was no triggering event in 2017 and
2016; therefore, there was no impairment on property and equipment for these years.
The determination of recoverable amounts can be significantly impacted by estimates related to current market valuations, current and
future economic conditions in the geographical markets of each CGU, and management’s strategic plans within each of its markets.
Estimates and assumptions used in the determination of the impairment loss were based upon information that was known at the time,
along with the future outlook. The Company completes the assessment of fair value using financial performance and current capitalization
rates. The fair value is a Level 3 valuation (note 26(b)).
20. Foreign Exchange (Gain) Loss and Fair Value Adjustments
Foreign Exchange Gain and Loss
Loss (gain) on foreign exchange include: (1) a $0.1 million unrealized foreign exchange loss related to the deferred consideration in
connection with the U.S. Sale Transaction (note 10) (2016 – loss of $1.1 million); (2) foreign exchange losses of $0.7 million on balances
remaining related to the U.S. Sale Transaction that are denominated in U.S. dollars, $1.3 million of which were unrealized (2016 – losses of
$0.8 million, most of which were unrealized) (note 22); and (3) a foreign exchange gain of $1.6 million on funds repatriated from the Captive
(2016 – gain of $0.7 million) (note 10).
Fair Value Adjustment on Interest Rate Swaps
The Company entered into interest rate swap contracts in August 2016 and May 2017 to lock in the interest rates for certain mortgages.
The fair value of these contracts as at December 31, 2017, resulted in a gain of $2.5 million for 2017 (2016 – gain of $1.0 million) (notes 10
and 12).
88
Notes to Consolidated Financial Statements
21. Earnings per Share
Basic earnings (loss) per share (EPS) is calculated by dividing the net earnings (loss) for the period by the weighted average number of
shares outstanding during the period, including vested DSUs awarded that have not settled. Diluted EPS is calculated by adjusting the
net earnings (loss) and the weighted average number of shares outstanding for the effects of all dilutive instruments. The Company’s
potentially dilutive instruments include the convertible debentures and equity-settled compensation arrangements. The number of shares
included with respect to the PSUs is computed using the treasury stock method.
The following table reconciles the numerator and denominator of the basic and diluted earnings per share computation.
Numerator for Basic and Diluted Earnings per Share
Earnings from continuing operations
Net earnings for basic earnings per share
Less: Earnings (loss) from discontinued operations, net of tax
Earnings from continuing operations for basic earnings per share
Add: after-tax interest on convertible debt
Earnings from continuing operations for diluted earnings per share
Net earnings
Net earnings for basic earnings per share
Add: after-tax interest on convertible debt
Net earnings for diluted earnings per share
Denominator for Basic and Diluted Earnings per Share
Actual weighted average number of shares
Vested equity-settled compensation
Weighted average number of shares for basic earnings per share
Shares issued if all convertible debt was converted
Dilutive effect of equity-settled compensation
Total for diluted earnings per share
Basic and Diluted Earnings (Loss) per Share (in dollars)
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
22. Discontinued Operations
2017
2016
2,132
(29,580)
31,712
7,342
39,054
2,132
7,342
9,474
35,452
4,035
31,417
7,086
38,503
35,452
7,086
42,538
2017
2016
88,720,572
88,349,331
84,786
22,712
88,805,358
88,372,043
11,244,444
11,244,444
38,121
7,646
100,087,923
99,624,133
0.36
(0.34)
0.02
0.36
0.04
0.40
U.S. IT Hosting Operations
The Company’s former U.S. IT Hosting operations were reclassified as discontinued in the 2016 second quarter following the decision to
actively market the sale of the operations. On December 22, 2016, the Company completed the sale of substantially all of the assets used
in those operations for gross cash proceeds of $11.5 million (US$8.5 million), prior to working capital adjustments and transaction costs.
Net proceeds from the sale, after working capital adjustments and transaction costs, were $9.5 million (US$7.1 million). The sale resulted
in a pre-tax loss of $8.6 million (after-tax loss of $8.4 million), and included a working capital adjustment of $0.3 million and the realization
of a foreign currency translation adjustment of $1.4 million that was previously included in AOCI.
89
Extendicare 2017 Annual Report U.S. Sale Transaction
The proceeds from the U.S. Sale Transaction included an element of deferred consideration. At June 30, 2017, the remaining balance
was written off resulting in a charge of $37.5 million in the 2017 second quarter (note 10). In addition, the Company agreed to indemnify
certain obligations of the U.S. operations related to tax, a CIA, and other items. In connection with these items, as at December 31, 2017,
the Company had remaining provisions totalling $22.7 million (US$18.0 million) (note 11), and a receivable of $2.8 million (US$2.2 million)
(note 10) (2016 – provisions of $28.4 million and receivable of $8.3 million). Changes in the estimates of indemnification provisions and
receivables are reflected as other expense (income) in the results of discontinued operations outlined below. The unfavourable changes
in 2017, were primarily related to a $5.1 million increase of estimated cost of the CIA in the second quarter. Favourable changes were
$2.7 million for 2016. Other expense (income) in 2017 also includes the release of accrual for self-insured liabilities of $5.7 million or
US$4.4 million (2016 – $16.8 million or US$12.7 million) (note 11).
In October 2014, EHSI completed and executed a settlement agreement with the U.S. Department of Justice (DOJ), the Office of the
Inspector General (OIG) of the U.S. Department of Health and Human Services and multiple states. As is standard practice in settlements
of OIG and DOJ investigations, EHSI entered into the CIA, with the OIG for a five-year period effective October 3, 2014. Under the terms of
the U.S. Sale Transaction, Extendicare has agreed to share in the costs incurred in order to implement and comply with the requirements of
the CIA. Though the actual costs for the Purchaser to comply with the CIA are difficult to estimate, the Company has included a provision
for such costs in its provision for indemnification obligations (note 11).
Results of Discontinued Operations
The following is a summary of results of the discontinued operations.
Nursing and assisted living centres revenue
Health technology services revenue
Outpatient therapy revenue
Management, consulting and other
Total revenue
Operating expenses
Administrative costs
Lease costs
Total expenses
Loss before depreciation, amortization, and other expense
Depreciation and amortization
Other expense (income)
Earnings (loss) before net finance costs and income taxes
Net finance costs
Earnings (loss) before income taxes
Income tax expense (recovery)
Earnings (loss) from discontinued operations,
before loss on sale of U.S. operations
Loss on sale of U.S. operations, net of income taxes
Earnings (loss) from discontinued operations
Cash Flows from Discontinued Operations
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
Effect on cash flows
90
Notes to Consolidated Financial Statements
2017
U.S. Sale
Total
U.S. IT Hosting
U.S. Sale
–
28,751
–
–
28,751
23,979
5,055
621
29,655
(904)
1,185
–
–
–
–
–
–
–
–
–
–
–
–
(22,651)
(22,651)
(2,089)
22,651
20,562
16
–
16
(2,105)
22,651
20,546
(50)
8,103
8,053
(2,055)
14,548
12,493
(8,458)
–
2016
Total
–
28,751
–
–
28,751
23,979
5,055
621
29,655
(904)
1,185
(8,458)
4,035
2016
U.S. IT Hosting
U.S. Sale
Total
575
(32,976)
(32,401)
8,096
32,976
41,072
(8,671)
–
–
–
(8,671)
–
–
–
–
–
–
–
–
–
–
–
–
36,576
(36,576)
–
(36,576)
(6,996)
(29,580)
–
2017
U.S. Sale
Total
(24,160)
24,160
–
–
(29,580)
(10,513)
14,548
23. Income Taxes
Tax Recognized in Net Earnings
Current Tax Expense
Current year
Items related to sale of U.S. operations
Utilization of losses
Other prior year adjustments
Deferred Tax Expense (Recovery)
Origination and reversal of temporary difference
Items related to sale of U.S. operations
Utilization of losses
Other prior year adjustments
Total tax expense
Tax expense from continuing operations
Tax expense (recovery) from discontinued operations
Total tax expense
2017
2016
10,191
(1,230)
(87)
45
8,919
(4,236)
(451)
–
(376)
(5,063)
3,856
10,852
(6,996)
3,856
11,304
8,521
(18)
(5,488)
14,319
946
(648)
–
665
963
15,282
7,411
7,871
15,282
Following a successful notice of objection to appeal a 2015 reassessment by the Canada Revenue Agency (CRA), the Company reversed a
$3.6 million tax provision, reflected as a current income tax recovery in the 2016 fourth quarter.
Tax Recognized in Other Comprehensive Income
Foreign currency translation differences for
foreign operations
Available-for-sale financial assets
Deferred benefit plan actuarial gains (losses)
Before Tax
Tax Expense
Net of Tax
Before Tax
Tax Expense
Net of Tax
2017
2016
(3,097)
(2,057)
(423)
(5,577)
–
–
112
112
(3,097)
(2,057)
(311)
(5,465)
(2,963)
3,042
3,147
3,226
–
–
(834)
(834)
(2,963)
3,042
2,313
2,392
Effective Tax Rate
The major factors that caused variations from the expected combined Canadian federal and provincial statutory income tax rates were
as follows:
Earnings from continuing operations before income taxes
Income taxes at statutory rates of 26.5%
Income tax effect relating to the following items:
Tax rate variance of foreign subsidiaries
Non-deductible items
Non-taxable income
Prior year adjustment
Current year U.S. losses for which no deferred tax asset was recognized
Other items
2017
42,564
11,279
(1,173)
1,033
(17)
(331)
–
61
2016
38,828
10,289
650
983
49
(4,823)
311
(48)
10,852
7,411
91
Extendicare 2017 Annual Report Summary of Operating and Capital Loss Carryforwards
Extendicare’s Canadian corporate subsidiaries had $7.2 million of benefited net operating loss carryforwards as at December 31, 2017
(2016 – $7.3 million), which expire in the years 2035 through 2037, and capital loss carryforwards of $16.5 million (2016 – $13.8 million)
which have not been tax benefited and are available indefinitely to apply against future capital gains.
Deferred tax assets recognized as at December 31, 2017, were $13.9 million (2016 – $15.3 million). Net deferred tax liabilities decreased in
2017 to $0.4 million from $5.2 million at December 31, 2016.
Recognized Deferred Tax Assets and Liabilities
Net deferred tax liabilities comprise the following:
Property and equipment
Intangible assets
Other assets
Deferred financing costs
Accounts receivable reserves
Financial assets at fair value
Self–insurance reserves
Indemnification provisions
Employee benefit accruals
Operating loss carryforwards
Deferred revenue
Decommissioning provision
Other
Set-off of tax
Assets
Liabilities
981
4,408
–
30,654
217
963
1,833
1,553
–
–
276
7,939
10,013
1,922
4,380
2,248
248
–
908
–
–
–
–
42
–
336
(20,357)
(20,357)
13,891
14,316
2017
Net
29,673
(4,191)
963
(280)
–
908
(276)
(7,939)
(10,013)
(1,922)
(4,338)
(2,248)
88
–
425
Assets
Liabilities
411
7,808
–
–
–
–
256
9,957
10,405
1,964
4,564
2,157
281
31,807
–
8,271
1,840
520
264
–
–
–
–
127
–
193
(22,456)
(22,456)
2016
Net
31,396
(7,808)
8,271
1,840
520
264
(256)
(9,957)
(10,405)
(1,964)
(4,437)
(2,157)
(88)
–
15,347
20,566
5,219
Deferred income taxes are provided for temporary differences between the carrying values of assets and liabilities and their respective tax
values as well as available tax loss carryforwards. Management believes it is more likely than not that Extendicare’s corporate subsidiaries
will realize the benefits of these deductible differences.
92
Notes to Consolidated Financial Statements
The significant components of deferred income tax assets and liabilities and the movement in these balances during the year were
as follows:
Balance
January 1
2017
Recognized in
Net Earnings
Recognized in Other
Comprehensive
Income/Other
Recognized in
Discontinued
Operations
Change in
Foreign
Exchange
Balance
December 31
2017
Property and equipment
Other assets
Deferred financing costs
Accounts receivable reserves
Financial assets at fair value
Self-insurance reserves
Indemnification provisions
Intangible assets
Employee benefit accruals
Operating loss carryforwards
Deferred revenue
Accounts receivable reserves
Decommissioning provision
Other
Deferred tax liabilities, net
Property and equipment
Other assets
Deferred financing costs
Accounts receivable reserves
Financial assets at fair value
Self-insurance reserves
Indemnification provisions
Intangible assets
Employee benefit accruals
Operating loss carryforwards
Deferred revenue
Accounts receivable reserves
Decommissioning provision
Other
Deferred tax liabilities, net
31,396
8,271
1,840
520
264
(256)
(9,957)
(7,808)
(10,405)
(1,964)
(4,437)
–
(2,157)
(88)
5,219
Balance
January 1
2016
24,472
6,165
1,525
–
–
(203)
(11,158)
885
(10,477)
(1,401)
(5,262)
(165)
(1,971)
764
3,174
(1,723)
95
(2,120)
(520)
644
(20)
–
3,617
504
42
99
–
(91)
176
703
–
–
280
–
–
–
–
–
(112)
–
–
(280)
–
–
–
(7,120)
–
(283)
29,673
963
–
–
–
–
–
–
–
–
1,354
664
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
908
(276)
(7,939)
(4,191)
(10,013)
(1,922)
(4,338)
(280)
(2,248)
88
425
(112)
(5,766)
381
Recognized in
Net Earnings
Recognized in Other
Comprehensive
Income/Other
Recognized in
Discontinued
Operations
Change in
Foreign
Exchange
Balance
December 31
2016
7,565
3,650
315
520
264
(53)
–
(8,693)
(665)
(1,837)
825
–
(186)
(95)
1,610
–
–
–
–
–
–
280
–
834
–
–
–
–
10
1,124
(613)
(1,163)
–
–
–
–
577
–
(91)
1,220
–
158
–
(736)
(648)
(28)
(381)
–
–
–
–
344
–
(6)
54
–
7
–
(31)
(41)
31,396
8,271
1,840
520
264
(256)
(9,957)
(7,808)
(10,405)
(1,964)
(4,437)
–
(2,157)
(88)
5,219
93
Extendicare 2017 Annual Report 24. Commitments and Contingencies
Operating Lease Commitments
At December 31, 2017, the Company was committed under non-cancellable leases requiring future minimum rentals in its continuing
operations as follows:
2018
2019
2020
2021
2022
2023 and beyond
Total minimum payments
Operating Leases
3,274
2,866
1,183
910
501
131
8,865
Property and Equipment Commitments
Extendicare has outstanding commitments of $56.0 million at December 31, 2017, in connection with private-pay retirement communities
under development in Ontario, which will be substantially financed with external financing. These are expected to be incurred over the next
two years.
Legal Proceedings, Claims and Regulatory Actions
Extendicare and its consolidated subsidiaries are defendants in various actions and proceedings that are brought against them from
time to time in connection with their operations. The Company is aware that a statement of claim was filed against it in Ontario in late
November 2017, which seeks an order certifying the action as a class action. The statement of claim, which has not been served on
Extendicare, alleges negligence by the Company in the operation of its long-term care facilities and its provision of care to residents, and
is seeking $150 million in damages. Management is unable to assess whether the claim will be advanced but believes that the allegations,
including the damages sought, are completely without merit. Should the claim be advanced, Extendicare intends to vigorously defend
itself and does not believe the outcome will have a material adverse impact on its business, results of operations or financial condition and
believes that any potential liability will be covered by insurance.
The provision of health care services is subject to complex government regulations. Every effort is made by the Company to avoid or
mitigate deficiencies in the quality of patient care through quality assurance strategies and to remedy any such deficiencies cited by
government inspections within any applicable prescribed time period. Extendicare accrues for costs that may result from investigations
(or any possible related litigation) to the extent that an outflow of funds is probable and a reliable estimate of the amount of the associated
costs can be made.
94
Notes to Consolidated Financial Statements
25. Employee Benefits
Retirement compensation arrangements are maintained for certain employee groups as described below.
Defined Benefit Plans
Extendicare has pension arrangements for certain of its executives, which include a registered defined benefit pension plan, as well as a
supplementary plan that provide pension benefits in excess of statutory limits. Both of these plans have been closed to new entrants for
several years. The plans are exposed to various risks, including longevity risk, currency risk, interest rate risk and market risks.
The different types of defined benefit plans of the Company are listed below.
Fair value of plan assets
Present value of obligations
Deficit
Funded Defined Benefit Plan
2017
5,443
7,913
2016
5,416
7,716
(2,470)
(2,300)
Unfunded Supplementary
Defined Benefit Plan
2017
–
34,168
(34,168)
2016
–
34,714
(34,714)
2017
5,443
42,081
Total
2016
5,416
42,430
(36,638)
(37,014)
Funding
As required by law, the registered defined benefit pension plan benefits are funded through a trust, and the Company is responsible for
meeting the statutory obligations for funding this plan. The funding requirement for past service is determined based on separate actuarial
valuations for funding purposes, which are completed every three years. The most recent actuarial review was performed effective
October 1, 2015, and was completed in early 2016.
The supplementary plan is unfunded and pension benefits are secured through a letter of credit that is renewed annually. We do not set
aside assets for this plan and the benefit payments are funded from our cash from operations.
Defined Benefit Obligations
Present Value of Defined Benefit Obligations
Accrued benefit obligations
Balance at beginning of year
Current service cost
Benefits paid
Interest costs
Actuarial losses (gains)
Balance at end of year
Plan assets
Fair value at beginning of year
Employer contributions
Expected loss (return) on assets
Actual return on plan assets
Benefits paid
Fair value at end of year
Defined benefit obligations
The expected contribution to the supplementary plan for the coming year is approximately $2.2 million.
Reported in Extendicare's Statements of Financial Position
Current accrued liabilities
Other long-term liabilities (note 13)
Accrued benefit liability at end of year
2017
2016
42,430
46,277
225
(2,603)
1,447
582
206
(2,719)
1,689
(3,023)
42,081
42,430
5,416
5,406
83
160
184
(400)
5,443
36,638
124
124
197
(435)
5,416
37,014
2017
2016
2,566
34,072
36,638
2,230
34,784
37,014
95
Extendicare 2017 Annual Report Effect of Changes to Defined Benefit Obligations
Expense Recognized in Net Earnings (Loss)
Annual benefit plan expense
Current service costs
Interest cost
Plan benefit expense recognized in the year – included in operating expenses and administrative costs
Actuarial Losses Recognized in Other Comprehensive Income
Amount accumulated in accumulated deficit at January 1
Actuarial loss arising from changes in:
Discount rate
Mortality assumption
Other experience
Return on assets
Income tax recovery (expense) on actuarial losses
Amount recognized in accumulated deficit at December 31
Plan Assets
Equities
Fixed income securities
Real estate / commercial mortgage
Actuarial Assumptions
Discount rate for year-end accrued obligation
Discount rate for period expense
Rate of compensation increase
Income Tax Act limit increase
Average remaining service years of active employees
2017
2016
225
1,263
1,488
206
1,492
1,698
(9,552)
(11,865)
–
–
(583)
160
112
(9,863)
2017
45%
37%
18%
100%
2017
3.25%
3.50%
2.0%
3.0%
2
–
–
3,023
124
(834)
(9,552)
2016
47%
34%
19%
100%
2016
3.50%
3.75%
2.0%
3.0%
2
The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of
assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate. Any changes in these
assumptions will impact the carrying amount of pension obligations.
Extendicare determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the
present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate
discount rate, the Company considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the
benefits will be paid, and those that have terms to maturity approximating the terms of the related pension liability.
96
Notes to Consolidated Financial Statements
Changes to the following actuarial assumptions, while holding the other assumptions constant, would have affected the defined benefit
obligation and related expense for 2017 by the amounts shown below.
Discount rate:
1% increase
1% decrease
Rate of compensation increase
1% increase
1% decrease
Income Tax Act limit increase
1% increase
1% decrease
Mortality rate
10% increase
10% decrease
Increase (Decrease) in
Benefit Obligation
Increase (Decrease) in
Net Earnings
(4,061)
4,837
7
(7)
–
–
(960)
1,055
(168)
231
(1)
1
–
–
33
(35)
Defined Contribution Plans
Canada maintains registered savings and defined contribution plans and matches up to 120% of the employees’ contributions according
to seniority, subject to a maximum based on the salary of the plan participants. Contributions expensed by Canada in 2017 and 2016 were
$16.5 million and $15.4 million, respectively.
26. Management of Risks and Financial Instruments
a) Management of Risks
Management of Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting its contractual obligations. We manage our liquidity risk
through the use of budgets and forecasts. Cash requirements are monitored regularly based on actual financial results and actual cash
flows to ensure that there are sufficient resources to meet operational requirements. We ensure that there are sufficient funds for declared
and payable distributions and any other future commitments at any point in time. In addition, since there is a risk that current borrowings
and long-term debt may not be refinanced or may not be refinanced on as favourable terms or with interest rates as favourable as those
of the existing debt, we attempt to appropriately structure the timing of contractual long-term debt renewal obligations and exposures
(note 12).
The following are the contractual maturities of financial liabilities, including estimated interest payments:
As at December 31, 2017
Convertible debentures
CMHC mortgages
Non-CMHC mortgages
Construction loans
Finance lease obligations
Carrying
Amount
Contractual
Cash Flows
Less than
1 Year
1–2 Years
2–5 Years
124,800
141,680
123,911
155,149
172,844
234,286
29,868
90,323
30,735
121,309
7,590
22,656
12,342
30,735
14,553
134,090
13,139
12,340
–
–
76,277
77,498
–
More than
5 Years
–
43,077
132,106
–
13,719
39,544
53,493
–
2,866
–
2,594
–
131
Accounts payable and accrued liabilities
126,920
126,920
126,920
Operating lease obligations
–
8,865
3,274
The gross outflows presented above represent the contractual undiscounted cash flows.
668,666
818,944
218,070
176,154
195,913
228,807
97
Extendicare 2017 Annual Report Management of Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the Company by failing to discharge its
obligation. The nature and maximum exposure to credit risk as at December 31 was:
Cash and short-term investments
Restricted cash
Accounts receivables, net of allowance (note 7)
Investments held for self-insured liabilities (notes 10 and 22)
Amounts receivable and other assets (note 10)
Deferred consideration (note 10)
Carrying Amount
2017
2016
128,156
101,582
2,300
42,491
86,296
58,541
–
2,227
52,234
136,109
63,470
37,429
317,784
393,051
Cash and Short-term Investments
The majority of our cash and short-term investments are held with highly rated financial institutions in Canada.
Restricted Cash
The restricted cash is cash held mainly on account of lender capital reserves with no credit risk.
Accounts Receivables, Net of Allowance
Extendicare periodically evaluates the adequacy of its provision for receivable impairment by conducting a specific account review of
amounts in excess of predefined target amounts and aging thresholds. Allowances for uncollectibility are considered based upon the
evaluation of the circumstances for each of these specific accounts. In addition, the Company has established percentages for provision
for receivable impairment that are based upon historical collection trends for each payor type and age of the receivables. Accounts
receivable that are specifically estimated to be uncollectible, based upon the above process, are fully reserved for in the provision for
receivable impairment until they are written off or collected.
Receivables from government agencies represent the only concentrated group of accounts receivable for Extendicare. In Canada,
Extendicare has receivables primarily from provincial government agencies. Management does not believe there is any credit risk
associated with these government agencies other than possible funding delays. Accounts receivable other than from government
agencies consist of private individuals that are subject to different economic conditions, none of which represents any concentrated
credit risk to the Company.
The maximum exposure to credit risk for accounts receivable at the reporting date is the carrying value of each class of receivable,
denominated in the following currencies.
Trade receivables
Retroactive rate receivables
Other receivables
2017
Carrying Amount
2016
Carrying Amount
U.S. Dollar
Canadian Dollar
Total
U.S. Dollar
Canadian Dollar
Total
–
–
1,544
1,544
33,466
33,466
–
–
7,481
9,025
40,947
42,491
–
–
3,352
3,352
40,832
40,832
585
7,465
48,882
585
10,817
52,234
Receivables from Canadian government agencies, which are included in accounts receivable, notes, mortgages and amounts receivable,
represented the only concentrated group of credit risks for the Company. As at December 31, 2017, receivables from government
agencies represented approximately 91% of the total receivables (2016 – 83%). Management does not believe that there is significant
credit risk associated with these government agencies other than possible funding delays. Management continuously monitors reports
from trade associations or notes from provincial or federal agencies that announce possible delays that are rare to occur and usually
associated with changes of fiscal intermediaries or changes in information technology or forms.
Receivables, other than those from government agencies, consist of receivables from various payors and do not represent any
concentrated credit risks to the Company. There is no significant exposure to any single party.
As at December 31, 2017, the Canadian operations had trade receivables of $33.5 million (2016 – $40.8 million). All the receivables were
fully performing and collectible in the amounts outlined above. The Canadian operations continuously monitor the collection of all trade
receivables and assess the collectability and aging of accounts by payor type and on an individual basis.
98
Notes to Consolidated Financial Statements
The aging analysis of these trade receivables is as follows:
Current
Between 30 and 90 days
Between 90 and 365 days
Over 365 days
Less: provision for receivable impairment
Movements on the Company’s provision for receivable impairment are as follows:
At January 1
Increase in provision for receivable impairment
Receivables written off as uncollectible
Other
At December 31
2017
22,800
6,846
1,779
3,638
(1,597)
33,466
2017
1,818
1,710
(1,931)
–
1,597
2016
31,895
6,985
3,058
712
(1,818)
40,832
2016
2,133
1,823
(2,118)
(20)
1,818
The increase in provision for receivables impairment has been included in operating expenses in net earnings. In general, amounts
charged to the provision for impairment of trade receivables are written off when there is no expectation of recovering additional cash.
Investments Held for Self-insured Liabilities
The Company’s investments held for self-insured liabilities include investments in corporate or government fixed-rate bonds with ratings
above a rating of AAA- along with U.S. treasuries. The majority of these investments are investment grade. Cash held for self-insured
liabilities are with high-quality financial institutions. The Company limits the amount of exposure to any one institution.
Notes, Mortgages and Amounts Receivable
Included in notes, mortgages and amounts receivable were $58.5 million (2016 – $63.5 million) of discounted amounts receivable due
from government agencies. These represent non-current amounts funded by the Ontario government for a portion of nursing centre
construction costs over a 20-year or 25-year period (note 10). The Company does not believe there is any credit exposure for these
amounts due from government agencies.
Management of Currency Risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign
exchange rates. Cross-border transactions are subject to exchange rate fluctuations that may result in realized gains or losses as and
when payments are made.
As a result of the U.S. Sale Transaction, our exposure to foreign currency risk has been significantly reduced. The following table outlines
the net asset exposure to both the U.S. continuing operations and other items retained from the U.S. Sale Transaction as at December 31,
2017 (note 22).
(in thousands of US$)
Assets
Current assets
Investments held for self-insured liabilities
Liabilities
Current liabilities
Indemnification provisions
Other long-term liabilities
Net asset exposure
2017
30,895
68,647
19,305
18,040
30,074
32,123
99
Extendicare 2017 Annual Report Net Earnings Sensitivity Analysis
Prior to the U.S. Sale Transaction, the majority of the Company’s operations were conducted in the United States. As at December 31,
2017, U.S. operations accounted for less than 1% of its revenue from continuing operations (2016 – less than 1%).
Every one cent strengthening of the Canadian dollar against the U.S. dollar in 2017 would favourably impact net earnings by $0.1 million
and OCI by $0.2 million. This analysis assumes that all other variables, in particular the interest rates, remain constant.
Management of Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
interest rates.
To mitigate interest rate risk, the Company’s long-term care debt portfolio includes fixed-rate debt and variable-rate debt with interest rate
swaps in place. At December 31, 2017, construction loans of $29.9 million are variable-rate debt, which do not have interest rate swaps
in place. The Company’s credit facility, and future borrowings, may be at variable rates which would expose the Company to the risk of
interest rate volatility (note 12).
Although the majority of the Company’s long-term debt is effectively at fixed rates, there can be no assurance that as debt matures,
renewal rates will not significantly impact future income and cash flow.
Below is the interest rate profile of our interest-bearing financial instruments, which reflects the impact of the interest rate swaps
(note 10):
Fixed-rate instruments:
Long-term debt(1)
Total liability in fixed-rate instruments
Variable-rate instruments:
Long-term debt(1)
Total liability in variable-rate instruments
(1) Includes current portion and excludes netting of financing costs.
Carrying Amount
2017
2016
512,218
512,218
29,868
29,868
497,705
497,705
12,605
12,605
Fair Value Sensitivity Analysis for Variable-rate Instruments
All long-term debt with variable rates are classified as other financial liabilities, which are measured at amortized cost using the effective
interest method of amortization; therefore, changes in interest rates would not affect OCI with respect to variable-rate debt. As at
December 31, 2017, long-term debt with variable rates represented 5.5% of total debt. The value of the interest rate swaps is subject to
fluctuations in interest rates, changes in fair value of these swaps are recognized in net earnings (notes 10 and 20).
Cash Flow Sensitivity Analysis for Variable-rate Instruments
An increase of 100 basis points in interest rates would have decreased net earnings by $0.2 million and a decrease of 100 basis points
in interest rates would have increased net earnings by $0.2 million. This analysis assumes that all other variables, in particular foreign
currency rates, remains constant, and excludes variable interest rate debt that is locked in through interest rate swaps.
100
Notes to Consolidated Financial Statements
b) Fair Values of Financial Instruments
As at December 31, 2017
Financial assets:
Cash and short-term investments
Restricted cash
Invested assets(1)
Accounts receivable
Interest rate swaps
Amounts receivable and other assets(2) (3)
Investments held for self-insured liabilities
Financial liabilities:
Accounts payable
Long-term debt excluding convertible
debentures(3) (4)
Convertible debentures
As at December 31, 2016
Financial assets:
Cash and short-term investments
Restricted cash
Invested assets(1)
Accounts receivable
Interest rate swaps
Amounts receivable and other assets(2) (3)
Deferred consideration(3)
Loans and
Receivables
Available
for Sale
Fair Value
Through
Profit
and Loss
Other
Financial
Liabilities
Total
Carrying
Amount
Fair Value
128,156
2,300
442
42,491
–
58,541
–
231,930
–
–
–
–
–
–
–
–
–
–
86,296
86,296
–
–
–
–
–
–
–
–
3,459
–
–
3,459
–
–
–
–
–
–
–
–
–
–
–
–
128,156
128,166
2,300
442
2,300
442
42,491
42,491
3,459
58,541
86,296
3,459
62,300
86,296
321,685
325,454
4,272
4,272
4,272
416,946
416,946
432,259
124,800
124,800
129,650
546,018
546,018
566,181
Loans and
Receivables
Available
for Sale
Fair Value
Through
Profit
and Loss
Other
Financial
Liabilities
Total
Carrying
Amount
Fair Value
101,582
2,227
442
52,234
–
63,470
37,429
–
–
–
–
–
–
–
–
–
–
–
985
–
–
–
–
–
–
–
–
–
–
–
–
101,582
101,595
2,227
442
2,227
442
52,234
52,234
985
63,470
37,429
985
66,970
37,430
136,109
136,109
394,478
397,992
Investments held for self-insured liabilities
–
136,109
257,384
136,109
985
Financial liabilities:
Accounts payable
Long-term debt excluding convertible
debentures(3) (4)
Convertible debentures
(1) Included in other assets.
(2) Primarily includes amounts receivable from government.
(3) Includes current portion.
(4) Excludes netting of financing costs.
–
–
–
–
–
–
–
–
–
–
–
–
6,738
6,738
6,738
386,398
386,398
413,582
123,912
123,912
135,342
517,048
517,048
555,662
101
Extendicare 2017 Annual Report Basis for Determining Fair Values
The following summarizes the significant methods and assumptions used in estimating the fair values of financial instruments reflected
in the previous table.
Fair values for investments designated as available for sale are based on quoted market prices.
Items designated as loans and receivables include cash, accounts receivable as well as notes, mortgages and amounts receivable.
Accounts receivable, including other long-term receivables, are recorded at amortized cost. The carrying values of accounts receivable
approximate fair values due to their short-term maturities, with the exception of certain settlement receivables from third-party payors
that are anticipated to be collected beyond one year. The fair values of these settlement receivables are estimated based on discounted
cash flows at current borrowing rates. Notes, mortgages and amounts receivable primarily consist of notes and amounts receivable from
government agencies, and other third-party notes. The fair values for these instruments are based on the amount of future cash flows
associated with each instrument, discounted using current applicable rates for similar instruments of comparable maturity and credit
quality. The fair values of convertible debentures are based on the closing price of the publicly traded convertible debentures on each
reporting date, and the fair values of mortgages and other debt are estimated based on discounted future cash flows using discount rates
that reflect current market conditions for instruments with similar terms and risks.
Fair Value Hierarchy
We use a fair value hierarchy to categorize the type of valuation techniques from which fair values are derived: Level 1 – use of quoted
market prices; Level 2 – internal models using observable market information as inputs; Level 3 – internal models without observable
market information as inputs.
The Company uses interest rate swap contracts to effectively fix the interest rate on certain mortgages. As hedge accounting is not
applied, the contracts are carried at fair value and reported as assets or liabilities depending on the fair value on the reporting date, with the
change in fair value recognized in net earnings. The fair value of the interest rate swap contracts are calculated through discounting future
expected cash flows using the BA-based swap curve. Since the BA-based swap curve is an observable input, these financial instruments
are considered Level 2.
The fair values of financial instruments presented above were as follows:
As at December 31, 2017:
Investments held for self-insured liabilities
Amounts receivable and other assets
Interest rate swaps
Convertible debentures
As at December 31, 2016:
Investments held for self-insured liabilities
Amounts receivable and other assets
Deferred consideration (note 10)
Interest rate swaps
Convertible debentures
Level 1
Level 2
Level 3
Total
86,296
–
–
129,650
136,109
–
–
–
135,342
–
62,950
3,459
–
–
67,620
–
985
–
–
–
–
–
–
–
37,430
–
–
86,296
62,950
3,459
129,650
136,109
67,620
37,430
985
135,342
102
Notes to Consolidated Financial Statements
27. Capital Management
The completion of the U.S. Sale Transaction facilitated the repositioning of Extendicare as a pure-play Canadian senior care and services
company. The Company’s objective is to further expand and grow our Canadian operations including growing our long-term care revenue
through redevelopment, and exploring opportunities in the private-pay retirement space.
The Company accesses the capital markets periodically to fund acquisitions, growth capital expenditures and certain other expenditures.
We monitor the capital markets to assess the conditions for raising capital and the cost of such capital relative to the return on any
acquisitions or growth capital projects. Funds raised in the capital markets that are not deployed in acquisitions or growth projects are
held in high-quality investments with surplus cash held in secure institutions. We manage our cash position and prepare monthly cash flow
projections over the remaining and future fiscal periods, and we continuously monitor the level, nature and maturity dates of debt and level
of leverage and interest coverage ratios to ensure our compliance with debt covenants. We provide information to the Board on a regular
basis in order to carefully evaluate any significant cash flow decisions.
Normal Course Issuer Bid
On January 10, 2018, Extendicare received the approval of the TSX for the Bid (note 15). As at February 28, 2018, the Company has
acquired and cancelled 352,233 Common Shares under the Bid at an average price of $8.94 per share, for a total cost of $3.1 million, all of
which were acquired in January 2018.
Capital Structure
The Company defines its capital structure to include long-term debt, net of cash and short-term investments, and share capital.
Current portion of long-term debt (1)
Long-term debt (1)
Total debt
Less: cash and short-term investments
Net debt
Share capital
(1) Net of financing costs.
2017
59,664
476,404
536,068
(128,156)
407,912
490,881
898,793
2016
54,826
448,742
503,568
(101,582)
401,986
489,656
891,642
Dividends
The declaration and payment of future distributions is at the discretion of our Board and will be dependent upon a number of factors
including results of operations, requirements for capital expenditures and working capital, future financial prospects of Extendicare, debt
covenants and obligations, and any other factors deemed relevant by the Board. If our Board determines that it would be in Extendicare’s
best interests, it may reduce, for any period, the amount and frequency of dividends to be distributed to holders of Common Shares.
Financial Covenants
Extendicare is subject to external requirements for certain of its loans on debt service coverage. Management and the Board monitor
these covenant ratios on a monthly and quarterly basis, respectively. The Company was in compliance with all these covenants as at
December 31, 2017.
103
Extendicare 2017 Annual Report 28. Related Party Transactions
a) Transactions with Key Management Personnel
Tim Lukenda, Extendicare’s President and Chief Executive Officer, and members of his family have a company that owns a long-term
care centre and a retirement centre in Ontario, in which Mr. Lukenda has an approximate 7.1% direct and indirect ownership interest,
and with which Extendicare has an ongoing relationship through the provision of management services to the long-term care centre
and group purchasing services to the retirement centre. Mr. Lukenda’s employment contract provides a mechanism and process that
effectively removes him from the decision-making process in situations where a conflict of interest may arise on any matter between
the two companies.
b) Compensation of Key Management Personnel
The remuneration of directors and other key management personnel of the Company during the years ended December 31, 2017 and
2016, was as follows:
Short-term benefits
Post-employment benefits
Share-based compensation
2017
4,555
137
1,773
6,465
2016
3,302
134
1,331
4,767
In 2017, contingent on his continued employment as of September 30, 2017, the CEO was paid $2.0 million, which amount is reflected
above as part of short-term benefits.
29. Segmented Information
The Company reports the following segments within its Canadian operations: i) long-term care; ii) retirement living; iii) home health care;
iv) management, consulting and group purchasing as “other Canadian operations”; and v) the Canadian corporate functions and any
intersegment eliminations as “corporate Canada”. The continuing U.S. operations now consist of the Captive.
The long-term care segment represents the 58 long-term care centres that the Company owns and operates in Canada. The retirement
living segment includes six acquired retirement communities, and two communities that were newly constructed and opened in the fourth
quarters of 2016 and 2017. The retirement communities provide services to private-pay residents at rates set by Extendicare based on
the services provided and market conditions. Through our wholly owned subsidiary ParaMed Inc. (ParaMed), ParaMed’s home health care
operations provide complex nursing care, occupational, physical and speech therapy, and assistance with daily activities to accommodate
those living at home.
The Company’s other Canadian operations are composed of its management, consulting and group purchasing operations. Through our
Extendicare Assist division, we provide management and consulting services to third-party owners; and through our SGP Purchasing
Partner Network division, we offer cost-effective purchasing contracts to other senior care providers for food, capital equipment,
furnishings, cleaning and nursing supplies, and office products.
The Company continues to group its former and remaining U.S. operations as one segment. The Captive’s expense incurred for self-
insured liabilities related to the Company’s U.S. general and professional liability risks up to the date of the U.S. Sale Transaction as well
as the disposed U.S. businesses are presented as discontinued operations; while the Captive’s costs to administer and manage the
settlement of the remaining claims are reported as continuing operations within the U.S. segment.
104
Notes to Consolidated Financial Statements
Intersegment adjustments in the following tables reflect the reversal of intercompany amounts that are eliminated prior to the preparation
of the Company’s consolidated financial statements.
(in thousands of Canadian dollars)
CONTINUING OPERATIONS
Revenue
Long-term care
Retirement living
Home health care
Management, consulting and other
Total revenue
Operating expenses
Administrative costs
Lease costs
Total expenses
Earnings (loss) before depreciation,
amortization, and other expense
Long-term
Care
Retirement
Living
Home
Health
Care
Other
Canadian
Operations
Corporate
Canada
Total
Canada
Total
U.S.
2017
Total
616,887
–
–
–
20,673
–
435,718
–
–
–
–
–
–
–
–
–
616,887
20,673
435,718
–
–
–
616,887
20,673
435,718
–
–
18,789
15
18,804
5,249
24,053
616,887
20,673
435,718
18,789
15 1,092,082
5,249 1,097,331
542,965
18,290
391,867
8,387
–
961,509
–
961,509
–
–
–
–
–
4,778
–
–
30,333
30,333
1,134
31,467
1,980
6,758
–
6,758
542,965
18,290
396,645
8,387
32,313
998,600
1,134
999,734
73,922
2,383
39,073
10,402
(32,298)
93,482
4,115
97,597
Depreciation and amortization
–
–
–
–
31,379
31,379
–
31,379
Earnings (loss) before net finance costs
and income taxes
Interest expense
Accretion of decommissioning provisions
Other accretion
Loss (gains) on foreign exchange
Interest revenue
Fair value adjustments
Net finance costs (income)
73,922
2,383
39,073
10,402
(63,677)
62,103
4,115
66,218
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
28,082
28,082
349
349
–
–
1,180
1,180
1,283
666
666
(1,530)
28,082
349
2,463
(864)
(3,695)
(3,695)
(207)
(3,902)
(2,474)
(2,474)
–
(2,474)
24,108
24,108
(454)
23,654
Earnings (loss) before income taxes
73,922
2,383
39,073
10,402
(87,785)
37,995
4,569
42,564
Income tax expense
Current
Deferred
Total income tax expense
Earnings (loss) from
continuing operations
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of
income taxes
–
–
–
–
–
–
–
–
–
–
–
–
10,149
10,149
–
10,149
603
603
10,752
10,752
100
100
703
10,852
73,922
2,383
39,073
10,402
(98,537)
27,243
4,469
31,712
–
–
–
–
–
–
(29,580)
(29,580)
Net earnings (loss)
73,922
2,383
39,073
10,402
(98,537)
27,243
(25,111)
2,132
105
Extendicare 2017 Annual Report
(in thousands of Canadian dollars)
CONTINUING OPERATIONS
Revenue
Long-term care
Retirement living
Home health care
Management, consulting and other
Total revenue
Operating expenses
Administrative costs
Lease costs
Total expenses
Earnings (loss) before depreciation,
amortization, and other expense
Depreciation and amortization
Other expense
Earnings (loss) before net finance costs
and income taxes
Interest expense
Accretion of decommissioning provisions
Other accretion
Loss on foreign exchange
Interest revenue
Fair value adjustments
Net finance costs (income)
Long-term
Care
Retirement
Living
Home
Health
Care
Other
Canadian
Operations
Corporate
Canada
Total
Canada
Total
U.S.
2016
Total
608,618
–
15,474
–
–
–
–
–
–
–
414,406
–
608,618
15,474
414,406
532,999
14,827
374,191
–
–
–
–
–
4,892
–
–
–
18,518
18,518
8,605
–
–
–
–
–
608,618
15,474
414,406
–
–
–
608,618
15,474
414,406
47
18,565
3,695
22,260
47
1,057,063
3,695
1,060,758
–
930,622
–
930,622
28,662
28,662
1,889
30,551
1,758
6,650
–
6,650
532,999
14,827
379,083
8,605
30,420
965,934
1,889
967,823
75,619
647
35,323
9,913
(30,373)
91,129
1,806
92,935
–
–
–
–
–
–
–
–
31,179
31,179
4,013
4,013
–
–
31,179
4,013
75,619
647
35,323
9,913
(65,565)
55,937
1,806
57,743
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27,039
27,039
349
827
753
349
827
753
–
–
1,325
445
27,039
349
2,152
1,198
(3,276)
(3,276)
(7,562)
(10,838)
(985)
(985)
–
(985)
24,707
24,707
(5,792)
18,915
Earnings (loss) before income taxes
75,619
647
35,323
9,913
(90,272)
31,230
7,598
38,828
Income tax expense (recovery)
Current
Deferred
Total income tax expense
Earnings (loss) from
continuing operations
DISCONTINUED OPERATIONS
Loss on sale of U.S. operations, net of
income taxes
Earnings from discontinued operations, net
of income taxes
–
–
–
–
–
–
–
–
–
–
–
–
6,818
6,818
(1,017)
(2,094)
(2,094)
4,724
4,724
3,704
2,687
5,801
1,610
7,411
75,619
647
35,323
9,913
(94,996)
26,506
4,911
31,417
–
–
–
–
–
–
–
–
–
–
–
(8,458)
(8,458)
–
12,493
12,493
Net earnings (loss)
75,619
647
35,323
9,913
(94,996)
26,506
8,946
35,452
106
Notes to Consolidated Financial Statements
30. Significant Subsidiaries
The following is a list of the significant subsidiaries as at December 31, 2017, all of which are 100% directly or indirectly owned by
the Company.
Extendicare (Canada) Inc.
ParaMed Inc.
Harvest Retirement Community Inc.
Stonebridge Crossing Retirement Community Inc.
Empire Crossing Retirement Community Inc.
Yorkton Crossing Retirement Community Inc.
West Park Crossing Retirement Community Inc.
9623094 Canada Inc.
Laurier Indemnity Company, Ltd.
Jurisdiction of Incorporation
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Bermuda
31. Subsequent Event
On February 23, 2018, the Company entered into a definitive agreement to acquire the Lynde Creek Retirement Community, located in
Whitby, Ontario, for a cash purchase price of $34.5 million, subject to normal closing adjustments. The acquired community consists of the
Lynde Creek Manor Retirement Residence, offering 93 independent and assisted living suites; the Lynde Creek Life Lease Village, with 113
townhomes; and 3.7 acres of adjacent land for expansion. Closing, which is subject to customary conditions, is expected to occur in the
second quarter of 2018.
107
Extendicare 2017 Annual Report Three-year Summary
(unaudited) (thousands of dollars unless otherwise noted)
Financial Position
Property and equipment
Total assets
Long-term debt, including current portion
Shareholders' equity
Number of shares outstanding (year end)
Financial Results
Revenue from continuing operations
Long-term care
Retirement living
Home health care
Management, consulting and other
U.S. remaining operations
Net operating income from continuing operations (1)
Long-term care
Retirement living
Home health care
Management, consulting and other
U.S. remaining operations
Adjusted EBITDA (1)
Earnings from continuing operations before separately reported items (1)
Gain (loss) on sale of U.S. operations
Net earnings
AFFO (Canadian continuing operations) (1)
per basic share ($)
AFFO (1)
per basic share ($)
Dividends declared per share ($)
Dividend payout ratio (% of AFFO)
Average U.S./Canadian dollar exchange rate
Other Information
Number of senior care centres operated (year end)
Owned/leased (2)
Long-term care
Retirement living
Managed
Operational resident capacity of senior care centres (year end)
Owned/leased (2)
Long-term care
Retirement living
Managed
Average occupancy of long-term care centres (owned/leased) (%)
Average occupancy of retirement living communities (%)
As at occupancy of retirement living communities (%)
Stabilized communities
Lease-up communities
Home health care hours of service
Number of employees (year end)
Senior care and living operations
Home health care operations
(1) Refer to discussion of non-GAAP measures on page 18.
2017
2016
2015
479,968
934,281
536,068
128,956
88,523,290
616,887
20,673
435,718
18,804
5,249
1,097,331
73,922
2,383
43,851
10,417
5,249
135,822
97,597
29,192
–
2,132
58,351
0.66
58,495
0.66
0.48
73
1.2986
58
8
50
116
8,112
676
6,216
15,004
97.7
69.7
465,433
988,617
503,568
174,759
88,684,485
608,618
15,474
414,406
18,565
3,695
1,060,758
75,619
647
40,215
9,960
3,695
130,136
92,935
30,907
(8,458)
35,452
58,625
0.66
65,056
0.74
0.48
65
1.3248
58
7
53
118
8,116
574
6,332
15,022
98.0
59.8
95.9
68.6
11,327,000
23,700
12,000
11,700
93.9
41.5
10,909,000
23,800
12,000
11,800
426,191
1,026,947
454,074
172,129
87,953,291
594,198
1,238
326,964
15,583
5,296
943,279
69,490
251
36,521
8,232
5,296
119,790
83,691
24,517
205,418
232,078
43,990
0.50
50,828
0.58
0.48
83
1.2787
58
4
54
116
8,116
348
6,426
14,890
97.9
64.1
74.2
61.0
8,873,000
23,000
11,700
11,300
(2) Extendicare operates nine long-term care centres under finance lease arrangements, whereby ownership transfers to Extendicare at the end of the respective lease terms.
108
Three-year Summary
Securityholder Information
Extendicare Inc.
Transfer Agent
3000 Steeles Ave. East, Suite 103
Computershare Trust Company
Markham, Ontario Canada L3R 4T9
of Canada
Tel: (905) 470-4000
Fax: (905) 470-5588
Tel: (800) 564-6253
Fax: (866) 249-7775
Exchange Listings/
Trading Profile
Toronto Stock Exchange Symbols
Common shares: EXE
Convertible debentures: EXE.DB.B
www.extendicare.com
Email: service@computershare.com
2017 EXE Common Share Activity
www.computershare.com
High: $10.75; Low: $8.73
Close: $9.15; Volume: 41,984,011
Shareholder Inquiries/
Investor Relations
Jillian Fountain
Corporate Secretary
Tel: (905) 470-5534
Fax: (905) 470-4003
Annual Meeting
Published Information
Shareholders are invited to attend
Extendicare’s 2017 Annual Report is
the Annual General Meeting
available for viewing or printing on
of Extendicare Inc. on May 24,
its website at www.extendicare.com,
2018, at 10:30 a.m., at the TMX
together with news releases, quarterly
Broadcast Centre - the Gallery,
reports and other filings with the
130 King Street West, Toronto,
securities commissions. Printed copies
Email: jfountain@extendicare.com
Ontario, Canada.
of the annual report are available upon
request to the Corporate Secretary.
Extendicare AFFO and Cash Dividends
AFFO ($ per basic share)
AFFO (Canadian continuing operations, $ per basic share)
Cash dividends ($0.48 per share)
Total Return Share Price Performance
(assuming $100 investment was made on December 31, 2014)
Extendicare
S&P/TSX Composite
0.58
0.50
0.74
0.66
0.66
0.66
0.48
$100.00
$100.00
$91.68
$111.01
$121.11
$157.12
$169.11
$163.49
2015
83%
2016
65%
Payout Ratio
2017
73%
2014
2015
2016
2017
63%
EXE Total Return
109
Extendicare 2017 Annual Report
Extendicare Inc.
3000 Steeles Ave. East, Suite 103
Markham, Ontario Canada L3R 4T9
Tel: (905) 470-4000
Fax: (905) 470-5588
www.extendicare.com